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

Idea Cellular (Q3 FY16): Rare quarterly miss – BUY
CMP Rs107, 1-yr Target Rs165, Upside 53.9%

• Idea posts a soft quarter as revenues, PAT misses estimates
• Traffic growth at 5.1% qoq lagged our expectation of 5.5% qoq while voice pricing continues its downtrend at -4.7% qoq
• Data volume growth at 12.5% qoq; would wait and watch for any trend slowdown in this key metric
• Margin declines ~50bps qoq on higher SG&A spends; PAT drops 5.6% qoq
• Raises FY16 guidance to Rs. 7,500cr on accelerated 4G roll outs; we revise estimates and retain BUY with revised 1-year target of Rs165

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Cairn India (Q3 FY16): Substantial risks ahead – Reduce
CMP Rs113, 1-yr Target Rs110, Downside 2.6%

• Net sales at Rs. 2,039crs declined 41.8% yoy and were tad higher than our expectations. Net working interest production for Q3 FY16 was at 128,402boepd, a decline of 6.1% yoy but a modest increase of 0.3% qoq
• OPM falls 26.1ppts yoy and 744bps qoq to 36.2% owing to sharp fall in crude oil realizations
• Company reported a PAT of Rs. 9crs a fall of 99.4% yoy owing to sharp fall in operating profit offset by lower exploration write offs and tax write-back of Rs49crs
• Maintains guidance of a flat production for FY16 and FY17 under current crude pricing and capex commitments
• Cut estimates to factor in lower crude oil prices but downgrade our rating to Reduce with a revised price target of Rs 110

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Biocon (Q3 FY16): Revenues disappoint, margin in line – Reduce
CMP Rs482, 1-yr Target Rs450, Downside 6.5%

• Biocon Q3 revenues miss estimates though margins were in line
• Research services revenue increase of ~30% drove 8.7% yoy increase in revenues vs. estimated 13.3%.
• Biopharma growth of 4% yoy lagged our estimate of +6.8%
• Higher gross margin supported ~180bps margin expansion though offset by higher R&D (+45% yoy) and staff expenses (+16% yoy)
• Forecast 14% revenues and 7% PAT cagr over FY15-18E and retain Reduce

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Syngene International (Q3 FY16): Yet another impressive quarter – Reduce
CMP Rs397, 1-yr Target Rs360, Downside 9.5%

• Revenues increased ~30% yoy in line with our estimates led by dedicated centres and full time equivalent (FTE) and fee for services (FFS) verticals.
• Excluding forex loss of Rs. 7cr, margin at 35.5% would have been ahead of our estimate vs. reported 33.5%
• Q3 PAT grew 29% yoy aided by lower tax rate; company maintains guidance of FY18E revenues at US$250mn.
• We expect robust 22% PAT cagr over FY15-18E though valuations at 25x FY18E EPS do not leave much room for upside. Assign Reduce rating with 1-year target of Rs. 360

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ITC Ltd (Q3 FY16): Slowdown in cigarette volume curtailed!!! – Not Rated
CMP Rs309

• ITC’s Q3FY16 revenue/EBITDA/PAT was up 2.6%/4.1%/0.7% to Rs9,177cr/Rs3,605cr/Rs2,653cr, respectively.
• Key positives were: (a) After quarters of reporting negative volume growth in the cigarette business, ITC reported a moderation in decline in cigarette volumes to 4% YoY (16% YoY dip in H1FY16 and 15.5% drop in Q3FY15)) helped by favorable base and faster growth of 64mm cigarettes, suggesting company ahd not fully passed on price hike; (b) Agri business reported a 68bps improvement in EBIT margin to 15.6% (second highest in 9 quarters); and (c) Paperboards reported a 128bps improvement in EBIT margin to 19.1% (second highest in 8 quarters).
• Key negatives were: (a) Despite curtail in volume decline, Cigarette division reported a 156bps decline in EBIT margin to 68.1% (for first time in past many years) impacted by conscious strategy to limit share loss to illegal cigarettes and also by change in mix; and (b) Because of soft leaf tobacco demand and lower trading opportunity in wheat, coffee and soya, Agri sales plummeted 7.3% YoY.
• Cigarette: The company’s proactive pricing strategy helped in curtailing cigarette volume decline to 4% YoY, price hike has not been passed on completely and 64mm segment which forms 17% of the total volume grew faster than rest of the category. This strategy helped in guarding share loss from illegal cigarette market (forms 1/5th of overall cigarette market) and also ensures consumer stickiness.
• With exorbitant increase in excise duty (Excise Duty and VAT on cigarettes, at a per unit level, has gone up cumulatively by 98% and 124%, respectively, over the past 3.5 years), the cigarette volumes had remained under pressure. These hikes led a multifold growth in the illegal cigarette market (India is now the 4th largest market for illegal cigarettes in the world), which further put pressure on the cigarette volumes.

