Stocks To Buy & Sell After Q3FY16 Results By Amar Ambani Of IIFL

Aurobindo Pharmaceuticals (Q3 FY16): Subdued quarter; outlook remains bright – BUY
CMP Rs. 642, 1-yr Target Rs. 960, Upside 49.5%

• Aurobindo reports mixed bag results as margins, PAT miss estimates while revenues broadly in line
• Q3 revenues up 4.9% qoq and 10.4% yoy driven by US (+6.3% qoq), ARV sales (+12.8% qoq); Europe revenues impacted by Euro depreciation
• Margin came in below our estimate on lower gross margin and higher staff expenses; PAT too below estimate at +18.4% qoq
• We look beyond a subdued quarter and forecast 25% EPS cagr over FY15-18E on back of sizable launches; retain BUY

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Apollo Tyres (Q3 FY16): Decent performance; valuations attractive – BUY
CMP Rs.150, 1-yr Target Rs.180, Upside 20.7%

• Consolidated revenues at Rs.2,943cr were above our estimates and were lower by 5.2% yoy due to Euro depreciation and restructuring of South Africa operations
• Standalone operations see 1% yoy growth in revenues to Rs.2,143cr
• European operations continue to see decline in revenues on account of realization fall and weakening of the Euro
• Consolidated OPM was at 17.2% a growth of 138bps on the back of improvement in Indian operations, Standalone OPM was higher by 248bps yoy to 17.8%; both standalone consolidated OPM were lower than estimates
• The market share of Chinese imports is still at a significant level even though it hasn’t increased in Q3 FY16
• Retain our BUY rating as valuations look attractive at FY18E P/E of 6.2x, risks to this view arises from further increase in Chinese imports and increase in rubber and crude oil prices

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Britannia Industries Ltd (Q3 FY16): Stellar Performance Continues!!! – BUY
CMP Rs.2,723, Target Rs.3,956, Upside 45.3%

• Consolidated Sales, EBITDA and Reported PAT posted 10.2%, 46.7% and 51.1% YoY growth to Rs.2,240cr, Rs.322cr and Rs.207cr, respectively.
• Stellar Quarter: Britannia or BRIT reported consolidated net sales growth of 10.2% to ₹2,240cr. Net sales growth was impacted by ~100bps due to phasing out of excise duty and 0.5% impact of revenue due to floods in Tamil Nadu. Though, BRIT reported double digit volume growth of 11%. Gross margins expanded 226bps to 42.3%. However, on QoQ basis, raw-material prices have moved up but we believe that BRIT has reached a position where its pricing power has strengthened and can withstand any adverse commodity cycle (BRIT had taken price cuts and also higher grammage, in last 24 months. Given the higher inflation in the wake of increase in input costs QoQ, BRIT expects to go for price hike to the tune of 2.5%-3% in FY17), especially given its healthy double digit and ahead of the industry volume growth. EBITDA margin came in at 14.4% up 357bps. In addition, the cost cutting initiatives bearing fruits, led conversion costs down 71bps to 5.7%. However, Ad spends remained flat at 8.2% of sales. Thus, EBITDA up 46.7% to ₹322cr. Higher tax rate by 395bps to 33% led Reported PAT to grow 51.1% to ₹207cr, impacted by additional bonus provisions of ₹10.3cr.
• Standalone Sales, EBITDA and Reported PAT posted 10.7%, 55.4% and 60.5% YoY growth to ₹2,050cr, ₹302cr and ₹193cr, respectively.
• Dairy and international performance was muted, registering 5% sales growth and 20% decline in EBITDA, partly due to the higher brand investments during the quarter.
• We retain Buy with a TP of ₹3,956 (PE 37x FY18E and 23.7x EV/EBITDA).

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ACC (Q4 CY15): Power cost hits 12 quarter low – Accumulate
CMP Rs.1269, 1-yr Target Rs.1295, Upside: 6.8%

• Revenue for ACC stood at ₹2846cr (3% yoy growth), meeting our estimate of ₹2895cr
• Despite poor demand in the Eastern and Northern regions, cement dispatches grew 4% yoy, in line with our estimates
• Realisations were down 3% qoq, owing to subdued demand in the Eastern, Northern, and Southern regions
• Subdued realisation dragged operational performance lower
• Positively surprised by drop in power and fuel cost
• Jump in personnel cost (₹389/ton as against our estimate of ₹302/ton) fritters away benefits arising from lower power and fuel cost
• Upgrade our earnings forecast for CY16 by 2% as we lower our power and fuel cost estimates
• Upgrade to Accumulate

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Cipla (Q3 FY16): Disappointing quarter – Accumulate
CMP Rs.539, 1-yr Target Rs.610, Upside 13.2%

Adjusted revenues miss estimates; ex-one off changes, margins impacted by higher R&D spending

Revenues declined 10% qoq on changes in domestic distribution policy which led to 0.4% qoq decline in India revenues; like to like domestic sale growth at 11%

Robust growth across Europe, North America and South Africa; adjusted margins of 18% lag estimates

Base business margins to correct from H1 FY16 levels; cut FY17E estimates and retain Accumulate with revised 1-year target of ₹610

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Bharat Forge (Q3 FY16): Weakness adequately factored in valuations – Accumulate
CMP Rs.780, Target Rs.850, Upside 9.0%

