Fw: Investor's Eye: Update - Insurance; Special - Q2FY2012 Agri inputs earnings review

 

 

Investor's Eye [November 28, 2011]  Sharekhan www.sharekhan.com

Summary of Contents SECTOR UPDATE Insurance APE declines sequentially by 17.6% The annual premium equivalent (APE) of the life insurance industry grew by 8.7% year on year (YoY) while it declined by 17.6% month on month (MoM). The year-on-year (Y-o-Y) growth in APE was mainly contributed by Life Insurance Corporation of India (LIC), which reported a growth of 18.5% YoY, while the private players witnessed a decline of 5% YoY in their APEs. Moreover, the growth on Y-o-Y basis was mainly due to the phasing out of the higher base of the previous year as new regulations were introduced. However, on a year-till-date (YTD) basis (ie April-October 2011), the APE of the industry continued to contract with the private players showing a higher decline (33.2% YTD) compared to an 11.6% decline shown by LIC. Outlook: On an M-o-M basis the premium collections showed a decline in October 2011, though the same showed a recovery on a Y-o-Y basis. That's because  of the phasing out of the higher base effect as new regulations were introduced from September 2010 onwards. On a YTD basis, the premium collection continues to decline while LIC has performed better due to its presence in traditional policies. The insurers are in the process of launching new products and revamping their distribution structure (bank assurance tie-ups, realignment of agent force etc) to curtail their expenses. While the Y-o-Y growth is expected to remain flattish, the growth in H2FY2012 is likely to be better due to seasonality and the lower base of the previous year. SHAREKHAN SPECIAL Q2FY2012 Agri inputs earnings review Q2 results ahead of expectations: Our universe of agriculture stocks reported a surprisingly strong performance in Q2FY2012 with aggregate revenue growth of 27.4% driven by both higher realisations and a smart uptick in the volume offtake. The adjusted profit after tax (PAT) grew by 77.9% during the same period. The outperformance was driven by a strong upsurge in the margins of Tata Chemicals. Margin improvement is one-off: The overall increase in the operating profit margin (OPM) was mainly due to the higher margin of Tata Chemicals during Q2FY2012 on the back of a price rise taken in the inorganic chemical segment (soda ash) and the last quarter's fertiliser subsidy that was included in Q2FY2012. The management of Tata Chemicals believes that going ahead there will be pressure on the margin due to a strong demand for raw materials and that the company would not be able to pass on the increase in the cost beyond a certain limit. This could hurt the margin. The margin of Deepak Fertilisers and Petrochemicals Corporation (Deepak Fertilisers) and United Phosphorus declined due to input cost pressures. The sales of complex fertilisers were affected due to the lower availability of MOP which adversely affected the sales mix and the margins.  Government to hike subsidy pay-out for fertiliser companies in current fiscal: The Government of India has made an additional provision of Rs13,779 crore for fertiliser subsidy during FY2012. So the total outlay for the fertiliser subsidy has increased from Rs53,837 crore to Rs67,616 crore. Out of the total incremental outlay of Rs13,779 crore, the bulk, ie Rs5,200 crore, has been allocated for indigenous complex fertiliser followed by Rs3,000 crore for imported complex fertiliser. The allocation to fertiliser subsidy was increased mainly due to a higher input cost and deprecation of the rupee against the dollar. Deepak Fertilisers and United Phosphorous remain our top picks: Deepak Fertilisers and United Phosphorus remain our top picks post-Q2FY2012 results because currently both the stocks are available at much attractive valuations. After the Q2FY2012 results, we remain positive on Deepak Fertilisers on account of the higher utilisation ratio of its newly commissioned ammonium nitrate plant and the higher trading margin in the specialty fertiliser business. United Phosphorus will grow at 20 to 25% for the next two years on the back of a higher inorganic growth from its recent acquisition of AVG Agro Brazil and is likely to maintain its OPM in a tight range.   "Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article."   Click here to read report: Investor's Eye

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Fw: Investor's Eye: Special - Q2FY2012 earnings review, FDI in retail

 

 

