| Summary of Contents
| STOCK UPDATE Tata Global Beverages
Cluster: Apple Green
Recommendation: Hold
Price target: Rs123
Current market price: Rs110 Price target revised to Rs123 Result highlights -
Q4FY2012 results-margins improved YoY: Tata Global Beverages Ltd (TGBL)'s Q4FY2012 results are ahead of expectations largely on account of a higher than expected operating profit margin (OPM) and a lower incidence of tax during the quarter. The stand-alone (domestic) business was the highlight of the quarter with a volume driven revenue growth of 9.2% and close to 500-basis-point year-on-year (Y-o-Y) improvement in the OPM. Tata Coffee continues to disappoint on account of persistently lacklustre performance by the Eight O'clock business. However, with initiatives undertaken and stable coffee prices, Eight O'clock Coffee is expected to post a better operating performance in the coming quarters. -
Results snapshot: The consolidated net sales grew by 10.7% year on year (YoY) in Q4FY2012 largely driven by price hikes and the favourable impact of the rupee's depreciation. The consolidated gross profit margin (GPM) improved by 64 basis points YoY largely on account of lower tea prices YoY. The OPM improved by 73 basis points YoY to 10.8% in Q4FY2012. This was largely on account of a strong improvement in the tea segment's profit before interest and tax (PBIT) margin, which improved by 262 basis points YoY during the quarter. The operating profit grew by 18.8% YoY to Rs187.2 crore. This along with a sharp Y-o-Y decline in the interest cost and lower incidence of tax resulted in a 65.1% Y-o-Y growth in the adjusted profit after tax (PAT) before minority interest and share of profit from associates to Rs124.6 crore during the quarter (ahead of our expectation of Rs95.6 crore). -
Outlook and valuation: TGBL is focusing on diversifying from the business of commodities (tea and coffee) to the high-margin business of value-added products. The company has undertaken several initiatives which will help it to post better margins at a consolidated level in the coming years. However, we believe this transformation from a commodity business to value- added product business will take some time to reflect in the performance of the company. We expect the consolidated OPM to stand in the range of 9-10% over the next two years. However, going ahead any substantial increase in the prices of raw tea or coffee might have an adverse impact on the margins.
We have revised our price target to Rs123 (valuing the stock at 17x its FY2014E earnings per share [EPS] of Rs7.2). At the current market price the stock trades at 17.4x its FY2013E EPS of Rs6.3 and 15.2x its FY2014E EPS of Rs7.2. In view of the limited upside from the current level, we maintain our Hold recommendation on the stock. Madras Cements
Cluster: Cannonball
Recommendation: Hold
Price target: Rs152
Current market price: Rs136 Price target revised to Rs152 Result highlights -
Impressive performance; earnings in line with estimates: Madras Cements in its Q4FY2012 results delivered an impressive performance and posted a net profit of Rs99.1 crore (increased by 55.8% year on year [YoY]) which is in line with our estimates. The impressive performance during the quarter was on account of healthy growth in its volume as well as average realisation. Further the company has also benefited in terms of lower than expected effective tax rate (26.1% in Q4FY2012 as compared to 33.5% in Q4FY2011) and increase in other income by 73.9% YoY to Rs31.4 crore. -
Strong volume growth and healthy realisation drives revenue growth: The overall revenue of the company increased by 32.9% YoY to Rs911.9 crore which includes revenue of Rs6.7 crore from the windmill division. The revenue growth during the quarter was driven by a strong volume growth of around 13% YoY (on account of stabilisation of its new capacity and partial revival in the demand in the southern region). Further the average cement realisation has increased by 17.5% YoY to Rs4,572 per tonne on account of supply discipline followed by the cement manufacturers. The demand environment in the southern region has partially recovered, particularly in Tamil Nadu and Karnataka. In terms of realisation, we believe the average realisation for FY2013 will remain higher than the average realisation of FY2012. -
