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Brokerage Recommendations

Monday, August 05, 2013

Angel Broking calls a ‘Buy’ on Dr. Reddy Lab
CMP: Rs. 2237            Target Rs. 2532
Dr Reddy’s Laboratories (DRL) reported lower-than-expected numbers for 1QFY2014 on the top-line and bottom-line fronts. The EBIT margin came in at 13.3% vs our expectation of 16.8%. Consequently, the net profit came in at Rs 361cr, a growth of 7.4%, lower than our expectation of Rs 453cr. The margins fell higher than expected on back of higher R&D expenses during the period, which rose by 55% yoy. We recommend an Accumulate rating on the stock with a price target of Rs 2,532.

Outlook and valuation: For DRL, we expect net sales to report a 14.9% CAGR to Rs 15,350cr and adjusted EPS to record a 10.8% CAGR to Rs 126.6 over FY2013-15. We recommend an Accumulate on the stock with a price target of Rs 2,532.

ICICI Securities calls a ‘Buy’ on Motherson Sumi
CMP: Rs. 209                      Target Rs. 237
Motherson Sumi (MSL) reported its Q1FY14 results, which were higher than our estimates on the margins front, as key subsidiaries SMR and SMP performed well. The consolidated topline at Rs 7082.6 crore (~11% YoY growth) came below our estimates as standalone sales grew only 1.7% YoY.
Operating margins (adjusted for forex impact) came at 8.8%, up 30 bps sequentially as raw material costs declined and utilisation levels improved. Subsequently, PAT, adjusted for forex, came at Rs 242.5 crore, a 16% YoY jump. Adjusted for adverse forex movement, PAT was at ~Rs 161 crore. Significant growth was witnessed in SMR’s performance, as the topline (£283 million) grew 22% YoY and margins expanded to 8.7% (370 bps YoY improvement) as major clients continued to perform well. Notable aspect of the quarterly result was that SMR’s RoCE has increased to 28% from 14% last year. The business profile of MSL continues to grow stronger as it becomes a one-stop supplier for global clients. With utilisation levels improving and new carlines added, we expect revenues and margins to rise for SMR, SMP. We continue to recommend BUY with a target price of Rs 237.

Religare calls a ‘Buy’ on Bank Of Baroda
CMP: Rs. 488            Target Rs. 775
BOB’s Q1FY14 earnings were in line, but asset quality risks remained elevated and future profitability outlook subdued. Business growth was muted and NIMs declined by 9bps QoQ. Impaired asset formation remained high at Rs 40bn (~5% on annualised basis). PAT was higher than estimates at Rs 11.7bn (+15% QoQ), but driven by trading profits. We cut FY14/FY15 EPS estimates by 17%/16% to factor in lower growth and higher provisions, but maintain BUY on attractive valuations (0.6x/4.8x FY14 ABV/EPS).

Slippages/restructuring remain high: Slippages/restructuring were high at Rs 19.6bn/Rs 20bn. Slippages from domestic advances stood at Rs 18.4bn (3.7% on annualised basis). Recoveries/upgrades improved from Rs 2.3bn in Q4FY13 to Rs 3.5bn in Q1FY14 but remained lower compared to peers.
GNPLs/NNPLs increased by 59bps/41bps QoQ to 3%/1.7% and the PCR declined to 44.3%. Outstanding standard restructured assets stood at Rs 175bn (5.4% of advances).

NIMs under pressure; advances growth muted: Advances/deposits declined by 1.4%/1.5% QoQ (up 13%/22% YoY). Domestic advances grew by 10% YoY whereas growth in international advances (+18% YoY) was driven by INR depreciation. Domestic/international NIMs declined by 9bps/17bps QoQ to 2.84%/1.3% as pricing power remains weak. However, the domestic C/D ratio was low at 66.5% which could provide support to NIMs. Other income grew by 60% YoY, but driven by trading profits (Rs 4.1bn as against Rs 815mn in Q1FY13). Opex increased by 27% as the bank provided Rs 1bn/Rs 0.75bn towards pension liabilities/wage revisions.

Subdued near-term outlook but valuations attractive: We cut our FY14/FY15 earnings estimates by 17%/16% to factor in lower growth and higher provisions, and trim our TP to Rs 775 (from Rs 875). While the near-term outlook is challenging given a weak macro, valuations (0.6x/4.8x FY14 ABV/EPS) are attractive.

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