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Trade advisory services for Today Buy Stock of Hindustan Zinc LTD

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Hindustan Zinc’s (HZL) Q3FY14 stood at Rs. 3450.1 crore higher by 8.6% YoY. We reaffirm our positive stance on HZL and assign a BUY rating to the stock with a target price of Rs. 148

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Trade advisory services for Today Buy Stock of Hindustan Zinc LTD

  1. 1. IEA-Equity Strategy India Equity Analytics 21th Jan, 2014 Daliy Fundamental Report on Indian Equities Hindustan Zinc LTD : Good gains ahead "BUY" Edition : 188 21th Jan 2014 Hindustan Zinc’s (HZL) Q3FY14 performance was inline to our estimates on the back of healthy zinc sales volumes and higher metal premiums. Total operating income for Q3FY14 stood at Rs. 3450.1 crore higher by 8.6% YoY but lower by 3.1% QoQ. Total zinc sales in Q3FY14 came in at 196,000 tonne, up 17% YoY and 2% QoQ . Being an integrated & dominant player in the domestic industry with low cost of production, the company is poised to benefit in the long run. We reaffirm our positive stance on HZL and assign a BUY rating to the stock with a target price of Rs. 148/-. .................................................. ( Page : 2-4) TCS :" Strong Fundamentals" "BUY" 20th Jan 2014 TCS witnessed inline set of numbers with 1.5%(QoQ)of consolidated sales growth led by 1.8% volume growth.We continue to believe that TCS will be star performer in growth sense than other peers. Hence, we are maintaining 18% revenue growth in dollar term for FY14E because of improved demand environment, while NASSCOM expects 12-14% for the Industry.We maintain" BUY" view on the stock and we revised our target price from Rs 2360 to Rs 2510. ...................................... ( Page : 5-7) HDFC Bank "BUY" 20th Jan 2014 HDFC Bank’s profit growth of 25% YoY lowers than its previous quarters growth trajectory that it had witnessed but remain very impressive in challenging macro environment. Bank is well poised in most of operating parameters like CASA ratio of 45%+, higher than industry credit growth, best asset quality among peers, better utilization of cash in form of higher CAR ratio for further growth, consistent delivered margin above of 4%. We continue to believe bank would enjoy valuation premium. We value bank at Rs.760/share which is 4 times of one year FY14E’s book value ...................................... ( Page : 8-12) FEDERAL BANK : "BUY" 20th Jan 2014 Federal bank’s profitability grew by 9.2% YoY on the back of lower provisions led by improving asset quality and comfortable high provision coverage ratio. But bank’s operating and financials metrics remained muted, this has resulted of negative growth at operating profit level. We slightly tweak our book value estimate to Rs.82.2 from earlier of Rs.78. We value bank at Rs.98/share which is 1.2 times of FY14E’s book value and 8.5 times of forward earnings........................................... ( Page : 13-17) DB CORP : "On Strong Footing" "BUY" 20th Jan 2014 Considering its long-term growth story with favorable earning scenario and leadership position in key market, we are positive on the stock. We maintain “BUY” view on the stock with the target price of Rs 340. At a CMP of Rs 301, stock trades at 4.1x of FY15E P/BV. .............................................................. ( Page : 18-20) ITC : " Accessing the growth" "BUY" 20th Jan 2014 Strong set of numbers, sales grew by 13.1% (YoY) led by robust sales across its FMCG and Paper and Packaging divisions. Cigarette volume declined by 2%(YoY) because of price hike by 18% in premium brand. PAT up by 16.3%, YoY. ITC offers the best earnings visibility in the sector especially when sector peers are confronting multiple challenges. The premium valuations enjoyed by ITC, at the CMP of Rs 325, the stock trades at 8.2x FY15E P/BV seems justified from a growth point of view. We maintain ” BUY” with a price target of Rs 380. ........................................................................... ( Page : 21-23) HCLTECH : "Retain confidence" "BUY" 17th Jan 2014 HCL tech beats expectations with a sustained momentum in volumes and proved its consistency to maintain its margin at 26% mark; Sales grew by 2.8% (QoQ) in INR term and 4% (QoQ) in USD term led by 4.6% of growth from Infrastructure services and BPO services. Considering the increasing discretionary spends across the geographies like US and Europe, we expect healthy earnings performance ahead. At a CMP of Rs 1392, stock trades at 17.5x of FY14E earnings, We retain BUY on the stock and revised our target price from Rs 1194 to Rs1560. ............................................... ( Page : 24-26) Narnolia Securities Ltd,
  2. 2. Hindustan Zinc LTD. "BUY" 21st Jan' 14 Good gains ahead Result Update BUY CMP Target Price Previous Target Price Upside Change from Previous 135 148 143 10% 3% Market Data BSE Code NSE Symbol 52wk Range H/L Mkt Capital (Rs Crores) Average Daily Volume (Nos.) Nifty 500188 HINDZINC 143/94 56133 5613 6291 Stock Performance-% 1M 4.3 0.0 Absolute Rel. to Nifty 1yr -1.7 9.2 YTD -3.4 11.3 Share Holding Pattern-% 3QFY14 64.9 1.8 31.4 1.8 Promoters FII DII Others 2QFY14 1QFY14 64.9 64.9 1.8 1.5 31.4 31.5 1.8 2.1 1 yr Forward P/B 450 400 350 300 250 200 150 100 50 Jul-13 Jan-14 Jul-12 Jan-13 Jul-11 Jan-12 Jul-10 Jan-11 Jul-09 Jan-10 Jul-08 Jan-09 Jul-07 Jan-08 Jan-07 0 Source - Comapany/EastWind Research The attorney-general’s clearance for the Centre’s proposal to divest its residual stake in Hindustan Zinc Ltd (HZL) lifted the Street’s mood. As the government holds 29.5 per cent (minority) stake in HZL, the attorney-general said HZL was no longer a public sector company. With the majority 64.92 per cent stake with Vedanta, the group will be eyeing the government’s stake as well as the remaining 5.58 per cent owned by others. A reason to wait and watch , is since the government is looking at auction, how much will Vedanta be able to garner and what price it is willing to pay is not known. In the past it has said it wanted majority control when Vedanta had earlier offered Rs 149 a share (13.7 per cent more than the current price). If this is any benchmark, investors stand to gain. Q3FY14 Performance : Hindustan Zinc’s (HZL) Q3FY14 performance was inline to our estimates on the back of healthy zinc sales volumes and higher metal premiums. Total operating income for Q3FY14 stood at Rs. 3450.1 crore higher by 8.6% YoY but lower by 3.1% QoQ. Total zinc sales in Q3FY14 came in at 196,000 tonne, up 17% YoY and 2% QoQ . The company realised premium on metal sales amounting to ~US$241/tonne for zinc (Zn) & ~US$305/tonne for lead (Pb) . Lead sales volume for the quarter stood at 23500 tonnes (lower by 24% QoQ and 22% YoY), while silver sales volumes stood at 78500 kg (lower by 31% YoY and 14% QoQ) . EBITDA came in at Rs.1823.8 crore and inline to our estimate of Rs. 1829.6 crore. Subsequently, net profit stood at Rs. 1722.7 crore . Being an integrated & dominant player in the domestic industry with low cost of production, the company is poised to benefit in the long run. We reaffirm our positive stance on HZL and assign a BUY rating to the stock with a target price of Rs. 148/-. Investment Concern HZL’s revenues are directly linked with the global market for products essentially, Zinc and Lead which are priced with reference to LME prices and Silver to LBMA (London Bullion Metal Association) prices. Disruptions in mining due to equipment failures, unexpected maintenance problems , non-availability of raw materials of appropriate price, quantity and quality for our energy requirements, disruptions to or increased cost of transport services or strikes and industrial actions or disputes.Lower than expected demand by galvanizing industries for zinc and industrial batteries, car batteries industries for lead would affect the company estimates. Financials : Q3FY14 Y-o-Y % Q-o-Q % Q3FY13 Q2FY14 Net Revenue 3450 8.6 -9.8 3178 3826 EBITDA 1824 22.1 -3.1 1883 1494 Depriciation 210 18.6 12.9 186 177 Tax 305 50.2 20.1 254 203 PAT 1723 6.8 5.1 1640 1613 (In Crs) Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 2
