Result Update: HCL Technologies
HCLT beat expectations with organic CC revenue growth of 3.5% and EBIT margins at 20.6%. Growth was largely led by IMS (10% QoQ), while applications business lagged (1.9% QoQ). The consistent under-performance of the applications business is a matter of concern and it likely needs need significant investments in capabilities / clients. EBIT margins fell by just 20bps QoQ, partly due to the Volvo consolidation. However, they outperformed expectations, led by higher automation and higher off-shore. We believe that, HCLT continues to face profitability challenges, in a bid to sustain high growth (SG&A spends at about 12% and 85.8% employee utilization rates (incl trainees). HCLT has guided for a 12%-14% CC revenue growth guidance and 19.5% - 20.5% EBIT margins in FY17, higher than estimates. However, excluding acquisitions, growth rates would be about 8.5% - 10.5%, lower than industry growth. We will watch out for the improvement in growth rates and margins in future quarters. We tweak our EPS estimates higher for FY17 and FY18 to Rs.58 (Rs.57.4, earlier) and Rs.64.5 (Rs.64.3). Our FY18-based PT stands revised to Rs.843 (Rs.838, earlier), based on target valuations of about 13x FY18 earnings. With limited upsides from current levels, we maintain REDUCE and will wait for better prices to turn buyers in the stock.
Result Update: Berger Paints Ltd
¾ Double digit volume growth in the decorative paint segment, improved performance in the industrial and auto OEM segment and lower raw material cost has enabled Berger to deliver healthy YoY growth in earnings in Q1FY17. Performance of subsidiaries continues to be healthy. Also the company has taken various steps to improve its product portfolio, enter more geographies and provide value added services which has yielded results to the company. Berger reported sales at Rs 12.4 bn (+11% YoY), highest ever Ebidta margin of 15.7% (+ 280 bps YoY) on the back of favourable raw material environment and earnings of Rs 1.2 bn (+55% YoY and ahead of our estimate of Rs 1.05 bn) looks strong in a competitive market with improving demand situation.
¾ We value the stock at 42x FY18E EPS (10% discount to Asian Paints) and arrive at a TP of Rs 255 (from 215) with ACCUMULATE rating maintaining our positive stance on the paint sector and Berger.
Result Update: Voltas
¾ Voltas delivered impressive quarterly numbers which exceeded our profits estimates led by significant margin gains in the UCP segment.
¾ Improving order backlog and the company's strategy of taking selective orders gives us comfort that margins in the MEP segment should continue to strengthen in the medium term.
¾ We remain positive on the company given market leadership, long term growth potential for room ACs and strong balance sheet.
¾ We arrive at a target price of Rs 368 (347 earlier) based on exit multiple of about 24x FY18 earnings (23x FY18 earnings earlier). Since the stock has outperformed in the past quarter, the upside has been constrained, hence we move rating to Accumulate compared to BUY earlier.
¾ Near-term challenges include - impact of decline in crude price on Middle East market, weak demand for spinning machinery, sluggish activity in mining sector and intense competition in the room AC segment.
Result Update: Cadila Healthcare
¾ Cadila results were in line with expectations. Revenues were down 2% at Rs 22.2 bn. Domestic formulations segment posted 6.2% growth (vs. our expectations of 8%) and US formulations revenues were at ~US$ 127mn vs. our expectations of US$ 120mn. We have been cautiously optimistic on Cadila for the last few quarters given the impending compliance issues at its Moraiya plant (The largest contributor to US revenues at ~60%). Though the warning letter at Moraiya plant yet needs to be resolved, Cadila however, recently got an EIR for Moraiya plant, which gives us comfort. We retain our estimates for the company, but value the company at higher multiple as we foresee resolution of the plant in coming months. We upgrade Cadila to BUY (Accumulate earlier) with a revised price target of Rs 400 (earlier Rs 360), 22x (earlier 20x) FY18E estimates.
Result Update: Kajaria Ceramics
¾ Revenues for Q1FY17 were in line with our estimates with sales volumes witnessing a gain of 6% YoY. Operating margins witnessed a sharp improvement led by lower power costs. Net profit performance was boosted by sharp improvement in margins despite higher tax outgo. Lower gas prices has helped in cost reduction and would help in aiding margins going forward. Volume push going ahead would be led by improved demand environment as well as commissioning of new capacities. Demand has started witnessing improvement in select segments. We expect company to benefit from incremental volumes coming from unorganized segment also post implementation of GST.
¾ We revise our estimates upwards to factor in lower power and fuel cost. We revise our valuation multiple upwards to factor in positive developments related to implementation of GST as well as impact of higher disposable income from 7th Pay Commission recommendation. Also, company is consistently gaining market share, improving margins and is expected to benefit from healthy demand coming from Tier-3 and Tier-4 cities. Peer group companies have also been re-rated to factor in expected demand revival in home building material. We thus arrive at a revised price target of Rs 1412 based on 30x FY18 estimates (Rs 1120 earlier based on 25x FY18 estimates earlier). Recommend BUY on the stock.
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