Prakash Industries’ 3QFY12 Adj PAT grew 20% QoQ to INR 668m (v/s est INR 668m) due to stronger market for sponge iron and power. EBITDA at INR 910m was also broadly in line with our estimate of INR 956m. Sponge iron realization increased 9% QoQ. PKI sold more sponge iron and power at the cost of steel production to capitalize on stronger market. PKI has entered into a contract with Andhra Pradesh SEB for sale of 27MW power at an average rate of INR 3.75/ kwh for next 5 months. Another 40MW capacity will be available for external sales after stabilization of all the units. New Fe-Mn capacity of 24ktpa is being planned in FY13 at a capex of INR 600m to leverage on enhanced power. Steel production is now being optimized to gain from improved market. Stock trades at very attractive FY13E P/E of 2.5x, EV/EBITDA of 2.7x, and P/BV of 0.3x. Maintain Buy for target of Rs 109.

Price target revised to Rs140

Result highlights

• Andhra Bank’s Q3FY2012 results were in line with our estimates as the net profit at Rs303 crore showed a decline of 8.4% year on year (YoY) and 4.1% quarter on quarter (QoQ). The de growth in profits was mainly due to a sharp rise in provisions (80% YoY).

• The net interest income (NII) growth was slightly higher than our estimates as it grew by 17.1% YoY. The growth in NII was contributed by a sequential growth in advances (6.3% QoQ) and stable net interest margins (NIMs; ie 3.81% in Q3FY2012 vs 3.82% in Q2FY2012).

• Led by a strong growth in recoveries the asset quality improved on a sequential basis as gross and net non performing assets (NPAs) were at 2.38% and 1.21% respectively compared to 2.67% and 1.48% in Q2FY2012. The bank restructured Rs1,200 crore of advances in Q3FY2012 (outstanding restructured advances at Rs3,676 crore).

• The non interest income registered a growth of 18.4% YoY and 32.3% QoQ contributed by a growth in fee income (11.9% YoY and 24.7% QoQ). The cost to income ratio declined to 37% from 39.2% in Q2FY2012.

Valuations
Andhra Bank’s Q3FY2012 results were characterised by a decline in NPAs aided by sharp increase in the recoveries. The operational performance remained healthy backed by higher NIM and steady growth in advances. We believe sturdy margins and robust recoveries will lower the credit cost in the coming quarters. We expect the earnings of the bank to grow at a compounded annual growth rate (CAGR) of 11.5% (FY2011-13) leading to a return on asset (RoA) of approximately 1.1%. Therefore due to improving trends on the asset quality front and attractive valuations (0.7x FY2013 book value [BV]) we revise our target price to Rs140 (0.9x FY2013E earnings). We upgrade the rating on the stock from Hold to Buy.

Result highlights

• Results synopsis: Marico’s Q3FY2012 consolidated net sales grew by 29.4% year on year (YoY) to Rs1,057.8 crore, driven by a mix of volume growth (of 20% YoY) and price-led growth (of approximately 10% YoY) in Q3FY2012. The gross margins improved by 114bps YoY and 518bps sequentially to 48.5%. However the operating margins were down by 68bps YoY to 11.5% mainly on account of a higher than expected surge in the ad-spends during the quarter. The operating profit grew by 22.1% YoY to Rs121.7 crore. However higher Y-o-Y depreciation charges and a higher incidence of tax (after adjusting for reversal of excess income tax provision of Rs5.6 crore for the previous year) resulted in a 12.9% YoY growth in the adjusted profit after tax (PAT) to Rs78.5 crore.

• Upward revision in estimates: We have revised upward our earnings estimates for FY2012 and FY2013 by 1.3% and 4.1% respectively to factor in a higher than expected top line growth and an improvement in the gross margins.

Outlook and valuation
Despite of inflationary pressures, Marico continued to surprise us with the volume in its domestic consumer products business growing by mid-teens in the past two quarters. This gives us an indication that the categories in which Marico is operating are not feeling the heat of sustained inflationary pressure. We expect the mid-teen volume growth to sustain in the domestic market. We expect the international business to grow by around 20% YoY on the back of several initiatives undertaken by the company in various international markets. Overall we expect the top line to grow at a compounded annual growth rate (CAGR) of approximately 25% over FY2011-13 and the bottom line to grow at a CAGR of 30% over the same period (on the back of expected improvement in the margins due to softening of raw material prices).
In line with the upward revision in earnings estimates, we revise our price target to Rs185 (based on 26x its FY2013E EPS of Rs7.1). The stock has run up after posting a strong operating performance in Q3FY2012, hence there is limited upside visibility from the current levels. Thus we maintain our Hold recommendation on the stock. At the current market price the stock trades at 31.0x its FY2012E EPS of Rs5.3 and 22.9x its FY2013E EPS of Rs7.1.

Maintain hold with price target of Rs526

Result highlights

• Results below expectation: Thermax’ Q3FY2012 results were below our expectation led by revenue sluggishness and margin pressure. Moreover, the standalone order inflow for the quarter remained muted at Rs590 crore (down 40% on a yearly basis and 50% on a sequential basis). On the positive side, the setting up of its power equipment manufacturing plant is progressing as scheduled. The company has also seen an uptick in inquiries since January and expects good demand from the consumption led sectors like auto and durables and also from the food sector.

• Top line grew by a mere 2%: Thermax’ Q3FY2012 net income from operations increased by a mere 2% year on year (YoY) on account of flattish revenue in the energy segment versus our expectation of a 7% growth. The company had been reporting sluggishness in order inflow for the past few quarters, which has translated in a revenue slowdown during the quarter. The environment division posted a Y-o-Y growth of 3% in revenue.

• OPM under pressure: The company reported an operating profit margin (OPM) of 10.7%, which is lower than the Q3FY2011 OPM of 11.8%. The margin was lower because of Rs12.6 crore of foreign exchange (forex) loss booked under other expenses and lower operating leverage. The employee expense was higher by 7% on a Y-o-Y basis at Rs104.2 crore.

• Net profit fell by 5%: In spite of a higher other income and lower tax rate, the net profit fell by 5% YoY to Rs95.5 crore, which is lower than our estimated net profit by 8%. The company availed of working capital loan to the tune of Rs90 crore, which has led to a rise in the interest cost. The same is likely to exert further pressure on the company’s margins going ahead.

• Maintain “Hold”: The growth in the company’s order book remains highly dependent on the momentum in capex cycle of India, making it highly susceptible to swing in investment sentiments. Marred by poor order inflow and tough business environment, the stock has languished in the last one year. However, on a positive note, recent data indicates some revival in the manufacturing sector, auguring well for Thermax and the capital goods sector. At the current market price, the stock trades at 15.1x and 13.8x its FY2012 and FY2013 estimated earnings respectively. Based on revised earnings and target multiple of 14x (past 1 year average) we have revised our target price to Rs526. In view of limited upside potential we maintain our “Hold” rating on the stock. The key positive triggers in the stock remain the winning of big ticket size power equipment orders and some relief on margins in view of the recent cooling off of commodity prices.