Stock Market Update on KPIT Cummins Infosystems for 1QFY2012

Stock Market Update on KPIT Cummins Infosystems for 1QFY2012 with an Accumulate recommendation and a Target Price of `206 (12 months)

For 1QFY2012, KPIT Cummins Infosystems (KPIT) reported a decent performance. For FY2012, management maintained its USD revenue guidance of US$275mn–285mn, i.e. 23–27% yoy growth, and has given PAT growth guidance of 25% yoy, i.e. `118cr. Management stated that the company’s demand pipeline is strengthening on account of recovery in its anchor vertical, manufacturing. Over FY2011–13E, we expect a strong 29% CAGR in USD revenue, with a 26.8% CAGR in PAT. Thus, we maintain Accumulate on the stock.

Quarterly highlights: For 1QFY2012, KPIT posted revenue of US$70.1mn, up 7.0% qoq, led by 4.0% qoq volume growth. In rupee terms, revenue came in at `316.1cr, up 6.4% qoq. The company’s EBITDA margin declined by 201bp qoq to 12.6% due to wage hikes given from April 1, 2011 (13% for offshore employees and 4% for onsite employees). PAT stood at `24.1cr, down 8.5% qoq due to higher tax rates (22.5% as against 13.8% in 4QFY2011) and lower other income of `2.2cr vs. `4.5cr in 4QFY2011.

Outlook and valuation: KPIT has been growing at a scorching pace of 7.7% CQGR over 3QFY2011–1QFY2012 after the complete integration of In2soft and CPG in 2QFY2011. The company has recently acquired 50% stake in Systime, which is based on Oracle practice and expects it to continue to post a 20% CAGR going forward. Management has been very proactive in terms of acquiring capabilities in the enterprise space to drive growth such as SAP (Sparta) and Oracle space (In2soft, CPG and Systime). Thus, we expect KPIT’s revenue to post a CAGR of 28.9% in USD terms and 27.1% in INR terms over FY2011–13E, with EBITDA and PAT CAGR of 30.9% and 26.8%, respectively. We maintain our Accumulate rating on the stock with a target price of `206, valuing it at 12x FY2013E (five-year historical one-year forward median P/E) EPS of `16.9.

Stock Market Update on Hero Honda for 2QCY2011

Stock Market Update on Hero Honda for 2QCY2011 with a Neutral recommendation.

 

Hero Honda’s (HH) 1QFY2012 results were in-line with our estimates on the top-line front, but its EBITDA margin was below our expectation due to raw-material cost pressures. However, driven by increased other income and lower tax rate, net profit registered an in-line performance. While we broadly maintain our volume and revenue estimates, we upgrade our earnings estimates for FY2012E/FY2013E by 6%/4% to account for lower tax rate as guided by management. We remain Neutral on the stock, considering the uncertainty regarding access to technology and product development capability post the split with Honda Motor Co.

Raw-material cost pressures restrict operating performance; lower tax rate boosts the bottom line: HH registered in-line revenue growth of 32.3% yoy (5.4% qoq) to `5,683cr, led by a robust 23.9% yoy (5.2% qoq) jump in volumes and a 6.7% yoy (0.2% qoq) increase in average net realisation. Adjusted EBITDA margin (adjusted for royalty payments) declined by 275bp yoy (84bp qoq) to 11.3% against our estimates of 12.1%, as raw-material costs increased by 355bp yoy (190bp qoq). Net profit increased by 13.5% yoy (11.2% qoq) to `558cr, supported by higher other income and lower tax outgo.

Outlook and valuation: We broadly maintain our volume estimates and model the company to record a CAGR of ~14% in revenue over FY2011–13E, aided by ~11% CAGR in volumes during the period. We expect margins to remain under pressure on account of higher advertising, rebranding and R&D spends. As a result, net profit is expected to register a CAGR of ~10% over FY2011–13E. Further, due to intense competition in the two-wheeler segment, we believe HH’s market share will remain under pressure, leaving limited room for earnings upgrade. We remain Neutral on the stock.

Stock Market Update on DB Corp. for 1QFY2012

Stock Market Update on DB Corp. for 1QFY2012 with a Buy recommendation and a Target Price of `302 (12 months)

    DB Corp. (DBCL) reported a mixed performance on the revenue and earnings front. The company’s top-line growth was driven by impressive ad and circulation revenue. Earnings for the quarter declined due to losses because of the new launches. We maintain our Buy recommendation on the stock.

    Top-line growth steady led by ad revenue growth and impressive circulation revenue growth: DBCL reported steady top-line growth of 18.4% yoy, driven by 20% yoy growth in print ad revenue and 18% yoy growth in radio ad revenue. Circulation revenue was higher by 5.8% yoy and 6.4% qoq on account of new launches in Jharkhand with Dhanbad edition and the company’s foray into Maharashtra with the launch of Aurangabad and Nasik editions.

    Earnings down by 14.7% yoy because of losses due to aggressive expansion: In terms of earnings, DBCL posted a decline of 14.8% yoy on a recurring basis and 14.8% yoy growth on a reported basis, primarily due to losses in new edition launches. Gross margin contracted by 561bp yoy due to heavy consumption of newsprint towards the launch of the new editions. On a sequential basis, earnings grew strongly by 35.8% with a mere 64bp qoq gross margin contraction.

   Outlook and valuation: We maintain our earnings estimate and have factored in the increase in newsprint price and higher number of loss-making editions.
    At the CMP of `224, DBCL is trading at 13.4x FY2013E consolidated EPS of `16.8. We maintain our Buy view on the stock with a target price of `302, based on 18x FY2013E earnings, which is in-line with its historical trading average since the company’s listing. Downside risks to our estimates include – 1) any further rise in newsprint prices, 2) competition becoming fierce and 3) higher-than-expected losses/increase in the breakeven period of its new launches.