Investor's Eye [November 25, 2011]  Sharekhan www.sharekhan.com

Summary of Contents SHAREKHAN SPECIAL Q2FY2012 earnings review Earnings growth in line; margin squeeze continues: The aggregate adjusted earnings of the Sensex companies (ex energy companies) grew by 8.1% during Q2FY2012. The growth was largely in line with the expectations. The major negative surprises came from stocks like Maruti Suzuki, Bharti Airtel (Bharti), Jindal Steel & Power, Sterlite Industries and Tata Power. However, the shortfall was made up by better than expected results from Tata Motors, Hindustan Unilever Ltd (HUL), Coal India, State Bank of India (SBI) and NTPC.  The revenue growth momentum remained quite strong with an aggregate net sales growth of 24.1% during the quarter. The revenue growth was broad-based with over 15% in all sectors except real estate and telecommunications (telecom). Apart from Reliance Industries, better than expected execution of projects in the capital goods and infrastructure sectors aided the outperformance in the revenue growth during the quarter. The margin pressure was visible in Q2 as well. The operating profit margin (OPM) of the Sensex companies (ex oil companies) declined by 150 basis points, marking the fourth consecutive quarter of a decline in the margins. Earnings estimates get downgraded further; H2 implied growth achievable but risk to FY2013 estimates: After the earnings downgrades post-Q2FY2012 results, the consensus estimate for the Sensex' earnings growth for FY2012 now stands at around 9.9% as against over 20% at the beginning of 2011. Taking into account the Sensex' earnings growth of 8.7% in the first half (H1FY2012), the implied growth in H2 works out to 11.2%, which appears to be achievable. Even after a downgrade of close to 12% in the FY2013 estimates over the past twelve months, the consensus estimate suggests an earnings growth of 14-15% for the next fiscal. This could be at risk if the global situation deteriorates and the policy inaction continues to impede the growth in corporate earnings. At the current consensus earnings estimate, the Sensex trades at around 12x one-year forward earnings, which is at the lower end of its price/earnings (PE) band, and the valuations are supportive now. However, the global turmoil and policy inaction are the key risks that could result in further downgrade of the PE multiples in the near term.   FDI in retail The union government has cleared the much awaited reforms in the Indian retail sector by allowing 51% foreign direct investment (FDI) in the multi-brand retail sector. It has also raised the FDI limit in the single-brand retail sector to 100% from 51% earlier. The enforcement of these reforms, not withstanding some political risk, will open the floodgates of funds for the burgeoning Indian retail sector. Further, the bill proposing a minimum $100 million of investments by any foreign investor would entail more serious participation from foreign players in the Indian retail space. The reforms will also result in enormous opportunities to develop front-end retail and provide impetus to develop back-end infrastructure, like cold chains, warehousing, logistics and expansion of contract farming. Industry experts believe these reforms have the potential to bring $8-10 billion of foreign investments in the next five to ten years.   "Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article."   Click here to read report: Investor's Eye

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Fw: L&T Infra Bond - Opening date 25 November 2011

 

Salient Features - Long Term Infrastructure Bonds 2011B Series (Tranche-1): Issuer L&T Infrastructure Finance Company Limited Issue of Tranche 1 Bonds Public issue of long term infrastructure bonds of face value of Rs. 1,000each, in the nature of secured, redeemable, non-convertible debentures, having benefits under section 80CCF of the Income Tax act, 1961, not exceeding Rs. 11,000.0 million for the FY 2012, to be issued at par on the terms contained in the Shelf Prospectus and the Prospectus - Tranche 1. Issue opening date Friday, November 25, 2011 Issue closing date Saturday, December 24, 2011* (Issue Details) Rating "(ICRA)AA+" from ICRA and "CARE AA+" from CARE Tax Benefits The investment up to Rs 20,000 made will be eligible for tax benefits in the year of investment under Section 80 CCF of the Income Tax Act, 1961 Who can apply? Indian nationals resident in India *(Issue Details) Hindu Undivided Families or HUFs, in the individual name of the Karta. Minimum application 5 Tranche 1 Bonds and in multiples of 1 Tranche 1 Bond thereafter.(5 Tranche 1 Bonds, across the same series or different series) Lock-in period 5 years from the deemed date of allotment Trading Dematerialized form only following expiry of Lock-in Period Redemption /Maturity Date 10 years from the Deemed Date of Allotment Buyback date Available on the first Working Day after the expiry of 5 years from the Deemed Date of Allotment or on the first Working Day after the expiry of 7 years from the Deemed Date of Allotment, as the case may be. Specific terms for each series of Tranche 1 Bonds Series 1 2 Frequency of Interest payment Annual Cumulative Face value per Tranche 1 Bond Rs. 1,000 Rs. 1,000 Interest Rate 9.00% p.a. 9.00% p.a. compounded annually Buy-back amount Rs. 1,000/- at the end of 5 years/ Rs. 1,000/- at the end of 7 years Rs. 1,538.62/- at the end of 5 years/ Rs. 1,828.04/- at the end of 7 years Maturity Date 10 years from the Deemed Date of Allotment 10 years from the Deemed Date of Allotment Maturity Amount Rs. 1,000/- Rs. 2,367.36/- Yield on maturity 9.00 % 9.00% compounded annually Yield on Buyback 9.00 % 9.00% compounded annually