  3. 3. Hindustan Zinc LTD. Silver(rs/ounce) Nov-13 Dec-13 Nov-13 Dec-13 Nov-13 Dec-13 Oct-13 Sep-13 Jul-13 Aug-13 Jun-13 Apr-13 May-13 Feb-13 Mar-13 1800 1600 1400 1200 1000 800 600 400 200 0 Jan-13 Source - Comapany/EastWind Research LME Price/Ton Lead Oct-13 Sep-13 Aug-13 Jul-13 Jun-13 May-13 Apr-13 Mar-13 160000 140000 120000 100000 80000 60000 40000 20000 0 Feb-13 From the Management Corner : Volatile Desel Price and high Sulphuric acid price affecting the company,s PAT adversly.Company is tracking on 95% capacity utilization.Captive plants enjoy the lower Tax rate and company enjoys zero tax from tax free geographycal areas. Smelting Plants are improvised and management is confident that the smelting plants will maintain their stance for the coming quarters also. Outlook and valuation: With a cash-rich balance sheet and strong visibility over production growth of zinc, lead and silver over FY2013-15, we are positive on HZL.The Rampura Agucha underground mine project is operational via ramps (tunnel driven downward from the surface) and commercial production already ramp up in Q3 and will in Q4 of FY14 . The Kayad mine project will also commence commercial production in the current fiscal year. A cash-rich balance sheet, low cost of production and inexpensive valuations make HZL an attractive bet at the current price levels.HZL’s integrated business model ensures steady cash flow, which reiterates our positive stance on the company.we Valuing the stock at this level, we recommend BUY rating on HZL with a target price of Rs.143-148 for FY14. LME Price/Ton Jan-13 Lower Production Guideline HZL has marginally downward revised its mined metal production guidance for FY14 from 950,000 tonnes earlier to 900,000 tonnes. This reflects slower-than-expected ramp up of underground mining projects and some changes in mining sequence wherein preference has been given to primary mine development during this period. Source - Comapany/EastWind Research LME Price/Ton Zinc Narnolia Securities Ltd, Oct-13 Sep-13 Aug-13 Jul-13 Jun-13 125000 120000 115000 110000 105000 100000 95000 90000 May-13 FY14E 13577 1787 15364 1291 707 6484 7093 718 37 1097 6967 19.0 Apr-13 FY13 12700 2032 14732 1070 696 6218 6482 647 29 921 6899 21.0 Mar-13 FY12 11405 1543 12948 1228 568 5336 6069 611 14 1419 5526 21.0 Feb-13 FY11 9912 979 10891 1023 492 4417 5496 475 19 1059 4900 22.0 Jan-13 P/L PERFORMANCE Net Revenue from Operation Other Income Total Income Power, fuel & water Repairs Expenditure EBITDA Depriciation Interest Cost Net tax expense / (benefit) PAT ROE% Source - Comapany/EastWind Research 3
  4. 4. Hindustan Zinc LTD. 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 423 17701 18124 0 60 0 478 340 20238 109 6071 1113 361 452 152 928 96 20238 FY10 3.2 95.6 1.9 6.0 0.6 FY11 845 21688 22533 0 0 0 475 567 25053 109 7145 875 594 762 209 5633 158 25053 FY11 2.2 11.6 2.1 4.8 0.8 FY12 845 26036 26881 0 0 0 410 504 29485 47 8466 445 876 798 332 5255 233 29485 FY12 2.1 13.1 2.9 3.6 0.7 FY13 845 31431 32276 0 0 0 484 825 35465 10 8474 1082 1898 1111 403 6942 373 35465 FY13 1.7 16.3 3.2 3.8 0.9 Net Revenue from Operatio n 4000 3500 3000 2500 30.0 Revenue Growth 4500 15.0 25.0 20.0 2000 10.0 1500 5.0 1000 0.0 500 0 -5.0 Source - Comapany/EastWind Research ZinC Productions: 250000 Zinc Production (tons) 200000 150000 100000 50000 0 Source - Comapany/EastWind Research 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 4001 77 4077 -3881 -187 8 FY11 4483 -212 4272 -3658 -363 250 FY12 4553 -61 4492 -3499 -1242 -248 FY13 4935 -183 4752 -3234 -1257 262 2500 EBIDTA % 2000 49 49 50 47 43 1500 60 EBIDTA 43 41 40 42 30 Trading At : 7000 EBIDTA & Margin : 1000 NIFTY HINDZINC 20 160 6000 140 5000 120 500 10 100 4000 80 3000 0 0 60 2000 40 1000 20 0 0 Source - Comapany/EastWind Research Narnolia Securities Ltd, 4
  5. 5. TCS "BUY" 20th Jan' 14 " Strong Fundamentals" Results update Buy CMP Target Price Previous Target Price Upside Change from Previous 2216 2510 2360 13% 6% Market Data BSE Code NSE Symbol 52wk Range H/L Mkt Capital (Rs Crores) Average Daily Volume Nifty 532540 TCS 2384/1300 433985 1011877 6262 Stock Performance 1M 9.8 8.1 Absolute Rel. to Nifty 1yr 64.4 60.1 YTD 67.2 57.1 Street stunned with inline set of number, management is confident to see better growth in near future; TCS witnessed inline set of numbers with 1.5%(QoQ)of consolidated sales growth led by 1.8% volume growth and1.2% pricing growth. This volume growth dampened because of holidays and furlough effects. PAT grew by 15.1% (QoQ). We continue to believe that TCS will be star performer in growth sense than other peers. Hence, we are maintaining 18% revenue growth in dollar term for FY14E because of improved demand environment, while NASSCOM expects 12-14% for the Industry. We continue to be positive on demand prospect for TCS. In US dollar terms, revenue was $3438mn compared with USD 3337 mn in Q2FY14. Net profit was at USD 858 mn, compared with USD 748 mn in Q2FY14. ▪Steady Margin growth: On margin front, EBITDA down by 20bps and EBIT 30bps on QoQ basis to 31.4% and 29.8%, during the quarter. The company attributed this fall to reinvestment of gains from margin into the business. Management is very confident to maintain EBITDA margin at a range of 26-28% ahead. ▪ Lower volume and stable pricing growth: The volume growth of 1.8% was lower than expectations and what the company has been delivering over the last few quarters. The company attributed this fall to de-growth in India business. The third quarter is generally slow due to holidays, and furloughs. The pricing is expected to be stable overall but expects variability across the quarters going forward. Share Holding Pattern-% Promoters FII DII Others Current 73.9 16.33 5.26 4.51 1 year forward P/E 2QFY14 1QFY14 73.96 73.96 16.09 15.67 5.58 5.90 4.37 4.47 ▪ Strong growth across segments: On segmental front, Manufacturing grew by 6.1% (QoQ), and Telecom (including media and entertainment) by 5.1% (QoQ), while, BFSI and Retail (including consumer-packaged goods) reported strong below 1% growth, sequentially. Even, the telecom sector posted excellent quarter than before but still wait to change view on the sector. ▪ Growth across the geographies: Among growth markets, Latin America, APAC and MEA registered strong growth. India business suffered from volatility and declined sequentially. Further, US grew by 2.6%, Europe by 2.6% and RoW by 7.1% QoQ. USA contributes 55%, Europe 29.1% and RoW 15.9% of its revenue. View and Valuation: We continue to remain positive on demand outlook and margin profile, the management expects for robust deal pipeline going forward and also expects to materialize its emerging space like Digital as well as Cloud, Mobility, Analytics and Big data. Based on initial discussions with customers, Management believes for stronger 2014 than 2013. We continue to be positive on demand environment and company’s strength of efficient deal execution. We advise that TCS now seem to be trading ahead of fundamentals; At a price of Rs 2216, it is trading at 20.3x FY15E earnings, We maintain" BUY" view on the stock and we revised our target price from Rs 2360 to Rs 2510. Financials Revenue EBITDA PAT EBITDA Margin PAT Margin 3QFY14 21294 6686.76 5333.43 31.4% 25.0% 2QFY14 20977.2 6633.0 4633.3 31.6% 22.1% (QoQ)-% 1.5 0.8 15.1 (20bps) 290bps 3QFY13 16069.93 4660.49 3549.61 29.0% 22.1% Rs, Crore (YoY)-% 32.5 43.5 50.3 240bps 290bps (Source: Company/Eastwind) Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 5
