Stock Update Reliance Industries
Reco: Buy
PT: Rs1,250
CMP: Rs1,040
Strong petchem margin supports earnings growth; PT revised up to Rs1,250 Key points - In-line performance with sustained healthy margin: Reliance Industries Ltd (RIL) reported another quarter of strong margin on both refining as well as petro-chemical segments. In line with our estimate, the operating performance was strong with a Y-o-Y growth of 24% and a sequential growth of 4%. Also, its profit after tax (PAT) grew by 14% YoY and remained elevated like the last quarter at Rs7,320 crore. Apart from strong gross refining margin (GRM) of $10.8 per barrel, the petro-chemical margin remained robust at 14% in the low absolute product prices environment. However, the profitability in exploration and production (E&P) business was affected substantially with lower realisation and languishing volume. On the positive side, the retail business continued to sustain healthy growth and registered a 26% profit before interest and tax (PBIT) growth YoY. Consequently, RIL's consolidated earnings grew by 13% YoY and was flat sequentially to Rs7,227 crore in Q4FY2016.
- Robust downstream performance but upstream slips: RIL achieved a GRM of $10.8 per barrel in this quarter, a premium of $3.1 per barrel over that of the benchmark Singapore GRM. While RIL managed to more than double its premium over Singapore GRM on a Y-o-Y basis, sequentially it was softer (against $3.3 per barrel in Q3FY2016). Sequentially, the Singapore GRM was slightly lower on the back of weak middle distillate cracks with continued oversupply (higher export from China). Backed by strong product deltas (resulting in 12% better realisation), low absolute product prices and better volume in polyester chain, the petchem business witnessed a strong margin at 14% in Q4FY2016. The upstream business (oil & gas) turned weaker with abysmally low margin as the domestic upstream business is affected with stagnating output and weak realisation. On the retail business, the growth momentum continued (PBIT grew by 26% YoY and but declined 11% QoQ).
- Valuation-Reiterate Buy with revised price target of Rs1,250: Given the recent improvement in crude oil prices, the benchmark GRM is expected to cool off slightly in short term but RIL should continue to maintain a healthy premium over that. Further, large capital expenditure (capex) in downstream business is likely to yield positive result from the end of FY2017. Therefore, we expect RIL's downstream business will continue to drive the earnings for the next two years, though oil & gas business will remain subdued. Reliance Jio was launched for the group employees and other associates on a trial basis, which will be upgraded to commercial launch in a couple of months. Hence, further clarity on the services and initial response to that would be the near-term trigger for the stock. We have introduced FY2018 earnings estimate in this report and revised our price target to Rs1,250 by rolling over our multiple to FY2018E earnings. We have retained our Buy rating on the stock.
HDFC Bank
Reco: Buy
PT: Rs1,300
CMP: Rs1,092
Operating performance remains strong; loan growth fastens; PT revised to Rs1,300 Key points - Consistency in profitability: For Q4FY2016, HDFC Bank has reported a 20.2% Y-o-Y growth in net profit driven by strong growth in net interest income (up 24.0% YoY). Advances during the quarter surged by 27.1% YoY while net interest margin stood at similar levels. The non-interest income for Q4FY2016 was up by 11.8% YoY due to decline in treasury and forex income, however fee income reported a healthy growth of 18.4% YoY.
- Loan book gathers pace, asset quality remains stable: During Q4FY2016, HDFC Bank reported a loan book growth of 27.1% YoY which was driven by 24.8% Y-o-Y growth in corporate advances and 29.7% Y-o-Y growth in the retail segment. Within the retail segment personal loan, credit cards and mortgage loans showed a healthy growth of 44.1%, 27.0% and 32.0% YoY respectively. Advances in the corporate segment were mainly driven by working capital and medium-term capital loans. The asset quality remained stable and showed a marginal improvement of 3BPS QoQ as gross NPAs for Q4FY2016 stood at 0.94%. Slippages for the quarter were around 1.5% of the advances. Restructured book stood at similar levels of 0.1% of the advances.
- Valuation and outlook: HDFC Bank has maintained its superior performance despite challenging environment. We believe that improving economic scenario and falling interest rate cycle would help the bank to maintain its growth momentum as the bank is well capitalised to grasp this opportunity. We expect earnings to grow at a CAGR of 22.2% during FY2016-18 resulting in an RoA of 1.9%. We have revised our price target to Rs1,300 by valuing the stock at 3.4x its FY2018E BV, and maintained our Buy rating on the stock.
IPO Flash Thyrocare Technologies
TTL is one of the leading pan-India diagnostics chain with focus on preventive and wellness health offerings. The company's geographic presence is in 483 cities across 27 states and 1 union territory through 1,122 authorised service providers (ASPs). It has a fully automated central processing laboratory (CPL) in Navi Mumbai and has received accreditations from CAP, NABL and ISO. It has total five regional processing laboratories (RPL) namely in New Delhi, Coimbatore, Hyderabad, Kolkata and Bhopal. The company has a hub and spoke business model, where sample procurement is done through ASPs under franchisee agreements. ASPs collect samples from local hospitals, laboratories, pathologists, referring doctors, walk-in customers and home collection services. Valuation: At a price band of Rs420-446, the issue is priced at 47.7-50.7x price-earnings (PE) ratio for FY2015 consolidated earnings per share (EPS) of Rs8.8 and 30-32x EV/EBIDTA for FY2015. The valuations at the offer price are similar to that offered in the public issue of recently listed comparable players like Dr Lal Pathlabs. After listing, the premium valuations of Dr Lal Pathlabs have expanded further due to its strong track record, healthy return ratios and high free cash flows despite the aggressive expansion and exponential growth in the business. |
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