IEA-Equity
Strategy

India Equity Analytics

28th Feb, 2014

Daily Fundamental Report on Indian Equities

IT Industry: 3QF...
IT Industry: 3QFY14 results review
"Clear acceleration in growth"
Price performance of our coverage:

Mix performance and ...
IT Industry: 3QFY14 results review

Companies Specific Earnings Review
Company
TCS
INFY*
WIPRO
HCLTECH#
TECHM
CMC
MINDTREE...
IT Industry: 3QFY14 results review

Operating Metrics across Tier-1 IT space
Sales mix- Geogrpahy wise

Discretionary spen...
IT Industry: 3QFY14 results review

Key Takeaways from Conference Call;
(1) TCS
- Confident of beating NASSCOM's FY15 grow...
IT Industry: 3QFY14 results review

(7) PERSISTENT SYS
- Persistent is confident of doing more than 15% revenue ($) growth...
IT Industry: 3QFY14 results review

Industry Outlook:

For FY15E, NASSCOM expects IT exports
to grow by 13-15% and domesti...
Public Sector Banks Result Review 3QFY14

Moderate NII growth in the system due to muted loan growth
Net interest income o...
Public Sector Banks Result Review 3QFY14
Worry about the structure damage of balance sheet, declined profit is not matter
...
SHREE CEMENT.
Update

Book Profit

CMP
Target Price
Previous Target Price
Upside
Change from Previous

4772
4791
4791
0%
N...
SHREE CEMENT.
Management Corner : From mid-January there is a big change in demand scenario
because of the Indian calendar...
SHREE CEMENT.
B/S PERFORMANCE
Share capital
Reserve & Surplus
Total equity
Long-term borrowings
Short-term borrowings
Long...
"BOOK PART
PROFIT "

AXIS BANK

25th Feb, 2014

Company Updated
CMP
Target Price
Previous Target Price
Upside
Change from ...
AXIS BANK
Moderate growth in profit & loss
Bank’s profitability was up by 19% due to reversal of investment depreciation. ...
AXIS BANK
Fundamenatl throught graph

NII growth led by healthy CD ratio and
margin expansion on YoY basis

Lower other in...
AXIS BANK
Quarterly Result

Quarterly Result
Interest/discount on advances / bills
Income on investments
Interest on balan...
AXIS BANK
FINANCIALS & ASSUPTION

Income Statement

2011

2012

2013

2014E

2015E

Interest Income
Interest Expense
NII
C...
Nestle India

"NEUTRAL"
24th Feb' 14

"The nest becomes weaker"
Result update
CMP
Target Price
Previous Target Price
Upsid...
Nestle India
Sales and Sales Growth(%)

Sales growth led by 4.7% (YoY) India
growth, contributed by net realization
and vo...
Nestle India
Financials
Rs in Cr,
Sales
RM Cost
Purchases of stock-in-trade
WIP
Employee Cost
Ad Spend
Other expenses
Tota...
Vardhman Textiles

"Buy"
24th Feb' 14

On a Strong earning foot..
Initial Coverage
CMP
Target Price
Previous Target Price
...
Vardhman Textiles
Advantage India remains for most of FY14E
Chinese players imported yarn from India owing to the high cot...
Vardhman Textiles
B/S PERFORMANCE
Share capital
Reserve & Surplus
Total equity
Long-term borrowings
Short-term borrowings
...
DENA BANK

"NEUTRAL"
24th Feb, 2014

ANNUAL REPORT UPDATE

Result update
CMP
Target Price
Previous Target Price
Upside
Cha...
DENA BANK
Profitability declined despite of tax reversal
Profitability declined by 67% YoY due to reversal of tax to the t...
DENA BANK

NII grew by 7.5% YoY to Rs.661 cr largely due
to margin compression in year on year basis
led by higher cost of...
DENA BANK
Quarterly Result ( Rs Cr)
Interest/discount on advances / bills
Income on investments
Interest on balances with ...
DENA BANK
P/L
Interest/discount on advances / bills
Income on investments
Interest on balances with Reserve Bank of India
...
N arnolia Securities Ltd
402, 4th floor 7/ 1, Lord s Sinha Road Kolkata 700071, Ph
033-32011233 Toll Free no : 1-800-345-4...
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India Equity Analytics :IT Industry 3QFY14 results review

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All IT companies are accelerating its revenue growth and shaping up its margin because of favorable demand and supply environment. We maintain our positive stance on (In order ofpreference) TECHM, PERSISTENT, ZENSARTECH, ECLERX and KPIT under mid cap space.

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India Equity Analytics :IT Industry 3QFY14 results review