• Revenues at ₹1,052cr lower by 12.2% yoy; lower than our estimates
• Tonnage volumes were lower by 4.8% yoy and 7% qoq, while realizations were lower by 7.7% yoy and higher by 1.3% qoq
• OPM at 30.2% was lower by 9bps yoy but was higher than expectations, benefits of lower raw materials cost and manufacturing expenses were offset by impact of operating deleverage
• Adjusted PAT at ₹170cr declined by 13.2% yoy and 2.6% qoq; was higher than our estimates
• Cut our estimates to factor in persistent weakness in the oil and gas segment and also increasing slowdown in other non-auto exports business, also factoring in slowdown in US CV business
• Maintain Accumulate with a price target of ₹850

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Hindalco Industries Ltd (Q3 FY16): Cost control saves the day – Accumulate
CMP Rs.67, Target Rs.73, Upside 8.9%

• Led by strong volumes in aluminium division Hindalco’s standalone operating performance was better than expectations
• Ramp up its new aluminum capacities led to a growth of 36.4% yoy and 10% qoq in production, quite higher than our estimate
• Aluminium business EBIT stood at ₹81cr against our expectation of a loss of ₹30cr, also aided by lower coal costs, commissioning of conveyor and operating leverage
• Copper business EBIT remained steady on the back of higher Tc/Rc margins. Volumes impacted by maintenance shutdown
• Novelis business results were inline with estimate largely driven by an increase in sales of automotive products
• The impact of higher margins in automotive business was offset by lower benefits from recycling, metal price lag and ramp up costs at its new facilities.
• Lower earnings estimate to incorporate the sharp drop in all-in aluminium prices. Maintain Accumulate rating with a revised price target of ₹73

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Havells India Ltd (Q3 FY16): Festive demand boosts topline – BUY
CMP Rs300, 1-yr Target Rs342, Upside 14%

• Havells standalone revenue grew 7.8% yoy on the back of strong festive demand for its consumer durable business and revival in demand for wires from industrial segment
• Topline growth was led by domestic market as exports declined to Africa and Sylvania
• The impact of lower commodity prices on margins was offset by higher ad and promotion expenses
• The process of 80% stake sale for Sylvania was completed and the consideration has been received during the quarter
• Havells to gain from strong brand recall, revival in consumer demand and lower commodity prices over the next 2 years. Maintain Accumulate rating with a price target of Rs. 342

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Kirloskar Oil Engines Ltd (Q3 FY16): No signs of growth – Accumulate
CMP Rs240, 1-yr Target Rs270, Upside 12.5%

• Net sales at Rs. 601cr was higher than our estimates; represented a decline of 1.9% yoy but a growth of 1.8% qoq
• Revenue was muted owing to lower large engine and industrial segment sales
• OPM at 8.1% was lower than our expectations and was lower by 136bps yoy and 4bps on a qoq basis, gross margins were higher by 73bps yoy but lower by 148bps qoq
• PAT was at Rs. 22crs lower than our expectations and decreased by 36.2% yoy
• Traction in high KVA segment, subsidy eligibility for power tillers and expansion in exports markets will lead to higher growth in future
• We assign Accumulate rating with a price target of Rs270 as we believe that the recovery will be gradual with economy picking up and the stock is trading at reasonable valuation

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Reliance Communications (Q3 FY16): Lackluster show – Accumulate
CMP Rs63, 1-yr Target Rs70, Upside 11.8%

• Rcom Q3 a mixed quarter as revenues miss estimates but margins, PAT ahead of forecasts
• Revenues decline 0.9% qoq on 2G license expiry in five circles where Rcom did not renew 900MHz; global operations revenues up 4.1% qoq
• Margins beat estimates on lower network opex, SG&A; PAT ahead of estimates on lower financing costs
• Raises FY16 guidance to Rs. 4,000cr to improve 3G coverage; revise estimates and retain accumulate with fresh 1-year target of Rs70

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Colgate-Palmolive India Ltd (Q3 FY16): Moderating Ad spends drive EBITDA margin!!! – Not Rated
CMP Rs855

• Colgate Palmolive’s (Colgate) Q3FY16 reported a muted quarter with revenue growth of just 1.9% to Rs1,015cr, while PAT grew by 21.8% to Rs159cr due to lower A&P spends and lower tax rate (tax write back).
• Key positives were: (a) Despite 550bps excise impact (phasing out of fiscal benefits) on the top-line, the company reported a 120bps YoY gross margin expansion (highest in 23 quarters) led by premiumisation and soft commodity prices; (b) EBITDA margin expanded 326bps led by moderating A&P costs; and (c) Despite disruptive competition (Patanjali aggressively advertising Dant Kanti), the company managed to gain market share in toothpaste and toothbrush categories of 60bps and 140bps YoY in CY15, respectively.
• Key negative was the soft ~1% YoY toothpaste volume growth (versus ~3% YoY category growth).
• Muted revenue growth: Net revenue grew by just 1.9% because of phasing out of excise benefits which impacted revenue growth ~550bps YoY. In addition, Chennai floods, unseasonal rainfall in South and some destocking (~100bps YoY impact) further put pressure on the top-line. With lower commodity costs and moderating A&P spends, EBITDA jumped 19% YoY to Rs231cr. Because of tax write back, the tax rate stood at 25% as against 28.9% in Q3FY15, which led a PAT growth at 21.8% to Rs159cr. As per management, FY16 tax rate likely to be ~30-31%.
• Despite disruptive competition (mainly led by Patanjali), Colgate gains market share: In Q3FY16, Colgate clocked its all time lowest volume growth of ~1% YoY in toothpaste, while it was mid- to high-single digit in toothbrush. The company gained market shares in toothpaste and toothbrush, which stood at 57.3% (up 60bps YoY) and 43.8% (up 140bps YoY), respectively for CY15. Mouthwash share improved ~250bps YoY.

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