Fw: Investor's Eye: Pulse - RBI Q1FY2013, Monetary policy review; Update - Ipca Laboratories, Zydus Wellness, GAIL India, Allahabad Bank; Viewpoint - Cipla, Titan Industries

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Subject: Investor's Eye: Pulse - RBI Q1FY2013, Monetary policy review; Update - Ipca Laboratories, Zydus Wellness, GAIL India, Allahabad Bank; Viewpoint - Cipla, Titan Industries

 

Investor's Eye [July 31, 2012]  Sharekhan www.sharekhan.com

Summary of Contents PULSE TRACK RBI Q1FY2013, Monetary policy review  RBI keeps policy rates unchanged, raises the ante on inflation and revises down GDP estimates: As expected, the Reserve Bank of India (RBI) in its Q1FY2013 monetary policy review kept the key policy rates (repo rate at 8.0% and, cash reserve ratio [CRR] at 4.75%) unchanged. However, the central bank surprised by reducing the statutory liquidity ratio (SLR) rate by 100 basis points in order to improve the liquidity in the system.  The RBI raised the ante on inflation by raising its inflation forecast to 7% (6.5% earlier) by March 2013 due to deficient monsoons, inherent supply constraints and suppressed inflation from subsidised energy prices. Since other factors (policy bottlenecks) are responsible for a dip in the growth, the RBI believes that easing rates at this point would not necessarily boost growth but would risk higher inflation. Notwithstanding the downward revision in the GDP estimates to 6.5% in FY2013, the RBI seems to have taken a more aggressive stance this time around. STOCK UPDATE Ipca Laboratories Cluster: Ugly Duckling Recommendation: Buy Price target: Rs436 Current market price: Rs400 Q1FY2013 results: First-cut analysis Result highlights Q1FY2013 revenue in line with expectations; institutional revenue seems to have declined: Ipca Laboratories (Ipca)'s net sales jumped by 19.7% year on year (YoY) to Rs630.3 crore in Q1FY2013, which is broadly in line with our estimates. The revenue was mainly driven by the formulation business in the domestic market, which grew by 18.6% YoY to Rs224.2 crore (outperforming the industry growth rate of near 15%) and the active pharmaceutical ingredient (API) business which grew by 39% YoY to Rs181.6 crore. The API business got a boost from the consolidation of Tonira Pharma. The growth in the domestic market has been better than that in the six sequential previous quarters, when the company witnessed the impact of sales force restructuring and addition of new field force. However, the revenue from the institutional business seems to have declined during Q1FY2013 as exports of formulations (including institutional tender business) recorded a meager 8.7% YoY rise, despite the benefits of a favourable currency.  Healthy rise in margin; reversal of trend: A better product mix helped the company to record a healthy rise in the operating margin by 460 basis points YoY to 21.8%. This is a reversal of trend, as Q1 records generally lower margin due to seasonality involved in some products. Even on a quarter on quarter (QoQ) basis, the margin expanded by 206 basis points. A strong revenue from the domestic market and synergies from Tonira Pharma are some of the factors which contributed towards the expansion in margins.  MTM forex loss impacts bottom-line; expect subsequent reversals: During Q1FY2013, the company provided for a foreign exchange (forex) loss of Rs58.85 crore against a forex gain of Rs9.10 crore in Q1FY2012. The forex loss partly represents forex differences on transactions and partly loss on translation of derivatives covering forex exposure. The translation provision is subject to further adjustments and we expect a part of it to be reversed in the subsequent quarters, assuming the Indian Rupee does not see any sharp movement against major currencies in the subsequent quarter. Due to the forex loss provision, the net profit after tax declined by 30% YoY to Rs43 crore.  Valuation: The stock is currently trading at 12x average earnings for FY2013E and FY2014E. We have a Buy rating on the stock with a target price of Rs436 (implies 13x average earnings for FY2013E and FY2014E).  We will come-out with a detailed note after an interaction with the company's management. The company is holding teleconference calls with analysts tomorrow (August 1, 2012) at 11 am.    Zydus Wellness Cluster: Emerging Star Recommendation: Hold Price target: Rs430 Current market price: Rs416 Price target revised to Rs430 Result highlights Result ahead of expectation: Zydus Wellness' Q1FY2013 results have come ahead of our expectations largely on account of a better than expected operating performance during the quarter. The highlight of the quarter was the significant increase in the gross margins by close to 700 basis points year on year (YoY). The company has significantly enhanced its media spends towards its key brands. This has helped Zydus Wellness to witness a strong revival in the performance of some of its key brands (including Sugarfree and Everyuth) during the quarter. Gross revenues grew by 14%: Zydus Wellness' revenue growth has revived in the last two quarters on the back of increased media spends towards key brands. The gross revenues grew by 13.9% YoY to Rs103.3 crore. The company has to pay excise duty on production from the Sikkim facility (which got fully operationalised from Q2FY2012). Hence the net sales grew by just 4% YoY to Rs94.4 crore in Q1FY2013. The Sugarfree brand has witnessed a revival in revenue growth from mid-single digits to high single digits while the Everyuth brand has achieved better revenue growth in comparison to some of the previous quarters. Nutralite's growth remained in lower single digits during the quarter. Profitability improves Y-o-Y: The gross margins improved by 681 basis points YoY to 71%, largely on account of improved revenue mix and the price hike of ~5% undertaken in the product portfolio at the end of Q4FY2012. The large savings at the gross