  1. 1. IEA-Equity Strategy India Equity Analytics 28th Feb, 2014 Daily Fundamental Report on Indian Equities IT Industry: 3QFY14 results review : "Clear acceleration in growth" Edition : 215 28th Feb 2014 For IT Industry, 3QFY14 has carried out a quarter of mix set of numbers largely impacted by seasonality and furloughs impact. However, most of companies expressed its sanguine view for industry outlook and demand discretionary environment ahead. Post earnings, almost all companies management have expressed for better earnings outlook in near term . .................................................. ( Page : 2-7) Public Sector Banks Result Review 3QFY14 26th Feb 2014 Most of PSBs profitability were declined due to higher operating cost, surge in provisions and contingencies and creation of DTL special reserve. But declining profitability and deteriorating asset quality is not a concern but structure damage of balance sheet. Going forward banks with higher CASA base and healthy growth in deposits would able to protect margin and hence profitability. Post result we like SBI, Union Bank and UCO Bank due to their structural improvement in balance sheet, operating and financial metrics. ............................................................................ ( Page : 8-9) SHREE CEMENT. "BOOK PROFIT " 25th Feb 2014 The stock is trading at 4x in 1 yr forward P/B chart.we believe for the current market scenario the price is fare enough to trade.But looking at future capex plans and sluggish demand we belive the earnings and profitability of Shree cement may fall for the next two consecutive quarters.The profitability may fall due to incrising depriciation.Till now the company's depriciation level is stable but it may surprise further.so we recommend its a better pic to book profit. ................................................................. ( Page : 10-12) "BOOK PART PROFIT " AXIS BANK : 25th Feb 2014 We advice our investor to book part profit in Axis Bank as bank has achieve our target price level of Rs.1217. We still stick to our valuation on account of bank’s uncomfortable earnings and asset quality stress. Bank’s profitability was up by 19% YoY on the back of right back of investment depreciation provisions. Exposure to risky sector remained high which would keep asset quality under stress. These factors compel us to value bank at 1.5 times of FY14E’s book value......................................................... ( Page : 13-17) Nestle India :"The nest becomes weaker" "Neutral" 24th Feb 2014 For 4QCY13, Nestle Ind reported below numbers than street expectations in all counts, sales grew by 4.7%(YoY) led by 3.7% domestic growth and 20.9% export growth. Its domestic sales contribute 94% and exports 6% of sales. While, PAT marginally declined by 0.7% on YoY basis. At a CMP of Rs 5043, stock trades at 15.9x P/BV of CY14E. We have a “Neutral” view on stock. .................................................................. ( Page : 1820) Vardhman Textiles : "BUY" 24th Feb 2014 Considering the favourable export scenario and completion of capacity expansions, we remain positive on FY14. We, hereby, initiate our coverage with Vardhman Textiles to BUY with a target price of Rs.412 . Currently the stock is trading at 0.8x p/b , we cut our Earning parameter for FY15 and cut p/b to 0.7x for FY15 . Looking at the current earning growth and environment the stock is looking very good but due to lack of trigeers in FY15 we are really conservative for FY15 . ................................................. ( Page : 21-23) DENA BANK : "Neutral" 24th Feb 2014 Bank’s performance was lower than our expectation in all fronts and reported very weak set of numbers. Operating as well as financials metrics were remained muted. Profitability was declined by 67% YoY despite of tax reversal owing to muted growth in NII and higher operating expenses. We are pessimist about the growth parameters. We have neutral view on the stock. .............................................................. ( Page : 24- 28 ) Narnolia Securities Ltd,
  2. 2. IT Industry: 3QFY14 results review "Clear acceleration in growth" Price performance of our coverage: Mix performance and margin sustainability, future outlook appears positive; For IT Industry, 3QFY14 has carried out a quarter of mix set of numbers largely impacted by seasonality and furloughs impact. However, most of companies expressed its sanguine view for industry outlook and demand discretionary environment ahead. The Top-4 companies responded a decent set of performance despite seasonally weak quarter with aggregate revenue of 2.8% in USD term (QoQ). Comparing with street expectation, Infosys and HCL Tech beat the street, while TCS and Wipro reported inline set of numbers. On margin front, they surprised positively with back-to-back quarters of margin improvement led by operational efficiencies and cost rationalization. Post earnings, almost all companies management have expressed for better earnings outlook in near term and they were confident to see stronger FY15E than FY14E on healthy growth prospect and a secular improvement in demand trend. (Source: Eastwind) Index Performance: ▲ 43% (Source: Eastwind) ▲ 9.4% (Source: Eastwind) Key takeaways from 3QFY14 earnings: USD revenue was marginally inline and Positive FY15E outlook: Reported USD revenues were in line or very marginally below our estimate during the seasonally weak quarter across the top tier. A part of this, companies management have given better outlook with margin expansion for FY15E, even NASSCOM aired the earning guidance of 13-15% for FY15E, better than FY14E and FY13. Margin ramped up across the Tier-1 and most of mid cap space: Despite flattish currency benefit, companies have been efficient to maintain its margin because of reinvested higher growth and efficient strategy to improve utilization. With macro improving and positive growth outlook, the operating advantage from investment is likely beginning to play out. SMAC and Digital were subject to discussion: Emerging verticals SMAC (Social, Mobility, Analytics and Cloud) and Digital transformation are expected to bring next generation of growth in IT Industry. A number of IT companies, especially tier-1 IT companies have expressed its priority area and strategy to pan-out growth opportunities on these emerging verticals. Current uptrend in discretionary spend is being driven by the same. Deal Pipeline remains healthy: During the quarter, weak seasonality marginally impacted order inflow. For near term, deal pipeline remains healthy and somehow, Pricing will be marginally under pressure in the traditional IT segment, Application Development and Management segment. While, we do not see any pressure on new emerging segments like SMAC, Digital, Infra, etc. Earning Performance v/s Estimates; INFY HCLTECH TECHM ZENSARTECH TATA ELXSI Outperform TCS WIPRO CMC MINDTREE HEXAWARE NIITTECH PERSISTENT ECLERX Inline KPIT Underperform (Source: Eastwind) Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 2
  3. 3. IT Industry: 3QFY14 results review Companies Specific Earnings Review Company TCS INFY* WIPRO HCLTECH# TECHM CMC MINDTREE HEXAWARE$ NIITTECH KPIT PERSISTENT ZENSARTECH ECLERX TATA ELXSI 3QFY13 16069.9 10424.0 9587.5 6273.8 3523.7 493.0 590.1 507.5 514.4 563.3 333.0 525.5 170.8 156.7 Sales,cr 2QFY14 3QFY14E 20977.2 21606.6 12965.0 13069.1 10990.7 11342.4 7961.0 8160.0 4771.5 4819.2 560.8 566.4 769.5 792.2 621.1 629.2 587.3 593.5 702.8 722.0 432.4 436.1 599.7 590.6 214.6 218.5 190.0 195.5 EBITDA,cr 3QFY14 3QFY13 2QFY14 3QFY14E 3QFY14 21294.0 4660.5 6633.0 6300.3 6686.8 13026.0 2677.0 2837.0 3424.1 3258.9 11327.4 2050.2 2503.8 2552.0 2652.7 8184.0 1416.6 2093.0 2080.8 2125.0 4898.6 756.9 1110.9 1084.3 1136.3 561.0 83.2 88.4 87.8 90.8 790.6 120.4 159.8 153.9 154.1 620.0 109.0 147.7 147.9 139.4 587.3 81.3 88.6 86.1 95.1 677.9 87.9 108.1 115.5 103.5 432.8 82.4 100.8 104.7 104.3 594.1 70.1 102.5 87.5 87.3 219.5 66.8 92.8 90.5 88.8 200.1 16.5 32.4 40.4 43.6 *Infosys (net profit for 2QFY14 includes the one-time visa charge of Rs219 crore). 