Stock Update Marico
Reco: Buy
PT: Rs256
CMP: Rs226
Volume growth back in double digits; upgraded to Buy with PT revised to Rs256 Key points - Strong operating performance; regained double-digit volume growth: During Q3FY2016, Marico's revenues grew by 7% to Rs1,556.6 crore, driven by 10% Y-o-Y volume growth (domestic business volume growth stood at 10.5% as against 5.5% volume growth in Q2FY2016). The gross profit margin (GPM) improved by almost 634BPS to 51.8% on the back of 28% Y-o-Y decline in the copra prices and 35% Y-o-Y decline in the prices of liquid paraffin. The higher advertisement spends (increased by 24% YoY) resulted in a 258-BPS improvement in OPM to 18.9%. Hence, the operating profit and the reported PAT grew by 24% each in Q3FY2016.
- Saffola volume growth revived; value-added hair strong performance continues: Marico's domestic business volume growth stood at 10.5%, driven by strong volume growth of 21% in value-added hair portfolio and improved volume growth of 17% in Saffola edible oil portfolio. On the other hand, the international business grew by 10% (on a constant-currency basis) driven by robust growth of 45% in the Middle East and North Africa (MENA) region. The operating profit margin (OPM) of the domestic business stood tall at 23.3% (largely driven by drop in copra prices) and the international business stood at 20.8%.
- Outlook-Volume growth to sustain in the range of 8-10%: The management is confident of sustaining volume growth in the range of 8-10% in the domestic consumer business in the near to medium term. Parachute rigid pack volume growth is expected to improve in high single digit (due to pricing cuts undertaken), while Saffola edible oil and value-added hair oil portfolio is expected to post volume growth in the range of 14-16% each in the coming quarters. On the international front, MENA region and Bangladesh are expected to post better operating performance in the coming quarters.
- Double-digit earnings growth to sustain; upgraded to Buy: We have fined-tuned our earnings estimates to factor in better volume growth in Saffola edible oil and higher-than-expected GPM. The relevant pricing action in the earlier quarters aided Marico to post double-digit volume growth in Q3FY2016 and expect it to sustain in the coming quarters. The international business is getting back into shape with MENA registering a strong growth. Marico's consolidated OPM is expected to remain in the range of 18-19% in the coming years. Hence, the consolidated earnings are expected to grow at a CAGR of 20% over FY2015-18. In view of volume growth getting back to double digits and strong earnings visibility, we have upgraded our recommendation on the stock from Hold to Buy with a revised price target of Rs256 (valuing the stock at 33x FY2018E earnings).
Grasim Industries
Reco: Buy
PT: Rs4,475
CMP: Rs3,661
Strong operating performance aided by VSF and chemical divisions; retain Buy Key points - Strong operating performance across all divisions: The result for Q3FY2016 is not comparable on a Y-o-Y basis, because the company has amalgamated Aditya Birla Chemicals India Ltd (ABCIL). For Q3FY2016, Grasim Industries (Grasim)'s revenue improved by 13.1% YoY to Rs8,924.1 crore led by volume growth across all its divisions. The OPM rose by 454BPS led by higher realisation in viscose stable fibre (VSF; up 7% YoY) and chemical (up 5% YoY) divisions. The pulp & fibre joint venture (JV) performance was aided by higher pulp realisation in its Canadian JV along with depreciation of the Canadian Dollar. Further, the company reported an earnings growth of 94.7% YoY on account of strong operating profit growth (up 51.5% YoY).
- Vilayat plant stabilisation and ABCIL merger to aid growth: The full ramp-up of Vilayat plant (increasing capacity to 804,000 tonne) is likely to aid VSF volumes going ahead although prices may soften in near term. Further, the merger of ABCIL and uptick in caustic prices is likely to maintain strong performance in chemical division. On the cement front, the company expects demand to pick up in near term while slow execution of government projects and surplus inventory remains concern areas. After the merger of the ABCIL, market share of the company in Chlor Alkali has increased to 26% from 16% earlier.
- Maintain Buy with price target of Rs4,475: We have revised our earnings estimates upwards for FY2016 and FY2017 factoring improvement in margins in its VSF and chemical divisions. We have also introduced FY2018 earnings estimates, and maintained our Buy rating on the stock with an unchanged price target of Rs4,475. Currently, the stock is trading at 14.9x its PE and 5.2x its EV/EBIDTA its FY2017E earnings.
