Stock Update Marico
Reco: Hold
PT: Rs270
CMP: Rs258
Positives priced in; downgraded to Hold with revised PT of Rs270 Key points - Volume growth momentum sustains in Q4: Marico posted a strong operating performance in Q4FY2016 with revenues growing by 7% (driven by 10.5% volume growth) and the operating profit growing by 27% (driven by 630-BPS improvement in the gross profit margin). The sales volume growth of 10.5% in Q4FY2016 was in line with 10.5% volume growth in Q3FY2016. The Indian business volume growth stood at 8.5% with Parachute coconut oil registering 6% volume growth, Saffola edible oil registering 13% volume growth and value-added hair oil portfolio registering 11% volume growth during the quarter. The OPM improved by 260BPS YoY to 16.6% and the operating profit grew by 27% to Rs216.6 crore. The adjusted PAT grew by 19% YoY to Rs130.7 crore during the quarter.
- Near-term outlook–Volume growth to sustain at 8-10%; margins to improve in H1FY2017: With prospects of monsoon improving for the current season, Marico expects the domestic consumption environment to improve in the second half of FY2017. We believe the Indian business volume growth would sustain in the range of 8-10% in the coming quarters and would gradually improve with the overall improvement in the domestic demand environment. The international business revenues are expected to grow in the range of 14-16% in the coming years. With copra prices remaining lower on a Y-o-Y basis and no major upsurge in the other raw material prices, the margin improvement is expected to sustain in the coming quarters (Indian business margins are expected to be in the range of 18-19%). The international business margins are expected to remain in the range of 16-18% in the coming quarters.
- Positives priced in; downgraded to Hold: We have broadly maintained our earnings estimates of FY2017 and FY2018. With expected improvement in the demand environment, expansion in the distribution reach and steady volume growth momentum in the domestic market, Marico is well poised to achieve 20% earnings CAGR growth over FY2016-18E. However, the current valuation of 33x its FY2018E earnings has factored in all the positives. Hence in view of limited upside, we have downgraded our rating on the stock from Buy to Hold with a revised price target of Rs270 (valuing at 34x its FY2018E earnings).
UPL
Reco: Buy
PT: Rs605
CMP: Rs538
Strong performance; PT revised upward to Rs605 Key points - Strong performance despite lukewarm demand environment across world: For Q4FY2016, UPL posted a strong set of numbers across parameters despite other agrochemical companies facing challenging demand environment across globe. Growth in UPL is driven by strong volume, operating efficiency and marginal price increase. The company reported revenues of Rs4,340 crore, a growth of 20% YoY, led by volume (up 25%) and price (up 1%) growth. However, the negative effect of the currency, around 6%, limits the growth for the quarter. The operating performance for the quarter improved on account of decline in input cost and better operational efficiency. The reported net profit improved by 25% YoY to Rs552 crore which includes extraordinary expenses of Rs58 crore, adjusting to that PAT stood at Rs610 crore, a growth of 33% YoY.
- Latina America drives growth for quarter: Strong growth in revenue was largely driven by Latin America where revenue grew by 57% YoY largely on account of fungicide and ease on exports tax on commodity in Argentina, strong performance in Mexico and Columbia. The North American market grew by 12.6% YoY while other markets grew in the range of 1-8% YoY (Europe, Rest of World and India).
- Stake increase in subsidiary and high receivable lead to rise in debt: In FY2016, the UPL's net debt has increased in the range of Rs860 crore to Rs3,230 crore largely on account of stake increase in subsidiary (from 75% to 100%), registration of new products and rise in debtors (tough weather condition and high growth exposure from Latin America where working capital cycle is long). Going ahead, the merger of Advanta Seeds is likely to take three to four months and after the merger, the management is confident of maintaining RoCE in the range of 18-20%. Going ahead, the company has planned a capex of Rs650 crore in expansion of its capacity in technicals (India, France, Colombia) and formulation (India, Rotterdam, Brazil and US) which will be kicked in from FY2018 and will be the key growth drivers. Maintenance capex of Rs250 crore in FY2017E.
- Strong guidance continues, maintain Buy with revised price target of Rs605: The management has maintained its guidance of 12-15% growth in the revenue and improvement in EBIDTA margin by around 60-100BPS in FY2017. The growth in revenue will be driven by new launches of innovative products and increase in market share (especially in Latina America where the company is a young player). We continue to prefer UPL in the agrochemical space due to strong growth momentum and it is trading at a discount to other domestic agrochemical players. We have rolled over our target multiple to FY2018E earnings, valuing the company around its average price multiple of 13x and arrived at the price target of Rs605. We reiterate our Buy rating on the stock.