margin level were utilised towards advertisement activities for various brands. The ad-spends as a percentage to sales stood at 33.3% in Q1FY2013 as against 25.3% in Q1FY2012. Hence the operating profit margin (OPM) improved by 228 basis points YoY to 16.3% (ahead of our expectation of 15.3%) during the quarter. The operating profit grew by 20.8% YoY to Rs15.4 crore in Q1FY2013. Though the palm oil prices have softened from their highs, the significant depreciation in the rupee will keep the key input prices higher in the domestic market. Hence the palm oil prices have to be keenly monitored in the coming quarters. PAT growth aided by lower tax: The adjusted profit after tax (PAT) grew by 63.7% YoY to Rs13.7 crore. The strong bottom line growth was driven by an improvement in the margins and lower tax expenses Y-o-Y during the quarter. The tax expenses were down by 27.8% YoY to Rs4.1 crore, as the company is gaining tax benefits from its Sikkim facility.  Outlook and valuation Zydus Wellness is targeting revenues of Rs500 crore by FY2014. In view of this the company has increased its focus on enhancing the product portfolio by introducing new variants under umbrella brands and expanding the reach of its products in the domestic market. This will help it to improve the growth prospects in the coming years. We expect the company's top line to grow at a compounded annual growth rate (CAGR) of 9% and the bottom line to grow at a CAGR of 11% over FY2012-14. We have revised upwards our price target to Rs430 (valuing the stock at 20x its FY2014E earnings which is at a 23% discount to the FMCG basket valuation of 26x). With visibility of little upside in the stock price from the current levels, we maintain our Hold recommendation on the stock. At the current market price the stock is trading at 22.2x its FY2013E earnings per share (EPS) of Rs18.8 and 19.3x its FY2014E EPS of Rs21.5. GAIL India Cluster: Apple Green Recommendation: Buy Price target: Rs410 Current market price: Rs353 Robust Q1 performance unlikely to sustain Result highlights Earnings ahead of estimated with better margin and lower subsidy: GAIL reported sales at Rs11,112 crore, in line with our estimate. However, the profit after tax (PAT) was reported significantly (47%) above our estimate with better than estimated margins in the LPG segment and natural gas (NG) trading business. However, the big push came from the lower than expected subsidy burden (at Rs700 crore vs our estimate of Rs838 crore).  Growth driven by LNG trading and LPG business: Sales grew by 25% year on year (YoY) and 6% quarter on quarter (QoQ) during Q1FY2013. The Y-o-Y sales growth was predominantly driven by better realisation in the NG trading business and LPG and liquid hydrocarbons (lower subsidy contribution). Sequentially, a healthy gain in the LPG and liquid hydrocarbons segment was partially offset by lower sales in the petchem segment (due to lower volume as a result of plant shut down for 17 days).  Margin expansion across segments except petchem business: In absolute terms, LNG trading and LPG and liquid hydrocarbons contributed to the growth at the profit before interest and tax (PBIT) level, overcompensating the dip in the profit of the petchem business which was affected by lower volume. The LNG trading business witnessed margin expansion (102 basis points YoY and 354 basis points QoQ), despite flattish or negative volume, indicating a strong improvement in realisation. Again, the LPG and liquid hydrocarbons segment reported better profitability influenced by improved realisation. Further, a significantly lower subsidy over Q4FY2012 reflects in improved profitability of the LPG and the liquid hydrocarbons segment.  Upcoming projects improve long term outlook: A new LNG terminal at Dabhol is likely to be commissioned in the next five to six months (by December 2012) and the next LNG terminal at Kochi is expected to be commissioned in December 2013. Further, its petchem capacity expansion at Pata, Uttar Pradesh has seen 45% execution progress as of now and is expected to be commissioned by December 2013. The company plans for a capital expenditure (capex) of Rs7,354 crore in FY2013 and Rs7,260 crore in FY2014. Out of the capex requirement, around 55% would be met from borrowing while the remaining is expected to be sourced from internal accruals. GAIL has recently raised Rs750 crore of INR bond and is looking to finalise around $450 billion of foreign exchange debts in a month's period.  Retain Buy with price target of Rs410: Recently, PNGRB cut tariff in one of GAIL's pipeline Dadri-Bawana-Nangal (DBN) by ~57% to Rs11.85/mmbtu, based on difference between some factors submitted by GAIL. Therefore we have incorporated that tariff revision and consequently reduced our estimates by 1-2% for FY2013 and FY2014. However, we continue to remain positive on GAIL considering that most of its pipelines' tariff is approved by the regulator. Further, we believe the Dhabol and Kochin LNG terminals would give volumes in two years time from now. We retain our target price of Rs410 per share.  Allahabad Bank Cluster: Cannonball Recommendation: Buy Price target: Rs205 Current market price: Rs134 Price target revised to Rs205 Result highlights Allahabad Bank's Q1FY2013 results came in ahead of estimates as the net profits grew by 22.9% year on year (YoY; 28.4% quarter on quarter [QoQ]) to Rs514 crore. This was largely contributed by a decline in the provision expenses and lower tax rates (20% vs 26.6% in Q1FY2012). The net interest income (NII) was in line with our estimates as it grew by 11.1% YoY and 1.4% QoQ to Rs1,306 crore. The net interest margin (NIM) declined 5 basis points QoQ to 3.17%. The current account savings account (CASA) ratio also declined sequentially (29.6% vs 30.5%). The advances grew by 11.9% YoY and remained flat sequentially. The incremental advances growth was in the corporate segment (1.1% QoQ) and the retail segment 1.4% YoY. However the small and medium enterprise (SME) and agri advances declined on a Q-o-Q basis by 2.9% and 2.2% respectively. The asset quality came under stress as the bank reported slippages of Rs590 crore (2.1% annualized), mainly from the priority segment. Further, the bank also restructured Rs4,777 crore of advances during the quarter of which Rs3,100 crore were accounted by state electricity boards (SEBs). The recoveries were strong; the bank recovered Rs235 crore which led to a lower net addition to non performing assets (NPAs).  