V-Guard Industries
Reco: Buy
PT: Rs1,155
CMP: Rs922
Strong earnings growth and high cash generation; retain Buy Key points - Healthy volume growth coupled with debt repayment lift earnings: For Q3FY2016, V-Guard Industries (V-Guard) reported a revenue growth of 5%, despite passing on the benefit of lower input cost to customers as it clocked a very healthy volume growth. To pass on the falling copper price, the cables segment (contributing a third of revenue) recorded flattish revenue, despite 12% volume growth. All other products (except UPS) witnessed a healthy volume growth during this quarter and managed to retain some of the benefits of lower commodity prices too. Consequently, V-Guard notched a better gross profit margin (GPM; expansion of 375BPS YoY) in Q3FY2016 and percolated to better operating profit margin (OPM). During Q3FY2015, there were inventory losses of around Rs5 crore; even if we adjust the same, the OPM has expanded on Y-o-Y basis, supported by better volume. Below the operating line, due to repayment of debt, interest expenses dropped sharply (Rs1.5 crore in Q3FY2016 vs Rs5.3 crore in Q3FY2015) and helped in lifting adjusted PAT by 51% YoY to Rs21 crore.
- Non-south revenue flat but high cash generation continues: The revenue from non-south market remained flat during Q3FY2016, due to delayed winter and unfavourable product mix (weak performance of some of the products and lower share of consumer products). However, the south zone witnessed a revenue growth of 7%, as all three southern states except Kerala witnessed a healthy traction. Moreover, southern states have higher share of consumer products where full benefit of commodity price depreciation is not being passed on. The non-south zone also witnessed a margin improvement (EBITDA margin of 4%) and turned positive at profit before tax (PBT) level for the first time. In the meanwhile, the company has paid off debt by generating strong cash from operations by prudent working capital management (especially inventory). We see the company achieving debt-free status by the end of the year, which would add value.
- Fine-tuned earnings; retain Buy: Given the soft revenue growth in M9FY2016, we have fine-tuned our revenue estimates but largely maintained our earnings estimates for FY2016 and FY2017. We believe, despite the weak demand environment, the company has managed to notch volume growth in almost all of its product lines which is appreciable. Further, the consistent efforts of the management to generate cash from the system to improve balance sheet is visible. The non-south market turned positive at PBT level in this quarter and going forward the management expects non-south margin to improve. Further, V-Guard is looking for inorganic opportunities to widen its network and product capability. On this back drop, we have retained our Buy rating on the high-return generating stock and rolled over our target multiple on FY2018 estimate (introduced in this note) to arrive at a price target of Rs1,155 (27x its FY2018E EPS).
Thermax
Reco: Hold
PT: Rs900
CMP: Rs813
Weak Q3 with poor order inflow; PT revised down to Rs900 Key points - Weak operating performance; lower revenue and softer margin: Thermax (stand-alone) reported another quarter of weak numbers; earnings declined by 11% YoY in Q3FY2016. Revenue slipped by 9% YoY and operating profit margin (OPM) contracted by 195BPS YoY. The subdued order inflow in the recent past would be attributed to weak revenue; further in this quarter order inflows declined by 29% YoY. Though it managed to expand gross profit margin (GPM) by close to 300BPS YoY, a decline in revenue played negative operating leverage; hence the operating profit declined by 25% YoY. However, higher other income and lower interest & tax outgo restricted PAT to decline by 11% only. The performance of subsidiaries also remained negative but loss reduced substantially over last year; resulting into 7% YoY earnings improvement at the consolidated level in Q3FY2016.
- Lower order inflow to affect future revenue; challenge remains: On a segmental basis, both the segments witnessed drop in revenue (energy 9% and environment 13%). The order inflow scenario deteriorated in this quarter (similar to Q2) with stand-alone order book declining by 29% YoY to Rs868 crore. Given the current environment, the management doesn't see much order inflow prospect from the metal and power sectors. However, enquiry from cement sector has improved. Moreover, they are optimistic about order prospect from hydrocarbon space, especially in the downstream section. Overall, the domestic opportunities are not encouraging but at the same time, the company is putting efforts to enhance its international presence. On the positive side, the management expects subsidiaries to contribute positively to its consolidated entity by the end of FY2016.
