Earnings growth ahead of estimates: Bajaj Finance Ltd (BFL) reported a 58.1% growth in net earnings driven by a strong uptick in the net interest income (up 48.3% YoY). Given the seasonally strong quarter and strong uptick in consumer segment (up 43% YoY), the overall assets under management (AUMs) expanded by 40.9% YoY. The mortgages (working on reorganising the business with in-house sourcing) and newer products like rural financing and lifestyle financing delivered a strong growth. The cost of funds moderated while yields expanded (disbursement in better yielding products) that aided growth in margins and core income.
Asset quality improves: The reported asset quality showed improvement on a sequential basis (as per 150 days past due) largely contributed by sale of Rs82 crore of non-performing asset (NPA) receivables (relating to mortgage segment) during the quarter. The provisions increased by 35.5% YoY partly due to accelerated provisioning of Rs17.5 crore in an account. The company continues to provide ahead of regulatory requirements and its provisioning coverage stood at 80% (vs 68% in Q3FY2015).
PT revised to Rs7,025, maintain Buy: BFL continued to deliver a strong growth in AUMs and sturdy asset quality. We believe, given the company's unique customer acquisition strategy, ability to cross sell, launch of innovative product and strong risk management systems will sustain loan growth momentum. We estimate its earnings CAGR to grow at 28% YoY resulting in superior return ratios (RoA of 3.2% and RoE of 19% by FY2017E). While the stock trades at significant premium to peer companies, we believe strong growth visibility in consumer segments, healthy asset quality and capitalisation levels, the valuation premium will sustain. We have revised our price target on the stock to Rs7,025 (3.7x its FY2018E BV) and maintained our Buy rating on the stock.
Key risk: NPA ratio and collections across the product segments have remained healthy for several quarters despite strong growth. Therefore any rise in NPAs may affect valuations.
Relaxo Footwear Reco: Buy PT: Rs600 CMP: Rs457
Healthy performance; maintain Buy with PT revised to Rs600
Key points
Another healthy performance; operating profit up 27.2% YoY: Relaxo Footwear (Relaxo) posted another quarter of healthy performance, wherein despite challenging times and muted on-ground demand, its top line grew at 16.6% YoY, driven by combination of volume and premiumisation. This double-digit growth is commendable and signifies the strong on-ground execution and brand salience efforts of the company. The growth in the revenue along with falling prices of raw materials (EVA and other chemicals that are crude derivatives) boosted the operating profit margin (OPM) by 116BPS in Q3FY2016, and the OPM stood at all-time high of 14%, driven by a healthy operating performance, the net earnings grew by 22.7% YoY.
Favourable industry dynamics coupled with enduring brands to keep financials strong: With its economical price points (averaging at Rs118-124), the company is well placed to cash in on the transition towards branded shoes from the unorganised segment. We, thus, expect the company to post 20% revenue CAGR over FY2015-18. Further, the initiatives to improve efficiency and rationalise cost along with low raw material prices are likely to culminate into a healthy 29.7% earnings growth (CAGR) over FY2015-18. We have slightly moderated our revenue growth estimates for the company for FY2017 and FY2018. We expect Relaxo to post 21% growth for both the years, as against our earlier estimate of 22% growth.
Strong brands, focused management; maintain Buy: Relaxo's strong presence in the lucrative mid-priced footwear segment (through its top-of-the-mind recall brands like Hawaii, Flite and Sparx) along with its integrated manufacturing set-up, lean working capital requirement and vigilant management puts it in a sweet spot to cash in on the strong growth opportunity unfolding in the footwear category due to a shift from unbranded to branded products. Thus, we remain positive on the stock with our price target revised to Rs600 (Rs635 previously).
Weak macro environment and rising competitive intensity affect earnings; PT revised to Rs345
Key points
Weak macro environment and margin pressure affect earnings: For Q3FY2016, Gateway Distriparks Ltd (GDL)'s consolidated adjusted earnings after minority interest and associate income declined by 43.1% YoY to Rs30.9 crore. The consolidated revenues were affected by lower volumes in container freight station (CFS; down 10.4% YoY) and rail (down 20.0% YoY) divisions. The volume off-take was primarily affected by Chennai floods, lower & imbalanced export-import trade and market shrinkage. Further, increased railway haulage charges and increasing competitive intensity pressuring realisations resulted in over 1,000-BPS erosion in operating profit margin (OPM) for both CFS and rail divisions. Consequently, the operating profit for the quarter declined by 27.1% YoY to Rs61.9 crore.
Long-term growth triggers still intact while near-term uncertainty remains: The company will be setting up a CFS facility at Krishnapatnam Port to commence operations after 15 months and enter into new locations to revive CFS volume. Further, proposed rail inland container depots (ICD) at Viramgam to commence operations in Q4CY2016 will help in consolidating its position on the western dedicated freight corridor (DFC) route. The demand recovery in CFS business is likely to get delayed owing to macro factors and competitive intensity at JNPT port. The management is negotiating with Blackstone for purchase of the balance stake in its rail division.
Maintain Buy with revised price target of Rs345: We had in our report dated December 22, 2015 highlighted on GDL's earnings for H2FY2016 to be affected on weak demand environment which we believe can put further pressure on GDL's valuation in the near term. We have revised our estimates for FY2016 and FY2017 factoring lower volume and margin erosion in rail and CFS divisions (we have introduced FY2018 estimate in this note). However, we believe the structural growth story over the long term remains intact for GDL (owing to a range of services, leadership position in the CFS and rail businesses and a healthy balance sheet). Thus, we have maintained our Buy rating on the stock of GDL with a revised price target of Rs345.
Risk: The risk to our call is a higher-than-expected or prolonged deterioration in demand environment.
Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.
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