Sharekhan Ltd.: BSE Cash-INB011073351; F&O-INF011073351; NSE - INB/INF231073330; MAPIN - 100008375; DP: NSDL-IN-DP-NSDL-233-2003; CDSL-IN-DP-CDSL-271-2004; PMS INP000000662. Sharekhan Commodities Pvt. Ltd.: MCX-10080; NCDEX-00132; MAPIN - 100013912, for any complaints email at igc@sharekhan.com. Regd/Admin Add:- Lodha iThink Techno Campus, 10th Floor, Beta Building, Off. JVLR, Opp. Kanjurmarg Station, Kanjurmarg (East), Mumbai 400 042, Maharashtra. Please carefully read the risk disclosure document as prescribed by SEBI & FMC and Do's & Don'ts by NCDEX. Disclaimer: Sharekhan Limited is engaged as a distributor for distribution of IDFC Long Term Infrastructure Bonds. Sharekhan or any of its group concerns do not in any manner recommends any product or any of its characteristics. The client is advised to take his / her own independent decisions for investing in any financial product after understanding their respective nature and risk and returns involved. The client may also approach his / her own consultants for investing in financial products or in relation to the tax related aspects. We do not solicit any action based upon this promotional material. Please note that the product does not take into account any particular investment objectives, financial decisions or needs of individual recipients. Neither Sharekhan nor any person connected with Sharekhan accepts any liability arising out of investment suggested in the material above.

Fw: Sharekhan Mutual Fund Finder - December 2011

 

 

Sharekhan Mutual Fund Finder [November 24, 2011] Sharekhan www.sharekhan.com

Summary of Contents Sharekhan Mutual Fund Finder Top equity picks Top SIP picks SIP calculator Crorepati calculator Fund of the month: Mirae Asset India Opportunities Fund Performance of debt funds and ETFs Click here to read report: Mutual Fund Finder

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Fw: Investor's Eye: Update -Genus Power Infrastructures; Special - Q2FY2012 Banking earnings review

 

 