Margin contraction due to increase in cost of production: Inspite of an increase in the average cement realisation by 17.5% YoY, the operating profit margin (OPM) contracted by 286 basis points YoY to 21.9%. The contraction in the OPM is on account of increase in the cost of production. During the quarter the freight cost increased by 32.6% on a per tonne basis and other expenses increased by 78.5% to Rs135.3 crore (which also includes Rs10.2 crore towards foreign currency fluctuation loss). Further, a loss in the windmill division to the tune of Rs14.2 crore at the profit before interest and tax (PBIT) level has also contracted the overall OPM. Hence the overall cost of production has increased by 22.1% YoY on a per tonne basis. The EBDITA per tonne for the quarter increased by 3.4% YoY to Rs974. -
We fine-tune earnings estimates for FY2013 and FY2014: We have marginally fine-tuned our earnings estimates for FY2013 and FY2014 mainly to factor in higher than expected cement realisation. We also factor in a higher than expected freight cost and power & fuel cost. The revised earnings per share (EPS) for FY2013 now stands at Rs16.4 and for FY2014 we estimate the EPS to be at Rs18.2. -
Maintain Hold with a revised price target of Rs152: Going ahead we expect the cement offtake in the southern region to improve gradually. Hence we expect the company to post a volume growth of close to 6% in FY2013 as compared to a flat volume growth posted in FY2012. However, a failure to adhere to the supply discipline will be a key concern on the cement realisation and the profitability of the company. Further cost pressure in terms of power and fuel and freight cost is expected to pressure margin. Hence we maintain our Hold recommendation on the stock with a revised price target of Rs152 (valued at EV/EBITDA of 6x FY2013E). However, in the longer run we believe Madras Cements holds potential to deliver returns to investors due to its operational efficiency. At the current market price the stock trades at a price earning (PE) multiple of 8.3x, and EV/EBITDA of 5.7x its FY2013E earnings. Bharti Airtel
Cluster: Apple Green
Recommendation: Buy
Price target: Rs362
Current market price: Rs298 Qualcomm deal at reasonable valuation fits in the data game plan Event- Bharti Airtel acquires 49% stake in Qualcomm India for $165 million -
Bharti Airtel (Bharti) has acquired a 49% stake in Qualcomm's broadband wireless access (BWA business in India). Under the agreement, Bharti has made an initial investment of approximately $165 million (Rs924 crore) to acquire a 49% stake in the company that holds licenses in Delhi, Mumbai, Haryana and Kerala. The company will also assume proportionate debt of the entity. -
As per the press release, the stake purchase will happen partly by acquiring 26% equity held by Global Holding Corporation (GHP) and Tulip Telecom (each of them hold 13% stake) while Bharti will acquire the balance 23% stake via subscription to fresh equity. Implications & valuation of the deal -
In June 2010, Qualcomm had paid a consideration of Rs4,912 crore for acquiring the four mentioned licenses in Delhi, Mumbai, Haryana and Kerala. -
Post the auction, Tulip Telecom acquired a 13% stake in Qualcomm at Rs140 crore, implying an equity value of Rs1,076 crore for the aggregate four licenses. -
Bharti's acquisition of 49% stake comes at an equity valuation of Rs924 crore ($165 million; at an exchange rupee dollar rate of 56). -
Based on the Tulip deal and implied valuation, we believe Bharti would be close to shelling out 1.17-1.2x the initial price paid by Qualcomm. Our view -
We view this acquisition by Bharti to be positive strategically as well as valuation wise, as post the acquisition, Bharti now has presence and 4G access in the most lucrative Mumbai and Delhi circles, while it's overall 4G presence increases from four circles to eight circles now. -
Reliance Industries Ltd (RIL) had acquired a 100% stake in Infotel enterprise, gaining a nationwide footprint in the data segment and is planning to roll out its 4G services by the end of 2012. We believe this acquisition further provides impetus and increases the competitive positioning for Bharti vis-a vis RIL as now both have licenses in the lucrative circles- Mumbai, Delhi, Kolkata, Maharashtra. -
Despite a good operational performance in Q4FY2012, Bharti has seen a strong correction in its stock price (down 9% in one month, 16% in three months) owing to the regulatory uncertainty and overhang. We believe at 6.2x FY2014 EV/EBITDA the stock captures the negatives. Coupled with the same the company is much resilient and relatively better placed when compared to its peers in terms of financials and the cash flow position. Thus we continue to prefer Bharti in the telecom space. We have a Buy rating on the stock with a price target of Rs362.
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