Fw: Investor's Eye: Update - Ashok Leyland, Fertiliser; Special - Q2FY2012 Oil & Gas earnings preview

 

 

Investor's Eye [October 05, 2011]  Sharekhan www.sharekhan.com

Summary of Content STOCK UPDATE Ashok Leyland Cluster: Ugly Duckling Recommendation: Buy Price target: Under review Current market price: Rs25 Are these signs of chocking? Underperformance in truck segment, a matter of concern: Ashok Leyland's medium & heavy commercial vehicle (MHCV) or truck volumes have significantly underperformed the competition in the April - August 2011 period. Industry data reveals that truck volumes grew by 9.9% year on year (YoY) between April - August 2011 whereas Ashok Leyland reported a dismal 11% decline in volumes during the same period. Consequently, the market share of the company in the truck segment dropped from 21% in June 2011 to 19.6% in August 2011. Valuation: Ashok Leyland's asset heavy strategy and southern market exposure has added high beta to its earnings. Our FY2012 estimates are based on the assumption that the company would achieve volumes of 1 lakh units for the financial year. This is 7% lower than the management's guidance. We will be reviewing our FY2012 earnings assumptions post Q2FY2012 results. However for the time being we are retaining our FY2012 estimates as well as the Buy recommendation on the stock. However, we are putting our target price under review.  SECTOR UPDATE Fertilisers Low volume offtake in the kharif season The aggregate sales volume for the 13 leading (mostly listed) fertiliser companies saw a decline during the recent kharif (July-September) season. The total sales volume declined by 16.8% as compared to last year, largely due to significantly lower imports this time around. The imports declined sharply due to extremely high prices globally and the deadlock between the Indian government and leading global complex fertiliser companies (specifically potash based fertiliser companies). In terms of locally produced fertilisers, the volume offtake of complex fertilisers dropped by 21.6% (tracking the aggregate of 13 leading companies) whereas the decline in urea's sales volume was limited to just 5% in the kharif season. The consumption of non urea fertilisers has declined mainly due to the non availability of raw materials and increase in price of non urea fertilisers. The supply of di-ammounium phosphate (DAP) and muriate of potash (MOP) was also tight internationally which has resulted in a steep increase in price, thereby affecting domestic consumption. Urea's sales volume for the kharif season (July to September) has decreased by 5% year on year (YoY). There was a decline in the sales volume of urea because its production was lower due to shortage of gas. We believe that going forward volume of urea will increase which will ultimately help pure urea manufacturers like Chambal Fertilisers and Nagarjuna Fertilisers. Any increase in the output of domestic gas will be allocated to fertiliser manufacturers as the government has listed the fertiliser sector as a priority sector and that too above power. Overall, the decline in imported non urea fertilisers during the current kharif season was of 40% YoY. The steep decline was mainly due to lower import of MOP and DAP. The import of NPK fertilisers has increased significantly as complex fertilisers are relatively easily available compared to MOP and DAP. Farmers have also started using complex fertilisers other than MOP and DAP due to growing awareness about the benefits of NPK fertilisers. We believe that there will be a healthy growth in the consumption of NPK fertilisers, which will have a positive effect on indigenous NPK manufacturers. This shift towards a higher use of NPK fertilisers will benefit manufacturers like Coromandel International. The consumption of DAP during the current kharif season has declined by 23% YoY as its imports declined. The availability of DAP was constrained in the international market, hence the decline in imports. Higher than expected demand and supply side constraints have kept the price of DAP strong. Currently the price of DAP is ruling firm at $665 per tonne. There was a sharp decline of 89% in the consumption of MOP during the current kharif season mainly due to its lower imports. Imports were lower due to a dead lock between Indian importers and global suppliers of potash over pricing. India imports 100% of its requirement of MOP (of 60 lakh tonne per annum) as it does not have the raw materials required to manufacture MOP. SHAREKHAN SPECIAL Q2FY2012 Oil & Gas earnings preview Brent crude oil price declined marginally; largely remained above $110 in Q2FY2012: During Q2FY2012, the average price of Brent crude oil hovered in the range of $105-120 per barrel. The average Brent crude price in Q2FY2012 stood at $112, which is approximately 5% lower over the last quarter. Nevertheless, it is 45% higher than in the corresponding period of last year. Hence, realisation of end products of exploration and production should replicate the trend. Sequentially a marginal decline in the realisation is expected. However, the dollar has appreciated in Q2FY2012 from Rs44.5 to Rs49, though the appreciation largely occurred in the last month of Q2FY2012 only.  Expect GRM to remain high: The Singapore gross refining margin (GRM) remained around $9 per barrel in Q2FY2012 as against $8.4 per barrel in Q1FY2012. Hence, we expect Reliance Industries Ltd (RIL) to report its GRM at around $10.7 per barrel in Q2FY2012. Macro environment signaling slow down; global oil demand may dip: Recently, the International Energy Agency (IEA) has reduced its forecast for global oil demand growth to 1.2% in CY2011 to 89.3mnbpd and 1.6% to 90.7mnbpd in CY2012. As stated in our previous report, we believe petrochem would get affected due to the apparent slow down. Even petrochemical prices declined sequentially in Q2FY2012 and are likely to remain subdued in the near future.  Outlook: Brent crude has declined mainly in the later part of the quarter; hence, the decline in the average crude price in Q2FY2011 has only been off 5% (sequentially). We observed a strong dollar appreciation and declining crude oil prices (due to weaker macro environment on account of the Europe crisis) in the tail end of the quarter. The scenario is likely to continue in Q3FY2012 as well. The full impact of the situation is likely to reflect fully in Q3FY2012. View and valuation: We retain our estimates for RIL and GAIL. We value RIL following the sum of the parts (SoTP) method at Rs1,040 and retain our Buy rating on it. We value GAIL at Rs567 based on the SOTP valuation method and retain our Buy rating on the stock. Click here to read report: Investor's Eye

Regards, The Sharekhan Research Team myaccount@sharekhan.com   www.sharekhan.com to manage your newsletter subscriptions