Investor's Eye [November 22, 2011]  Sharekhan www.sharekhan.com

Summary of Content STOCK UPDATE Genus Power Infrastructures Cluster: Ugly Duckling Recommendation: Buy Price target: Rs18 Current market price: Rs13 Price target revised to Rs18 Result highlights Q2FY2012 results, a mixed bag: Genus Power Infrastructure Ltd (GPIL)'s Q2FY2012 results were in line with our expectation on the operating front. However, a high interest cost driven by high working capital requirement spoiled the overall profit after tax (PAT) picture. The receivables days rose sharply to over 200 days led by a delay in receiving payments from the state electricity boards (SEBs). Top line growth in line with estimate: The net sales during the quarter rose by 9% and was in line with our expectation of Rs177.8 crore. The management indicated that this growth was on account of a good growth in the meter segment (which accounts for about 55% of revenue) while the project segment was sluggish.  Margin under slight pressure: The operating profit margin (OPM) of 15.3% was in line with our expectation of 15% but lower than the 16.9% margin reported in Q2FY2011. The raw material cost was in line with the rise in the revenues. However, sharp rise in the other expenses offset this positive impact. The management indicated that GPIL would maintain a robust margin of about 15% in the coming quarters on the back of a healthy growth in the sales of meters, which have high margins.  PAT fell by 44% YoY: The interest cost increased sharply to Rs15.5 crore, which included a foreign exchange (forex) loss of Rs6.14 crore. Consequently, the PAT fell by 44% to Rs8.6 crore as against our expectation of Rs13.6 crore. The loans increased to Rs340.5 crore, led by a delay in receiving payments from its key clients, the SEBs. The SEBs are currently facing a financial crunch, which could be eased by the hiking of tariffs. But due to the impending elections and therefore political pressure, most of the state utilities are reluctant to hike tariffs. The SEBs form 80% of GPIL's current debtors owing the company Rs414.7 crore.  Order book at Rs605 crore: The current order book of the company stands at Rs605 crore as against Rs602 crore at the end of Q1FY2012. This implies an order inflow of Rs184 crore (up 50% year on year [YoY]) for the quarter. The company has already participated in tenders worth Rs2,500 crore. Nonetheless, the book-to-bill ratio has fallen to 0.83x, indicating poor revenue visibility. Estimates downgraded: We have updated the annual report details in our model and built in the higher interest cost. Consequently, our estimates for FY2012 and FY2013 have been downgraded by 12% and 22% respectively. We are expecting a negative compounded annual growth rate (CAGR) of 1.4% in the bottom line over FY2011-13. We would like to see good order inflows and recovery in receivables in order to upgrade our estimates for the company. Price target revised to Rs18: GPIL, a mid-cap company under our coverage, has a leadership position in the Indian meter space with a growing presence in the transmission and distribution space. However, in recent times its order inflow and execution have been below our expectation and its guidance. Further, the delay in the receivable payments has added to its woes. On these concerns, in recent times, the stock's price has seen a steep fall. At the current market price, the valuation remains attractive at 3.9x FY2013E earning per share (EPS) while it discounts its historical (FY2011) book value by 0.5x. Hence we maintain our Buy recommendation on the stock with a revised price target of Rs18 (5.5x FY2013E EPS). Improved order inflow, timely payment from its debtors and profitable execution are the key positive triggers for the stock in the near term. SHAREKHAN SPECIAL Q2FY2012 Banking earnings review Key points The Q2FY2012 earnings of our banking universe were marginally higher than our estimates mainly due to a better than expected performance on the net interest income (NII) front. This could be attributed to steady margins, which increased for most banks on a sequential basis. However, the asset quality deteriorated sharply for the public sector banks (PSBs) led by a shift to the system-based non-performing asset (NPA) recognition, slippages from restructured book and some large corporate accounts resulting in a sharp rise in the provision expenses. The non-interest income growth remained subdued due to nominal treasury gains and weakness in the fee income growth.  Going ahead, we expect the business growth to moderate in line with the weak macro environment, thereby affecting the core income, which has shown a steady growth so far. Meanwhile, the slower growth, the rising stress across sectors of the economy and the asset quality risks will take the centre-stage. While bank stocks have corrected significantly (the correction partly factors in the concerns over the rise in the NPAs and the earnings slowdown), the risks on asset quality have increased with the deterioration in the macro environment. We, therefore, prefer banks having a relatively stable earnings profile and less asset quality pressure in the emerging environment. We recommend Yes Bank (a strong growth and reasonable valuation), HDFC bank (a consistent performance) and ICICI Bank (upgraded to Buy due to attractive valuation). Though we remain cautious on the PSBs, but we prefer Bank of Baroda (BoB), which has consistently delivered on all fronts and is trading at a reasonable valuation. Valuations and outlook: In view of the slower growth, weak macro environment and emerging concerns on asset quality the bank index has underperformed the broader markets for the past several months. The stocks especially the ones showing higher NPAs (such as SBI, Union Bank of India, Bank of India) have declined sharply and are trading at lower than three-year mean valuations. We believe the asset quality remains the dominant risk to the banking sector especially in the backdrop of a weak macro environment, persistently high interest rates and policy issues on the infrastructure sector. While the PSBs are more vulnerable to the NPA pressures due to their higher exposure to the sensitive segments (agriculture, SME, exports, state electricity boards), the private sector banks are placed better. We, therefore, remain selectively positive on the banking sector with a preference for the private banks Yes Bank (a strong growth and reasonable valuations), HDFC Bank (a consistent performance) and ICICI Bank (upgraded to Buy on reasonable valuations). In general we remain cautious on the PSBs but prefer BoB, which has consistently delivered on all fronts and is available at reasonable valuations.  "Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article." Click here to read report: Investor's Eye

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Fw: Investor's Eye: Update - Lupin, ISMT; Special - Q2FY2012 Construction earnings review

 

 

