Healthy Margins; Retain Buy
Kajaria Ceramics’ (KCL) 3QFY15 revenue increased 30.5% to Rs5,562mn, in line with expectations, because of 39.1%/23.7% rise in production/sales volume, respectively, on a lower base and a 24.1% increase in capacity despite weak demand. With a better product mix and earlier price hikes, operating margin remained firm at 15.7%. Healthy operating profit growth and lower interest costs/tax rate led to a 55.2% rise in net profit to Rs456mn, 15.6%/12.7% above our/Bloomberg consensus estimates, respectively. With a fall in crude oil prices, spot prices of gas have started declining. As KCL’s power and fuel costs increased 415bps over FY12-FY14, it will benefit the most going forward from lower gas prices, which we/street haven’t factored in yet. The 55% increase in capacity, better product mix and lean working capital needs are likely to result in revenue/net profit CAGR of 20.7%/30.6%, respectively, leading to strong operating cash flow of Rs8bn and a decline in the D/E ratio from 0.4x to 0.1x, and a 385bps improvement in RoCE to 24.7% over FY14-FY17E. Based on 13.5x FY17E EV/EBITDA (from 14.5x average over FY16E-FY17E) and 24.9x P/E, we have retained Buy rating on KCL with a revised target price of Rs868 (Rs848 earlier).
PAT Beats Expectations, One-off Impacts Asset Quality
Federal Bank’s 3QFY15 bottom-line, which grew 15% YoY, is 6% above our estimate. Loan slippage was higher at 1.9% of the loan book as against 1.5% during in the previous quarter, mainly on account of slippage of Rs1.25bn in a large account. Slippage from retail and SME (small and medium enterprise) segments eased sequentially. Provision coverage ratio was healthy at 85%. Net interest income grew 8%, which is 3% below expectations. Credit off-take grew 15% against our estimate of 20%, as the drawdown did not take place in a few loans sanctioned along with some repayments. Adjusted net interest margin (NIM) compressed 5bps sequentially on account of reversal of interest charges on slippage by a large corporate. Non-interest income grew 41% driven by healthy treasury income. Reversal of provisioning on investment depreciation and restructured assets worth Rs0.6bn helped in profitability to remain above expectations. We have retained Buy rating on Federal Bank with a target price of Rs183, valuing the stock at 1.65x P/ABV FY17E numbers.
Yet Another Robust Performance
IndusInd Bank’s 3QFY15 performance was in line with our expectations. Its bottom-line grew 29% YoY on the back of a healthy operating profit growth of 20% and reasonable credit costs. Net interest income grew 18%, driven by a credit growth of 22% and stable NIM (net interest margin) of 3.7%. Non-interest income grew 27%, with higher traction witnessed in distribution fees and foreign exchange income, up 41% and 29%, respectively. Cost-to-income ratio improved 50bps sequentially to 47.4%, despite setting up of 115 new branches to touch a total of 800 branches. Loan slippage for the quarter was at a healthy level of 1%. Annualised credit costs stood at 62bps for the quarter and 52bps for the nine-month period. The management retained its credit cost guidance of 60bps for FY15. We have rolled over our valuation to FY17 estimates, valuing IndusInd Bank stock at 3.7x P/ABV FY17E earnings with a target price of Rs975 and a Buy rating on it.