3QFY13 3549.6 2369.0 1598.1 974.3 455.9 61.1 87.7 66.2 56.6 59.9 49.5 48.7 49.8 8.8 PAT,cr 2QFY14 3QFY14E 3QFY14 4633.3 5096.7 5333.4 2407.0 2695.8 2874.9 1932.0 1984.2 2014.7 1416.0 1472.6 1495.0 718.2 754.1 1009.8 67.3 65.6 70.6 113.0 98.6 114.0 98.7 103.6 103.3 60.4 57.4 52.5 66.7 69.4 60.8 60.8 66.9 64.2 70.6 50.4 50.8 67.2 61.4 62.3 19.9 20.5 21.6 (Source: Company/Eastwind) # HCL Technologies (June year ending). $ Hexaware (Follow Callendar year) Growth and Margin Performance-% Company TCS INFY WIPRO HCLTECH TECHM CMC MINDTREE HEXAWARE NIITTECH KPIT PERSISTENT ZENSARTECH ECLERX TATA ELXSI Growth (QoQ)-% Sales EBITDA PAT 1.5% 0.8% 15.1% 0.5% 14.9% 19.4% 3.1% 5.9% 4.3% 2.8% 1.5% 5.6% 2.7% 2.3% 40.6% 0.0% 2.7% 4.8% 2.7% -3.6% 0.9% -0.2% -5.7% 4.7% 0.0% 7.3% -13.1% -3.5% -4.3% -8.8% 0.1% 3.5% 5.6% -0.9% -14.9% -28.0% 2.3% -4.3% -7.2% 5.3% 34.6% 8.5% Growth (YoY)-% Sales EBITDA PAT 32.5% 43.5% 50.3% 25.0% 21.7% 21.4% 18.1% 29.4% 26.1% 30.4% 50.0% 53.4% 39.0% 50.1% 121.5% 13.8% 9.1% 15.5% 34.0% 28.0% 30.0% 22.2% 27.9% 56.0% 14.2% 17.0% -7.2% 20.3% 17.7% 1.5% 30.0% 26.6% 29.7% 13.1% 24.5% 4.3% 28.5% 32.9% 25.2% 27.7% 164.4% 146.9% Margin-% EBITDA PAT 31.4% 25.0% 25.0% 22.1% 23.4% 17.8% 26.0% 18.3% 23.2% 20.6% 16.2% 12.6% 19.5% 14.4% 22.5% 16.7% 16.2% 8.9% 15.3% 9.0% 24.1% 14.8% 14.7% 8.6% 40.5% 28.4% 21.8% 10.8% Margin Change,(QoQ) EBITDA PAT (20bps) 290bps 310bps 350bps 60bps 20bps (30bps) 50bps (10bps) 560bps 40bps 60bps% (130bps) (30bps) (130bps) 80bps 110bps (130bps) (10bps) (50bps) 80bps 80bps (240bps) (320bps) (280bps) (290bps) 470bps 30bps (Source: Company/Eastwind) Tier-1 ; The top four IT companies delivered a decent performance in a seasonally soft quarter with an aggregate revenue growth of 2.8% QoQ. INFY and HCL Tech beat the street on growth and margin front, while TCS and Wipro reported inline set of numbers. Mid cap/Niche (Tier-2)-TECHM and Persistent outmatch peers; TECHM’s broad based revenue growth and deal signing was robust. Persistent system surprised positively on margin front for the second consecutive quarter led by higher utilization. Apart of this, Zensar Tech also reported good margin ramp up during the quarter. As a backbencher, KPIT, NIITTECH and Hexaware reported flat to below expected numbers. Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 3
  4. 4. IT Industry: 3QFY14 results review Operating Metrics across Tier-1 IT space Sales mix- Geogrpahy wise Discretionary spends continue to gain momentum in America and in specific pockets in Europe. (Source: Company/Eastwind) Sales mix- Segment wise During the quarter, manufacturing segment reported attractive growth. Whilea mong service offerings, Infrastructure Management Services (IMS) will be a key growth driver. (Source: Company/Eastwind) Utilization Rate-% Employee Addition; TCS INFY WIPRO HCLTECH Total Employee 290713 158404 146402 88332 Gross Addition 14663 6,682 -814 7593 (Source: Company/Eastwind) Attirition rate-% Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. (Source: Company/Eastwind) 4
  5. 5. IT Industry: 3QFY14 results review Key Takeaways from Conference Call; (1) TCS - Confident of beating NASSCOM's FY15 growth guidance of 13-15%, -FY15E will be better than the current fiscal, -Expect Europe to perform better than the US, -Chasing 20-25 large transformational deals, -Seeing an uptick in discretionary spends, - Lateral hiring 50000-55000 in FY15E, (2) INFOSYS -Management upgraded its earning guidance for FY14E from 9-10% to 11.5-12%. -They are seeing confidence coming back from client’s metrics. -The Company is looking to bring in about maximum 6,000 off-campus offers. (3) WIPRO -4QFY14: Revenues from IT Services business to be in the range of $ 1,712 million to $1,745 million* including the revenues from acquisition. -Expect better FY15E than FY14. -Hiring target for FY15E would be like FY14, will focus on onsite hiring. -Wage hike by 1st June ,2014. (4) HCLTECH: -The company is expecting to catch up more deal from US and Europe because of better demand environment ahead. -The company expects to see margin at a range of 21-22% in near term. -The wage hike is spread over two quarters or rather more than two quarters. Q3 and Q4 margin could be impact be 30bps. (5) TECHM -The Company aspires revenues of USD 5 billion by 2015. This expects to be through organic and inorganic initiatives (looking for USD 0.5 billion to 0.8 billion as acquisition targets) going forward. -Year 2014 would be better year than FY13, demand environment and Order pipeline is looking good. -Despite salary hike in 4Q, margin would be on place. Wage hike in 4Q could impact 200bps in margin front, but management is confident to mitigate. -Expecting utilisation rate to 77% from 75%(3QFY14) in near term. -The tax rate expected to be 26% for the FY'14. (6) CMC -CMC continues to target growth ahead of the overall IT industry; the company expects to grow faster than that in the current financial year. -Expects operating Profit margin at 16 percent for FY14E, -The company expects to maintatin its tax regime at 20-20.5% for coming quarter. For next year tax rate could be stand at a range of 20-21%. -Company’s hiring Plan; a net addition of 400-500 this year. Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 5
  6. 6. IT Industry: 3QFY14 results review (7) PERSISTENT SYS - Persistent is confident of doing more than 15% revenue ($) growth forFY14E. -They expect to maintain margin at 24-25% for FY14E. -Expects 20-21% growth in the next year from IP led business, which in turn will help improve margins going forward. -The Company’s focus on newer technologies like cloud, analytics, mobility and digital transformation are gaining traction. -The company is optimistic to see more deals on SMACS and IP led business. (8) NIITTECH -Company expects FY14 to be better than FY13 with respect to both revenue growth and EBIT margin. -Managent is very confident to maintain attrition at 12-13% and utilization at 77-80% in near to medium term. -It expects the growth momentum will sustain with holding the margins going forward. (9) ZENSARTECH - It expects double-digit growth in the Enterprise Services business for the FY15 on the back of healthy pipeline. - It anticipates good growth from the IMS for the FY'15. -Management has expressed its margin at a range of 16-17% (10) ECLERX -The billing rates expected to be flat to slight uptick for the FY15E. -Expect to see similar set of environment in FY 15E than FY14. -On margins, it indicated that it will continue to operate in the mid 30% (30-31%) going forward. -Tax rate is expected to see at 23% mark in FY15E. -It continues to look at inorganic opportunities. - Expects to maintain 51% of payout ratio. (11) MINDTREE -Management expects the strong traction in top 10/20 clients to continue. -Expects 4QFY14E revenue performance to be better than both 4QFY13 revenue performance (+2.8% QoQ) as well as 3QFY14 revenue growth (+2.5% QoQ). -Company expects to maintain operating margins at current levels in the near/medium term (12) KPIT -Management expects to see better revenue growth in 4QFY14E than 3QFY14. -The company is making significant changes in organization structure. -Margins are expected to improve going forward as the one off during the quarter will be absent. -Utilization will also go up as revenue growth is realized on the back two deals won this quarter which have a duration of 12 months. Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 6
  7. 7. IT Industry: 3QFY14 results review Industry Outlook: For FY15E, NASSCOM expects IT exports to grow by 13-15% and domestic market to grow by 9-12% based on broad feedback loop from companies and captives. We have seen a significant increase in global technology spending this year, creating opportunities for the Indian software services sector to post double-digit growth again in export as well as in the domestic markets. FY15E promises to be bigger and stronger than the last 3 years, which were marked by bloodbath in global markets due to Euro-zone crisis and falling consumer confidence in the US. Demand is set to pick up in sectors like BFSI, healthcare, retail and transportation globally in the year ahead. For FY15E, We expect that strong fundamentals should help to sustain earning momentum in FY15E. Foray into niche verticals and executions of large deal would play an important factor for better earning visibility in near future. There is a window of opportunity for competent large caps and midcaps to displace incumbents and gain some incremental business. In the past 4 quarters, large caps (four companies) have grown at 3.4% CQGR, while midcaps (five companies) at 3.2%which is comparable to larger peers. Concerns: US Immigration Bill to remain an overhang in short-to-medium term, However, hardening of regulatory related to visa approval in USA, Canada and Australia could spoil the party. Even, the approval of Immigration Bill attached with higher visa fee, wage requirements and enhanced audit by US agencies could turn the growth story of Indian IT players adversely. If passed in its current form, the Bill could hurt the margins of the Indian IT export sector, which derives almost 55-60% of its revenues from USA. Our top picks: TCS and HCLT are growing the fastest and with tremendous margin performance. Infy is accelerating growth … While all companies are accelerating its revenue growth and shaping up its margin because of favorable demand and supply environment. Across the tier-1 IT space, TCS, INFY and HCL TECH remain our best picks in order of our preference. These companies are very much optimistic to improve margin as well as operational efficiencies with healthy deal pipeline across emerging verticals as well as traditional IT Space under positive demand scenario. Hence, with strong medium term earnings visibility, better demand environment and optimistic management comments, we maintain our positive stance on (In order of