Investor's Eye [November 18, 2011]  Sharekhan www.sharekhan.com

Summary of Content STOCK UPDATE Lupin Cluster: Apple Green Recommendation: Buy Price target: Rs538 Current market price: Rs449 Lupin expands presence in Japan Key points  Lupin expands presence in Japan: Lupin is set to acquire I'rom Pharmaceutical Co (I'rom Pharma) through its Japanese subsidiary, Kyowa. The agreement has been reached between Kyowa and I'rom Holdings Co. Ltd (IH) to acquire up to 100% of the outstanding shares of its subsidiary, I'rom Pharma. With this acquisition, Lupin's revenue from Japan is expected to expand by 50% in FY2012. We expect Lupin's annual revenue to increase by 5% due to this acquisition (on an annualised basis).  $11-billion market opportunities: The market size for I'rom Pharma is estimated at $11 billion, which is approximately 10% of the Japanese pharmaceutical (pharma) market. I'rom Pharma generated $67.9 million worth revenue in FY20011 and is expected to reach $75 million by the end of FY2012. I'rom Pharma has strong presence in diagnosis procedure combination (DPC) hospitals in Japan, which is a fixed-rate treatment hospital segment in Japan, where the government mandates clinics to offer low-cost healthcare services. There are 1,400 DPC hospitals in Japan and I'rom Pharma covers 35% of all hospital beds nationwide.  Strategic fit for Lupin: Through this acquisition, Lupin would not only expand its presence in the Japanese market but also get better synergies through product alignments and integration. I'rom Pharma's product portfolio mainly consists of injectibles in the anti-infective, gastro-intestinal, cardiovascular and nutrition segments. This will help Lupin to fill the gap in its products pipeline, which mainly consists of oral products like tablets and capsules. Besides, Kyowa will also get help in clinical trials through site management expertise from I'rom Holdings (this agreement has been signed separately), which will help Kyowa to ramp up its product filings. Valuation and view: Inorganic expansions have been one of key strategies for Lupin to grow at a faster pace. The acquisition of I'rom Pharma is a strategic move to expand its presence in Japan, which is the world's second largest pharma market. Japan is witnessing increased penetration of generic products, given the government's focus to contain healthcare costs through increased genericisation of the market. Through this acquisition, Kyowa will have control over the key distribution channels (hospitals), which will help fasten the introduction of newer products in the markets. Besides, the alliance with I'rom Pharma for clinical trial management would help Kyowa to get faster approvals in Japan, where the approval process is relatively stringent.  We expect this acquisition to be earnings accretive from the first year itself, which should grow faster over a period of time. We expect the revenue and profit after tax (PAT) to grow at compounded annual growth rate (CAGR) of 18% and 19% respectively over FY2011-13. At the current market price, the stock is trading at 19.9x and 16.1x FY2012E and FY2013E earnings per share (EPS). We maintain our Buy recommendation on the stock with a revised price target of Rs538 (implies 19.6x FY2013E EPS). ISMT Cluster: Ugly Duckling Recommendation: Buy Price target: Rs42 Current market price: Rs29 Price target revised to Rs42 Result highlights Steady revenue growth: ISMT reported strong revenue numbers for Q2FY2012 with its net sales rising by 26.6% to Rs512.2 crore on the back of a volume growth and an improvement in the realisation. The tube segment reported a 19.5% volume growth and a 7.5% improvement in its realisation. The steel segment reported a 10.2% growth in its volume and a 7.8% improvement in its realisation.  OPM declines: Despite the volume growth and realisation improvement, the EBITDA margin contracted by 640 basis points to 13.3% mainly due to input cost pressures. The raw material cost as a percentage of sales increased from 41% in Q2FY2011 to 51.3% in Q1FY2012 which led to a 14% fall in the EBITDA to Rs69.3 crore. On a segmental basis, the profit before interest and tax (PBIT) margin of the steel business declined sharply to 11.1% as compared to 20% in Q2FY2011 whereas that of the tube division fell by 294 basis points to 9.6%. We expect the margins to improve going forward as the company passes on some of the impact of the input cost pressures to its customers.  