ICICI Bank
Reco: Hold
PT: Rs250
CMP: Rs237
Higher provisioning dents profits; stress to persist in near term; PT revised to Rs250 Key points - Profitability takes a nosedive: For Q4FY2016, ICICI Bank reported a 76.0% Y-o-Y decline in its net profit as the overall provisions rose to Rs6,926 crore (up 415.1% YoY). The steep increase in provision was mainly on account of an additional contingent provision of Rs3,600 crore made by the bank sighting stress in its few sectoral exposures. The net interest income (NII) growth during the quarter stood at 6.4% YoY owing to decline in margins, interest reversals due to higher NPAs and relatively slower growth in its advances.
- Asset quality weakens; AQR factored in completely: During Q4FY2016, the bank's asset quality showed deterioration as gross non-performing asset (NPA) during the quarter increased to 5.8% versus 4.7% QoQ. Accounts worth Rs7,003 crore slipped into NPA versus Rs6,544 QoQ, out of which around 60% of the slippages came in from the RBI's asset quality review (AQR) which now has been completely taken into account. However, the bank has sighted stress in its exposures related to iron & steel, mining, power, rigs and cement sectors and has accordingly provided for contingent provision during the quarter. Accounts worth Rs2,724 crore slipped into NPA from restructured category. The bank invoked strategic debt reconstruction (SDR) in accounts worth Rs1,200 crore during the quarter and has a pipeline of Rs500 crore for the same. Loans amounting to Rs679 crore were undertaken for 5:25 refinancing during the quarter and has a pipeline of Rs750 crore.
- Valuation and outlook: ICICI Bank has shown deterioration in its asset quality and also foresees stress in some of its corporate exposures. However, since RBI's AQR has been dealt with and the bank's strategy to focus more on retail lending and highly rated corporate hereon would help in arresting higher slippages. Though near-term stress cannot be ruled out in the existing book, the bank has a strong liability franchisee (CASA ratio 45.8%) and healthy capital adequacy (tier-1 CAR at 13.1%) due to which the bank is well placed to take up opportunities both in retail and corporate segments during economic revival. We have downgraded our estimates by 11.5% and 10.7% for FY2017 and FY2018 respectively to factor in higher provisions. Also, we have rolled our valuation to FY2018E, leading to a revised SOTP-based price target of Rs250, while maintaining our Hold rating on the stock.
Raymond
Reco: Buy
PT: Rs500
CMP: Rs420
Strong performance, brand investment to continue; upgrade to Buy with PT revised to Rs500 Key points - Strong Q4FY2016 performance: Raymond's consolidated revenue grew by 7.9% YoY aided by a robust double-digit growth from the branded apparel (+14.7% YoY) and the garment (+44.7% YoY) business. The textiles and the denim business clocked a single-digit (+7.1 and 5.2% YoY respectively) revenue growth. Aided by robust revenue performance coupled with improved sales mix in the textile portfolio (textiles business saw a margin expansion of 310 basis points [BPS] YoY), the consolidated operating profit grew by strong 70% YoY. Strong operational performance percolated into adjusted earnings which more than doubled from Rs19.7 crore in Q4FY2015 to Rs56.2 crore in Q4FY2016.
- Key management comments: The management in the conference call eluded that richer product mix in the textile, coupled with strong growth in the garment vertical contributed to the robust margin expansion for the company (the consolidated operating profit margin expanded by 377BPS). It also mentioned that the ongoing investment in its brands along with increasing distribution footprint would continue (for the year, the company's ad spends stood at 5% sales), which would drive a higher-than-market growth for the branded apparel segment (it has guided for a Rs250-crore capex for FY2017). Also, the benefits of enhanced capacity (both denim and shirting by 5 million metre and 7 million metre respectively) would get reflected in the financials ahead. For the year, it renovated 85 stores and is likely to renovate another 50 stores in FY2017.
- Outlook & valuation: We believe that Raymond's efforts towards stepping up its brands, and distribution network augurs well towards creating a profitable branded play in the next few quarters once the investment starts yielding results along with improvement in the macro environment. Thus, we continue to like the medium- to long-term brand franchisee of Raymond, along with a strong brand play. Raymond's stock also has embedded real estate value (122 acre land parcel in the heart of Thane) which makes us positive on the company. In this note, we have introduced our FY2018E earnings, and now expect Raymond to post 26% earnings CAGR over FY2016-18E. Thus, in the wake of improving fundamentals and increased aggression of the management, we have upgraded our rating on the stock from Hold to Buy with a revised price target of Rs500 (core business valued at 12x its FY2018E EPS + 50% value of land parcel). Further, any development on the unlocking front, through divestment of non-core assets (engineering & tools) would be positive for the company.
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