Sell stocks of Asian Paints at current level

Asian Paints:-

“Asian Paints’ Q1FY13 consolidated revenues at Rs 2,539.3 crore, grew by 12.3% yoy, largely led by price hikes and favorable product mix; however volumes declined by 2% yoy. The decline in volume can also be attributed to the effect of high base in both Q1FY12 and Q4FY12 due to dealer stocking ahead of price hikes in addition to slowdown in GDP. The management admitted that volume decline was much below their expectation. Both, the urban demand and rural demand grew at a similar pace. Despite the negative volume surprise, management remains confident of demand reviving as the retailer and dealer feedback regards future expectations remains optimistic However, we are circumspect about their optimism and maintain a cautious stance. On a standalone basis, the net sales grew by a mere 6.7% yoy in value terms to Rs 2,035 crore while the EBITDA grew by 12.2% yoy despite a 6% rise in material index on the back of favourable product mix. The gross margins expanded by 315 bps yoy. The company continues to see a favourable shift towards premium segment from the lower end supported by favourable consumer demographics.”

“EBITDA margins for the quarter stood at 17.5%, up 20 bps and 250 bps on yoy and qoq basis. Raw Material costs stood lower by 160 bps to 55.9%. However, increase in other expenses by 100 bps yoy and that of personnel expenses by 40 bps yoy lead to the growth in margins. The material prices have increased by 6.0% over the last year, however better contribution from higher margins products and price hikes have helped the company arrest the decline in margins. Despite increase in depreciation costs, lower other income, and forex losses, lower interest expenses help the company arrest the fall in net profit margins. The net profit margins for Q1FY13 stood at 11.7%, down 30 bps yoy. The net profit grew by 10.1% yoy to Rs 298.9 crore. The net profit adjusted for minority interest stood at Rs 288.4 crore.   The company has given guidance of Rs 750 crore capex for FY13E, which includes Rs 500 crore to be spent on the Khandala plant in Maharashtra.”

“Slowdown in GDP growth, high inflation scenario, weak monsoons and drying up of investment cycle coupled with political inaction on account of coalition politics can lead to the likely fall apart of the Indian consumption story in the near term. Asian Paints, a play in the consumption story and changing consumer preferences, in all respect is likely to be affected by this. Early signs of volume growth falling and dwindling rural growth might indicate weak growth in volume in the near term. Further, volatile crude prices, depreciating rupee and inability to pass on further price hikes would keep margins under pressure. At the CMP of Rs 3,564, Asian Paints trades at a PE multiple of 28.8x and 23.8x FY13 & FY14 consensus earnings estimates and at premium valuations. Considering, unfavorable macro environment and premium valuations, we recommend a SELL on the stock,” says Ventura research report

Sell stocks of Hindustan Unilever; target of Rs 435

Hindustan Unileve:-

“Hindustan Unilever (HUL) reported net sales growth of 14%YoY to Rs 6250 crores for Q1FY13. Domestic consumer business grew at 19%YoY led by underlying volume growth of 9%YoY. On segmental basis Soaps & Detergents registered 24%YoY growth, Personal products 13%, Beverages 8% and Packaged foods 17%. EBITDA margin for Q1FY13 rose 137bps YoY to 13.4% aided by gross margin improvement of 215bps, lower other expenses (down 93bps) partly offset by higher Advertising & Promotions spends (up 160bpsYoY). Net profit for the quarter grew 28%YoY to Rs 726 crores adjusted for income from sale of properties worth Rs 605 crores. We assign SELL rating on the stock with a price target of Rs 435 (25x FY14E EPS of Rs 17.4).”

“HUL continued with strong quarterly performance with topline growth of 14%YoY (up 10%QoQ) driven by 9%YoY underlying volume growth. Domestic consumer business grew by 19%YoY. Both key segments Soaps & Detergents and Personal products contributed with double digit volume growth. HUL reported double digit growth across segments with its key segments Soaps & Detergents (improved volumes & double digit growth across brands), Personal Products(driven by skin & Hair care) and Packaged foods (Kissan Ketchup and soups registering double digit growth led by volumes) leading the pack registering 24%, 13% and 17%YoY revenue growth. Beverages segment reported growth of 8% YoY growth led by strong growth in coffee. EBIT growth was driven by all the segments. EBIT margins for the soaps & detergent category (up 297bps YoY), Beverages (up 213bps YoY), Packaged foods (up 100bps YoY) and personal products (up 41bps YoY) improved on back of increase in prices, global buying efficiencies and lag effect between consuming cost and replacement cost. We believe with judicious price hikes the current EBIT margins are sustainable.”