Bottom line affected by forex charge: On the back of the rupee's depreciation from Rs44.6 as of June 30, 2011 to Rs48.98 on September 30, 2011 to the US Dollar, the company booked foreign exchange (forex) loss of Rs12.5 crore against a marginal loss in the corresponding previous quarter. The loss pertains mainly to the un-hedged portion of the foreign debt. On the back of lower tax provisioning at Rs4.2 crore, down from Rs15.7 crore in the corresponding quarter of the previous year, the fall in the net profit was restricted to 56.5% at Rs10.5 crore against a 63% fall in the profit before tax (PBT). Valuation and view: The company has maintained a good revenue performance but due to cost pressures it has seen a consistent fall in its margins. With the power plant now being commissioned towards the end of FY2012, the benefit of the same would be seen only in FY2013. On account of the delay in the commissioning of the power plant, which is the key driver of the margin improvement, we have downgraded our earnings estimates by 34% and 32% for FY2012 and FY2013 respectively. At the current market price, the stock is available at 4.2x FY2013 estimated earnings. We maintain our Buy rating on the stock with a revised price target of Rs42 (6x FY2013E earnings). SHAREKHAN SPECIAL Q2FY2012 Construction earnings review  Key points Poor show continues; in line with expectation: The net profit for the engineering, procurement and construction (EPC) companies (ex Punj Lloyd) fell by 31.4% year on year (YoY; in line with our estimate), despite stable operating performance, mainly on account of higher interest burden which shot up by 60% YoY. Revenues for the same grew by 7.5% YoY (below expectation), pulled down by poor execution from NCC and IVRCL. However, the performance at the operating level for the EPC companies was satisfactory with the operating profit growing by 9% YoY (in line with expectation). All the companies were able to sustain their margin which cumulatively expanded by 20 basis points (bps) YoY to 11.1% and was 50bps above our estimate. In case of infrastructure developers, revenues were up 45% YoY (much above our expectation) on the back of large portions of their portfolios being under construction. But margins saw a contraction (as expected) due to a higher share of their revenue coming from their construction arms, resulting in a 36% growth at the operating level. Despite a strong operating performance, the net profit was up by just 8.2% YoY on account of a high interest burden. Asset developers & small EPC players outperform: Asset developers and small EPC players outperformed the mid size construction players on account of better execution. While IRB Infrastructure Developers (IRB) and IL&FS Transportation Networks (ITNL) both surprised us positively on the execution front, NCC & IVRCL disappointed the most. Among EPC players, small companies outperformed the mid sized ones on the back of strong execution and expansion in the EBITDA margins. While Pratibha Industries (Pratibha) outperformed at the revenue level with a strong 30% growth, Gayatri Projects (Gayatri) and Unity Infraprojects (Unity) outperformed at the operating level seeing a margin expansion of 329bps and 186bps respectively. On the other hand, mid cap players displayed a disappointing performance with NCC & IVRCL registering a fall of 9% and 3% respectively in their revenues due to poor execution. However Simplex Infrastructures (Simplex) gave a surprise by posting a 26% revenue growth (much ahead of expectation) led by better execution in their international division. Further Punj Lloyd gave a better than expected result led by a high foreign exchange (forex) gain for the quarter. Outlook: For the midcap construction companies in our universe, we have downgraded our estimates for FY2012 and FY2013 to factor in slower execution and higher interest burden as compared to our earlier estimate. The near-term outlook for the infrastructure sector remains challenging till the government indecisiveness continues, pace of awarding of new projects remains slack and major policy actions remain unresolved. The government has to speed up decision making in order to support the desired policy changes and there will have to be a quicker roll out of projects which would boost investment in infrastructure. Till then the poor performance of the infrastructure companies will continue. Thus we prefer being very selective and favour companies with healthy order books along with healthy balance sheets. Our top picks in the sector are ITNL and Unity among our coverage stocks, and Ramky Infrastructure (Ramky) among the non-coverage stocks that could be watched by investors.   "Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article." Click here to read report: Investor's Eye