The non-interest income grew by 8.3% YoY (12.8% QoQ) mainly driven by an 8.9% YoY (-12.3% QoQ) growth in the commission income. The cost to income ratio grew to 40.8% for the quarter as against 39.1% in Q1FY2012 (45.2% in Q4FY2012).  Outlook and valuation Allahabad Bank reported better than expected numbers on the back of lower provisions and tax rates. Though asset quality concerns remain, we derive comfort from the higher recoveries and better provision coverage compared to peer banks. We expect Allahabad Bank to maintain its return on equity (RoE) of ~17% and return on assets (RoA) of ~1% going ahead. Due to revision in our estimates, our target price gets revised to Rs205 (0.9x FY2014 adjusted book value [BV]). We maintain our Buy rating on the bank. VIEWPOINT Cipla        Beats expectations Result highlights Strong domestic sales fuel top-line growth: Cipla has reported a strong performance during Q1FY2013 on the back of strong revenue from the domestic market and surge in operating margins on a better product mix. The net sales of the company jumped by 23.7% year on year (YoY) to Rs1,917 crore on a 30% YoY rise in revenue from domestic formulations and a 23% YoY rise in revenue from export formulations. However, the revenue from the active pharmaceutical ingredient (API) segment declined by nearly 2% YoY to Rs168 crore.  OPM expands by 484 bps on better product mix: The operating profit margin (OPM) expanded by 484 basis points to 26% during the quarter mainly on account of a better product mix (lower proportion of anti-retrovirals and high contribution of anti-depressants, mainly Esciltalopram) and a favourable currency movement. As a result, raw material costs declined to 38.2% of net sales during the quarter from 43.1% in Q1FY2012. PAT jumps by 58% despite higher effective tax rate: During the quarter the effective tax rate rose by 198 basis points YoY to 22.8%. Nonetheless, the net profit after tax rose by 58.2% YoY to Rs400.8 crore, which is much higher (33%) than our as well as the street's estimates.  No major capex going forward: The company is expected to spend Rs400-500 crore as capital expenditure (capex), mainly towards setting up an API facility and research and development (R&D) centers in FY2013. Going forward, the company has major capex commitments. This would give better leverage and the return on capital is likely to improve significantly.  Management revises FY2013 guidance: A strong Q1FY2013 performance has prompted the management to revise its guidance for FY2013. The revenue growth guidance has been revised to near 15% for FY2013 while the net profit growth guidance has been revised upward to 15-20% (earlier, the revenue growth guidance and profit growth guidance were at 10% and 15% respectively). Outlook and view: Cipla's Q1FY2013 performance has been a positive surprise. Although a few non-recurring items like supply of Esciltalopram (brand name - Lexapro; Teva has exclusivity on this product till August 2012) which must have earned thick margin, may not fetch similar profits in H2FY2013. Also, supplies of anti-retroviral (ARV) products which make discrete appearance in the revenue line as and when a related tender comes up, may dilute the margin of the company. But in Q1FY2013, we believe the base business itself has shown a better operating performance . We expect the domestic branded business to continue to post a 15% plus growth on a sustainable basis while exports revenue would be driven by key product supplies including inhalers which contribute nearly 15% of exports. We have a positive view on the company and expect it to record a 14% compounded annual growth rate (CAGR) in revenue and 20% CAGR in profit over FY2012-14E. The stock is currently trading at 18x FY2014E earnings per share (EPS), which is at a 27% discount compared to Sun Pharma (trading at 23x FY2014E EPS).    Titan Industries        Bleak performance Titan Industries (Titan)' Q1FY2013 results were below our expectation on the revenue and the earnings front. The top line / EBITDA and net earnings grew at 9.2%/14.3% and 9% year on year (YoY) respectively. This is among the lowest growth in revenue reported by the company in the last ten quarters, and is led by volume contraction in the jewelry segment (result of high price volatility, slowing discretionary demand and less marriage dates in the quarter).   Key negatives Jewelry sales grew at a mere 8.7% YoY for the quarter, volume contracted 21% YoY, while prices increased by ~30% over the same period. The same store sales growth also came off from high teens to single digits while the Gold plus format reported an 8% decline in the same store sales growth. The watches business too showed growth moderation, and witnessed a volume decline of 3% YoY for the quarter. Key positives Jewelry margin expanded by 30 basis points YoY, led by an increase in share of studded jewelery in the total jewelery sales (studded jewelry's contribution was 25% to total jewelry sales). Retail expansion momentum continues to be strong. For the quarter, Titan added 20 new stores, taking the overall retail area to 1.08 million sq ft. The loss from the others segment (includes precision engineering and eyewear) came off from Rs3.6 crore in Q1FY2012 to Rs1.6 crore for the quarter under consideration.     Click here to read report: Investor's Eye Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.