“We maintain our positive outlook on the stock and believe 21% earnings growth over FY12-14E is achievable considering healthy volume growth & improved margins (product mix & price increases). However the stock is currently trading at a P/E of 31x and 27x its FY13E and FY14E earnings. Consequently, we recommend SELL on stock with a target price of Rs. 435, (25x FY14E EPS of Rs 17.4), giving a downside potential of 7%,” says KRChoksey research report.

Sell stocks of Wipro; target of Rs 321

Wipro:-

“Wipro’s 2QFY13 US dollar revenue guidance of 0.3-2.3% QoQ growth was poor and, in absolute terms, is the third successive quarter that the IT major has given the exact same dollar revenue guidance, implying no growth momentum whatsoever. In our view, this guidance is likely to lead to the stock continuing to get a short shrift from investors. Owing to a worsening growth outlook for the company and consistent decline in YoY IT services dollar revenue growth over the past five successive quarters, we have cut our PE multiple from 15x to 12.5x FY13E EPS. Thus, despite the fact that the stock has shed 16% since we downgraded it to Sell, we retain our Sell rating with a revised TP of Rs321 (Rs392) as we have cut the PE multiple and also FY13E/FY14E EPS estimates by 1.6%/3.9%, respectively.”

“Wipro’s 2QFY13 US dollar revenue guidance of 0.3-2.3% QoQ growth was poor and, in absolute terms, is the third successive quarter that the IT major has given the exact same dollar revenue guidance, implying no growth momentum whatsoever. In our view, this guidance is likely to lead to the stock continuing to get a short shrift from investors. Owing to a worsening growth outlook for the company and consistent decline in YoY IT services dollar revenue growth over the past five successive quarters, we have cut our PE multiple from 15x to 12.5x FY13E EPS. Thus, despite the fact that the stock has shed 16% since we downgraded it to Sell, we retain our Sell rating with a revised TP of Rs321 (Rs392) as we have cut the PE multiple and also FY13E/FY14E EPS estimates by 1.6%/3.9%, respectively. Wipro’s’ 1QFY13 IT service revenue declined 1.4% QoQ to US$1,514.8mn (our estimate US$1,544mn). Pricing fell 1.7% QoQ and volume growth stood at 0.8% QoQ, both below our estimates (0.7% QoQ fall, 1.3% QoQ growth, respectively). Adjusted for cross-currency movements, constant currency revenue grew 0.3% QoQ to US$1,540mn. From a vertical perspective, telecom equipment manufacturers and investment banking remain under stress. In rupee terms, IT revenue grew 9.5% QoQ to Rs83.1bn (our estimate Rs83.6bn). Total revenue grew 6.8% QoQ to Rs104.8bn, slightly below our and consensus estimates.”

“Wipro’s 2QFY13 guidance was a major disppointment and reflects no growth momentum whatsoever. We retain our Sell rating on Wipro with a revised TP of Rs321 (Rs392) as we have cut the target PE multiple to 12.5x (15x) and also FY13E/FY14E EPS by 1.6%/3.9%, respectively,” says Nirmal Bang research report.

Buy stocks of Dish TV; target of Rs 79

Dish TV:-

“Dish TV standalone performance was better than our expectations with subscription revenue growth of 4.6% QoQ. Lease rental revenue was lower due to change in accounting policy, which led to flat revenue QoQ. Lease rental revenue stood at Rs460mn v/s 660mn in Q4FY12. 50%/15% QoQ decline in advertisement/other operating expenditure supported EBITDA growth of 8% QoQ to Rs1.55bn. EBITDA margin at 29.9% grew 244bps QoQ. Total loss for the quarter stood at Rs323mn which includes forex loss of Rs138mn. Adj. net loss for the quarter was at Rs 164mn v/s Rs180mn in Q4FY12. On the back of strong EBITDA and lower capex (due to lower subscriber addition), the company reported +ve FCF of Rs400mn v/s Rs430mn in Q4FY12.”

“Dish TV added 0.50mn gross subs v/s our est. of 0.58mn. ARPU during the quarter grew 2.9% to Rs156. SAC during the quarter stood at Rs2145 v/s Rs2127 in Q4FY12. Monthly churn rate remained stable at 1.0%. We estimate gross subscriber addition of 2.3mn for FY13E with ARPU of Rs158 (Q4FY13E ARPU at Rs165). We expect churn rate to remain at current levels going forward.”