preference) TECHM, PERSISTENT, ZENSARTECH, ECLERX and KPIT under mid cap space. View and valuation: Company TCS INFOSYS HCLTECH WIPRO TECHM CMC NIITTECH KPIT HEXAWARE PERSISTENT eCLERX TATAELXSI ZENSARTECH MINDTREE CMP (26.02.14) 2182.4 3803.85 1572.9 603.35 1821.65 1450.4 446.4 174.9 165.85 1119.25 1341.05 518.65 387.2 1632.7 View Target BUY BUY HOLD NEUTRAL BUY NEUTRAL HOLD BUY NEUTRAL HOLD BUY NEUTRAL BUY NEUTRAL 2510 3910 1560 2130 443 177 1065 1358 440 - Upside % 15.0% 2.8% -0.8% 16.9% -0.8% 1.2% -4.8% 1.3% 13.6% - FY13 71.82 164.2 58.10 25.0 123.97 75.3 36.28 10.8 13.90 46.1 64.25 10.6 40.03 89.7 EPS-Rs FY14E 95.00 188.0 79.36 31.1 155.37 86.0 43.33 12.6 15.04 61.4 71.61 24.0 52.70 100.9 FY15E 109.31 218.2 98.11 33.5 175.50 92.4 54.18 16.8 16.01 79.1 83.65 28.4 68.97 114.9 FY13 30.39 23.16 27.07 24.09 14.69 19.27 12.30 16.19 11.93 24.27 20.87 48.79 9.67 18.20 Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. P/E-x FY14E 22.97 20.24 19.82 19.42 11.72 16.86 10.30 13.85 11.02 18.22 18.73 21.59 7.35 16.18 FY15E 19.97 17.44 16.03 18.01 10.38 15.70 8.24 10.40 10.36 14.15 16.03 18.29 5.61 14.21 FY13 36.4% 24.8% 30.7% 21.7% 34.8% 24.1% 20.0% 20.1% 27.4% 18.1% 43.8% 16.9% 23.2% 28.4% RoE-% FY14E 37.5% 23.7% 31.5% 22.7% 30.7% 22.8% 19.4% 19.3% 24.9% 20.3% 37.9% 29.7% 24.5% 25.6% FY15E 34.4% 22.9% 29.4% 20.8% 26.0% 20.7% 19.6% 20.7% 22.5% 21.4% 34.4% 27.4% 25.2% 23.6% 7
  8. 8. Public Sector Banks Result Review 3QFY14 Moderate NII growth in the system due to muted loan growth Net interest income of our universe grew by 10.4% YoY on the back of margin expansion on YoY basis along with moderate to healthy loan growth. In our coverage universe, Bank of India and UCO Bank were reported healthy NII growth whereas Andhra Bank reported 10.6% YoY declined in NII. SBI reported NII growth of 13 YoY largely due to loan growth of 17% while margin was declined by 12 bps and flat at QoQ basis. Lower operating profit on account of higher wage settlement provisions and cost related to branch expenses Operating profit of our universe was declined by 1.5% YoY on the back of higher cost against employee provisions, operating cost and non supportive other income. Most of PSBs were reported negative growth in their other income led by lower corporate fee income. In our universe ALBK, Bank of India and UCO bank reported healthy operating profit. But we have not seen improvement of operating metrics in these banks. Operating leverage of PSBs bank has been increasing led higher wage provisions and branch expansion. Profitability declined led by higher operating expenses, higher provisions and Nifty Vs Bank Nifty during Year Loan (Rs tn) and YoY Gr(%) creation of DTL special reserve Earnings growth of Public Sector Banks (PSBs) are remained weak largely due to higher operating expenses led by employee provisions and surged in provisions and contingencies and higher tax provision for DTL special reserve as per RBI’s suggestion. In our banking coverage universe, profitability declined by 27% YoY and 11.5% QoQ. UCO Bank reported 208% YoY growth while Andhra Bank de-grew by 82% YoY. Asset quality deterioration sequentially on account of tight liquidity condition and rising interest rate Most of PSBs reported 10 to 20% deterioration in asset quality sequentially while United Bank’s GNPA and net NPA were 11% and 7.5% of gross advance and net advance respectively and fresh slippages were 16% (annualized). On slippage front some banks like PNB, Bank of Baroda, Union Bank and UCO bank showed some strength. But in tight economy condition and rising interest rate scenario, asset quality pressure would continue. Banks with higher coverage ratio would be protected. PNB and Bank of Baroda are in better place and their management commentaries reflect some confidence on asset quality issue. Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 8
  9. 9. Public Sector Banks Result Review 3QFY14 Worry about the structure damage of balance sheet, declined profit is not matter We are not worried about the declining trend of PSBs profitability but to worry about the structural damage of balance sheet. Most of PSBs were reported moderate to healthy loan growth but their deposits and CASA growth were absent. In rising interest rate scenario, banks with higher low cost deposits would be able to report healthy NII growth on the back of margin expansion and would absorb operating cost. In our sense, PSBs would either have to improve their cost structure or improve deposits franchise to report growth at operating profit level. On cost structure front, we are pessimist as PSBs have higher numbers of unproductive employee than private banks and their salary at lower to middle level management are no means less than private sector banks. So banks with higher deposits growth and strong CASA would be able to report healthy growth going forward. We have buy rating on SBI on the back of its high CASA base and reasonable valuation despite of bank’s profitability was declined by 34% YoY. Outlook Most of PSBs are trading at lower range of valuation multiple owing to absence of core earnings, operating leverage, deteriorating asset quality and higher amount of restructure assets that are in pipeline. Most of banking stocks reported moderate revenue and profit growth owing to multiple headwinds. In near term we are not seeing improvement in economic condition and asset quality pressure are expected to remain in the system due to tight liquidity situation and rising interest rate. Post result we like SBI, Union Bank and UCO Bank due to their structural improvement in balance sheet, operating and financial metrics. Result Snapshot PSU BANKS ALBK ANDHRABANK BANKBARODA BANKINDIA CANBK DENABANK IOB ORIENTBANK PNB SBIN SYNDIBANK UCOBANK UNIONBANK VIJAYABANK Total NII 1336 868 3057 2719 2191 661 1398 1230 4221 12641 1359 1566 1964 495 34369 3QFY14 PPP Net Profit 1008 325 522 46 2197 1048 2144 586 1425 626 371 68 961 75 858 224 2702 755 7618 2235 806 380 1137 315 1262 349 168 11 22170 6717 NII 1309 1045 2895 2527 2191 107 1452 1281 4016 12251 1411 1569 1954 705 33404 2QFY14 PPP Net Profit 1154 276 643 71 2125 1168 2102 622 1425 626 369 625 791 133 825 251 2535 505 6312 2375 811 470 1166 400 1225 208 273 136 20601 7590 NII 1330 971 2841 2308 1988 615 1382 1204 3733 11154 1400 1177 1891 456 31120 3QFY13 PPP Net Profit 860 311 712 257 2256 1012 1856 803 1516 714 443 206 1017 116 926 326 2682 1306 7791 3396 864 508 831 102 1358 302 261 127 22513 9175 YoY Growth NII PPP Net Profit 0.4 17.2 4.7 -10.6 -26.8 -82.3 7.6 -2.6 3.6 17.8 15.5 -27.0 10.2 -6.0 -12.3 7.5 -16.3 -67.1 1.2 -5.5 -35.3 2.2 -7.3 -31.2 13.1 0.8 -42.2 13.3 -2.2 -34.2 -3.0 -6.8 -25.2 33.0 36.8 208.4 3.8 -7.1 15.5 8.5 -35.7 -91.0 10.4 -1.5 -26.8 Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. QoQ Growth NII PPP Net Profit 2.0 -12.6 18.0 -16.9 -18.9 -35.5 5.6 3.4 -10.3 7.6 2.0 -5.8 0.0 0.0 0.0 517.7 0.5 -89.2 -3.7 21.5 -43.6 -3.9 4.0 -10.6 5.1 6.6 49.6 3.2 20.7 -5.9 -3.7 -0.7 -19.2 -0.2 -2.5 -21.4 0.5 3.0 67.8 -29.8 -38.6 -91.6 2.9 7.6 -11.5 9
  10. 10. SHREE CEMENT. Update Book Profit CMP Target Price Previous Target Price Upside Change from Previous 4772 4791 4791 0% NA Market Data BSE Code NSE Symbol 500387 SHREECEM 52wk Range H/L Mkt Capital (Rs Crores) Average Daily Volume (Nos.) Nifty 5210/3413 16572 4143 6186 Stock Performance-% 1M 8.2 9.5 Absolute Rel. to Nifty 1yr 9.5 3.8 YTD 8.1 4.0 Share Holding Pattern-% 2QFY14 64.8 8.2 5.9 21.2 Promoters FII DII Others 1QFY14 4QFY13 64.8 64.8 8.2 8.1 5.7 5.9 21.3 21.2 1 yr Forward P/B 6000 PRICE 2x 3x 4x 5000 1.5x 2.5x 3.5x 4.5x 4000 3000 2000 1000 Apr-13 Nov-13 Sep-12 Jul-11 Feb-12 Dec-10 Oct-09 May-10 Mar-09 Jan-08 Aug-08 Jun-07 Apr-06 Nov-06 Sep-05 Jul-04 Feb-05 Dec-03 Oct-02 May-03 Mar-02 0 Source - Comapany/EastWind Research "Book Profit" 25th Feb' 14 Profitability and Earning drag may surprise for the next cosecutive quarters. The stock is trading at 4x in 1 yr forward P/B chart.we believe for the current market scenario the price is fare enough to trade.But looking at future capex plans and sluggish demand we belive the earnings and profitability of Shree cement may fall for the next two consecutive quarters.The profitability may fall due to incrising depriciation.Till now the company's depriciation level is stable but it may surprise further.so we recommend its a better pic to book profit. Volumes grew by18 % but prices came down by 5%. So the EBITDA margin has hit badly:Shree Cement Ltd has reported a 47% fall in its December quarter net profit on lower sales as well as 5% degrowth in realization. PAT impacted due to lower other income (down by 70% YOY), Depriciation burden on EBIDTA (Depriciation increased 41% YOY). Volumes grew by18 % to3.8mn ton from 3.3mn ton QOQ. Net profit decreased by 47% yoy from Rs.217.44 crore (Rs.62.42 per share) in 2Q13 to Rs.115.49 crore (Rs.33.15 per share) in 2Q14.Total net income from operations stood at Rs.1318.13 crore in 2Q14, a 6% fall yoy from Rs.1401.23 crore in 2Q13.Other income decreased from Rs.30.2 