Fw: Investor's Eye: Update - ITC, Bharat Heavy Electricals, Mahindra Lifespace Developers, Raymond; Special - Monthly economy review

 

 

Investor's Eye [July 26, 2012]  Sharekhan www.sharekhan.com

Summary of Contents  STOCK UPDATE ITC Cluster: Apple Green Recommendation: Hold Price target: Rs271 Current market price: Rs249 Price target revised to Rs271 Result highlights Results in line with expectation: ITC's Q1FY2013 results are broadly in line with our expectation with the bottom line growing by 20.2% year on year (YoY) to Rs1,602.1 crore. As anticipated, the sales volume of the core cigarette business stood flat during the quarter. The highlight of the quarter was once again the strong performance of the non-cigarette fast moving consumer goods (FMCG) business whose revenues grew by 23.0% YoY and whose losses declined by 52.0% YoY during the quarter. The hotel business disappointed with flat revenues and a drop in the business profitability during the quarter.  Performance snapshot: The income from operation (including the other operational income) grew by 14.7% YoY to Rs6,713.1 crore in Q1FY2013, marginally lower than our expectation of Rs6,848.2 crore. The steady top line growth could be attributed to 15% year-on-year (Y-o-Y) revenue growth in the core cigarette business and above 20% Y-o-Y growth in the non-cigarette FMCG business. The higher sales realisation (especially in the core cigarette business) and the improved revenue mix aided the gross profit margin (GPM) to improve by 109 basis points YoY to 61.6%. The operating profit margin (OPM) improved by a strong 183 basis points YoY to 35.3%. Hence, the operating profit grew by 21.0% YoY to Rs2,368.3 crore and the reported net profit grew by 20.2% YoY to Rs1,602.1 crore.  Segmental performance: The performance of the core cigarette business was in line with expectations with a 15% Y-o-Y growth in the gross revenues and a 142-basis-point Y-o-Y improvement in the PBIT margins to 31.3% in Q1FY2013. The cigarette sales volume affected by a significant price increase in the cigarette portfolio stood almost flat during the quarter. Q1FY2013 was the fourth consecutive quarter of above 20% revenue growth YoY in the non-cigarette FMCG business. The agri business' revenues stood flat YoY but the PBIT margin improved by 93 basis points YoY to 10.1% during the quarter. The first quarter of a fiscal is normally a lean period for the hotel industry in India. This along with the macro uncertainties in the global markets led to flat revenues and a sharp decline of above 1,000 basis points in the PBIT margin of the hotel business during the quarter. Outlook and view: We broadly maintain our earnings estimates for FY2013 and FY2014. We expect the non-cigarette FMCG business to maintain the strong growth momentum in the coming quarters. ITC's cigarette business sales volumes are likely to remain flat in FY2013, but its revenues are expected to grow by ~18% YoY largely on account of the price increases undertaken in the cigarette portfolio. The hotel business is expected to improve with an improvement in the global macro environment. Overall, we expect ITC's top line to grow at a compounded annual growth rate (CAGR) of 17.2% over FY2012-14. With an OPM of about 36%, we expect the bottom line to grow at a CAGR of 21.0% over FY2012-14.  At the current market price the stock is trading at 26.6x its FY2013E earnings per share (EPS) of Rs9.4 and 22.1x its FY2014E EPS of Rs11.3. In the last twelve months ITC has traded at an average one year forward multiple of 24.0x on the back of its strong business performance. We have revised our price target upwards to Rs271 (based on 24x its FY2014E EPS of Rs11.3). However we maintain our Hold recommendation on the stock due to limited upside in the stock price from the current level.    Bharat Heavy Electricals Cluster: Apple Green Recommendation: Hold Price target: Rs250 Current market price: Rs212 Robust performance but fall in order book a concern Result highlights Results above expectation, future growth uncertain: The Q1FY2013 results of Bharat Heavy Electricals Ltd (BHEL) were above expectation due to good order execution and a foreign exchange (forex) gain of Rs140 crore. The order inflow continues to be subdued aggravating the concerns about the company's growth. The management maintained its order inflow guidance of Rs60,000 crore in FY2013 (less than 10% of this target was achieved in Q1FY2013) which looks an uphill task in the current environment of slow industrial capital expenditure (capex) and tough competition.  Robust 18% growth in revenue: In Q1FY2013, the turnover of BHEL grew by 18%, which was higher than our expectation of a 10% year-on-year (Y-o-Y) growth. The industry division's revenues grew by a robust 19% year on year (YoY). The power division also reported a pick-up in execution with a 17% yearly growth in its revenues.  Margin stable at 13.1%: The company reported an operating profit margin (OPM) of 13.1%, which was lower than our expectation of 13.5% but higher than 13% posted in Q1FY2012. An increase in the raw material cost was largely in line with the increase in the revenues. The other expenses jumped by 32% YoY, led by higher provisioning as well as power and freight charges. In terms of segments, the power segment reported a rise in its PBIT margin to 17.8% from 16.5% in Q1FY2012 whereas the industry segment reported slight margin pressure at 21%.  