Apar Industries Ltd (Q1 FY18): Weak quarter; outlook remains strong - BUY
CMP (Rs) 725, 12-mts Target (Rs) 902, Upside 24.4%
Apar Industries reported topline growth of ~19% which was inline with our estimates. Revenue growth was driven by the cables segment while growth in conductors and oil segment remained subdued. Profitability during the quarter came under pressure owing to aggressive pricing being witnessed in conductor and oil segment. Additionally higher costs related to newly commissioned capacity in the conductor and oil segment further led to higher costs. Sharp rise in input costs was partially offset by the decline in other expenses leading to a 283bps deterioration in operating margin. Sharp rise in depreciation cost has offset the benefits of decline in interest costs thereby impacting performance at net level. The order book in the conductor segment stood at Rs.11.6 bn. While the order book has been impacted offlate due to lower order flows by customers, the situation is expected to normalize in very near term. As demand improves and the new capacity ramps up volumes are likely to pickup during the near to medium term. Going ahead, we expect the profitability to improve as volumes pick up post GST implementation and new capacity stabilizes. We reduce our profit estimates marginally and retain our BUY rating on the stock for revised target of Rs.902 (~16x FY19E P/E).
Kalpataru Power Transmission (Q1 FY18): Margin expansion surprises positively - BUY
CMP (Rs) 343, 12-mts Target (Rs) 435, Upside 26.7%
Kalapataru managed to report strong numbers despite execution impacted by GST. The outperformance was led by better margins in railways and pipe business. Higher margins offset the impact of lower execution on earnings. Railways reported 17% yoy and pipe business 27% yoy growth on the back of strong order book. However, GST related issues led to transmission business reporting degrowth of 3% yoy. OPM expanded 40bps yoy as margins in pipe and railways business improved and were similar to transmission business margins. Order inflow during the quarter was higher by 9% yoy and for 4M FY18 stood strong at Rs.32bn. Orderbook at the end of Q1 FY18 was higher by 7.2% yoy and is company is favorably placed in orders worth Rs.25bn. The company has maintained its revenue guidance of +15% yoy and have marginally increased its margin guidance on the back of strong performance in other businesses. Gross debt increased qoq due to inventory accumulation and increase in debtor days. We have upgraded our estimates for FY18 and FY19, factoring in higher margins in standalone entity. Revival in JMC projects has also led to an upgrade in our SOTP fair value to Rs.435. We maintain our Buy recommendation on the stock.
Adani Ports and SEZ (Q1 FY18): Decent performance; Outlook bright - Accumulate
CMP (Rs) 384, 12-mts Target (Rs) 406, Upside 5.7%
Adani Ports’ Q1 FY18 witnessed topline growth of ~50% which was higher than our estimate. The growth was driven by pickup in cargo volumes and increasing contribution from high value cargo. The consolidated cargo volumes improved 18% yoy (to 50 MMT), which was driven by the robust 21% yoy growth in container volumes. During the quarter, the company has continued its focus on reducing its dependence on Coal cargo which has been under pressure owing to decline in coal imports. On the operational front, operating margin stood at 58% which was impacted by the higher operating expenses related to addition of new cargo handling capacity. Mundra port is now out of the tax holiday and from April 01, 2017 the Company is under full taxation. The higher taxes and lower other income saw net profit decline by 14% yoy. Going ahead, we expect the company to deliver cargo volume growth of ~12% during FY18. Also, we believe decline in coal volumes is likely to get offset by the increase in container volumes, inline the company’s cargo diversification strategy. We have revised our estimates to factor-in the Q1 FY18 performance. The stock is currently trading at ~20x FY19E EPS. We maintain our Accumulate rating on the stock with target of Rs.406.
Hindalco Ltd (Q1 FY18): Aluminium to drive earnings growth - Accumulate
CMP (Rs) 221, 12-mts Target (Rs) 244, Upside 10.4%
Hindalco’s operating performance was inline with estimate as the impact of weaker sales volume was offset by higher margins. Topline was below par due to inventory accumulation in aluminium division. Though aluminium production was higher by 4.2% yoy, sales volume was higher by just 2.6% yoy, due to delay in export shipment and domestic volumes impacted by GST. Due to subdued demand in the domestic market before GST, share of exports increased, impacting margins. Metal sold in domestic market is at a premium to exports. Aluminium division operating profit was stronger than expected as input costs were lower on a qoq basis. Lag impact of carbon products and increase in supply of cheaper linkage coal led to CoP reducing on a sequential basis. Higher spot alumina prices led to a sharp jump in Utkal’s operating performance. Copper division performance was weaker due to lower DAP prices and volumes and was also due to marginal decline in Tc/Rc margins. Provision of Rs.1bn for mining related litigation led to an underperformance in PAT.
The company secured additional coal linkage of 2.9mn tons in Q1 FY18, increasing linkage plus captive coal availability to more than 80% of total coal demand. Post the QIP issue, the company has reduced its debt by Rs.64bn and would continue to deleverage in FY18 on the back of strong cash flows. Debottlenecking of Utkal refinery to increase capacity from 1.5mtpa to 2mtpa would take 30 months and would require capex of Rs.12bn. Raw material costs are expected to increase by 4-5% on Q2 on account of higher carbon derivative prices. Earnings growth in the standalone entity would be led by various cost saving measures, increase in share of value added products and higher aluminium prices. Novelis earnings too have improved over the last six months led by superior product portfolio. We believe valuations at 5.9x FY19 EV/EBIDTA largely factor in the strong earnings growth and downgrade the stock to Accumulate with a revised price target of Rs.244.
State Bank of India (Q1 FY18): Weak performance – Accumulate
CMP (Rs) 280, 12-mts Target (Rs) 309, Upside 10.2%
· Operating performance disappoints - weak loan growth and NIM
· Influx of NPLs was large; but outlook guided better
· A sharp recovery in profitability plausible over FY18-19; Rate Accumulate
BHEL (Q1 FY18): All eyes on Telangana project - Reduce
CMP (Rs) 126, 12-mts Target (Rs) 122, Downside 3.6%
BHEL continued to witness weak execution for the second consecutive quarter. Topline of Rs.55.2bn was lower by 2.1% yoy even on a weaker base of Q1 FY17. Industrial segment revenue was lower by 8% yoy eventhough the company had a stronger order book in this segment. Weaker execution coupled with provisioning for employee wage revision led to an operating loss of Rs.883mn against our estimate of positive Rs.321mn. BHEL continued to report gross margin expansion, however high fixed costs impacted margins. Forex gain of Rs.2bn aided the company to stay in black. Order inflow was quite weak at Rs.18bn, lower by 44% yoy and led to order book shrinking by 3.6% qoq. There was no major order win in the power segment during the quarter. The company continues to focus on converting its slow moving orders to executable. FY19 growth would be largely dependent on 5*800MW (Rs.180bn) Yedadri project in Telangana. The company has recently entered into an agreement with Kawasaki Heavy Industries to manufacture stainless steel coaches for Metro rail. We believe earnings would remain under pressure due to high competitive intensity and weak opportunities. Maintain our reduce rating on the stock with a revised target price of Rs.122.
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