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Fw: Investor's Eye: Update - Jaiprakash Associates, Phillips Carbon Black

 

 

 

Investor's Eye [November 16, 2011]  Sharekhan www.sharekhan.com

Summary of Content STOCK UPDATE Jaiprakash Associates Cluster: Ugly Duckling Recommendation: Buy Price target: Rs105 Current market price: Rs67 Price target revised to Rs105 Result highlights Earnings ahead of estimate: Jaiprakash Associates Ltd (JAL) on a stand-alone basis posted a net profit of Rs128.7 crore (an increase of 11.4% year on year [YoY]), which was well ahead of our as well as the Street's expectations on account of much higher than expected profitability in its construction division and a higher than expected other income. However, the cement division disappointed with a loss at the EBIT level; its real estate division's performance was also below expectation due to the slowdown in the property market.  Overall revenue supported by cement division: JAL's revenues improved by 2.5% YoY to Rs3,067 crore in Q2FY2012. The overall revenue of the company was supported by its cement division, which posted a revenue growth of 9.6% YoY (driven by a volume growth of 18.8% as the realisation declined by 7.8% in the same period). Its construction division's revenue even though declined by 1% YoY the same at Rs1,555 crore was higher than our estimate. However, on account of the slowdown in the property market its real estate division posted a 37.6% decline in its revenue.  OPM contracts due to loss in the cement division: The operating profit margin (OPM) contracted by 81 basis points YoY to 22.3% in Q2FY2012 on account of the cement division, which posted a loss to the tune of Rs29 crore on account of cost push and higher than expected pressure on cement realisation. However, the negative impact of the disappointing performance of the cement division was largely offset by a surge in the EBIT (in percentage terms) of the construction division by over 15 percentage points YoY to 36.1%. Consequently, the operating profit declined by 1.1% to R683 crore. SOTP valuation: We have re-visited our earnings estimates for FY2012 and FY2013 mainly to factor in the higher than expected cost pressure in the cement division and the better than expected profitability of its construction division. Consequently, the revised EPS estimates for FY2012 and FY2013 work out to Rs3.1 and Rs4.2.  We continue to like JAL due to its diversified business model and aggressive expansion plan. However, the huge cost pressure in the cement division and the fluctuating profitability of the construction division will be the key risks. In terms of valuation we continue to value the stock using the SOTP valuation methodology. We have valued the cement business at 6x FY2012 EV/EBITDA. We have valued the construction division at 6x EV/EBITDA. We continue to value the real estate business at 1x its net asset value. For power projects, we have considered those projects in our valuations that are either operational or financially closed. In terms of the hotel business, we have valued the same at 7x FY2012 EV/EBITDA. The fair value based on the SOTP method works out to Rs105 per share. We maintain our Buy recommendation on the stock with a revised price target of Rs105. At the current market price, the stock is trading at a PE of 21.7x FY2012 and 15.8x FY2013 earnings estimates. Phillips Carbon Black Cluster: Cannonball Recommendation: Buy Price target: Rs173 Current market price: Rs117 Price target revised to Rs173 Result highlights Sales grew on better realisation but volume performance was poor: The net sales of Philips Carbon Black Ltd (PCBL) grew by 35% year on year (YoY), supported by a 27% growth in the realisation of carbon black. However, the performance on the volume front was poor. The volume grew by 7% YoY (new capacity was added over the previous year) but declined by 8% sequentially, indicating a poor demand. We observed that the company has cut production compared to the Q1FY2012 levels and there was a significant rise in its inventory in H1FY2012. Both indicate a lower demand outlook. The sales from the power segment remained healthy with a 23% growth YoY but slipped by 18% quarter on quarter (QoQ).  Profitability hit by margin pressure: The operating profit margin (OPM) for Q2FY2012 slipped to 8.2% compared to the historical trend of 12-13%. One of the highlights of the cost was a large foreign exchange (forex) fluctuation loss of Rs10 crore (PCBL has foreign debt) due to the rupee's depreciation. Even if we adjust this expense (as the same is notional in nature), the OPM appears to be around 10%, which is still lower. Moreover, the employee cost was reported high in this quarter compared to the previous quarter due to a variable payment made by the company (historical data suggests the trend). Consequently, the operating profit declined by 9% YoY despite a 35% sales growth. Sequentially, on flat sales the operating profit declined by a whopping 40%.  Valuation and outlook: Given the apparent slowdown in the domestic demand, the company is likely to witness several challenges in the medium term. Moreover, a higher interest rate coupled with the depreciating rupee could further be challenging for the company for some time. Hence, we have cut our earnings estimates by 13% and 11% for FY2012 and FY2013 respectively. As a result, we have reduced our price target to Rs173 from Rs205, considering the likely headwinds the company is expected to face in the medium term. Nevertheless, we remain positive on the stock from a longer-term perspective given its leadership position in the growing Indian market and the stock's low valuation. At the current market price, the stock trades at 0.6x its FY2012E BV and 0.5x its FY2013E BV. It is available at 3x its FY2012 and FY2013 earnings estimates. Therefore, we retain our Buy rating on the stock with a revised price target of Rs173.    "Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article." Click here to read report: Investor's Eye

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