crore in 2Q13 to Rs.9.9 crore in 2Q14.In the mean time company declares a Rs.10 as interim dividend/share. Power Segment: Realization Down By 15% : For power generation the net realization has come down from Rs 383 to Rs 334 compared to last year same quarter and in the first quarter it was still better at Rs 397.So the power realization is down by 13 percent and hence sales also have come down by 35 percent to Rs.290 Cr. At the same time 14% increase in its profitability from power segment to Rs112.56 crore while its cement segment reported 79% fall in its profitability to Rs37.65 crore. MAT Credit support the buttom line : During the Quarter Company got MAT (minimum alternative tax) credit entitlement of Rs9.25 crore and deferred tax of Rs1.79 crore. This reduced total tax payable amount to Rs15.27 crore from Rs26.31 crore. On the expansion front : The 2m-ton Line-IX clinker unit at Ras, Rajasthan, was commissioned in Jun’13.Line X of similar capacity along with 25MW of WHRS (at the same location) is expected by Jun’14.Two grinding units of 2m tons each, at Ras and in Bihar,are being constructed and expected by Jun’14.We expect Shree to be a 21.5m-tpa company by Jun’15.It plans to foray into high demanding eastern.Total capex for these expansion is Rs.3,000 crore which is spread over next 2 years. Financials : Q2FY14 Y-o-Y % Q-o-Q % Q2FY13 Q1FY14 Revenue 1318 -7.7 5.6 1428 1248 EBIDTA 271 -24.7 8.8 360 249 Net Profit 115 -46.9 -32.9 217 172 EPS 33 -46.9 -32.9 62 49 EBIDTA% 21 -18.4 3.1 25 20 NPM% 9 -42.5 -36.5 15 14 (In Crs) Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 10
  11. 11. SHREE CEMENT. Management Corner : From mid-January there is a big change in demand scenario because of the Indian calendar, the prices have improved, the demand has also improved and they think that January to June some impact of elections will be there pre-election demand and other things. So margins should be better than 21 percent. 1500 60 Revenue 1450 50 Growth 1400 40 1350 Outlook : From the view company Operations in the high utilisation North and Central markets, capacity expansions underway, low gearing and strong RoE are fundamental positives. We believe although, near term challenges in terms of a slowdown in demand for cement would remain, strong balance sheet and better efficiency in terms of cost remains a key positive for this company to overcome challenges.Company Management is bull for the rest two quarters of FY2014 as according to them demand has already buttom out.We are positive on the stock as it always beats its peers group with lower operational cost. The stock is trading at 4x in 1 yr forward P/B chart.we believe for the current market scenario the price is fare enough to trade.But looking at future capex plans and sluggish demand we belive the earnings and profitability of Shree cement may fall for the next two consecutive quarters.The profitability may fall due to incrising depriciation.Till now the company's depriciation level is stable but it may surprise further.so we recommend its a better pic to book profit. we recommend book profit at a 11% high,and stay out from the stock for medium term,till the triggers hit. Company Description : Shree Cement (SCL) is a cement producer operating in the two segments cement and power. As of June 30, 2012, the company had a cement capacity of 13.5 million tonnes per annum (MTPA) and power capacity of 560 MW. The company’s brands include Shree Ultra,Bangur Cement and Rockstrong Cement. It has manufacturing facilities at Beawar and Ras in Ajmer and Pali district and grinding units at Khushkhera, Suratgarh and Jaipur, respectively, in Rajasthan and Roorkee in Uttarakhand. P/L PERFORMANCE FY11 FY12 FY13 FY14E Net Revenue from Operation 3454 5898 5590 5409 Other Income 203 163 188 197 Total Income 3656 6061 5779 5550 Power and fuel 905 1500 1513 1409 Freight and forwarding 602 1006 915 1090 Expenditure 2569 4252 4029 4318 EBITDA 885 1646 1561 1091 Depriciation 676 873 436 562 Interest Cost 98 235 193 138 Net tax expense / (benefit) -99 69 115 54 PAT 365 619 1004 478 ROE% 20.8 23.1 26.1 11.0 Narnolia Securities Ltd, 30 1300 20 1250 10 1200 0 1150 -10 1100 -20 Source - Comapany/EastWind Research EBIDTA 450 400 INTEREST SERVICE COVERAGE RATIO 10 350 300 8 250 6 200 150 4 100 2 50 0 0 Source - Comapany/EastWind Research 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 - 12 NPM % OPM % EBITDA % 11
  12. 12. SHREE CEMENT. B/S PERFORMANCE Share capital Reserve & Surplus Total equity Long-term borrowings Short-term borrowings Long-term provisions Trade payables Short-term provisions Total liabilities Intangibles Tangible assets Capital work-in-progress Long-term loans and advances Inventories Trade receivables Cash and bank balances Short-term loans and advances Total Assets RATIOS P/B EPS Debtor to Turnover% Creditors to Turnover% Inventories to Turnover% FY10 FY11 FY12 FY13 35 1798 1833 1789 318 28 171 472 4906 0 752 967 299 358 82 416 415 4906 FY10 4.4 212.3 2.3 4.7 1.0 35 1951 1986 1472 217 16 185 267 4940 0 1167 729 308 404 108 499 429 4940 FY11 3.6 118.6 3.1 5.3 1.2 35 2699 2734 818 143 17 584 178 5973 0 1521 97 205 503 181 459 363 5973 FY12 3.8 177.5 3.1 9.9 0.9 35 3809 3844 443 534 18 81 87 6160 0 1782 133 378 530 315 369 326 6160 FY13 4.2 288.2 5.6 1.4 0.9 Trading At : Source - Comapany/EastWind Research Narnolia Securities Ltd, 12
  13. 13. "BOOK PART PROFIT " AXIS BANK 25th Feb, 2014 Company Updated CMP Target Price Previous Target Price Upside Change from Previous Market Data BSE Code NSE Symbol 52wk Range H/L Mkt Capital (Rs Cr) Average Daily Volume Nifty Stock Performance 1M Absolute -2.2 Rel.to Nifty 0.8 BOOK PART PROFIT 1237 1217 1147 -2 6 532215 AXISBANK 1549/764 55229 3.14 lakh 6186 1yr -17.4 -21.0 YTD -17.4 -21.0 Share Holding Pattern-% Current 4QFY13 3QFY1 3 Promoters 33.9 33.9 33.9 FII 43.2 43.4 40.7 DII 9.7 4.9 8.8 Others 13.2 17.8 16.6 Axis Bank Vs Nifty Axis Bank is now trading at Rs.1237/share which met our target price of Rs.1217. This price implies P/BV multiple of 1.5 times which is quite reasonable as per our view. We advice our investor to book part profit from this stock as we neither see improvement of asset quality nor revival in economy in near term. In 3QFY14’s result, bank’s profitability was up by 19% largely due to reversal of investment depreciation otherwise operating profit was just up by 10.7% YoY. Bank’s exposure to risky sector (Power + Infrastructure) remained high at 12.87% as against 12.64% in previous quarter. However, fresh slippage was marginally softened to Rs.589 cr versus Rs.618 on sequential basis. Impairment of assets (GNPA+ Restructure Assets) remained stable at 3.7% of net advance which was higher among peers. Lower multiple on account of uncomfortable earnings and lower corporate loan demand We have lower valuation multiple of bank in compare to its peers on account of uncomfortable earnings and asset quality stress. Operating performance of bank was remained under pressure as bank’s core operating revenue (NII + Other Income) grew by 12.6 YoY owing to lower fee income led by muted corporate and retail fee income. Corporate loan segment which constituted 46% of total loan grew by 3% YoY while retail segment loan grew by 44% YoY which constituted 33% of total loan. Incremental loan growth came from retail segment implying that bank has to maintain retail growth trajectory for industry average loan growth of 15%. Demand of corporate loan remained weak due to prevailing economy scenario. So loan growth for FY14 is likely to be line with system credit growth due to weakness in corporate loan demand and moderation in retail loan. Asset quality pressure persist; exposure to risky sector remained high Asset quality pressure remained persist during the quarter with GNPA and net NPA increased by 10% and 20% YoY respectively in absolute term. Fresh slippage inch up improved to Rs.589 cr as against Rs.618 cr in previous quarter. In percentage term GNPA and net NPA stood at 1.42% and 0.47% as against 1.36% and 0.42% respectively in previous quarter. Provision coverage ratio without technical write off declined by 270 bps QoQ led by lower provisions made on sequential basis. Impairment of assets (GNPA + Restructure Assets) for the quarter remained stable at 3.7% which was higher among peers. Moreover bank’s exposure to risky sector (Power + Infrastructure) was remained high at 12.87% of net advance where slippage risks are relatively high. Financials NII Total Income PPP Net Profit EPS 2011 6566 11238 6377 3340 81.4 Narnolia Securities Ltd, 2012 8026 13513 7413 4224 102.2 Rs, Cr 2013 2014E 2015E 9666 12224 14775 16217 19146 21697 9303 11206 12367 5179 5826 6934 110.7 124.2 148.2 (Source: Company/Eastwind) 13