- Revised down earnings estimate and retain Hold: We believe the domestic order inflow visibility is not encouraging in near term. We have revised down our earnings estimate (FY2017E earnings cut by 9%) by building lower inflow assumptions and introduced FY2018 estimates in this note. We believe, muted outlook would be an overhang for the stock especially being at a high valuation. Nevertheless, the company is prepared to withstand the phase backed by strong balance sheet and technology advantage. Hence, we have retained our Hold rating on the stock but revised down our price target to Rs900 (earlier Rs955).
Skipper
Reco: Hold
PT: Rs190
CMP: Rs170
Earnings momentum taper down; downgrade to Hold Key points - Moderate earnings growth with softer revenue and higher other expenses: For Q3FY2016, despite higher volume growth, Skipper reported a revenue growth of 12% on softer commodity prices reflecting on its realisation. Consequently, the gross profit margin (GPM) expanded during this quarter. However, the other expenses jumped sharply and eroded the benefit at GPM level. Consequently, the operating profit margin (OPM) remained subdued but the export incentive earned by the company of around Rs10 crore helped adjusted earnings to go up by 10% YoY to Rs18.7 crore in Q3FY2016.
- Drop in infra segment profit overshadows growth in PVC profit: The profit before interest and tax (PBIT) was contributed by the engineering segment largely, which also recorded a growth of 23%, backed by 20% volume growth. However, the infrastructure segment profit dropped sharply though on a low base (as the company being selective in bidding projects), which overshadows growth in the profit of PVC segment. Consequently, the PBIT grew by 16% YoY in Q3FY2016. The engineering products division is having an order book of around Rs2,000 crore (~1.4x its FY2015 revenue) but the management expects to end the year with higher order backlog, as they have participated in ~Rs3,000-crore tender and being L1 in some. On the export front, the company is hopeful of gaining orders in future especially having fair presence in Latin America and Africa. On the PVC segment, the capacity addition plan is largely on track to achieve 40,000 tonne by the end of FY2016. Further, it plans to take the total capacity to 100,000 tonne by FY2019.
- Revised down earnings estimates and downgrade to Hold: We have revised down our revenue estimate to factor in softer commodity prices (to reflect in realisation). The management expects to maintain volume growth; transmission volume growth is likely to be ~20% while PVC segment will witness hefty jump in volume. We believe a majority of the order backlog is export orders, where we have stepped up higher other expenses now (surprised us in Q3FY2016); therefore we have revised down our earnings estimates by around 15% and 20% for FY2016 and 2017. However, we have introduced FY2018 earnings estimate in this note and rolled over our target multiple. We have reduced our price target to Rs190 (Rs210 earlier) and downgraded the stock to Hold from Buy.
Gabriel India
Reco: Buy
PT: Rs105
CMP: Rs87
Good margins performance; maintain Buy Key points - Margins performance ahead of expectations, revenue growth subdued: For Q3FY2016, Gabriel India (Gabriel)'s revenue declined to Rs354.8 crore (in line with our expectation), a drop of 1.3% on a Y-o-Y basis on the back of declining realisations owing to softness in commodity prices, which off-set the growth in volumes. The volumes in the passenger car and commercial vehicles segment remained strong, while that in the two-wheeler were muted, which pulled down the revenues. The gross profit margin (GPM) for the quarter improved by 223BPS YoY to 29.6%, led by lower raw material cost (down 223BPS YoY), while higher employee cost for the quarter was higher by 128BPS primarily due to retrospective provision for the amendments in Bonus Act for Rs3.6 crore, which restricted margin expansion to 82BPS YoY, while adjusted margin was at 9.9%. The net income for the quarter was higher by 10% YoY to Rs17.6 crore.
- Pick-up in two-wheeler market remains the key: The management has indicated that the softness in the two-wheeler market continued owing to weak monsoon and lower rural demand. Nevertheless, the passenger vehicle as well as commercial vehicle segments, demand remained strong and expect further positive rub-off effect from the implementation of seventh pay commission. The management maintained its margin target of 10%, with improvement in exports and aftermarket sales. In Q4FY2016, Mahindra & Mahindra's KUV1OO and Maruti's Vitara Breeza sales are expected to drive revenue growth.
- Maintain Buy with an unchanged price target of Rs105: We have revised down our estimates for FY2016, FY2017 and FY2018 owing to lower-than-expected pick-up in the two-wheeler market (60% of the company's revenues). Though we continue to remain positive on Gabriel, long-term prospects, yet we expect near-to-medium term stock performance will depend on the recovery in the two-wheeler market. We have rolled over our target multiple to FY2018 and consequently maintained our price target at Rs105. We have also retained our Buy rating on the stock.
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