  6. 6. TCS. Revenue and growth in INR term-(QoQ) The Company remains confident to clock better growth in FY14 than FY13 and aims to exceed upper end of industry body NASSCOM’s guidance at 12-14% in FY14. We expect better revenue growth than its peer like Infy (Source: Company/Eastwind) Margin-% The outlook on margins, it indicated that is comfortable in the current level and will be in the range of 26-28% range going forward. (Source: Company/Eastwind) Volume and Pricing Growth (QoQ)-% The volumes were strong across the board during the quarter. The pricing is expected to be stable overall but expects variability across the quarters going forward.The volume growth could be improve further because of better demand environment across all geogrpahies and space. (Source: Company/Eastwind) Key Facts from Conference Call (attended on 16th Jan,2014): (1)TCS, which does not provide detailed revenue forecasts, The Company remains confident to clock better growth in FY14 than FY13 and aims to exceed upper end of industry body NASSCOM’s guidance at 12-14% in FY14. And continued to reiterate its stand that FY15 will be a better year than FY14. (2) The management stated that pricing would be stable for next 12 months. Realization seeing minor fluctuations, but (3) The outlook on margins, it indicated that is comfortable in the current level and will be in the range of 26-28% range going forward. (4) The company has maintained hiring target of 55,000 gross employees for FY14, (5) Demand environment from Domestic market for next 2Qtrs will be adversly impacted because of fortcong general election. Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 6
  7. 7. TCS. Attrition is low in the Industry – Expects to improve Utilizations to 85% and beyond:: At the end of 3QFY14, TCS continued its uptick in hiring and upped the numbers to 55,000 from its earlier stated 50,000. This is reflective of the demand environment. The utilization rate (excluding trainees) was at 84.3% and that including trainees was 77.5 %. The attrition rate in IT was at 10.3 %, while BPS attrition fell to 13.4 %. The attrition rate (LTM) was stable at 10.9% including BPS. Sound clients metrics: TCS sees a robust demand pipeline across markets and a unique opportunity to strategically partner and participate with clients. TCS' USD added total 8 large clients(net). Financials Rs, Cr Net Sales-USD Net Sales Employee Cost Overseas business expenses Services rendered by business associates and others Operation and other expenses Total Expenses EBITDA Depreciation Amortisation Other Income EBIT Interest Cost PBT Tax PAT PAT ((Reported PAT)) Growth-% Sales-USD Sales EBITDA PAT Margin -% EBITDA EBIT PAT Expenses on Sales-% Employee Cost Overseas business expenses Services rendered by business associates and others Operation and other expenses Tax rate Valuation CMP No of Share NW EPS BVPS RoE-% Dividen Payout ratio P/BV P/E FY10 6339.0 30029.0 10879.6 4570.1 1262.0 4622.8 21334.4 8694.6 601.8 59.1 272.0 8033.7 16.1 8289.6 1197.0 7092.7 7000.6 FY11 8187.0 37325.1 13850.5 5497.7 1743.7 5054.3 26146.2 11178.9 686.2 49.1 604.0 10443.6 26.5 11021.2 1830.8 9190.3 9068.6 FY12 10171.0 48894.3 18571.9 6800.5 2391.3 6694.8 34458.5 14435.8 860.9 57.1 428.2 13517.9 22.2 13923.8 3399.9 10524.0 10414.0 FY13 11569.0 62989.5 24040.0 8701.9 3763.7 8443.9 44949.6 18040.0 1016.3 63.7 1178.2 16960.1 48.5 18089.8 4014.0 14075.7 13917.4 FY14E 13660.8 81964.9 30327.0 11680.0 4917.9 10655.4 57580.4 24384.6 1282.9 57.5 1434.4 23101.7 35.9 24500.2 5880.0 18620.2 18620.2 FY15E 16393.8 97543.1 36578.7 14143.7 6340.3 12680.6 69743.3 27799.8 1526.7 76.7 1950.9 26273.1 33.8 28190.2 6765.6 21424.5 21424.5 8.0% 21.3% 31.8% 29.2% 24.3% 28.6% 29.6% 24.2% 31.0% 29.1% 14.5% 13.7% 28.8% 25.0% 33.7% 18.1% 30.1% 35.2% 32.3% 20.0% 19.0% 14.0% 15.1% 29.0% 26.8% 23.6% 30.0% 28.0% 24.6% 29.5% 27.6% 21.5% 28.6% 26.9% 22.3% 29.8% 28.2% 22.7% 28.5% 26.9% 22.0% 36.2% 15.2% 4.2% 15.4% 14.4% 37.1% 14.7% 4.7% 13.5% 16.6% 38.0% 13.9% 4.9% 13.7% 24.4% 38.2% 13.8% 6.0% 13.4% 22.2% 37.0% 14.3% 6.0% 13.0% 24.0% 37.5% 14.5% 6.5% 13.0% 24.0% 780.8 195.7 18466.7 36.2 94.4 38.4% 28.1% 8.3 21.5 1182.5 195.7 24504.8 47.0 125.2 37.5% 50.8% 9.4 25.2 1322.0 195.7 29579.2 53.8 151.1 35.6% 37.5% 8.7 24.6 1563.0 196.0 38645.7 71.8 197.2 36.4% 41.2% 7.9 21.8 2216.0 196.0 49594.4 95.0 253.0 37.5% 41.2% 8.8 23.3 2216.0 196.0 62192.0 109.3 317.3 34.4% 41.2% 7.0 20.3 (Source: Company/Eastwind) Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 7
  8. 8. HDFC Bank "BUY " 20th Jan.,2014 Result update CMP Target Price Previous Target Price Upside Change from Previous BUY 668 760 720 14 6 HDFC Bank’s profit growth of 25% YoY lowers than its previous quarters growth trajectory that it had witnessed but remain very impressive in challenging macro environment. Bank is well poised in most of operating parameters like CASA ratio of 45%+, higher than industry credit growth, best asset quality among peers, better utilization of cash in form of higher CAR ratio for further growth, consistent delivered margin above of 4%. We continue to believe bank would enjoy valuation premium. We value bank at Rs.760/share which is 4 times of one year FY14E’s book value. Market Data BSE Code NSE Symbol 52wk Range H/L Mkt Capital (Rs Cr) Average Daily Volume Nifty 500180 HDFCBANK 727/528 160030 4.17 lakhs 6261 Profit growth of 25% YoY, quite impressive in present economy scenario HDFC bank’s profitability grew by 25% YoY to Rs.2326 cr against our expectation of Rs.2289 cr. Growth in profit was due to higher growth in revenue, lower cost income ratio and stable asset quality. But growth trajectory of the bank was lower if we compare it from past as bank has been witnessing 30% growth previously. In previous quarter bank reported 27% YoY growth in profit and this quarter reported lower from previous quarter. We believe to maintain 30%+ growth would be tough in present challenging macro environment. Stock Performance 1M Absolute 0.1 Rel.to Nifty -0.6 1yr 0.0 -3.4 YTD 0.0 -3.4 Share Holding Pattern-% Current 4QFY13 3QFY1 3 Promoters 22.7 22.7 22.7 FII 34.9 33.6 34.9 DII 9.3 9.8 6.6 Others 33.1 33.8 34.2 Healthy NII growth on the back of stable margin and higher CD ratio HDFC Bank reported another good set of numbers with NII grew by 22% YoY to Rs.4635 cr better than our expectation due to healthy loan growth, stable margin, higher credit deposits ratio and controlled cost of deposits. Total revenue of the bank grew by 21.2% YoY to Rs.6783 cr. Non- interest income registered growth of 19.4% YoY to Rs.2148 cr. Other income comprises fees & commissions of Rs 1,575.0 cr (Rs 1,413.5 cr in 3QFY13), foreign exchange & derivatives revenue of Rs.333.2 cr (Rs 258 cr in 3QFY13), gain on revaluation / sale of investments of Rs 50.9 cr (gain of Rs. 135.8 cr in 3QFY13) and miscellaneous income including recoveries of Rs 189.1 cr (Rs 120.4 cr in 3QFY13). HDFC Bank Vs Nifty Declined CI ratio along with healthy revenue growth led operating profit growth Cost to income ratio declined to 42.7% from 46% in 3QFY14 largely due to employee expenses. In 3QFY14, employee cost was declined by 3.1% YoY due to hiring soften strategy taken by bank. At the end of quarter, bank has total 68200 employees as against 69700 employees in last quarter. Other operating cost increased by 12.5% YoY largely due to addition of new branches and ATMs. At the end of December quarter, bank’s added 274 branches taking total network to 3336 branches against 2776 branches in 3QFY13. With the support of healthy NII growth, non interest income and control cost measurement; bank’s operating profit grew by 28.6% YoY. Rs, Cr Financials 2011 2012 2013 2014E 2015E NII 10543 12885 15811 18713 22944 Total Income 14878 18668 22664 26604 30835 PPP 7725 9391 11428 14516 15572 Net Profit 3926 5167 6726 8453 9119 EPS 84.4 22.0 28.7 36.0 38.9 (Source: Company/Eastwind) 8 Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report.
