Stock Market Update on Bhushan Steel for 1QFY2012

StockMarket  Update on Bhushan Steel for 1QFY2012 with a Neutral recommendation.

Strong top-line growth: During 1QFY2012, Bhushan Steel’s (BSL) net sales grew by 62.6% yoy to `2,232cr mainly on account of higher volumes of flat products. Flat products sales volumes grew by 80.2% yoy to 388,790 tonnes, while long product sales volumes grew by 7.6% yoy to 100,664 tonnes in 1QFY2012. Long product average realisation increased by 18.2% yoy to `42,915/tonne, while flat product average realisation decreased by 3.2% yoy to `49,294/tonne.

Depreciation and interest costs mute net profit growth: During 1QFY2012, EBITDA increased by 62.1% yoy to `661cr, representing EBITDA margin of 29.6%, compared to 29.7% in 1QFY2011. EBITDA/tonne increased to `13,505 (US$300) in 1QFY2012, compared to `13,186 (US$293) in 1QFY2011. Depreciation expense increased by 182.4% yoy to `151cr due to increased capacity, while interest expense increased by 173.8% yoy to `216cr because of higher debt. A sharp increase in depreciation and interest costs resulted in net profit growth of only 2.0% yoy (despite 62.1% growth in EBITDA) to `210cr.

Outlook and valuation: At the CMP, the stock is trading at 8.1x FY2012E and 7.1x FY2013E EV/EBITDA, a significant premium over its peers. Although we expect sales volume growth of 24.8% over FY2011–15E, we believe it is too early to play the volume growth story of BSL as strong volume growth is expected only post FY2013. Further, although BSL uses a combination of BF-EAF technology to produce steel, rising prices of iron ore and coal will affect its margins. Moreover, BSL’s debt-equity ratio remains high. Further, we believe the increase in the stock price in the past three months fairly discounts the growth prospects of BSL. Hence, we maintain our Neutral view on the stock.

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.