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Axis Bank Ltd. (Q3 FY16): Asset quality pain intensifies – BUY
CMP Rs385, 1-yr Target Rs484, Upside 25.8%

• Loan growth sturdy; retail segment continues to lead
• No pick-up in CASA growth; bank well-positioned to deliver 20% pa loan growth
• NIM marginally declined as expected; likely to fall further over next couple of quarters
• Fee growth moderates; cost/income ratio being managed adeptly near 40%
• Asset quality pain coming to the fore; more to come in future
• Cut FY17/18 estimates materially; however retain BUY as stock valuation has come-off significantly

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Ultratech Cement Ltd (Q3 FY16): In line performance; tough times ahead – Accumulate
CMP Rs2,617, 1-yr Target Rs2,750, Upside 5.1%

• Revenue lags estimates owing to lower dispatches
• Slowdown drags realisation. Blended realisation down 2.5%
• Savings in power costs drive operational efficiency
• Upgrade to Accumulate; Maintain 12-month price target of Rs2,750

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Reliance Industries Ltd (Q3 FY16): Strong performance continues – BUY
CMP Rs1,043, 1-yr Target Rs1,200, Upside 15.1%

• Reliance Industries Q3 FY16 performance was ahead of estimates on the back of an strong performance from the refining segment
• OPM improved 917bps yoy and 199bps qoq to 18.2% in line with our expectations; yoy increase was led by 406bps and 841bps rise in petchem and refining segment EBIT margins respectively
• US$11.5/bbl GRMs was tad higher than our estimates
• PAT at Rs. 7,218cr was higher than our estimates due to better than expected refining and petchem performance and higher other income
• Raise FY16 and FY17 estimates and maintain BUY rating with higher 1-year target price of Rs1,200

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HCL Tech Ltd. (Q3 FY16): Growth likely to pick-up – BUY
CMP Rs838, 1-yr Target Rs998, Upside 19.1%

• Revenue growth was modest as expected; growth in IMS improves
• Execution on order backlog to uplift growth trajectory
• Operating margin improved by 80bps qoq; recovery likely to be gradual over medium term
• Investment risk-reward favourable; Retain BUY

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Greenply Industries Ltd (Q3 FY16): Result beat on all counts!!! – BUY
CMP Rs177, Target Rs252, Upside 42%

• Amid weak demand, Greenply Industries (GIL) posted a modest 7.3% growth in Q3FY16 revenue to Rs422cr, 1.2%/1.7% above our/Bloomberg consensus estimate following a 4.4% growth in plywood division and a 15.3% growth in medium density fibre (MDF) board division.
• Gross margin rose 157bps to 44.3% led by a better product mix (higher contribution of MDF to 31% in Q3FY16 as against 29% in Q3FY15). Gross margin expansion coupled with higher capacity utilisation rate of 111% (compared to 99.6% YoY) in MDF board division resulted in its best ever operating margin improved by 185bps to 15.4%.
• With higher EBITDA margin, EBITDA grew by a strong 22% to Rs65cr, 7.2%/10.6% above our/Bloomberg consensus estimates, respectively.
• Following healthy cash flow and lower debt, interest costs declined 31% to Rs7cr. PBT grew 47.1% and despite a higher tax rate of 23.6% as against 16.9% YoY (as Nagaland factory had come out of the purview of tax exemption), PAT grew by a strong 35.2% to Rs35cr, 18.4%/24.5% above our/Bloomberg consensus estimates, respectively.
• Working capital days increased by 8days YoY and 7days QoQ because of weak demand in October and November 2015 and a major portion of sales in Q3FY16 occurring in December 2015.
• There is likely to be a slow and steady growth in wallpaper segment and it is expected to be volume-driven. Currently, GIL is building a distribution network for this segment and it intends to achieve revenue of Rs4cr by FY17E and Rs200cr by FY20E from Rs2cr currently.
• We have retained Buy rating on GIL with a target price of Rs252 based on 22x/12.5x FY17E P/E and EV/EBITDA.

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