  9. 9. HDFC BANK Sequentially stable asset quality despite of challenging macro environment Despite of challenging macro environment, bank reported stable asset quality with GNPA in absolute term grew by mere 3% on sequential basis. As a percentage to gross advance, GNPA stood at 1.02% versus 1.1% in previous quarter. Loan loss provisions were Rs.389 cr versus Rs.386 cr in previous quarter. Consequently net NPA increased by 4% QoQ and in percentage to net advance, it stood at 0.27% versus 0.29%. Provision coverage ratio with technical write-off was stable on sequential basis to 73.8%. Advance grew by 23% YoY and deposits grew by 23% led by FCNR deposits Total advance increased by 23% to Rs.2967 bn. Loan growth was driven by 13.6% YoY increased of retail loan and 22.1%YoY increased of corporate loan. Composition of retail and corporate loan stood at 54:46 ratios. Deposits increased by 23% to Rs.3492 bn in which saving deposits increased by 16% and current deposits grew by 23% taking overall CASA ratio of 43.7%. Deposits growth of 23% included US$3.4 bn of FCNR deposits raised through RBI’s special window. Adjusted with same, deposits grew by 15.5% YoY. Credit deposits ratio during quarter stood at 85% which was by and large same in both quarter on quarter and year on year basis. Valuation & View HDFC Bank’s profit growth of 25% YoY lowers than its previous quarters growth trajectory that it had witnessed but remain very impressive in challenging macro environment. Bank is well poised in most of operating parameters like CASA ratio of 45%+, higher than industry credit growth, best asset quality among peers, better utilization of cash in form of higher CAR ratio for further growth, consistent delivered margin above of 4%. We continue to believe bank would enjoy valuation premium. We value bank at Rs.760/share which is 4 times of one year FY14E’s book value. Valuation Band Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 9
  10. 10. HDFC BANK Fundamental Through Graph NII growth of 22% led by healthy loan growth, stable margin, higher credit deposits ratio and controlled cost of deposits Declined CI ratio along with healthy revenue growth led operating profit growth Profit growth of 25% YoY due to higher growth in revenue, lower cost income ratio and stable asset quality Source: Eastwind/ Company Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 10
  11. 11. HDFC BANK Quarterly Performance Quarterly Performance 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 2QFY14 3QFY13 % YoY Gr % QoQ Gr 3QFY14E Variation 8183 7692 6722 21.7 6.4 8524 4.2 2309 2292 1893 22.0 0.8 2354 1.9 85 84 68 25.7 1.2 97 14.2 13 25 25 -48.3 -48.4 18 35.7 10591 10093 8708 21.6 4.9 10993 3.8 2148 1844 1799 19.4 16.5 1885 -12.3 12739 11938 10507 21.2 6.7 12878 1.1 5956 5617 4909 21.3 6.0 5798 -2.7 4635 4477 3799 22.0 3.5 5195 12.1 2148 1844 1799 19.4 16.5 1885 -12.3 6783 6321 5598 21.2 7.3 7080 4.4 973 1036 1004 -3.1 -6.1 1115 14.6 1922 1899 1570 22.4 1.2 2071 7.7 2895 2934 2574 12.5 -1.3 3186 10.0 3888 3387 3024 28.6 14.8 3894 0.2 389 386 307 26.6 0.8 426 9.6 3499 3001 2716 28.8 16.6 3468 -0.9 1173 1018 857 36.9 15.2 1179 0.5 2326 1982 1859 25.1 17.3 2289 -1.6 Balance Sheet( Rs Cr) Net Worth Deposits Borrowings Investment Loan 42891 349215 43848 110616 296742 40485 313011 39340 101850 268617 35436 284119 31585 95979 241493 21.0 5.9 22.9 11.6 38.8 11.5 15.3 8.6 22.9 10.5 Asset Quality GNPA( Rs Cr) NPA(Rs Cr) GNPA(%) NPA(%) PCR(w/o tech write-off)(%) 3017.84 2941.71 797 767 1.0 1.1 0.3 0.3 74 74 2432.2 496 1.0 0.2 80 24.1 2.6 60.8 3.9 42774 331291 44639 108215 284134 -0.3 -5.1 1.8 -2.2 -4.2 Source: Eastwind/ Company Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 11
  12. 12. HDFC BANK Financials P/L 2011 2012 2013 2014E 2015E 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 Total Income Growth(%) Employee Other Expenses Operating Expenses PPP( Rs Cr) Provisions( Incl tax provision) Net Profit Net Profit Growth(%) 15085 4675 148 20 19928 4335 24263 8028 1336 20 9385 10543 25.7 4335 14878 20.3 2836 4317 7153 7725 3799 3926 33.2 21124 6505 137 108 27874 5784 33658 12690 2253 47 14990 12885 22.2 5784 18668 25.5 3400 5878 9278 9391 4224 5167 31.6 26822 7820 282 141 35065 6853 41917 16321 2889 44 19254 15811 22.7 6853 22664 21.4 3965 7271 11236 11428 4701 6726 30.2 32002 9311 373 65 41751 7891 49642 20281 4571 44 23038 18713 18.4 7891 26604 17.4 4231 7857 12087 14516 1751 8453 25.7 40213 10952 373 65 51603 7891 59494 24337 4278 44 28659 22944 22.6 7891 30835 15.9 5342 9921 15263 15572 6453 9119 7.9 208586 24.6 14394 11.4 159983 27.1 70929 21.0 246706 18.3 23847 65.7 195420 22.2 97483 37.4 296247 20.1 33007 38.4 239721 22.7 111614 14.5 355496 20 50785 54 299651 25 114580 3 426596 20 47529 -6 365574 22 156461 37 9.4 6.6 7.7 4.3 9.4 4.2 10.8 6.7 8.9 5.6 9.6 5.5 11.2 7.0 9.3 6.0 8.9 5.8 10.7 8.1 10.1 6.5 9.0 5.7 11.0 7.0 9.9 6.2 9.0 6.0 545.5 4.3 27.8 127.5 4.1 23.6 154.3 4.1 21.8 189.4 3.5 18.7 222.3 3.0 17.3 Key Balance Sheet Data Deposits Deposits Growth(%) Borrowings Borrowings Growth(%) Loan Loan Growth(%) Investment Investment Growth(%) Eastwind Calculation Yield on Advances Yield on Investments Yield on Funds Cost of deposits Cost of Borrowings Cost of fund Valuation Book Value P/BV P/E Source: Eastwind/ Company Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 12
  13. 13. FEDERAL BANK Result update CMP Target Price Previous Target Price Upside Change from Previous( Rs) Market Data BSE Code NSE Symbol 52wk Range H/L Mkt Capital (Rs Cr) Average Daily Volume Nifty BUY 80 98 87 23 13 500469 FEDERALBNK 104.75/44.25 6792 9.78 lakh 6261 Stock Performance Absolute Rel.to Nifty 1M -0.6 -1.3 1yr -24.3 -27.7 YTD -24.3 -27.7 Share Holding Pattern-% Current 1QFY14 4QFY1 3 Promoters FII 42.4 44.1 44.4 DII 21.6 20.6 20.8 Others 36.1 35.3 34.8 FEDERAL Bank Vs Nifty "BUY" 20th Jan, 2014 Bank reported net profit growth of 9.2% YoY largely due to lower provision led by improving asset quality. Making lower provision in order to inflate profit is not too bad in our sense as bank has high provision coverage ratio and sequentially improved gross NPA. However at operating profit level, bank reported negative growth of 9.7% due to muted performance all around. We revised our book value estimate to Rs.82.2 from earlier of Rs.78. We believe bank to trade at 1.2 times of book value of FY14E. We value bank at Rs.98/share which is 1.2 times of FY14E’s book value and 8.5 times of full year earnings Profit growth on the back of