PAT increased by 13% YoY: The other income rose by a subdued 10% YoY as a result of a jump in the foreign exchange (forex) gain of approximately Rs140 crore while the interest on cash and deposits fell on a lower base. The depreciation charge jumped by 34% YoY on the capital expenditure (capex) undertaken in the later part of FY2012. The adjusted net profit rose to Rs920.9 crore, which was above our estimate of Rs854 crore. Disappointing order backlog position for the quarter: The company's order book stood at Rs132,900 crore (down 17% YoY and 2% on a sequential basis) at the end of Q1FY2013 as against Rs159,600 crore at the end of Q1FY2012. The power sector accounted for 80% of the orders, the industry 13% and the rest was contributed by exports. The reported order inflow for the quarter was Rs5,590 crore (up 126% YoY on an extremely low base and 18% down sequentially). The order booking from the power sector stood at Rs3,797 crore (2,970MW); the industrial segment's order intake plummeted by 62% YoY to Rs833 crore. The book/bill ratio declined further to 2.6x (the lowest in 24 quarters) from the past levels of 4x+, which has aggravated the concerns about its growth. It indicated that the order inflow could pick up in the subsequent quarters on the back of a pick-up in the power sector's orders. The company is also increasingly focusing on non-power sectors like railways, transport, power transmission and distribution as well as exports to diversify away from the power sector.  Estimates maintained: We had sharply downgraded our earnings estimate in FY2012 when the company had reported a 63% fall in the order inflow. Hence, after the decent Q1 results, we are for now maintaining our estimates. Overall, we are estimating a negative compounded annual growth rate (CAGR) of 1% in the top line and that of 2% in the adjusted earnings over FY2012-13. The management maintained its order inflow guidance of Rs60,000 crore in FY2013 (less than 10% of this target was achieved in Q1FY2013) which looks an uphill task in the current environment of slow industrial capex and tough competition. The company is hoping to achieve this target by winning some major orders in the power and transmission & distribution sectors in the coming quarters.  Future growth visibility remains a concern, maintain Hold: Overall, the company's performance was outstanding but it continued to disappoint with a sluggish order inflow. The long awaited import duty on power equipment has been recently approved by the government. However, the move is perceived to be too late to be effective as most of the ordering for the 12th Five-Year Plan has already taken place and the move is likely to benefit once the ordering for the 13th Five-Year Plan starts. BHEL's management also stressed that the import duty might help only to the extent of a 4% differential duty to the domestic players after accounting for the excise duty and the high import content in the super-critical power projects (which account for 25-30% of the equipment cost). Further, the domestic boiler and turbine manufacturing capacity is likely to face an overcapacity situation by 2015, which is likely to intensify the pricing competition. The supercritical orders expected from NTPC could boost BHEL's order book in the coming quarters. But these orders are also largely priced in now. Due to a lack of any near-term trigger we see limited upside from the current level. Hence, we maintain our Hold rating on the stock. At the current market price, the stock trades at 7.6x FY2014E earnings. We maintain our price target of Rs250 (9x FY2014E).    Mahindra Lifespace Developers Cluster: Vulture's Pick Recommendation: Buy Price target: Rs400 Current market price: Rs324 Property sale boosted earnings Result highlights One-time item boosts Q1 results: For Mahindra Lifespace Developers (MLD) the divestment of the Ghatkopar property resulted in a strong revenue growth of 27.8% in Q1FY2013 and a 71.2% surge in the net profit to Rs29.3 crore. The management has not disclosed the exact amount from the sale of the Ghatkopar property. But it has indicated that after adjusting for the same the revenues would have declined by close to 20% YoY and the operating profit margin (OPM) would have been maintained sequentially while the profit after tax (PAT) would have been flat. The same would have been in line with our expectations.  Sales booking continues to be muted; added two new land parcels: The sales booking continued to be muted in Q1FY2013 with MLD recording sales of Rs52 crore (0.16 million square feet [mn sq ft]) vs sales of Rs53 crore (0.13mn sq ft) in Q4FY2012 and Rs172 crore (0.34mn sq ft) in Q1FY2012. The sales primarily took place in its Nagpur project Bloomdale where it also launched the second phase during the quarter. MLD is awaiting approvals for its projects at Pune, Hyderabad and the subsequent phases of Iris Court at Chennai. During the quarter, the company acquired two new land parcels in Chennai and Pune each with the total developable area being 0.8mn sq ft. In Chennai, it will be coming out with its first affordable housing project.  