Stocks To Buy & Sell After Q2FY16 Results By Amar Ambani Of IIFL

KEC International Ltd (Q2 FY16) – BUY
CMP Rs137, Target Rs175, Upside 27.7%

• KEC’s results were a mixed bag. Topline of Rs. 2,021cr is quite lower than our estimate due to slower execution in domestic market and lower commodity prices
• However, operating margin of 7.7% was better than our expectations and was also at its 15 quarter high. Margins expanded 210bps yoy and 17bps qoq
• The company benefited from the sharp correction in commodity prices during the quarter
• Order inflow of Rs. 1,506cr was marginally lower than our estimate due to slower conversion of L1 orders. Order book at the end of Q2 FY16 stood at Rs. 9,872cr, higher by 6% yoy. The company has additionally secured orders worth Rs. 555cr in October
• Management remained confident of delivering margins in the range of 7.5-8% in FY16; but lowered its revenue growth guidance from 10-15% to ~10%
• Maintain Buy on the stock with a price target of Rs. 175

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Alembic Pharma (Q2 FY16) – SELL
CMP Rs676, Target Rs600, Downside 11.2%

• gAbilify drives a huge beat on revenues, margin and PAT; international generics sales up 3.5x while total revenues surged 84% yoy
• Margin expanded ~18ppts as company booked profit from gAbilify supplies; management indicated US partner is losing share and such growth is not sustainable
• Other opportunities beyond gAbilify like Celebrex and Pristiq to drive FY17E growth and beyond; albeit valuations remains expensive at ~26x FY17E PE and we maintain our sell with revised 9-12mth target of Rs600

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Tata Communications (Q2 FY16) – BUY
CMP Rs426, Target Rs525, Upside 23.2%

• Q2 revenues declined 1% qoq as Neotel drags overall revenues lower
• Data revenues remain strong at +4.2% qoq with stable margins qoq at 19.2%
• Voice margins rebound from Q1 lows on favourable market shift in India termination rates; voice gross revenues inch up 0.7% qoq
• Lower estimates mainly to account for higher tax rate assumptions; our BUY stays with 9-12mth SOTP target of Rs525

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Greenply Industries Ltd. (Q2 FY16) – BUY
CMP Rs962, Target Rs1,300, Upside 35%

• Q2FY16 net revenue of Greenply Industries or GIL at Rs401cr, 2.5%/9.2% below our/Bloomberg estimate of Rs411cr/Rs441cr, respectively, led by 7.8% decline in Plywood revenue (lower real-estate sales and poor liquidity) which forms 72% of sales. However, MDF continues to grow at a healthy pace of 14.5%.
• Operating margin of MDF board division improved 471bps to 27.9% on account of lower raw material costs, introduction of high- margin new product called Ecolite MDF, and higher capacity utilisation at 91.2% compared to 79.1% YoY.
• Gross margin improved 351bps to 45.1% on the back of better product mix and benign input cost. As per management, the input cost will remain stable going forward.
• With higher gross margin, EBITDA margin improved 125bps to 14.1% for the quarter. Hence, EBITDA grew 7.1% to Rs57cr, 2.4%/9.3% lower than our/Bloomberg estimates of Rs58cr/Rs62cr, respectively.
• With a better cash flow and lower debt interest costs decline by 14.7%, PBT grew 12.9% to Rs36cr. However, the PAT grew by just 1.5% to Rs27cr on the back of rise in effective tax rate which stood at 25.2% as against 16.8% in Q2FY15 which curtailed the PAT growth. The PAT growth was 4.1%/13.5% lower than our/Bloomberg estimates of Rs28cr/Rs32cr, respectively.
• High RoCE outsourced plywood business posted a 16.1% revenue growth for the quarter and is expected to sustain its growth rate in FY16. MDF board division is likely to report a 27%-28% operating margin in FY16, up 471bps in Q2FY16, with a pre-tax RoCE of 33.4% in FY16.
• The management has lowered the FY16 guidance from 10%-12% to 5%-6% on the back of poor consumer sentiment, higher real estate inventory and no-pickup in the premium category of Plywood.
• We have slightly tweaked our PAT estimates by 4.5%/2.0%/1.9% in FY16E/FY17E/FY18E, respectively.
• We have retained Buy rating on GIL with a reduced target price to Rs1,300 based on 22x/12.5x FY17E P/E and EV/EBITDA, respectively, (from Rs1,327 based on 22x/12.6x FY17E PE and EV/EBITDA), respectively.