“We revise our revenue and EBITDA marginally by 1%-2% for FY13E & FY14E, as our numbers already reflect higher ARPU assumptions. EBITDA margin in coming quarters is expected to decline from current levels due to increase in content cost. Net loss expands led by finance cost and depreciation. Revised net loss for FY13E stands at Rs797mn and PAT for FY14E is expected at Rs401mn. At CMP of Rs71 stock trades at 13.6x/11x EV/EBITDA of FY13E/FY14E. We maintain ACCUMULATE rating on the stock with revised TP of Rs79,” says Emkay Global Financial Services research report.

Buy stocks of Karur Vysya Bank; target of Rs 512

Karur Vysya Ban:-

“In FY12, Karur Vysya Bank (KVB) reported healthy performance even in on-going turbulent times on the back of healthy margin of 2.9% and robust growth in fee income. Followings are key observations in KVB’s annual report.”

“The bank’s management indicated that the major thrust areas for FY13 would be improvement in CASA ratio, improvement in asset quality and recoveries of NPAs, further broadening of fee income and increasing footprints to have a better pan India coverage. In the past four years, the bank opened 25 branches on an average each year; whereas in FY12, it added highest number of branches (81new branches and up-gradation of a satellite branch into a full fledged branch), taking the total to 451 KVB’s CASA deposit share came down to 19.2% in FY12 from 23.3% in FY11 on account of moderation in low-cost deposit mobilization mainly due to lesser liquidity in the system and competition from new-generation banks.”

“KVB maintained its secured loan book proportion in the range of 89-93% since last four years. On an industry-wise credit book break-up, KVB’s loan book is mainly exposed to infrastructure, textile, iron & steel, food processing and chemical industries. The bank’s exposure to these industries has been coming down over time barring in iron & steel On maturity profile front, as on end-March’ 12, up to 53% of KVB’s deposits and 43% of advances would redeem/mature in a one-year time horizon, compared to 46% of deposits and 39% of advances as on end-FY11. In FY12, KVB reported 28bps YoY decline in margin to 2.87%, on higher allocation of assets towards secured loans (low yielding & non risky assets), decline in low cost deposits share and higher cost of deposits.”

“Overall, we maintain our positive stance on the stock and estimate that the bank would report RoAA and RoAE in the 1.2-1.3% and 18-20% ranges respectively in FY13-14. We reiterate Buy rating on the stock with a target price of ` 512. At current price, it quotes at 1.5x and 1.3x ABV FY13 and FY14 respectively; based on our target price, the stock would trade at 1.6x adjusted book value FY14,” says Dolat Capital research report.

Buy stocks of Dr Reddys Labs; target of Rs 1824

Dr. Reddy's Laboratories Ltd:-

“Established in 1984, Dr. Reddy's Laboratories Ltd. is an integrated global pharmaceutical company, committed to providing affordable and innovative medicines for healthier lives. Dr Reddy's started its operation in the Active Pharmaceutical Ingredients (API) segment, with a single drug in 60 ton facility near Hyderabad. In 1986 it shipped its first consignment of Methyldopa drug to West Germany. During FY11, the company launched 135 new generic products, filed 107 new product registrations and filed 56 DMFs globally. April 11, 2001, the symbolic bell rang and Dr. Reddy's became the first pharmaceutical company in the Asia-Pacific, outside Japan, to be listed on NYSE. Dr. Reddy’s Lab is the fastest Indian Pharma Company to cross $1 billion in revenues.”

“The company’s net profit jumps to Rs.3359.50 million against Rs.2627.40 million in the corresponding quarter ending of previous year, an increase of 27.88%. Revenue for the quarter rose 28.42% to Rs.25406.10 million from Rs.19783.20 million, when compared with the prior year period. Reported earnings per share of the company stood at Rs.19.81 a share during the quarter, registering 27.80% increase over previous year period. Profit before interest, depreciation and tax is Rs.3917.40 millions as against Rs.19783.20 millions in the corresponding period of the previous year.”

“India's pharmaceutical sector is gaining its position as a global leader. The pharma market in India is expected to touch US$ 74 billion in sales by 2020 from the current US$ 11 billion, according to a PricewaterhouseCooper (PwC) report. At the current market price of Rs.1614.00, the stock P/E ratio is at 18.14 x FY13E and 17.09 x FY14E respectively. Earning per share (EPS) of the company for the earnings for FY13E and FY14E is seen at Rs 88.98 and Rs.94.46 respectively. Net Sales and PAT of the company are expected to grow at a CAGR of 11% and 13% over 2011 to 2014E respectively. On the basis of EV/EBITDA, the stock trades at 15.02 x for FY13E and 14.20 x for FY14E. Price to Book Value of the stock is expected to be at 3.77 x and 3.09 x respectively for FY13E and FY14E. The first quarter witness a healthy increase in overall sales as well as profitability on account of Launching of new products and emerging markets, an enhanced store network and robust pharma businesses.”