Muted addition of clients in MWC Jaipur: At Mahindra World City (MWC), the integrated business city promoted by the company, the total number of operational facilities grew by one (as compared with the previous quarter) to 39 vs 60 in Chennai. On the other hand, in Jaipur three clients were added to the operational list taking the count to 11 with another eight having initiated developments. At MWC Chennai and MWC Jaipur MLD also added two clients and one client respectively in the domestic tariff area. Further, during the quarter exports also commenced from the Handicrafts Zone in MWC Jaipur. Approvals hold the key: MLD has already sold more than 75% of its ongoing projects and execution on a majority of them is in advanced stages. Thus, the revenue visibility now completely depends on the new launches, which, in turn, depend upon the pending approvals. For the next two to three years MLD has a strong pipeline of 6.48mn sq ft awaiting approvals. Hence, timely approvals hold the key. Currently, it is awaiting final approvals for its projects at Pune and Hyderabad both of which got environmental clearance in Q1FY2013 and the subsequent phases of Iris Court at Chennai. All three are expected to be launched by the end of Q2FY2013. Any further delay in it might pose a problem for the company.  Maintain Buy with price target of Rs400: We continue to like MLD due to the quality of its management and its strong balance sheet that can be leveraged for acquiring new land parcels in the distressed markets and for better execution of the existing land bank. But we continue to attribute a 10% discount to our net asset value (NAV) to factor in the risk of the projects getting further delayed on account of a delay in obtaining clearances. Hence, we maintain our Buy recommendation on the stock with a price target of Rs400. We would revisit our estimates after H1FY2013 once we get more clarity on the pending approvals for a few of its projects. At the current market price, the stock is trading at 0.8x its NAV, 10.6x FY2013 earnings estimate and 1.1x FY2013E price/book value (P/BV).    Raymond Cluster: Ugly Duckling Recommendation: Buy Price target: Rs463 Current market price: Rs335 Price target revised to Rs463 Result highlights Q1FY2013's performance dismal on poor show by core textiles and branded apparels: Raymond posted dismal results for Q1FY2013, mainly led by a subdued performance in its core textile and branded apparel business. The revenue growth was muted at 10% year on year (YoY); it was largely in line with our estimates. Multiple factors like- (a) a sharp change in the product mix (fall of polyester wool's contribution by 400 basis points), (b) lack of wedding dates and (c) a general slowdown in the macroeconomic environment took a toll of the profitability of the textile business (reported an earnings before interest and tax [EBIT] loss of Rs8.6 crore for Q1FY2013 vs a profit of Rs24.1 crore in Q1FY2012), and also of the branded apparels business. Raymond reported a loss at the profit before tax (PBT) level and at the net level. The consolidated net loss for the quarter was Rs35 crore vis a vis a profit of Rs10.7 crore in Q1FY2012. Branded apparels & Retail continue to face challenges: On the branded apparels front, a visibly high slowdown in the consumer discretionary space impacted sentiments as was reflected in the negative same store sales growth (same store sales growth registered a 3% decline for the quarter). Consequently there was a contraction in the overall revenues of the branded apparels business. Low sales with high fixed overheads adversely impacted the margin (the same contracted by 710 basis points from 13% in Q1FY2012 to 5.8% in Q1FY2013). The management in the conference call reiterated that the macro environment still appears gloomy till the festive season that would start later this year by Q3FY2013.  Our estimates stand revised downwards: Building in the pathetic performance of Q1FY2013, and further expecting Q2 and early Q3 to remain subdued, and expecting a recovery from late Q3FY2012 on account of festive season demand coupled with a favourable base of FY2012, we revise our FY2013 earnings estimate downwards by 15% from Rs30.4 to Rs25.8, while for FY2014 the estimates get tweaked downwards by 5.8% on a revised earnings per share (EPS) of Rs34.8 (from Rs36.9 earlier).  We find value at current price; maintain Buy: Despite a weak Q1FY2013 performance (which lead us to reduce our FY2013 estimates), we continue with our bullish stance on Raymond as we expect the revival in consumer discretionary spent to start by late Q3FY2013 and continue till FY2014. Thus we expect Raymond to post a strong performance in FY2014. Besides performance, we believe that Raymond's strong brand equity strength, unmatched distribution network, strong focus on rejuvenating and innovating brands and increasing consumer connect are yet not captured in the valuations (Raymond currently trades at <10x its FY2014 price earning ratio [PER]). Further, any development with regard to the Thane land in the form of either joint development or disposal would lead to value unlocking and provide significant cash to the company. We continue to maintain our Buy rating and our revised sum of the parts (SOTP) based price target for the stock of Rs463 (valuing the core business at 10.5x FY2014E earnings +50% value for the Thane land bank parcel).  SHAREKHAN SPECIAL Monthly economy review   Economy: industrial growth remains subdued; inflation remains above RBI's comfort zone In May 2012 the Index of Industrial Production (IIP) increased by 2.4% after remaining in the negative territory in the previous two months. The higher than expected growth for the month was led by a 2.5% growth in the manufacturing sector and a 5.9% growth in the electricity sector. The April 2012 IIP numbers have been revised downwards to -0.9% from 0.1%. For year-till-date (YTD) FY2013, the IIP growth stood at 0.8% vs 8.2% in the previous year.  