lower provision led by improving asset quality Federal bank continued to deliver moderate growth in net profit on the back of muted growth in operating as well as financial metrics. During quarter bank’s net growth grew by 9.2% YoY largely due to lower provisions led by improving asset quality. This quarter bank reported improvement in asset quality when most of banks reported deteriorating or stable stress in assets which surprise us positively. Despite of lower loan loss provisions, bank’s provision coverage ratio remained high against regulatory requirement. Therefore we take it positive as bank’s strategy to make lower provision in order to inflate profit. But muted growths in balance sheet remain a cause of concern. Flat revenue growth because of negative growth in other income During this quarter bank’s NII grew by 9.7% on account of muted loan growth along with continuous fall in credit deposits ratio. However bank able to maintain cost of deposits under control. Other income de-grew by 23.4% YoY taking flat revenue growth on year on year basis and quarterly basis. Operating profit de-growth by 9.7% YoY led by flat revenue growth and high CI ratio Cost Income ratio increased by 550 bps YoY to 49.3% but operating leverage (operating cost to total assets) remain flat at 0.45%, indicating comfortable cost management. Employee cost and other operating cost increased by 8.1% and 17.7% respectively. During quarter bank opened 18 new branches and 47 ATMs. Operating profit de-grew by 9.7% YoY on account of muted NII growth and lower other income. Financials NII Total Income PPP Net Profit EPS 2011 1747 2263 1427 902 6.5 2012 1953 2486 1506 734 8.6 Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. Rs, Cr 2013 2014E 2015E 1975 2206 2543 2639 2893 3230 1460 1520 1777 803 799 1012 9.4 9.3 11.8 (Source: Company/Eastwind) 13
  14. 14. FEDERAL BANK Provision lower to Rs.7 cr but PCR remain high In 3QFY14, Federal bank made total provisions of Rs.7 cr versus Rs.11 cr in previous quarter and Rs.74 cr in last quarter. Lower provision was due to improving asset quality. Gross NPA improved by 18% QoQ to Rs.1201 cr in absolute term whereas as a percentage to total advance, it stood at 2.88% versus 3.47% in previous quarter. Loan loss provisions were lower by 20% QoQ, taking PCR ratio to 70.3% (without technical write-off). This has resulted net NPA declined to 0.9% versus 1% in previous quarter. NIM declined sequentially due to higher cost of fund than deposits NIM on sequential basis declined by 6 bps to 3.24% due to higher cost of fund (in absolute term) than yield on loan (in absolute term). Higher cost of fund largely came from cost of borrowing than deposits. Borrowings as a percentage of NDTL, sequentially increased to 9.2% from 8.1% taking overall interest expenses up in absolute term. Loan yield improved by 18 bps QoQ to 12.2% from 12% but muted growth in loan, increased interest income by 0.1% QoQ whereas interest expenses increased by 2.4% QoQ. Despite of lower increased in cost of fund (6 bps QoQ), NIM declined sequentially. Loan & deposit grew by moderate pace Federal Bank’s balance sheet grew by 15% YoY in which loan grew by 5.4% YoY. SME and retail loan registered growth of 38.4% and 11.5% YoY respectively but corporate loan de-grew by 14.4% YoY. Share of corporate loan declined to 33% from 40% in 3QFY14 whereas share of SME and retail loan increased to 24% and 32% from 18% and 30% respectively. Despite of reported higher growth in SME and retail loan, overall loan grew by 5.4% YoY. Deposits witnessed growth of 12% YoY led by CASA growth of 15% YoY while term deposits de-grew by 10% YoY. In percentage term CASA improved by 90 bps YoY to 30.4%. Valuation & View Bank reported net profit growth of 9.2% YoY largely due to lower provision led by improving asset quality. Making lower provision in order to inflate profit is not too bad in our sense as bank has high provision coverage ratio and sequentially improved gross NPA. However at operating profit level, bank reported negative growth of 9.7% due to muted performance all around. We revised our book value estimate to Rs.82.2 from earlier of Rs.78. We believe bank to trade at 1.2 times of book value of FY14E. We value bank at Rs.98/share which is 1.2 times of FY14E’s book value and 8.5 times of full year earnings Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 14
  15. 15. FEDERAL BANK Fundamental Through Graph Valuation Band Source: Eastwind/Company Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 15
  16. 16. FEDERAL BANK Quarterly Result Quarterly Performance(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 PBT Tax Net Profit Balance Sheet(Rs Cr) Net Worth Deposits Borrowings Investment Loan Asset Quality GNPA(Rs Cr) NPA(Rs Cr) GNPA(%) NPA(%) PCR(w/o tech write-off)(%) 3QFY14 2QFY14 3QFY13 % YoY Gr % QoQ Gr 3QFY14E Variation 1266 1265 1151 10.0 0.1 1348 6.4 461 438 358 28.7 5.3 434 -6.0 11 11 11 -8.2 -5.2 12 15.6 2 1 1 48.7 151.5 -100.0 1740 1714 1522 14.3 1.5 1793 3.1 156 143 204 -23.4 9.0 180 14.9 1896 1858 1726 9.9 2.0 1973 4.1 1194 1166 1024 16.6 2.4 1184 -0.8 546 548 497 9.7 -0.5 609 11.6 156 143 204 -23.4 9.0 180 14.9 702 692 701 0.1 1.5 789 12.4 177 170 163 8.1 3.7 189 7.0 169 167 144 17.7 1.1 182 7.3 346 338 307 12.6 2.4 371 7.1 356 354 394 -9.7 0.6 418 17.4 7 11 74 -90.2 -33.6 90 1132.4 349 343 320 9.1 1.7 328 -5.9 118 117 109 8.9 1.2 98 -16.9 230 226 211 9.2 1.9 230 -0.2 6872 57737 5850 25028 41640 6696 56794 5033 22794 42220 6323 51607 3562 19433 39494 1201 356 2.9 0.9 70 1466 411 3.5 1.0 72 1564 363 4.0 0.9 77 8.7 2.6 11.9 1.7 64.2 16.2 28.8 9.8 5.4 -1.4 -23.2 -18.1 -1.9 -13.4 6926 59221 5197 23124 44922 0.8 2.6 -11.2 -7.6 7.9 - Source: Eastwind/Company Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 16
  17. 17. FEDERAL BANK Financials & View 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 (%) 4052 2305 1747 23.8 517 2263 16.6 836 1427 12.8 525 902 902 94.1 5558 3605 1953 11.8 532 2486 9.8 979 1506 5.6 335 1172 734 -18.6 6168 4193 1975 1.1 664 2639 6.2 1180 1460 -3.1 297 1162 803 9.4 6989 4783 2206 11.7 687 2893 9.6 1372 1520 4.2 335 1186 799 -0.5 7707 5164 2543 15.3 687 3230 11.7 1454 1777 16.9 331 1445 1012 26.7 43015 19 11554 22 1888 14538 31953 19 48937 14 13476 17 4241 17402 37756 18 57615 18 15652 16 5187 21155 44097 17 66257 15 19111 22 5361 23453 47624 8 76196 15 22360 17 6272 26656 55244 16 Avg. Yield on loans Avg. Yield on Investments Avg. Cost of Deposit Avg. Cost of Borrowimgs 9.9 6.0 5.0 7.6 11.1 7.6 6.8 6.5 10.5 6.9 6.7 6.9 10.9 7.4 6.6 7.0 10.5 6.9 6.6 7.0 Valuation Book Value CMP P/BV 60 84 1.4 67 85 1.3 74 96 1.3 83 80 1.0 85 80 0.9 Balance Sheet Deposits( Rs Cr) Change (%) of which CASA Dep Change (%) Borrowings( Rs Cr) Investments( Rs Cr) Loans( Rs Cr) Change (%) Ratio Source: Eastwind/Company Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 17