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Amara Raja Batteries (Q2 FY16) – Reduce
CMP Rs915, Target Rs860, Downside 6.2%

• Revenues at Rs1,158cr higher by 8.7% yoy; lower than our estimates mainly because of benefit of lower raw material prices passed on to the OEM customers
• OPM at 17.2% was lower by 24bps yoy and 101bps qoq, on account of higher other overheads, OPM was below our estimates
• PAT at Rs123cr was higher by 22.2% and 0.4% qoq and was lower than estimates
• Maintain Reduce rating as valuations look expensive at P/E of 25.6x FY17E EPS of Rs35.7

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Ambuja Cements (Q3 CY15) – Accumulate
CMP Rs209, Target Rs228, Upside 9%

• ACL cement revenues stood at Rs. 2,095cr (down 4.2%yoy) as realisation drop 7% yoy (our est. of -5% yoy).
• Volume dispatches grew 3%yoy; lower than forecast of 8% jump
• OPM stood at 14.7%; better-than our estimate on back of lower RM cost.
• Downgrade to accumulate with a 9-month price target of Rs228

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Axis Bank (Q2 FY16) – BUY
CMP Rs483, Target Rs650, Upside 34.5%

• Loan growth was ahead of expectation at 23% yoy; both retail and corporate loans grew strongly
• Deposits mix continues to move towards retail; CASA + Retail TDs constitute 80%
• NIM was surprisingly steady; could gradually decline from here
• Fee growth healthy at 14% yoy; suppressed opex growth aids in containing the cost/income ratio
• Substantial flow of impaired assets was as a big negative
• Risk-reward is favourable; Retain BUY

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Maruti Suzuki (Q2 FY16) – BUY
CMP Rs4,494, Target Rs5,200, Upside 15.7%

• Net sales rise 13.2% yoy owing to 9.8% yoy rise in volumes and 3% higher realizations. Domestic volumes were higher by 12.4% yoy while export volumes declined 12.1% yoy
• Reported OPM at 16.3% was higher than our and street expectations and represented an increase of 393bps yoy but was flat sequentially, driven by lower raw material prices, favorable currency movements and better product mix
• PAT at Rs. 1,226cr was in line with our estimates owing to higher than estimated tax rate
• Company aims to grow at a faster rate when compared with the industry in FY16 with several new launches lined up
• Maintain BUY as we see earnings CAGR of 31.6% during FY15-18E. We raise our target price to Rs5,200

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Strides Arcolab (Q2 FY16) – BUY
CMP Rs1,288, Target Rs1,500, Upside 16.6%

• Q2 revenues include 30 days of Arrow consolidation; reported revenues up 29% yoy
• Institutional business rebounds with strong 20% qoq growth; consol EBIDTA margin declines ~230bps on lower gross margin
• Reported PAT impacted by forex loss, merger related costs; company to raise Rs. 1,500cr to retire debt
• Cut FY16/17E estimates on H2 FY16 guidance but retain BUY with unchanged 9-12mth target of Rs1,500

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Vedanta Ltd (Q2 FY16) – Accumulate
CMP Rs105, Target Rs116, Upside 10.4%

• Vedanta’s performance was above our estimate due to outperformance in domestic zinc and copper business
• The impact of outperformance of copper and domestic zinc division was curtailed by lower contribution from zinc international
• Aluminium division performance remained impacted due to weak aluminium prices and ramp up costs of new capacities
• Domestic zinc business outperformed on the back of strong mined metal output, inventory reduction and write back of provisions
• Led by strong Tc/Rc margins the copper division continued to outperform
• Power division performance remained lackluster due to lower demand and lower availability of coal
• International zinc business performance was impacted due to lower refined metal production at Skorpion and lower metal prices
• Aluminium expansion would be slower than previous guidance due to the sharp fall in realisations and higher costs at BALCO
• Vedanta has received approval to mine 5.5mtpa of iron ore in Goa. First export shipment of 88,000tons was dispatched in October ‘15
• The company has managed to reduce its net debt by Rs. 5,334cr on a qoq basis due to lower working capital requirement. It has also managed to lower its long term debt rate during the quarter
• Merger with Cairn would face hurdles due to the widening spread. No sweetener announced yet
• Maintain accumulate rating on attractive valuations with a revised price target of Rs. 116

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Lupin (Q2 FY16) – Accumulate
CMP Rs1,946, Target Rs1,960, Upside 0.7%

• Disappointing Q2 with large miss on margins and PAT; US revenues declined ~9% yoy on slowdown in approvals, lack of sizable launches
• India revenue growth tepid at 9.4% yoy vs expected 15% yoy; Europe (+32%), ROW (+53%) only bright spots
• EBIDTA margin decline much worse than expected on higher staff, other expenses; R&D costs up 36% yoy to 11.7% of revenues
• Earnings catch up likely in FY17E but already baked in the price; valuations leave no room for disappointment: Accumulate

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TVS Motors (Q2 FY16) – Reduce
CMP Rs276, Target Rs255, Downside 8.2%

• Net sales rise 8% yoy owing to 7.6% jump in realizations as volumes saw a muted 0.4% yoy growth, Sales were above our expectations
• OPM at 7.4% was substantially above our estimates of 6.7%, while gross margins were higher by 221bps, 109bps yoy increase in overheads was disappointing
• APAT was at Rs. 116cr was higher than estimates on better than expected operating performance
• Growth in volumes was on account of 12% yoy increase in scooters and 18% yoy growth in three-wheeler volumes which was offset by decline in moped volumes by 15.2%
• We cut our estimates to factor in weaker than expected volume trends in the first half and retain Reduce rating with a revised price target of Rs255

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