  14. 14. AXIS BANK Moderate growth in profit & loss Bank’s profitability was up by 19% due to reversal of investment depreciation. Overall provisions and contingencies were lower by 71% QoQ which led PBT growth of 22% YoY. At operating profit level, bank grew by 10.7% YoY which was lower among peers (HDFC Bank 29 YoY, ICICI bank 28.6%). Bank’s NII grew by 19.6% YoY largely due to margin expansion of 14 bps YoY which was supported by low cost deposits franchise. Core operating revenue (NII+ other income) grew 12.6% owing to muted other income growth of 1.8% YoY. Valuation & View We value bank at Rs.1217/share implying 1.5 times of FY14E’s book value which is quite reasonable as per our view. We have given this multiple on account of uncomfortable earning and asset quality stress. Bank’s profitability was up due to reversal of investment depreciation otherwise growth at operating profit level was remained lower as compare to its peers. Asset quality increased at moderate pace with high exposure in risky sector where fresh slippage risks are remaining high. Valuation Band 1 Yr forward P/BV 1 Yr forward P/E Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 14
  15. 15. AXIS BANK Fundamenatl throught graph NII growth led by healthy CD ratio and margin expansion on YoY basis Lower other income and higher CI ratio led muted PPP growth Profit growth was higher than expectation on the back of lower provisions Source: Eastwind/Company Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 15
  16. 16. AXIS BANK Quarterly Result Quarterly Result Interest/discount on advances / bills Income on investments Interest on balances with Reserve Bank of India Others Total Interest Income Others Income Total Income Interest Expended NII Other Income Total Income Employee Other Expenses Operating Expenses PPP( Rs Cr) Provisions PBT Tax Net Profit 3QFY14 5557 2110 49 73 7789 1644 4628 4805 2984 1644 4628 655 1358 2013 2615 202 2413 808 1604 2QFY14 5394 2143 35 37 7609 1766 4703 4672 2937 1766 4703 644 1309 1953 2750 687 2062 700 1362 Balance Sheet Date Net Worth Deposits Loan 37649 36224 27027 262398 255365 244501 211467 201303 179504 Asset qualtiy( Rs Cr) GNPA NPA %GNPA %NPA 3008 1003 1.4 0.5 2734 838 1.4 0.4 3QFY13 % YoY Gr % QoQ Gr 3QFY14E Variation 4907 13.3 3.0 5748 3.4 2014 4.8 -1.5 2235 5.9 25 97.7 39.4 35 -29.2 19 277.1 95.6 38 -47.4 6965 11.8 2.4 8056 3.4 1615 1.8 -6.9 1774 7.9 4110 12.6 -1.6 4780 3.3 4470 7.5 2.8 5049 5.1 2495 19.6 1.6 3006 0.8 1615 1.8 -6.9 1774 7.9 4110 12.6 -1.6 4780 3.3 615 6.5 1.7 0 1134 19.8 3.8 0 1749 15.1 3.1 2008 -0.3 2362 10.7 -4.9 2772 6.0 387 -47.7 -70.5 752 271.4 1975 22.2 17.0 2020 -16.3 628 28.8 15.5 687 -15.0 1347 19.1 17.7 1333 -16.9 2275 679 1.3 0.4 39.3 3.9 7.3 2.8 17.8 5.0 32.2 10.0 47.8 19.7 37558 272935 214892 -0.2 4.0 1.6 - Source: Eastwind/Company Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 16
  17. 17. AXIS BANK FINANCIALS & ASSUPTION Income Statement 2011 2012 2013 2014E 2015E Interest Income Interest Expense NII Change (%) Non Interest Income Total Income Change (%) Operating Expenses Pre Provision Profits Change (%) Provisions PBT PAT Change (%) 15155 8589 6566 31.2 4671 11238 25.3 4860 6377 22.4 3033 3345 3340 34.8 21995 13969 8026 22.2 5487 13513 20.2 6100 7413 16.2 3189 4224 4224 26.5 27183 17516 9666 20.4 6551 16217 20.0 6914 9303 25.5 4124 5179 5179 22.6 31198 18974 12224 26.5 6922 19146 18.1 7940 11206 20.5 2402 8804 5826 12.5 38490 23716 14775 20.9 6922 21697 13.3 9330 12367 10.4 2461 9906 6934 19.0 189166 34 77758 18 26268 71788 142408 36 219988 16 91412 18 34072 92921 169760 19 252614 15 112100 23 43951 113738 196966 16 290506 15 124917 11 51266 129873 228481 16 334081 15 143655 15 58956 149354 265037 16 460 1404 3.1 549 1146 2.1 708 1304 1.8 813 1174 1.4 942 1174 1.2 Balance Sheet Deposits( Rs Cr) Change (%) of which CASA Dep Change (%) Borrowings( Rs Cr) Investments( Rs Cr) Loans( Rs Cr) Change (%) Valuation Book Value CMP P/BV Source: Eastwind/Company Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 17
  18. 18. Nestle India "NEUTRAL" 24th Feb' 14 "The nest becomes weaker" Result update CMP Target Price Previous Target Price Upside Change from Previous NEUTRAL 5043 - Market Data BSE Code NSE Symbol 52wk Range H/L Mkt Capital (Rs Cr) Average Daily Volume Nifty 500790 NESTLEIND 5865/4410 48593 21590 6091 Stock Performance 1M Absolute -3.7 Rel. to Nifty -1.0 1yr 10.7 7.4 YTD 3.4 1.8 Share Holding Pattern-% Current Promoters FII DII Others 1 yr Forward P/B 62.8 13.1 5.9 18.2 3QCY13 2QCY13 62.8 12.6 6.3 18.3 62.8 12.6 6.2 18.5 Weak numbers and showing up margin as well…, For 4QCY13, Nestle Ind reported below numbers than street expectations in all counts, sales grew by 4.7%(YoY) led by 3.7% domestic growth and 20.9% export growth. Its domestic sales contribute 94% and exports 6% of sales. While, PAT marginally declined by 0.7% on YoY basis. The company does not share volume growth numbers, but its statement did mention that sales rose mainly because of higher prices and product mix. For CY13, Company posted 9.2% sales growth, hugely impacted by weak consumer demand and high competitive intensity environment, PAT up by 6%. Management will continue to focus on reinforcing the fundamentals of growth drivers. Further, improve operational efficiencies, and keep rationalizing its SKUs. They are very confident of strategy to deliver long-term sustainable profitable growth, despite the short-term challenges. Margin dip: During the quarter, company has been efficient to maintain its mark of margin above than 20%. However, Margin ramp down by 210bps(YOY) to 21.1% because of inflationary pressure on raw material. There was improvement in raw material cost by 110 bps to 46.1% of adjusted net sales. PAT margin inched down by 70bps(YOY) to 12.7%. For CY13, EBITDA Margin and PAT margin were flat at 22.2% and 13%. Mix impact on RM Cost: Its top 3 inputs by value are milk and milk products, flour, and palm oil, which together account for two-thirds of its material cost. Milk and wheat flour have both seen prices increase, while a weak rupee has affected palm oil prices. However, other inputs such as green coffee and sugar have seen softer price trends. Jerk on Potential Market share: Nestle has been enjoying its leadership position (No.1) in all categories except soups and its positioning in Chocolates, noodles, Coffee has dominantly been unchallenged. Despite all facts, company has been facing many challenges over the past one and half years from Cadbury's and Ferrero Rocher in Chocolate, from HUL and ITC in noodles and from HUL in Coffee (Bru). Nestlé’s more focus on margin stability could sacrifice its volume. Company’s cash cow portfolio baby foods becoming weaker because of low ad spend. Now, Mead Jhonson and Danone are dominating in same segment. View and Valuation: Company’s less aggression on volume growth and the excessive focus on Margin expansion make us cautious on the stock. At same time, company believes on expansion of new plant set up by ignoring the dividend payout to investors. Consistently, its RoE is on downward direction. At a CMP of Rs 5043, stock trades at 15.9x P/BV of CY14E. We have a “Neutral” view on stock. Financials Revenue EBITDA PAT EBITDA Margin PAT Margin 4QCY13 2262.97 478.3 287.1 21.1% 12.7% 3QCY13 2360 503.9 289.6 21.4% 12.3% Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. Rs, Cr (QoQ)-% 4QCY12 (YoY)-% -4.1% 2161.1 4.7% -5.1% 504.1 -5.1% -0.9% 289.2 -0.7% (30bps) 23.3% (210bps) 40bps 13.4% (70bps) (Source: Company/Eastwind) 18
  19. 19. Nestle India Sales and Sales Growth(%) Sales growth led by 4.7% (YoY) India growth, contributed by net realization and volume growth in certain product categories (Source: Company/Eastwind) Margin-% RM inflation outlook appears adverse and that could impact margins to hold out. (Source: Company/Eastwind) Domestic and Export sales-(% of Sales) Domestic revenue growth continues to be very weak (Source: Company/Eastwind) Catalysts and Concerns; Catalysts: Nestle plays on “Urban consumption theme” and now urban consumption and demand are stagnant. Thus, we see steady growth in near term, while we maintain that Nestle is a great long-term story with excellent quality management, strong leadership across several categories in the food segment and with brand portfolio, there are several headwinds, which will keep volume growth muted. Concerns: (1)Continued input cost pressure could impacts its margin, (2) Competitive intensity impacting its market share adversely, (3) Any adverse impact of inflation on consumer demand would significantly impact sales and earnings growth assumptions. Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 19