  18. 18. DB CORP "BUY" 20th Jan' 14 "On Strong Footing" Result update Buy CMP Target Price Previous Target Price 301 340 - Upside Change from Previous 13% DBCORP beats the street with 18% (YoY) revenue growth led by healthy Ad- revenue positively impacted by festive and election season during the quarter. PAT (excluding EOI) grew by 28 %(YoY) because of growth in other Income. Consistency on earning performance led by regional growth and strategy on judicious mix of price and promotion energize its strong visibility in near future. Management is also committed for cost control and yield improvement, it will continue its strong market positioning in all aspect. Robust Margin: Market Data BSE Code NSE Symbol 52wk Range H/L Mkt Capital (Rs Crores) Average Daily Volume Nifty 533151 DBCORP 321.50/210 5521 25750 Company witnessed impressive ramp up in margin front because of cost controlling efforts, EBITDA margin up by 170bps (YoY) to 29.67% and PAT margin improved by 140bps (YoY) to 18.1%. Management stated to maintain its margin going forward and clearly indicated for thrust on yield improvement. For few quarters company has been consciously working on improvement of yield and cutting discount. 6261.65 Segmental Performance: Stock Performance Absolute Rel. to Nifty 1M 10 8 1yr 28.74 25.06 YTD -0.003 -0.002 During the quarter, company has seen 18.2% revenue growth from its advertisement, 14% from circulation and 25% from Radio business on YoY basis. Management expressed its interest regarding inorganic expansion in near future to maintain its healthy growth across all segments. Management Commentary: Share Holding Pattern-% Promoters FII DII Others Current 74.96 17.73 2.95 4.36 2QFY14 74.97 16.46 4.00 4.57 Stock Performace with Nifty 1QFY14 74.98 14.66 5.34 5.02 According to management, Company will maintain a pragmatic approach towards operational controls and higher efficiency. DBCORP will continue to capitalize its consumption potential of Tier 2 and 3 cities. And they are studying on marketing strategies of niche brands in Tier 2 and 3 cities. Company is expected to launch its Bihar edition on 19 Jan, 2014, and we expect to see some part of additional revenue from Bihar edition by 4QFY14E and also expect to see breakeven in 3 to 4 years. View and Valuation: In view of upcoming general election, we expect government ad spending to go up substantially. Provision of TRAI’s 12 minutes ad cap would provide revenue visibility to print media players, being one of the largest players DB Corp will be strong beneficiary in near future. Company’s continuous efforts towards yield improvement and cutting discounts will lead to margin improvement in future. Considering its long-term growth story with favorable earning scenario and leadership position in key market, we are positive on the stock. We maintain “BUY” view on the stock with the target price of Rs 340. At a CMP of Rs 301, stock trades at 4.1x of FY15E P/BV. Financials Revenue EBITDA PAT EBITDA Margin PAT Margin 3QFY14 518.2 153.8 93.57 29.7% 18.1% 2QFY14 438 112.5 63.2 25.7% 14.4% (QoQ)-% 18.3 36.7 48.0 400bps 370bps 3QFY13 438.9 122.8 73.2 28.0% 16.7% Rs, Crore (YoY)-% 18.1 25.2 27.9 170bps 140bps (Source: Company/Eastwind) Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 18
  19. 19. DB CORP Sales and Sales growth(%)(yoy) (Source: Company/Eastwind) Margin-% (Source: Company/Eastwind) PAT and PAT growth(%)(yoy) (Source: Company/Eastwind) Segments Printing & Publishing newspaper Radio Event Sales Growth Margin Change Margin-% 3QFY14 2QFY14 3QFY13 (YoY)-% (QoQ)-% YoY QoQ 488.63 416.17 416.83 17% 17% 28% 200bps 500bps 23.82 17.09 19.08 25% 39% 36% 1200bps 2100bps 1.12 1.76 0.89 26% -36% -66% (3500bps) (7900bps) (Source: Company/Eastwind) Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 19
  20. 20. DB CORP Revenue Segments Revenue Geography-wise Financials; Rs,cr Sales RM Cost 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 Employee Cost Ad Spend Event Expenses consumption of store & spare Distribution expenses Other expenses Tax rate Margin-% EBITDA EBIT PAT Valuation: CMP No of Share NW EPS BVPS RoE-% P/BV P/E FY10 1062.1 327.87 -0.0016 131.81 12.98 161.24 720.03 342.07 37.83 11.15 304.24 35.69 279.70 105.72 173.98 FY11 1265.18 383.91 -0.06 184.56 12.52 185.2 862.13 403.05 43.28 14.18 359.77 15.3 358.65 99.97 258.68 FY12 1451.51 508.04 -0.04 242.93 15.04 216.06 1105.03 346.48 50.57 24.02 295.91 9.23 310.7 98.32 212.38 FY13 1592.32 544.54 0.03 279.5 17.21 234.07 1210.25 382.07 58.06 21.34 324.01 7.99 337.36 113.18 224.18 FY14E 1861.91 623.74 -1.86 307.21 22.34 260.67 1371.5 490.5 64.5 27.9 426.0 8.0 445.9 156.1 289.8 FY15E 2176.94 740.16 -2.18 380.97 23.95 315.66 1656.7 520.3 75.4 28.3 444.9 5.1 468.1 163.8 304.3 10.5% 132.2% 265.4% 19.1% 17.8% 48.7% 14.7% -14.0% -17.9% 9.7% 10.3% 5.6% 16.9% 28.4% 29.3% 16.9% 6.1% 5.0% 30.9% 12.4% 1.2% 1.1% 4.8% 2.1% 15.2% 10.0% 30.3% 14.6% 1.0% 1.3% 4.6% 1.7% 14.6% 7.9% 35.0% 16.7% 1.0% 1.0% 5.8% 1.7% 14.9% 6.8% 34.2% 17.6% 1.1% 0.8% 6.0% 1.8% 14.7% 7.1% 32.0% 16.6% 1.2% 0.8% 6.0% 1.8% 14.0% 8.4% 34.3% 17.0% 1.1% 1.0% 6.2% 1.9% 14.5% 7.5% 32.2% 28.6% 16.4% 31.9% 28.4% 20.4% 23.9% 20.4% 14.6% 24.0% 20.3% 14.1% 26.3% 22.9% 15.6% 23.9% 20.4% 14.0% 239 18 649 9.6 36 27% 6.7 24.9 246 18 829 14.1 45 31% 5.4 17.4 219 18 927 11.6 51 23% 4.3 18.9 212.1 18.33 1029 12.2 56 22% 3.8 17.3 301 18.33 1180 15.8 64 25% 4.7 19.0 301 18.33 1344 16.6 73 23% 4.1 18.1 (Source: Company/Eastwind) Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 20