The Wholesale Price Index (WPI)-based inflation for June 2012 came in at 7.25% as against 7.55% in May 2012. The same was slightly below the market's expectation. However, the inflation rate for April 2012 has been revised upwards sharply to 7.5% from the provisional figure of 7.23% led by an upward revision in the fuel segment. The trade deficit for June 2012 came in at $10.3 billion, lower than the trade deficit recorded in May 2012. The trade deficit declined by 27% year on year (YoY). The growth in the exports remained weak showing a decline of 13.5% YoY (down 4.2% in May 2012). The imports saw a decline of 5.5% YoY (as against a decline of 7.4% in May 2012). Banking: Government policy action remains key to RBI action Though in the forthcoming policy meet on July 31, 2012 the market's expectation of a rate cut by the Reserve Bank of India (RBI) is not significant, but if the government takes any major action on the diesel pricing front the RBI may surprise with a 25-basis-point reduction in the cash reserve ratio (CRR)/repo rates.  The credit offtake registered a growth of 17.7% YoY (as on July 13, 2012), which was in line with the growth recorded in the previous month. The credit growth is broadly in line with the RBI's guidance of 17%. The deposits registered a growth of 14.7% YoY (as on July 13, 2012), which is higher than the 14.3% growth seen during the previous month (on June 15, 2012). The growth in the deposits has been subdued due to the higher yields offered by the other debt instruments. The credit/deposit (CD) ratio was at 75.9% (as on July 13, 2012), marginally lower than 76.4% seen as on June 15, 2012. Meanwhile, the incremental CD ratio increased to 88.9% for the period and was lower than the ratio seen during the previous month, reflecting a lower credit offtake during the period. The yields on the government securities (G-Secs; of ten-year maturity) stood at 8.07% as on July 23, 2012, in line with the previous month's figure. The G-Sec yields across the long-term maturities have remained stable on a month-on-month (M-o-M) basis but have declined in the short term. Equity market: FIIs remain buyers  During the MTD period in July 2012 (July 1-23, 2012), the FIIs were the net buyers of equities and the domestic mutual funds were the net sellers of equities. For the MTD period in July 2012 (July 1-23, 2012), the FIIs bought equities worth Rs9,377 crore while the mutual funds sold equities worth Rs2,225 crore.   Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.

Fw: Investor's Eye: Update - Ashok Leyland, Lupin, Wipro, Hindustan Unilever, Larsen & Toubro, Torrent Pharmaceuticals, Polaris Financial Technology, Telecommunications; Viewpoint - Idea Cellular

 

 

Investor's Eye [July 24, 2012]  Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE Ashok Leyland Cluster: Ugly Duckling Recommendation: Hold Price target: Rs28 Current market price: Rs23 Q1FY2013 results: First-cut analysis Result highlights Ashok Leyland's Q1FY2013 results: PAT 23% below estimates on higher employee and interest costs Ashok Leyland Ltd (ALL)'s performance in Q1FY2013 was significantly below our and the street's estimates. Higher employee costs impacted the operating margin that came in 70 basis points below our estimates at 8%. Higher interest costs further marred profitability leading to a profit after tax (PAT) of Rs67 crore, 23% below estimates. Positive surprises Contribution per vehicle improved on a sequential basis despite increased proportion of buses and the traded light commercial vehicle (LCV) Dost. Depreciation at Rs89 crore was below our estimates of Rs98 crore. Negative surprises  Employee costs increased on both, year-on-year (Y-o-Y) and quarter-on-quarter (Q-o-Q) basis. The employee/sales at 8.9% was much above our expectation of 7.1%. Financial charges at Rs83 crore were higher on a sequential basis despite of it being a seasonally lean period. This may be due to higher inventory levels at the stockyard. Valuation In the recent analyst interaction of July 4, 2012, the company maintained its volume guidance of 1.07 lakh units ex-Dost but lowered its FY2013 margin guidance to 10%. We would seek further clarity on volume and margin expectations from the conference call to be held tomorrow. We maintain our Hold recommendation on the stock but may revise our estimates post an interaction with the management in our subsequent note.    Lupin Cluster: Apple Green Recommendation: Buy Price target: Rs597 Current market price: Rs582 Q1FY2013 results: First-cut analysis Result highlights An impressive all-round performance; higher tax incidence affects profit: Lupin reported better than expected revenues and profit for Q1FY2013 on a good all-around performance during the quarter. Its net sales grew by 42.8% year on year (YoY) to Rs2,219.2 crore during the quarter and its profit before tax rose by 67.2% YoY to Rs405.8 crore. The profit growth was driven by a 158-basis-point year-on-year (Y-o-Y) rise in the operating profit margin (OPM) to 19.1% and a 126% Y-o-Y growth in the other income during the quarter. However, a sharp rise in the tax incidence (29.8% in Q1FY2013 vs 11.8% in Q1FY2012) restricted the profit growth to 33.5% YoY at Rs280.39 crore. But even that is impressive. US, Japan and India lead the growth: During the quarter the revenues from the US market rose by 62.8% YoY to Rs802 crore while the revenues from the Japanese market (excluding the newly acquired Irom Pharma) jumped by 36.7% YoY to Rs227.8 crore. The revenues from Japan (including Irom Pharma) now account for 15% of the total revenues of the company. Lupin continues to outpace the domestic formulation market with a 25% Y-o-Y growth recorded during the quarter. The growth in the other emerging markets was also impressive at 54% YoY to Rs117.4 crore.  