19 January 2014
Suprajit Engineering Growth continues despite adversities; re-rating justified; Buy :: Anand Rathi
Suprajit Engineering
Growth continues despite adversities; re-rating justified; Buy
Key takeaways
Strong sales despite slowdown in industry. Suprajit Engineering’s sales are
expected to have risen 23.4% yoy, to `1.4bn, on account of an increased
offtake in the two-wheeler segment (OEM clients) and higher utilisation.
Exports and the after-market would have grown faster on account of the
company’s focused strategy.
Margin set to be firm, at 17%. The EBITDA margin is expected to have
held at the same level of 17.1% yoy. Despite the cost push, the company has
been hiked prices. Ahead, management is hopeful of selling more high-margin
products. With an expected rise in volumes of such products, the margin is
likely ot have held at around 16-17%.
Profits expected to rise 24.3%. On improving sales and a firm margin,
profit is expected to rise 24.3% yoy, to `139m. The 3QFY14 PAT margin is
expected to come at 10% (3QFY13: 9.9%).
Capacity addition, strategic plant location augurs well. Capacity
expansion is on track, and by end-1QFY14 capacity had touched 150m units.
Commercial production at its new unit in the Bommasandra Industrial Area,
Bangalore, began in Mar’13. Land has been allotted in Karnataka for the
company’s proposed cable plant for one of its key two-wheeler customers.
Additional capacities would be of plants to cater to Honda Motors and
Scooters India and to Yamaha, by FY15.
Our take. We believe that there exists upside potential to our estimates on
account of strong resilience to the slowdown, which could yield better profit
consequent on improved asset sweating. Additionally, we believe that ongoing
efforts at Suprajit to further improve its aftermarket business would bear fruit
3-4 quarters down the line. At our target, we value the stock at 13x Mar’15e
PE. At present, it quotes at FY15e EV/EBITDA of 6.3x. Risks. Higher
interest rates, commodity price increases and keener competition.
Growth continues despite adversities; re-rating justified; Buy
Key takeaways
Strong sales despite slowdown in industry. Suprajit Engineering’s sales are
expected to have risen 23.4% yoy, to `1.4bn, on account of an increased
offtake in the two-wheeler segment (OEM clients) and higher utilisation.
Exports and the after-market would have grown faster on account of the
company’s focused strategy.
Margin set to be firm, at 17%. The EBITDA margin is expected to have
held at the same level of 17.1% yoy. Despite the cost push, the company has
been hiked prices. Ahead, management is hopeful of selling more high-margin
products. With an expected rise in volumes of such products, the margin is
likely ot have held at around 16-17%.
Profits expected to rise 24.3%. On improving sales and a firm margin,
profit is expected to rise 24.3% yoy, to `139m. The 3QFY14 PAT margin is
expected to come at 10% (3QFY13: 9.9%).
Capacity addition, strategic plant location augurs well. Capacity
expansion is on track, and by end-1QFY14 capacity had touched 150m units.
Commercial production at its new unit in the Bommasandra Industrial Area,
Bangalore, began in Mar’13. Land has been allotted in Karnataka for the
company’s proposed cable plant for one of its key two-wheeler customers.
Additional capacities would be of plants to cater to Honda Motors and
Scooters India and to Yamaha, by FY15.
Our take. We believe that there exists upside potential to our estimates on
account of strong resilience to the slowdown, which could yield better profit
consequent on improved asset sweating. Additionally, we believe that ongoing
efforts at Suprajit to further improve its aftermarket business would bear fruit
3-4 quarters down the line. At our target, we value the stock at 13x Mar’15e
PE. At present, it quotes at FY15e EV/EBITDA of 6.3x. Risks. Higher
interest rates, commodity price increases and keener competition.
Why order matters in returns :: Business Line
A capital loss of 5 per cent will hurt. But the effect will depend on whether this loss precedes or follows a 10 per cent gain.
Three factors determine whether you will achieve your life goals. First is your disciplined approach to savings. Second is your choice of investment products. And third is your portfolio’s return experience.
In this article, we discuss how your portfolio’s returns experience in each period, called the sequence of returns risk (SORR), can affect your life goals and how you can moderate this risk.