  21. 21. ITC "BUY" 20th Jan' 14 " Accessing the growth " Result update CMP Target Price Previous Target Price Upside Change from Previous BUY 325 380 320 17% 19% Market Data BSE Code NSE Symbol 52wk Range H/L Mkt Capital (Rs Cr) Average Daily Volume Nifty 500875 ITC 380/281 257784 3497040 6262 Stock Performance 1M 3.7 2.0 Absolute Rel. to Nifty 1yr 14.5 10.2 YTD 13.8 9.3 Share Holding Pattern-% Current Promoters FII DII Others 1 yr Forward P/B 19.3 34.3 46.4 2QFY14 1QFY14 19.3 34.3 46.1 19.6 33.8 46.6 ITC posted better growth ahead of street expectations, Cigarette business on a strong footing, long-term growth outlook remains strong; Strong set of numbers, sales grew by 13.1% (YoY) led by robust sales across its FMCG and Paper and Packaging divisions. Cigarette volume declined by 2%(YoY) because of price hike by 18% in premium brand. PAT up by 16.3%, YoY. Further, with ITC being the market leader in cigarettes, higher pricing power in Cigarette would continue to maintain higher margins. However, volume growth on cigarette would be on the way of recovery position, previously impacted by price hike on cigarette (king and 74mm size). Price rises in the cigarettes business drove margin, revenue and profit growth. Win- win performance across all Segments: Cigarettes (47.7% of Sales) up by 12.6% , FMCG-others (24.1% of sales up by 16.1%, Hotels (3.7% of sales) up by 2%, Agri business (20.7% of sales) up by 10% and Paper and packaging (15% of sales) up by 19%. FMCG business outside of cigarettes has broken even operationally despite consumers slowing their discretionary spending. Margin status: The Company’s EBITDA Margin inched up by 50bps to 37.6% on YoY basis. On segment wise, FMCG margin was positive to 0.5%, Cigarette Margin (EBIT) improved to 64.4% from 61.1% (3QFY13), Hotel business margin up by 170bps to 19.7% and AgriBusiness up by 90bps to 11.5% on YoY basis. While Paper & Paper Product Business margin down by 310bps to 18.4%, and Agri Business margin remains on negative respectively. Volume growth: This was the third consecutive quarter when the company’s cigarettes volume fell. Because of increased prices of cigarette, and volume growth declined by 2% YoY. We expect, Volumes will retain its growth by next quarter, but the latest hike would ensure better margins for the company. Sound response from new launches: Its newer launches Sunfeast Delishus gourmet cookies and Candyman confectionery during the quarter grew rapidly. Products strategy: ITC continues to enjoy dominant market share in cigarette while ban on Gutkha by most of state govt- has provided a strong demand. FMCG business is expected to maintain momentum led by distribution linked growth, expected the price hikes to aid cigarettes revenue. View and Valuation: ITC’s cigarette volume decline to arrest towards Q4FY14 and recover in FY15E, while non-cigarette business to report EBIT breakeven in FY14E. We are positive on long-term demand growth in cigarette business due to rising affordability and huge demand potential in small towns and rural areas. ITC offers the best earnings visibility in the sector especially when sector peers are confronting multiple challenges. The premium valuations enjoyed by ITC, at the CMP of Rs 325, the stock trades at 8.2x FY15E P/BV seems justified from a growth point of view. We maintain ” BUY” with a price target of Rs 380. Financials Revenue EBITDA PAT EBITDA Margin PAT Margin 3QFY14 8623.11 3284.3 2385.3 38.1% 27.7% 2QFY14 7775.79 3173.3 2227.98 40.8% 28.7% Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. (QoQ)-% 10.9% 3.5% 7.1% (270bps) (100bps) 3QFY13 7627 2857.7 2051.8 37.5% 26.9% Rs, Cr (YoY)-% 13.1% 14.9% 16.3% 60bps 80bs 21
  22. 22. ITC Sales and its Growth(%) Cigarette sales have grown by 13% YoY. However, ITC attributed its performance to the strategy of creating multiple drivers of growth. (Source: Company/Eastwind) Margin-% These cost pressures were, however, mitigated through a combination of improvements in product and process efficiencies, smart sourcing and supply chain initiatives. (Source: Company/Eastwind) RM Cost improved by 130bps because of higher prices of Cigarette leaves and imported paper products (Source: Company/Eastwind) Cigarette Volume Growth-% ITC clocks cigarettes, 2% volume decline in (Source: Company/Eastwind) Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 22
  23. 23. ITC Segment-wise Performance-% Segments Cigarettes FMCG - Others Hotels Agri business Paper and packaging Sales Contribution Sales Gr-YoY EBIT Margin 47.7% 12.6% 64.4% 24.1% 16.6% 0.5% 3.7% 1.9% 19.7% 20.7% 9.7% 11.5% 14.6% 18.5% 18.4% Margin Change(YoY) 330bps 180bps 180bps 90bps (310bps) Double digit growth in Cigarette, FMCG, Agri and Paper & Packaging, but single digit growthon Hotel business 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 FY10 19302.1 6045.5 826.0 100.5 1464.0 544.9 3830.9 12811.8 6490.3 643.9 452.7 6299.1 53.4 6245.7 2034.9 4210.8 FY11 22575.0 7136.9 1296.8 -272.7 1708.5 654.6 4381.9 14905.9 7669.1 699.1 536.1 7506.1 70.9 7435.2 2365.5 5069.7 FY12 26552.2 7810.5 1921.2 -86.4 1944.3 710.1 5042.4 17342.0 9210.1 745.5 784.3 9249.0 80.5 9168.5 2845.8 6322.7 FY13 31627.5 9069.8 3305.2 -256.8 2145.6 834.2 5355.1 20453.2 11174.3 859.1 877.6 11192.8 87.2 11105.7 3412.1 7693.6 FY14E 35368.9 10433.8 2829.5 -247.6 2475.8 919.6 6647.6 23058.8 12310.2 943.2 1061.1 12428.1 12.9 12415.1 3910.8 8504.4 FY15E 40349.1 11903.0 3227.9 -322.8 3026.2 1089.4 7583.6 26507.3 13841.8 968.4 1210.5 14083.9 17.9 14065.9 4430.8 9635.2 15.7% 24.7% 25.4% 17.0% 18.2% 20.4% 17.6% 20.1% 24.7% 19.1% 21.3% 21.7% 11.8% 10.2% 10.5% 14.1% 12.4% 13.3% 31.3% 2.8% 7.6% 19.8% 32.6% 31.6% 2.9% 7.6% 19.4% 31.8% 29.4% 2.7% 7.3% 19.0% 31.0% 28.7% 2.6% 6.8% 16.9% 30.7% 29.5% 2.6% 7.0% 18.8% 31.5% 29.5% 2.7% 7.5% 18.8% 31.5% 33.6% 32.6% 21.8% 34.0% 33.2% 22.5% 34.7% 34.8% 23.8% 35.3% 35.4% 24.3% 34.8% 35.1% 24.0% 34.3% 34.9% 23.9% 263.2 381.8 14458.3 11.0 37.9 29.1% 6.9 23.9 181.5 773.8 16489.9 6.6 21.3 30.7% 8.5 27.7 256.5 779.6 19458.6 8.1 25.0 32.5% 10.3 31.6 335.0 790.2 23157.9 9.7 29.3 33.2% 11.4 34.4 325.0 790.2 26808.9 10.8 33.9 31.7% 9.6 30.2 325.0 790.2 31128.5 12.2 39.4 31.0% 8.2 26.7 Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. (Source: Company/Eastwind) 23