“We expect that the company surplus scenario is likely to continue for the next three years, will keep its growth story in the coming quarters also. We recommend ‘BUY’ in this particular scrip with a target price of Rs 1824 for medium to long term investment,” says Firstcall Research report.

Buy stocks of Hindustan Zinc; target of Rs 134

Hindustan Zinc:-

“Hindustan Zinc (HZL) net sales at Rs27.1bn(-12.3%QoQ,-3.9%YoY) missed estimate primarily due to lower than expected refined metal ouput. Mined metal for Zinc declined by 4.3%YoY/17%QoQ to 162,000 tonnes as it continued to mine lower grade Zn ore at Rampura Agucha (RAM). However mined metal for Lead increased by 30.3%YoY as the production increased by 60%YoY at Sindesar Khurd mine. Silver sales also increased by 76%YoY/-2.7%QoQ to 72000 kgs due to commissioning of 350tonnes silver refinery at Pantnagar.”

“HZL cost of production of Zinc (excluding royalty) was at Rs45,579 per tonne primarily due to increase in coal and other consumable cost. EBITDA declined by 10.8%YoY/13.9%QoQ to Rs13.93bn (DCe:Rs14.84bn) due to lower production and higher cost of production. Other income increased by 59.8%YoY/50.7%QoQ due to increase in treasury yields and investment surplus and one time mark to market gain of Rs1.2bn due to fall in interest yields. HZL tax rate has decreased to 12.9% (DCe:20%) primarily due to higher other income which was tax free. HZL profits rose by 12%YoY/5.8%QoQ to Rs15.8bn boosted by higher other income and lower tax rate despite lower operating profits. HZL maintained its production and sales guidance for the year and stated that the decline in grade at Agucha mines were as per its expectation. HZL expects to start the mining at 3 of its mines at Zawar in Q3FY13 which will add 30000 tonne MIC Lead production.”

“HZL will continue to deliver strong free cash flows, despite higher spending on the mine development at Kayar and Rampura Agucha. HZL earnings growth will be driven by increase in silver and Lead volumes which will lead to earnings CAGR of 12% over FY12-14. HZL is currently trading at 4.4xFY13EV/EBITDA and 3.3xFY14EV/EBITDA. We maintain our Accumulate rating with a target price of Rs134 (5.5x FY13 EV/EBITDA),” says Dolat Capital research report. 

Hold stocks of South Indian Bank

South Indian Bank:-

"For 1QFY2013, South Indian Bank (SIB) reported healthy net profit growth of 49.2% yoy (up 0.9% qoq) to `123cr, which was higher than our estimates on account of higher non-interest income than estimated by us. We remain Neutral on the stock."

"For 1QFY2013, the bank’s business growth remained healthy, with advances growing by 23.5% yoy and deposits growing by 17.5% yoy. On a qoq basis, the growth in savings deposits was healthy at 8.0% qoq driven by 13.1% qoq growth in NRE Savings accounts deposits. The total low cost deposits (including low cost NRE deposits) stands at ~22% of overall deposits. The gold loan portfolio declined on a sequential basis by ~`400cr and now stands at ~`6,400cr (23.4% of the overall portfolio)."

"The fee income of the bank reported a strong growth of 49.8% yoy during 1QFY2013. The treasury income was also strong, registering a growth of 34.0% yoy to `20cr. The asset quality of the bank surprised negatively in 1QFY2013, with slippages increasing to `91cr (annualised slippage ratio of 1.3%). The rise in slippages during 1QFY2013 can be primarily attributed to one chunky account (exposure of `38cr to a single MFI account)."

Outlook and Valuation

"The bank’s asset quality which had held up pretty well till now inspite of the macro headwinds (which have led to higher provisioning expenses for most banks) has started to witness signs of pressure. Aggressive yields (~12.8%) on non-gold loan portfolio could further increase provisioning expenses and hence provide downside risk to the bank’s ROA. Also, current valuations at 1.0x FY2014E ABV seems to have factored in the positives (strong growth in gold loans and traction in fee based income) and in our view are considerably above the valuations of small and mid-sized PSU banks having similar fundamentals. Hence we maintain our Neutral stance on the stock," says Angel Broking research report.

