Stock Market Update on Ashok Leyland for 1QFY2012

Stock Market Update on Ashok Leyland for 1QFY2012 with a Buy recommendation and a Target Price of `62 (12 months)

For 1QFY2012, Ashok Leyland (ALL) registered an in-line top-line and operating performance, but high depreciation and interest costs negatively affected the company’s profitability. The increase in average net realisation led to the company’s top-line growth, whereas higher working capital requirements and additions to the gross block in 4QFY2011 led to higher financing and depreciation costs, respectively. We broadly maintain our volume and earnings estimates and continue to maintain our Buy view on the stock.

In-line operating performance; high interest and depreciation costs impact profitability: ALL reported modest 6.3% yoy (down 34.8% qoq) growth in its top line to `2,496cr, driven by an 18% yoy (remained flat qoq) increase in average net realisation. Volume performance, however, was subdued during the quarter, reporting a 9.9% yoy decline (35% qoq), resulting in 500bp of market share loss in the M&HCV segment, which currently stands at 22.2%. Adjusted EBITDA margin came in at 9.4%, registering a decline of 60bp yoy as compared to 10% in 1QFY2011 and in-line with our estimates of 9.5%. Sequentially, however, the operating margin declined by 389bp from 13.3%, largely due to the decline in volumes, which negatively affected the company’s operating leverage. Margins were supported by price increases carried out by the company. ALL reported a 29.7% yoy decline (71.1% qoq) in net profit to `86cr on account of higher-than-expected interest and depreciation expenses.

Outlook and valuation: We expect ALL to report a healthy CAGR of 12–13% in revenue, driven by a 9–10% increase in volumes over FY2011–13E. We estimate the company to report EPS of `5.6 in FY2013E. At `50, ALL is trading at attractive valuations of 8.8x FY2013E EPS. We maintain our Buy rating with a revised target price of `62, valuing the stock at 11x FY2013E earnings.

Stock Market Update on Wipro for 1QFY2012

Stock Market Update on Wipro for 1QFY2012 with an Accumulate recommendation and a Target Price of `419 (12 months)

   For 1QFY2012, Wipro reported lower-than-expected results. The major disappointment came from the price realisations front, which declined by 1.7% and 1.2% qoq for onsite as well as offshore in constant currency (CC) terms, respectively. During 1QFY2012, Wipro’s IT services revenue came in at US$1.408bn, while Cognizant has given a revenue guidance of at least US$1.45bn for the quarter (results not yet out), which (if achieved) makes Cognizant the third largest Indian IT player. Revenue guidance for Wipro’s IT services segment for 2QFY2012 looks lacklustre at US$1.436bn–1.464bn, only 2–4% qoq growth, as 2Q is seasonally the strongest quarter for IT companies. Wipro continues to lag its peers and is undergoing new organisational restructuring at the top end. Thus, we expect volumes to remain tepid. Accordingly, we downgrade our recommendation to Accumulate from Buy.

Quarterly highlights: For 1QFY2012, Wipro registered 3.1% qoq growth in revenue to `8,564cr. Volume growth of the IT services segment came in tepid at 1.8% qoq. Revenue from IT products and consumer care and lightening segments grew strongly by 20.9% and 17.6% yoy, respectively. EBIT margin of the IT services and consumer care and lightening segments fell by 10bp and 22bp qoq to 22.0% and 11.9%, respectively; while for IT products, EBIT margin increased by 56bp qoq to 4.2%. Overall EBIT margin declined by 35bp qoq to 17.5%.

Outlook and valuation: In FY2011, Wipro added incremental revenue of only US$830mn vis-à-vis Infosys, TCS and Cognizant (in CY2010) adding US$1.23bn, US$1.83bn and US$1.31bn, respectively. Further, management guided for revenue growth of only 2–4% qoq for 2QFY2012. Management maintained that it will take another 2–3 quarters to grow at rates comparable to its peers. Thus, we expect revenue CAGR for IT services (US$ terms) to be muted at 15% (17.4% earlier) over FY2011–13E, underperforming not only tier-I companies but also tier-II companies such as KPIT, Persistent and Hexaware. We value Wipro at 16x FY2013E EPS of `26.2 and downgrade our rating to Accumulate from Buy with a target price of `419. 

Share Market Update on Godrej Consumer Products Ltd

    GCPL has entered an agreement for the right to acquire 51% stake in Darling Group Holdings: Godrej Consumer Products (GCPL) enters into an agreement for the right to acquire 51% stake in Darling Group Holdings, one of the largest players in hair care category in Africa with brands like Darling and Amigos; both these brands are market leaders in the countries in which they are present. Darling Group Holdings  manufactures and distributes full range of hair extension products in Africa and operates in 14 countries in sub-Saharan African region.

    Nature of deal: Financial details of Darling Group and the deal size have not been disclosed by the company. GCPL’s management has said that the deal is going to be EPS accretive from the first year itself and going forward the company plans to acquire 100% stake in the Darling Group. While Darling Group’s current management team will continue to manage the business, GCPL will institute a cross functional team with members from current Darling Group’s management team and its team to leverage synergies.

    Our take on the deal: We have not factored the deal in our numbers due to lack of details particularly, deal size and financial details of the company. We believe the acquisition is in line with GCPL’s global 3x3 strategy – presence in 3 continents – Asia, Africa and Latin America through 3 core categories - Home care, Personal wash and Hair care.

    Outlook and valuation: We have modeled in a 12.3% CAGR in domestic revenue and a 21% CAGR in international revenue. We expect the company’s operating margin to sustain at ~20% going ahead, supported by higher revenue contribution from the home care division and cross-pollination resulting in synergistic benefits in terms of cost rationalisation. Hence, we expect GCPL to post a 13% CAGR in earnings during the period (post ~ 5% dilution from the recent QIP). At the CMP of `418, the stock  trading at 20.6x FY2013E earnings of `20.3. We maintain an Accumulate rating on the stock with a target price of `447.