Understanding SORR
Suppose, your initial investment capital was Rs 5 lakh and your contribution was Rs 50,000 every month between December 2012 and 2013.
Suppose, your initial investment capital was Rs 5 lakh and your contribution was Rs 50,000 every month between December 2012 and 2013.
Based on the actual returns on the Nifty Index, your portfolio would have accumulated Rs 11,85,288 by December 2013. But what if the order of returns-experience were changed?
Assuming the same initial capital and monthly contribution, if the monthly returns on the Nifty Index were reversed (if December 2013 returns were actually experienced in December 2012 and likewise for the rest of the months), your portfolio would have accumulated Rs 11,49,918.
We also arranged the monthly index returns from the lowest to the highest returns and vice-versa. If your portfolio suffered all negative returns first and all positive returns later during this 13-month period, your portfolio would have accumulated Rs 12,57,956 by December 2013. But if you earned all positive returns first and negative returns later, your portfolio would have been 14 per cent lower at Rs 10,88,709.
This exercise shows that your portfolio wealth depends on the order of your returns-experience. Imagine the effect on your portfolio when your investment horizon is 30 years!
The risk that you will fail to achieve your life goals because the order of returns-experience could affect your portfolio wealth is called SORR. You run this risk whether you contribute capital or withdraw capital from your investment portfolio. SORR, thus, affects both working professionals and retirees.
Moderating SORR
Your portfolio size will be large as you approach retirement. And that is when your portfolio is even more vulnerable to the sequence of returns-experience. You can moderate SORR by reducing your equity investments as you enter your working-life side of the retirement risk zone –— the 10 years approaching your retirement.
Your portfolio size will be large as you approach retirement. And that is when your portfolio is even more vulnerable to the sequence of returns-experience. You can moderate SORR by reducing your equity investments as you enter your working-life side of the retirement risk zone –— the 10 years approaching your retirement.
Note that a typical portfolio will contain about 25 per cent equity investment at retirement. You can, therefore, only moderate and not eliminate SORR. What if you fail to accumulate the required wealth at retirement despite moderating SORR?
Typically, you may have to resort to one of the two choices; you can defer your retirement date if possible or reduce your post-retirement consumption. But you can also morph part of your retirement portfolio into your retirement income portfolio and retire without reducing your living expenses (for more details, read “Bridging shortfall in retirement portfolio” that appeared in this column dated September 22, 2013).
But what if you are already retired? You run high SORR especially during the 10 years immediately after retirement – the retired-life side of the retirement risk zone. You should keep your equity investments to a minimum during this 10-year period.
You will be exposed to SORR only if you withdraw cash from your equity portfolio. So, one way to reduce your SORR is to have stable cash-flow products, such as annuity (preferably) or bank fixed deposits to fund your monthly living expenses.
Conclusion
You will be exposed to SORR whether you are a working professional or a retiree. Only those contributing lump-sum money and holding their portfolio through the investment horizon do not suffer from SORR.
You will be exposed to SORR whether you are a working professional or a retiree. Only those contributing lump-sum money and holding their portfolio through the investment horizon do not suffer from SORR.
Note that SORR is not market risk. Market risk is the risk that your portfolio will decline with the market. SORR is the risk that the order of returns may hurt your portfolio value – whether your portfolio experiences, say, 5 per cent loss first and 10 per cent gain next or the other way.
Investing is, indeed, uncertain!
AxisBank : Underperformance to linger :centrum
Underperformance to linger
Axis Bank’s Q3FY14 results were in line with our estimates on the operational
front. However, led by lower NPA provisioning and MTM reversals, net profit at
Rs16.0bn, was ahead of our / consensus estimates. Lower than expected stress
asset addition at Rs12.6bn (2.4% of loans) and further improvement in retail
franchise were key positives. However, margin compression, weakening of
operating profit metrics and risk to asset quality make us believe that
underperformance will continue for a few more quarters. Retain HOLD. Prefer ICICI
Bank to Axis Bank.