  20. 20. Nestle India Financials Rs in Cr, Sales RM Cost Purchases of stock-in-trade WIP Employee Cost Ad Spend Other expenses Total expenses EBITDA Depreciation and Amortisation Other Income EBIT Interest PBT Tax Exp PAT Growth-% (YoY) Sales EBITDA PAT Expenses on Sales-% RM Cost Ad Spend Employee Cost Other expenses Tax rate Margin-% EBITDA EBIT PAT Valuation: CMP No of Share NW EPS BVPS RoE-% P/BV P/E CY10 6284.7 2560.1 578.4 (83) 433.4 302.6 1213.0 5004.7 1280.1 127.8 12.7 1165.0 1.1 1163.9 326.5 837.5 CY11 7526.6 2933.4 704.2 (48) 546.5 327.6 1474.2 5937.6 1589.0 153.3 15.1 1450.8 5.1 1445.7 426.4 1019.3 CY12 8334.5 3756.9 111.5 (92) 663.4 355.9 1680.9 6476.5 1858.0 277.2 31.0 1611.9 26.6 1585.3 484.7 1100.6 CY13 9101.1 3907.0 110.0 105 741.5 391.3 1826.3 7081.5 2019.6 330.0 83.1 1772.7 36.5 1736.2 560.9 1175.3 CY13E 9218.0 3871.6 110.62 175 760 488.6 1797.51 7203.9 2014.1 342.9 73.7 1744.9 36.0 1708.9 564.0 1145.0 CY14E 9904.9 4308.6 118.86 99 792.39 435.8 1931.45 7686.19 2218.69 402.0 49.5 1866.23 59.7 1806.5 578.1 1228.45 CY15E 10942.2 4814.6 142.25 131 875.38 492.4 2133.73 8589.64 2352.58 474.0 87.5 1966.08 83.7 1882.4 611.8 1270.62 21.9% 20.5% 27.9% 19.8% 24.1% 21.7% 10.7% 16.9% 8.0% 9.2% 8.7% 6.8% 10.6% 8.4% 4.0% 8.8% 9.9% 4.5% 10.5% 6.0% 3.4% 40.7% 4.8% 6.9% 19.3% 28.0% 39.0% 4.4% 7.3% 19.6% 29.5% 45.1% 4.3% 8.0% 20.2% 30.6% 42.9% 4.3% 8.1% 24.4% 32.3% 42.0% 5.3% 8.3% 19.5% 33.0% 43.5% 4.4% 8.0% 19.5% 32.0% 44.0% 4.5% 8.0% 19.5% 32.5% 20.4% 18.5% 13.3% 21.1% 19.3% 13.5% 22.3% 19.3% 13.2% 22.2% 19.5% 12.9% 21.9% 18.9% 12.4% 22.4% 18.8% 12.4% 21.5% 18.0% 11.6% 3795.2 9.6 855.4 86.9 88.7 97.9% 42.8 43.7 4569.3 9.6 1274.0 105.7 132.2 80.0% 34.6 43.2 4592.0 9.6 1798.4 114.2 186.6 61.2% 24.6 40.2 5189.0 9.6 2368.8 121.9 245.7 49.6% 21.1 42.6 5189.0 9.6 2369.6 119.3 246.8 48.3% 21.0 43.5 5043.0 9.64 3050.2 127.43 316.4 40.3% 15.9 39.57 5043.0 9.64 3773.9 131.81 391.5 33.7% 12.9 38.26 Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. (Source: Company/Eastwind) 20
  21. 21. Vardhman Textiles "Buy" 24th Feb' 14 On a Strong earning foot.. Initial Coverage CMP Target Price Previous Target Price Upside Change from Previous 341 412 NA 21% NA Market Data BSE Code NSE Symbol 52wk Range H/L Mkt Capital (Rs Crores) Average Daily Volume (Nos.) Nifty 502986 VTL 410/241 2170 868 6155 VTL with its largest domestic capacity in terms of spindles, drives a significant por-tion of its revenue from spinning segment. Company is one of the largest cotton yarn exporters from India. Significant presence in Indian market and has emerged as a well known supplier of the global market. Past few quarters were the turnaround for the company . Company has strategic tie-ups with Japanese and Korean companies. Consistent expansion and technological up-gradation has given a global status to the company. VTL is the supplier of fabrics to the world’s leading brands such as Tommy Hil-figer, Esprit, Gap, Louis Philippe, Arrow, etc Profitability at the pick to serve Vardhman Textiles Ltd (VTL), India’s leading textile player, reported a significant revenue growth of 30.7% to Rs. 1431 Cr during Q3-FY14 over corresponding period previous year on the back of 45.8% YoY increase in fabric business to Rs.522 Cr, which constitutes 3540% of the overall revenue. While yarn segment, which is the highest contributor of the revenue, reported YoY growth of 30.5% to Rs.1182 Cr. Stock Performance-% 1M -3.8 -0.5 Absolute Rel. to Nifty 1yr 22.6 20.1 YTD 29.5 26.2 Share Holding Pattern-% Promoters FII DII Others 3QFY14 61.9 6.6 17.2 14.4 2QFY14 1QFY14 61.7 61.6 5.7 5.3 18.2 18.9 14.4 14.2 1 yr Forward P/B Source - Comapany/EastWind Research Operating profit of the company recorded substantial growth of 70.9% to Rs.274 Cr during Q3FY14 yoy and outpaced the revenue growth due to significant control over material cost, employee expenses and fuel charges. Material cost, which constitutes 60% of the total expenses, grew at YoY rate of 22.9% to Rs.660 Cr. As a result, EBITDA and operating profit margin re-ported a considerable improvement of 358bps and 455bps during Q3FY14 yoy respectively. PAT reported the YoY growth of 109.6%, while PAT margin improved by 466bps. VTL reported consistent and strong YoY growth in past several quarters with the average growth rate of more than 20%. Company reported compounded quarterly growth of 3.5% in past 10 quarters Despite expansion and heavy CAPEX for capacity enhancement, VTL managed to reduce its debt to equity on the back of significant expansion in reserves & surplus due to phenomenal improvement in profit-ability in past several quarters. Company operates at EBITDA and net margin of 24.9% and 12.2% respectively, which provides sufficient financial cushion against operating cost and financial expenses. With liquidity being excellent and cash flows positive, current ratio at 2.58 and cash ratio at 0.47 offer no worries. Financials : Q3FY14 Y-o-Y % Q-o-Q % Q3FY13 Q2FY14 Net Revenue 1431 30.9 10.9 1093 1290 EBITDA 346 53.1 0.0 346 226 Depriciation 72 10.8 1.4 71 65 Interest Cost 31 -22.5 -11.4 35 40 Tax 68 83.8 9.7 62 37 PAT 175 108.3 -1.7 84 178 (In Crs) Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 21
  22. 22. Vardhman Textiles Advantage India remains for most of FY14E Chinese players imported yarn from India owing to the high cotton prices. This led to the strong performance of Vardhman over the last three quarters. There is no clarity yet on the policy to be followed by China. If the current scenario continues, Indian spinners will continue to gain. However, if Chinese players are able to procure cotton at lower prices, it will have a negative impact on the demand for Indian yarn. We, thereby, remain conservative about our FY15 estimates. Business and its strategies VTL with its largest domestic capacity in terms of spindles drives a significant portion of its revenue from spinning segment. Company is one of the largest cotton yarn exporters from India. Significant presence in Indian market and has emerged as a well-known supplier of the global market. Past few quarters were the turnaround for the company. Company has strategic tie-ups with Japanese and Korean companies. Consistent expansion and technological up-gradation has given a global status to the company. VTL is the supplier of fabrics to the world’s leading brands such as Tommy Hilfiger, Esprit, Gap, Louis Philippe, Arrow, etc Views and Valuation Vardhman is geared to report a record profit in FY14. Despite weak macro-economic scenario and recent expansion, VTL managed to report significant improvement in its key metrics.Considering the favourable export scenario and completion of capacity expansions, we remain positive on FY14. We, hereby, initiate our coverage with Vardhman Textiles to BUY with a target price of Rs.412 . Currently the stock is trading at 0.8x p/b , we cut our Earning parameter for FY15 and cut p/b to 0.7x for FY15 . Looking at the current earning growth and environment the stock is looking very good but due to lack of trigeers in FY15 we are really conservative for FY15 . P/L PERFORMANCE Net Revenue from Operation Cost Of Projects & Contractual Power and fuel Other expences Employee benefit Expence Expenditure EBITDA Depriciation Interest Cost Tax PAT ROE% FY12 4641 2651 460 386 292 4025 616 274 174 66 141 6 FY13 4972 2316 559 486 349 3997 975 295 177 168 356 14 FY14E 6245 2741 647 887 433 4709 1536 343 160 336 720 23 Narnolia Securities Ltd, FY15E 6682 3007 702 1002 520 5231 1451 397 160 296 628 17 Source - Comapany/EastWind Research 22
  23. 23. Vardhman Textiles B/S PERFORMANCE Share capital Reserve & Surplus Total equity Long-term borrowings Short-term borrowings Long-term provisions Trade payables Short-term provisions Total liabilities Intangibles Tangible assets Capital work-in-progress Long-term loans and advances Inventories Trade receivables Cash and bank balances Short-term loans and advances Total Assets RATIOS P/B EPS Debtor to Turnover% Creditors to Turnover% Inventories to Turnover% FY10 FY11 FY12 FY13 57 1548 1604 2346 297 3 87 26 5077 0 2553 45 77 1297 476 262 272 5077 FY10 1.0 45.3 14.2 2.6 3.9 63 2202 2264 2925 20 3 123 30 6103 0 2534 156 111 1933 667 71 395 6103 FY11 0.7 82.5 15.1 2.8 4.4 63 2144 2207 2044 505 5 116 48 5967 18 2557 185 92 1535 630 84 326 5967 FY12 0.6 22.2 13.6 2.5 3.3 63 2444 2506 2100 778 6 84 64 6789 22 2679 213 147 1784 746 65 475 6789 FY13 0.7 56.0 15.0 1.7 3.6 CASH FLOWS Cash from Operation Changes In Working Capital Net Cash From Operation Cash From Investment Cash from Finance Net Cash Flow during year FY10 640 -629 11 -132 10 -111 FY11 933 -902 31 -456 234 -192 FY12 576 444 1020 -647 -355 18 FY13 843 -510 333 -517 165 -19 Source - Comapany/EastWind Research Source - Comapany/EastWind Research Trading At : Narnolia Securities Ltd, 23