  24. 24. HCLTECH "BUY" 17th Jan' 14 "Retain confidence" Result update Buy CMP Target Price Previous Target Price Upside Change from Previous 1392 1560 1194 12% 30.7% Market Data BSE Code NSE Symbol 52wk Range H/L Mkt Capital (Rs Crores) Average Daily Volume Nifty 532281 HCLTECH 1398/653 97287 1193062 6319 Stock Performance 1M 17.8 15.4 Absolute Rel. to Nifty 1yr 109.4 105.1 YTD 149.1 131 Share Holding Pattern-% Promoters FII DII Others Current 61.84 26.01 5.70 6.45 1 year forward P/E 4QFY13 61.92 24.45 6.49 7.14 3QFY13 61.99 24.32 6.56 7.13 HCL tech beats expectations with a sustained momentum in volumes and proved its consistency to maintain its margin at 26% mark; Following the successive 10th quarter, again company witnessed healthy growth in 2QFY14 than street expectation. Sales grew by 2.8% (QoQ) in INR term and 4% (QoQ) in USD term led by 4.6% of growth from Infrastructure services and BPO services. During the quarter, the company has crossed the landmark of USD5bn. PAT grew by 5.6 %(QoQ) in INR term and 7.1% (QoQ) in USD term. The company continues to lead the industry in profitable growth, with 11 successive quarters of net income margin expansion, having reported 55% growth in Net Income on Yearly basis. Management is confident to focus on vendor consolidation and cost control activities to maintain its growth story. Stable Margin: During the quarter, its EBITDA Margin was almost flat at 26% and good thing is, company has been able to maintain its range of 25-26% for its margin. PAT margin improved by 50bps to 18.3%, sequentially. Segmental Performance: Infrastructure Services (contributes 34% of sales) continued to lead with growth at 4.6%, and BPO services (contributes 5% of sales) grew by 10%(QoQ)followed by Enterprise Application at 1.6%, Custom Application Services at 1.4% and Engineering/ R&D Services at 1%, respectively. Mixed performance across verticals: The Company contributed strong growth in the Retal and manufacturing verticals. Retail & CPG and Manufacturing’s revenue growth up by 6.5% and 3.7% respectively and Financial Services up by 2.4%. While growth from Healthcare and Other services declined by 5.2% and 16.1% respectively. Healthy deal pipeline: During the quarter, HCL Tech reported an addition of 15 transformational deals in the US and Europe for the December quarter. These wins have been in the momentum markets of manufacturing and Financial Services as well as the emerging momentum markets of life sciences & Healthcare and Public Services. Across the geographies, USA and Europe remain best to drive deal wins during the quarter because of healthy scenario of demand environment. View and Valuation: HCL tech’s decent level of utilization, focused on cost control and utilization of new market opportunities through vendor’s consolidation would provide a new shape to the company in near future. On performance front, it continues to be bullish on the rebid market and bullish on short-term to medium term, momentum on deals pipeline also looking robust. Considering the increasing discretionary spends across the geographies like US and Europe, we expect healthy earnings performance ahead. At a CMP of Rs 1392, stock trades at 17.5x of FY14E earnings, We retain BUY on the stock and revised our target price from Rs 1194 to Rs1560. Financials Revenue EBITDA PAT EBITDA Margin PAT Margin 2QFY14 8184 2125 1495 26.0% 18.3% 1QFY14 7961 2093 1416 26.3% 17.8% (QoQ)-% 2.8 1.5 5.6 (30bps) 50bps 1QFY13 6273.8 1417 965 22.6% 15.4% Rs, Crore (YoY)-% 30.4 50.0 54.9 340bps 290bps (Source: Company/Eastwind) Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 24
  25. 25. HCLTECH Sales(USD term) and Sales growth-%(QoQ) In dollar terms, the revenues grew by 4% QoQ (cc terms 3.1%) to USD 1321mn and net profit grew by 7.1% QoQ to USD 241.6mn. (Source: Company/Eastwind) Margin-% Tha company expects to maintain EBIT margin at 18.5-19.5% in FY14 (Source: Company/Eastwind) Clients Metrics Clients Contribution . Top 5 Clients Top 10 Clients Top 20 Clients 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 15.3% 15.8% 16.0% 16.4% 16.2% 15.7% 15.4% 15.4% 24.1% 24.2% 24.3% 24.7% 24.5% 24.2% 24.0% 23.8% 34.2% 33.9% 33.9% 34.1% 33.6% 33.3% 32.8% 33.0% 1QFY14 15.1% 23.8% 33.2% 2QFY14 14.8% 23.8% 33.6% Employee Metrics . No of Employee Gross Addition Attrition 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 70321 72055 72474 74675 75621 75226 74226 74912 87196 88332 6927 4931 3303 5274 4479 3291 2933 4316 8061 7593 15.9% 15.7% 15.0% 14.0% 13.6% 13.6% 14.2% 14.9% 16.10% 16.6% Utilization rate Utilization down from 84.9% to 84.1%. Further, it's Utilization are at decent levels, indicated can still derive more efficiency . (Source: Company/Eastwind) Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 25
  26. 26. HCLTECH Key facts from Con-Call The company is expecting to catch up more deal from US and Europe because of better demand environment ahead. Clients are looking vendor’s consolidation, and company will try to turn this opportunity into deal. 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. The infrastructure business is largely under penetrated globally, less than 5% from an Indian (vendor's) standpoint. They expect to see significant growth over there, in that business and expect to raise infrastructure services margins by supporting customers migrating to cloud computing. Financials; Rs, Cr Net Sales-USD Net Sales Raw Materials Cost Employee Cost Operation and other expenses Total Expenses EBITDA Depreciation Other Income Extra Ordinery Items EBIT Interest Cost PBT Tax PAT Growth-% Sales-USD Sales EBITDA PAT Margin -% EBITDA EBIT PAT Expenses on Sales-% Employee Cost RM Cost Operation and other expenses Tax rate Valuation CMP No of Share NW EPS BVPS RoE-% Dividend Payout ratio P/BV P/E FY10 2704.6 12136.3 443.6 6253.7 3498.5 10195.7 1940.6 418.1 154.1 0.0 1522.5 204.1 1472.4 213.4 1259.0 FY11 3545.3 15730.3 522.1 8589.6 4163.2 13274.9 2455.4 459.7 299.7 0.0 1995.7 142.6 2152.8 488.5 1664.3 FY12 4151.5 20830.6 612.0 11104.6 5418.8 17135.3 3695.2 549.2 206.5 0.0 3146.0 142.6 3209.8 782.7 2427.1 FY13 4686.5 25581.1 959.3 12574.2 6386.4 19919.9 5661.2 636.8 306.6 44.5 5024.4 105.6 5269.9 1225.3 4044.6 FY14E 5379.7 32278.2 968.3 16139.1 7101.2 24208.6 8069.5 748.6 511.6 -484.2 7320.9 79.2 7269.1 1744.6 5524.5 FY15E 6492.2 38628.3 1158.8 19507.3 8691.4 29357.5 9270.8 903.4 645.6 77.3 8367.3 59.4 9030.8 2212.5 6818.2 24.1% 18.6% 5.9% -4.6% 31.1% 29.6% 26.5% 32.2% 17.1% 32.4% 50.5% 45.8% 12.9% 22.8% 53.2% 66.6% 14.8% 26.2% 42.5% 36.6% 20.7% 19.7% 14.9% 23.4% 16.0% 12.5% 10.4% 15.6% 12.7% 10.6% 17.7% 15.1% 11.7% 22.1% 19.6% 15.8% 25.0% 22.7% 17.1% 24.0% 21.7% 17.7% 51.5% 3.7% 28.8% 14.5% 54.6% 3.3% 26.5% 22.7% 53.3% 2.9% 26.0% 24.4% 49.2% 3.8% 25.0% 23.3% 50.0% 3.0% 22.0% 24.0% 50.5% 3.0% 22.5% 24.5% 364.9 67.9 6288.8 18.5 92.6 20.0% 25.0% 3.94 19.68 493.5 68.9 7653.0 24.2 111.1 21.7% 31.5% 4.44 20.43 490.0 69.3 9837.9 35.0 141.9 24.7% 33.1% 3.45 13.99 759.5 69.6 13164.0 58.1 189.1 30.7% 24.2% 4.02 13.07 1392.0 69.6 17548.4 79.4 252.1 31.5% 20.6% 5.52 17.54 1392.0 69.6 23226.5 97.9 333.7 29.4% 16.7% 4.17 14.21 (Source: Company/Eastwind) Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 26
  27. 27. 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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