Sell stocks of Kotak Mahindra Bank; target of Rs 545

Kotak Mahindra Bank:-

"Kotak Mahindra Bank reported muted consolidated earnings of Rs 443 crore which grew 6.6% Y-o-Y & down 14.9% Q-o-Q, below than our expectation. Standalone bank, Kotak prime and Kotak Life continued to be key growth drivers to consolidated PAT. Securities broking, investment banking and asset management businesses continued to see weak earnings and core operating performance. Net earnings from Broking, and investment banking management were down 54% & 40% sequentially reflecting challenging operating environment and falling business volumes. Kotak Life insurance‘s net profits went down 30.4% Y-o-Y to Rs32 crs owing to subdued volume growth."

"On standalone basis, NII increased 27.0% y-o-y & 4.9% q-o-q led by strong loan growth of 30.9% y-o-y & 8.3% Q-o-Q and steady NIM. Standalone PAT grew modestly 12.1% y-o-y and down 4.9% q-o-q mainly due to weaker non interest income and higher loan loss provisions. Asset quality has slipped during the quarter as gross NPAs and net NPAs increased sharply 11.5% Q-o-Q & 43.3% Q-o-Q respectively. Provision coverage ratio (excluding write offs) declined from 61.3% in Q4FY12 to 50.3%. Maintain Reduce."

"Financing businesses’ contribution to consolidated earnings increased 76% in Q4FY12 to 85% in Q1FY13 owing to lower-than-expected earnings capital market linked businesses and weak earnings from Kotak life insurance. Standalone Bank’s NII grew by 27.0% y-o-y and 4.9% on q-o-q to Rs 721 crore led by strong loan growth and steady NIMs. Non-interest income increased only 5.5% Y-o-Y but down 5.1% Q-o-Q mainly due to sluggish fee income growth and lower distressed asset sale (Rs20 crore vs. Rs65 crore in Q1FY12). Net profits reported Rs282 crore growing 12.1% y-o-y & down 4.9% q-o-q. Kotak prime (KP) reported PAT of Rs94 crore vs. Rs97 crore in Q4FY12, down 3.1% Q-o-Q. We expect the bank to deliver 26.5% CAGR in net earnings over FY12-FY14 driven by strong loan growth, steady NIMs and stable asset quality and improving productivity levels."

Buy stocks of Hero MotoCorp; target Rs 2340

Hero MotoCorp:-

"Hero MotoCorp's 1QFY13 operating performance is in-line, with adj EBITDA margin at 10.8% (v/s est 10.7%) and adj PAT of INR6.15b (v/s est INR6.13b). While lower than estimated volumes and realizations resulted in marginally below estimated EBITDA, impact of which was offset by higher other income."

"Volumes grew 7.4% YoY (+4.5% QoQ) to 1.64m units (v/s est 1.67m). Realization were flat QoQ (+ 2.6% YoY) to INR37,799 (v/s est INR38,284) impacted by adverse market mix, despite price increases in April & May and higher excise benefit at Haridwar plant (due to excise increase). As a result, net sales grew by 10% YoY (+4% QoQ) to INR62.1b (v/s est INR63.9b). Adj EBITDA margin at 10.8% were flat QoQ/YoY as benefit of operating leverage as offset by part impact of weaker INR on RM and royalty. EBITDA grew 14.5% YoY (+5% QoQ) to INR9b (v/s est INR9.2b)."

"Higher other income and lower tax boosted reported PAT to INR6.15b (v/s est INR6.13b). The management has maintained its industry growth guidance at 9-10%. Its inventory levels have now increased to ~4 weeks (v/s 3 weeks earlier). It expects short-run margins to remain under-pressure due to weaker INR (70-80bp impact in 2QFY13) and increase in advertising spend (v/s lower spend in 1QFY13). We maintain our EPS estimates for FY13/FY14 at INR132/INR146. We model in for volume growth of 9%/12.5% for FY13/FY14, and EBITDA margins of 14.4%/14.7% respectively."

"We maintain our EPS estimates for FY13/FY14 at INR132/INR146. We model in for volume growth of 9%/12.5% for FY13/FY14, and EBITDA margins of 14.4%/14.7% respectively. Hero MotoCorp has outperformed Sensex (by 10% in last 6 months and 24% in last 12 months) on the back of strong volume growth. However, volume momentum in domestic 2W industry is expected to moderate in 1HFY13 to ~6%, but expected to pick up in 2HFY13. Also, there are no near term catalysts, as margins remain under pressure and profit growth below-normal. However, long term potential remains intact, with significant volume growth and margin expansion potential ahead. The stock trades at 15.8x FY13 and 14.3x FY14 EPS. Maintain Buy with target price of INR2,340 (16x FY14E EPS)," says Motilal Oswal research report.