  24. 24. DENA BANK "NEUTRAL" 24th Feb, 2014 ANNUAL REPORT UPDATE Result update CMP Target Price Previous Target Price Upside Change from Previous Market Data BSE Code NSE Symbol NEUTRAL 51.55 57 55 11 - Bank’s performance was lower than street expectation and disappointed in most of operating metrics. GNPA remain high at 2.96% while net NPA were 1.97%. Provision coverage ratio (without technical write off) improved slightly on sequential basis. Valuation wise, stock is trading at 0.4 times of one year forward book which is quite reasonable. But looking at growth and operating metrics, we believe bank would be trade in the range of 0.3 to 0.4 times of one year forward book. We have neutral view on the stock with price target of Rs.57. 532121 DENABANK NII grew at moderate pace owing to margin compression on Y-o-Y Dena bank reported very weak set of numbers during quarter with NII grew by 7.5% YoY to Rs.661 cr largely due to margin compression in year on year basis led by higher cost of fund than fund yield. Higher cost of fund was due to 208 bps declined in low cost franchise deposits. Other income was lower at 10.7% YoY to Rs.129 cr 52wk Range H/L Mkt Capital (Rs Cr) Average Daily Volume Nifty Stock Performance 1M Absolute -13.6 Rel.to Nifty -10.7 103/42 1809 1.16 lakh 6155 1yr -50.3 -53.9 YTD -50.3 -53.9 Share Holding Pattern-% Current 4QFY13 3QFY1 3 Promoters 66.6 55.2 55.2 FII 7.9 8.6 16.5 DII 4.9 7.3 8.1 Others 20.7 28.9 20.2 DENA Bank Vs Nifty versus Rs.144 cr in previous quarter. Total income was moderate at 4% YoY growth. Higher operating expenses led negative growth in PPP Operating expenses during quarter was higher at 32.5% YoY which escalated cost income ratio to 63.4% versus 51.4% in last year. Bank’s employee cost and other operating expenses both surged to 33% and 32% YoY respectively. This had make down operating profit to Rs.371 cr (down by 16.3% YoY) versus Rs.443 cr in last quarter and Rs.371 cr in previous quarter. Provision and contingencies were up on the back of deteriorating asset quality Provisions and contingencies were up by 44% QoQ on the back of deteriorating asset quality. In absolute term gross NPA and net NPA both increased by 5% YoY each. In percentage term GNPA and net NPA stood at 2.96% and 1.97 versus 3.04% and 2.02% in previous quarter. Cumulative provision was up by 4.7% which slightly improved provisions coverage ratio without technical write off to 33.4% from 33.5% in 2QFY14. Dena Bank's Capital Adequacy Ratio as per Basel III norms stood at 10.61% as against 10.21% in previous quarter. Financials NII Total Income PPP Net Profit EPS 2011 1763 2297 1224 612 18.3 2012 2101 2683 1528 803 22.9 Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. Rs, Cr 2013 2014E 2015E 2383 2551 3538 3039 3410 4397 1739 1808 1627 810 445 502 23.2 9.5 10.7 (Source: Company/Eastwind) 24
  25. 25. DENA BANK Profitability declined despite of tax reversal Profitability declined by 67% YoY due to reversal of tax to the tune of Rs. 79 cr as against reversal of Rs.73 cr in previous quarter. At PBT level, bank was negative at Rs.12 cr which was highly discouraging. This was basically due to moderate NII growth, higher operating expenses and higher provisions. Sequentially margin improved on the back of stable loan yield and slightly increased of cost of deposits NIM improved by 10 bps sequentially on the back of higher yield on advance than cost of deposits. During quarter, bank’s yield on advances remained flat at 11.6% while yield on investment improved by 4 bps QoQ to 7.6%. Cost of deposits increased by 5 bps QoQ to 7.6%. Going forward, management guided NIM at the range of 2.75% to 3%. Deposits growth faster than loan growth On balance sheet growth front, bank’s deposits grew by 13.2% YoY led by term deposits which grew by 17% YoY. Current account deposits de-grew by 5% YoY while saving account deposits grew by 9% YoY. Overall CASA ratio de-grew by 208 bps to 29%. Bank’s loan grew by 11% YoY aided by agriculture and MSME segment which was grown by 30.7% and 25.4% YoY respectively. Retail advance grew by moderate at 14.4% YoY. Management guided loan growth of 15-17% for FY14. We model 15% loan growth and 6% deposits growth for FY14. Valuation & View Bank’s performance was lower than street expectation and disappointed in most of operating metrics. GNPA remain high at 2.96% while net NPA were 1.97%. Provision coverage ratio (without technical write off) improved slightly on sequential basis. Valuation wise, stock is trading at 0.4 times of one year forward book which is quite reasonable. But looking at growth and operating metrics, we believe bank would be trade in the range of 0.3 to 0.4 times of one year forward book. We have neutral view on the stock with price target of Rs.57. Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 25
  26. 26. DENA BANK NII grew by 7.5% YoY to Rs.661 cr largely due to margin compression in year on year basis led by higher cost of fund than fund yield. Higher operating expenses led negative growth in PPP Profitability declined by 67% YoY due to reversal of tax to the tune of Rs. 79 cr as against reversal of Rs.73 cr in previous quarter. Source: Eastwind/Company Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 26
  27. 27. DENA BANK Quarterly Result ( Rs Cr) Interest/discount on advances / bills Income on investments Interest on balances with Reserve Bank of India Others Total Interest Income Others Income Total Income Interest Expended NII Other Income Total Income Employee Other Expenses Operating Expenses PPP( Rs Cr) Provisions( Incl. tax provision) PBT Tax Net Profit 3QFY14 1848 654 3 30 2534 129 2663 1873 661 129 790 255 164 419 371 382 -12 -79 68 2QFY14 1790 644 9 7 2450 150 2600 1825 625 150 775 251 154 406 369 335 34 -73 107 3QFY13 1742 519 3 0 2264 144 2408 1649 615 144 759 192 124 316 443 157 286 80 206 Balance Sheet Data (Rs Cr) Deposits Saving Accounts Current Accounts Loan 96081 21983 5786 69895 93669 21476 5695 64785 84882 20216 6083 63040 Asset Quality GNPA (Rs Cr) NPA (Rs Cr) GNPA(%) NPA(%) PCR(%) (Without technical writeoff) 2066 1375 2.96 1.97 33 1968 1309 3.04 2.02 34 % YoY Gr % QoQ Gr 3QFY14E ariation(%) V 6.1 3.2 1931 -4.3 26.0 1.4 666 -1.9 -1.5 -70.1 9 -72.2 7541.0 303.8 4 707.6 11.9 3.4 2610 -2.9 -10.7 -13.9 150 -14.0 10.6 2.4 2760 -3.5 13.6 2.6 1926 -2.8 7.5 5.7 684 -3.3 -10.7 -13.9 150 -14.0 4.0 1.9 834 -5.3 32.8 1.6 225 13.4 32.1 6.1 150 9.2 32.5 3.3 375 11.7 -16.3 0.4 458 -19.1 144.2 14.1 351 8.9 -104.1 -134.2 107 -110.9 -199.3 8.6 21 -470.0 -67.2 -36.9 86 -21.1 1317 817 2.09 1.30 38 Source: Eastwind/Company Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 27
  28. 28. DENA BANK P/L Interest/discount on advances / bills Income on investments Interest on balances with Reserve Bank of India Others Total Interest Income Others Income Total Income Interest on deposits Interest on RBI/Inter bank borrowings Others Interest Expended NII NII Growth(%) Other Income Total Income Employee Other Expenses Operating Expenses PPP( Rs Cr) Provisions Net Profit 2011 2012 3820 1193 16 4 5034 534 5567 3117 8 145 3270 1763 60.3 534 2297 688 385 1073 1224 612 612 5161 1544 38 51 6794 582 7376 4528 18 147 4693 2101 19.1 582 2683 715 440 1155 1528 725 803 2013 2014E 6819 2019 31 30 8899 655 9555 6234 59 223 6516 2383 13.4 655 3039 792 508 1300 1739 706 810 7421 2536 28 50 10035 859 10894 6583 0 228 7484 2551 7.1 859 3410 978 625 1603 1808 1308 445 2015E 8737 2307 28 50 11122 859 11981 7242 0 342 7583 3538 38.7 859 4397 1690 1080 2770 1627 1000 502 64210 25.1 1692 8.3 44828 26.4 18769 19.6 77167 20.2 3881 129.4 56693 26.5 23028 22.7 97207 26.0 8414 116.8 65781 16.0 34343 49.1 102068 5.0 6515 -22.6 72359 10.0 34203 -0.4 112274 10.0 9763 49.9 83213 15.0 38442 12.4 8.5 6.4 7.4 4.9 9.0 5.0 9.1 6.7 8.0 5.9 4.2 5.8 10.4 5.9 8.1 6.4 3.4 6.2 10.5 7.4 9.4 6.5 3.4 6.9 10.5 6.0 9.1 6.5 3.5 6.2 Key Balance sheet data Deposits Deposits Growth(%) Borrowings Borrowings Growth(%) Loan Loan Growth(%) Investments Investments Growth(%) Eastwind Calculation Yield on Advances Yield on Investments Yield on Funds Cost of deposits Cost of Borrowings Cost of fund Source: Eastwind/Company Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 28
  29. 29. N arnolia Securities Ltd 402, 4th floor 7/ 1, Lord s Sinha Road Kolkata 700071, Ph 033-32011233 Toll Free no : 1-800-345-4000 em ail: research@narnolia.com , w ebsite : w w w .narnolia.com Risk Disclosure & Disclaimer: This report/message is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. Narnolia Securities Ltd. (Hereinafter referred as NSL) is not soliciting any action based upon it. This report/message is not for public distribution and has been furnished to you solely for your information and should not be reproduced or redistributed to any other person in any from. The report/message is based upon publicly available information, findings of our research wing “East wind” & information that we consider reliable, but we do not represent that it is accurate or complete and we do not provide any express or implied warranty of any kind, and also these are subject to change without notice. The recipients of this report should rely on their own investigations, should use their own judgment for taking any investment decisions keeping in mind that past performance is not necessarily a guide to future performance & that the the value of any investment or income are subject to market and other risks. Further it will be safe to assume that NSL and /or its Group or associate Companies, their Directors, affiliates and/or employees may have interests/ positions, financial or otherwise, individually or otherwise in the recommended/mentioned securities/mutual funds/ model funds and other investment products which may be added or disposed including & other mentioned in this report/message.

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