RESULTS UPDATE
Tata Motors (BUY): JLR margin disappoints
Tata Motors' 2QFY17 performance lagged our expectations (consolidated adjusted EBITDA at Rs73bn, 11% lower than expectation) due to weaker-than-expected Jaguar Land Rover (JLR) margin and both topline/margin miss at domestic business. Going forward, we expect JLR's volume growth to remain healthy in FY17 (14% growth in 2HFY17) and FY18 (11%) driven by successful response to new launches (such as Jaguar F-Pace) and incremental volumes from further launches, such as new Discovery, mid-sized Range Rover. On EBITDA margin front, while we downgrade our estimates sharply for FY17 (by 230bps to 13.0%), we expect sharp improvement in FY18 (up 150bps) driven by favourable impact of GBP depreciation. Overall, we downgrade consolidated EBITDA by 13%/2% and net earnings by 22%/3% for FY17/FY18 and valuation by 1% to Rs609 (implying 4x FY18E adjusted EBITDA for JLR [Rs550]). The stock currently trades at an attractive valuation of 10x FY18E adjusted net earnings. (Ashvin Shetty, CFA, +91 22 3043 3285)
Bank of Baroda: Asset quality trends improve
Fresh addition to NPAs (~Rs29bn) fell significantly compared to Rs87bn, quarterly run-rate in previous four quarters. Further, recovery/upgrades (~Rs25bn) maintained the momentum of last two quarters. With provision coverage (43% on stressed assets) improving total stressed assets, net of provisions, declined by 20bps QoQ to 9.4%. Supported by treasury gains, operating profits grew by 15% YoY. NIM continued to improve (up 6bps QoQ to 2.29%). The management however retained its full-year outlook (unchanged) on asset quality. We keep our FY17/18E earnings unchanged. The management reiterated its long-term action plan, targeting ~15% RoE and ~3% domestic NIM in three years. Relatively high provision coverage on stressed assets (43% vs 30-32% for peers) is a key comfort for the bank. We expect RoA/RoE of 0.7%/13% in FY18. We retain BUY on BoB with unchanged target price of Rs184, implying 1.0x FY18E BV. (Ravi Singh, +91 22 3043 3181)
Hindalco (SELL): Aluminium business disappoints
Hindalco's 2QFY17 standalone EBITDA was up 2% QoQ (but 16% below our estimates), as normalisation of copper EBITDA was offset by sequential decline in aluminium EBITDA. Aluminium EBITDA decreased 7% QoQ to Rs8bn (from Rs8.7bn in 1QFY17). Decline was due to higher-than-expected alumina transfer costs from 100% subsidiary Utkal Alumina and coal availability issues pertaining to high rainfall near Renukoot and Mahan smelters, which should normalise going forward. Management maintained muted outlook for aluminium prices, given continuous production growth in China. For Novelis, we factor in 4% volume CAGR over FY16-18E driven by capacity ramp-ups in auto segment and rise in share of auto volumes from 15% in FY16 to 25% by FY18E, resulting in adjusted EBITDA of US$1.1bn in FY18E. However, we believe the stock fully factors in not only the sharp improvement in Novelis' EBITDA but also a sharp recovery in aluminium prices and hence, maintain our SELL stance. (Parita Ashar, CFA, +91 22 3043 3223)
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