Axis Bank’s Q3FY14 results were in line with our estimates on the operational
front. However, led by lower NPA provisioning and MTM reversals, net profit at
Rs16.0bn, was ahead of our / consensus estimates. Lower than expected stress
asset addition at Rs12.6bn (2.4% of loans) and further improvement in retail
franchise were key positives. However, margin compression, weakening of
operating profit metrics and risk to asset quality make us believe that
underperformance will continue for a few more quarters. Retain HOLD. Prefer ICICI
Bank to Axis Bank.
Phillips Carbon Black Volumes to improve yoy; stock rallied; Hold :: Anand Rathi
Phillips Carbon Black
Volumes to improve yoy; stock rallied; Hold
Key takeaways
Slowdown in domestic market continues. We expect Phillips Carbon
Black to report 3QFY14 volumes have risen 1.2% qoq (11.7% yoy). Last
year’s quarter had a very low base due to demand in the domestic market
dropping and more imports by domestic clients. On account of the rise in
export volumes, we expect revenue to have grown 8.4% yoy. And the
contribution from power could have declined, by 11.2% yoy, to `180m.
Disappointment in carbon black. We expect a 5.6% EBITDA margin in
3QFY14 vs 2.7% in 3QFY13. This 290-bp improvement in OPM would be
due to the pass-through of raw material costs. Carbon black imports are
squeezing the company. Though we expect other expenditure to be up
132bps to 11.5% yoy, we expect the EBITDA margin to have improved
290bps due to substantially lower raw-material costs (as percent of sales).
Expected to report profit. We expect a `47m profit in 3QFY14, a steep
513% jump yoy. We expect the volume pickup to have pulled the profit up.
The company was struck by dumping by China and other countries. The
government has imposed a 30% safeguard duty on carbon-black imports
from China. Though this would help reduce imports over time, we do not see
any benefit in domestic volumes in 3Q.
Our take. Since the 30% safeguard duty was imposed in Oct’12 (till Oct’13)
and 25% on CB imports from China till 31 Dec’13, such imports have slid.
Imports, though, from Korea have now risen. The 50,000-ton Cochin plant CB
expansion was completed in May’13. An MoU has been signed with the Tamil
Nadu government to set up a new CB and power plant; environment clearances
are in progress. In view of global developments, project work at Vietnam is
under review. We value the stock at a target PE of 3.5x FY15e earnings. We
downgrade the stock to a Hold, with a target price of `49. Risks. A slowdown
with original equipment manufacturers and adverse forex movement.
Volumes to improve yoy; stock rallied; Hold
Key takeaways
Slowdown in domestic market continues. We expect Phillips Carbon
Black to report 3QFY14 volumes have risen 1.2% qoq (11.7% yoy). Last
year’s quarter had a very low base due to demand in the domestic market
dropping and more imports by domestic clients. On account of the rise in
export volumes, we expect revenue to have grown 8.4% yoy. And the
contribution from power could have declined, by 11.2% yoy, to `180m.
Disappointment in carbon black. We expect a 5.6% EBITDA margin in
3QFY14 vs 2.7% in 3QFY13. This 290-bp improvement in OPM would be
due to the pass-through of raw material costs. Carbon black imports are
squeezing the company. Though we expect other expenditure to be up
132bps to 11.5% yoy, we expect the EBITDA margin to have improved
290bps due to substantially lower raw-material costs (as percent of sales).
Expected to report profit. We expect a `47m profit in 3QFY14, a steep
513% jump yoy. We expect the volume pickup to have pulled the profit up.
The company was struck by dumping by China and other countries. The
government has imposed a 30% safeguard duty on carbon-black imports
from China. Though this would help reduce imports over time, we do not see
any benefit in domestic volumes in 3Q.
Our take. Since the 30% safeguard duty was imposed in Oct’12 (till Oct’13)
and 25% on CB imports from China till 31 Dec’13, such imports have slid.
Imports, though, from Korea have now risen. The 50,000-ton Cochin plant CB
expansion was completed in May’13. An MoU has been signed with the Tamil
Nadu government to set up a new CB and power plant; environment clearances
are in progress. In view of global developments, project work at Vietnam is
under review. We value the stock at a target PE of 3.5x FY15e earnings. We
downgrade the stock to a Hold, with a target price of `49. Risks. A slowdown
with original equipment manufacturers and adverse forex movement.
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