We have Buy rating on the stock with a price target of Rs597.     Wipro Cluster: Apple Green Recommendation: Hold Price target: Rs360 Current market price: Rs345 Downgrade to Hold Result highlights Performance below expectations, disappointing guidance: Wipro's overall performance for Q1FY2013 was below our expectation. The most disappointing part was the Q2FY2013 guidance, which suggested a 0.3% to 2.3% sequential growth to $1,520-1,550 million, much below our as well as the street's expectations. This is in spite of the September quarter being a traditionally strong quarter for the IT sector.  Soft volume growth: IT services revenues were down 1.4% quarter on quarter (QoQ) to $1,514.8 million (our expectation was of $1,531 million). On a constant currency basis, the revenues were up 0.3% QoQ to $1,540 million. The volume growth came in at 0.8% QoQ. Onsite pricing was down by 0.9% QoQ (up 0.2% on constant currency basis) and offshore pricing was down 2% (down 1% on constant currency basis).  Margins disappoint, incremental investments continue in S&M space: The IT services' earnings before interest and tax (EBIT) margins have shown an improvement of 30 basis points to 21% (much below our expectations of 22.5%), despite the rupee benefits (11.1% rupee depreciation) and absence of full quarter impact of wage hikes (effective from June 1, 2012). The lower margin performance has been attributed to incremental allocation to selling and marketing (S&M), which has gone up by 22.9% to Rs533 crore (additional investment of Rs100 crore on QoQ basis). As a matter of fact, on a trailing twelve month (TTM) basis, Wipro's S&M investments have gone up by 34% to Rs1,781 crore. Wipro is heavily investing and strengthening its front end as a part of its business transition. Thus the margins are expected to continue to remain in a narrow range in the next few quarters, as the benefits of investments will take time to reflect.  Net profit below expectation: The consolidated revenues of the company for the quarter were up 6.8% QoQ to Rs10,483.2 crore. The net other income was down 33% QoQ to Rs132.5 crore driven by higher foreign exchange (forex) losses pertaining to external commercial borrowing (ECB) to the tune of Rs100.2 crore as compared to Rs33.7 crore in Q4FY2012. The net profit was up 6.7% QoQ to Rs1,580.2 crore (below our expectations of Rs1,708.9 crore).  Performance/guidance does not favour revival thesis: Wipro has failed to meet the upper end of its revenue guidance in constant currency terms in four of the last six quarters. Volume growth continues to languish with an average 1.1% sequential growth in the last three preceding quarters (lowest among the peers). Further, a lackluster guidance for the seasonally strong September quarter reflects at a slower than anticipated ramp up in the clients' accounts. We draw comfort from the incremental investments in the S&M area (130 people in the hunting team) and clients mining ($100 million clients moved to 8 from 4 in one year). However any meaningful benefit from the S&M investments would take time to reflect in numbers (management indicates at 8-12 months time frame). Overall, looking at the current business traction and increasing uncertainties in the macro environment, we expect Wipro to take atleast three quarters to come closer to match its peer companies' (TCS, HCL Technologies, Cognizant) growth levels.  Outlook and valuation: We have reset our currency estimates to Rs54.4 and Rs54 and have lowered our earnings estimates by 4.7% and 5.8% on the back of lower revenue estimates of 4.2% and 9.2% respectively for FY2013E and FY2014E. In the last one month Wipro's stock price has corrected by close to 14% and is trading at close to 12x FY2014E earnings. Though any major downside from the current levels looks unlikely, we remain circumspect on upside triggers. With lack of positive investment triggers in the medium term, we have downgraded our rating to Hold from Buy and lowered the target price to Rs360.     Hindustan Unilever Cluster: Apple Green Recommendation: Hold Price target: Rs479 Current market price: Rs476 Price target revised to Rs479 Result highlights Strong beginning to FY2013: Hindustan Unilever Ltd (HUL) began FY2013 on a strong note by posting a strong operating performance in the first quarter of the fiscal. Despite macro uncertainties and sustained high food inflation HUL was able to maintain a strong growth in the domestic consumer business, which grew by 19% year on year (YoY) in Q1FY2013. The sales volume growth stood at 9% (close to 10% volume growth in Q4FY2012). This was the fourth consecutive quarter when HUL's volume growth in the consumer business stood in the range of 9-10%. The highlight of the quarter was close to a 220-basis-point year-on-year (Y-o-Y) improvement in the gross profit margin (GPM).  Performance snapshot: HUL's net sales grew by 13.7% YoY to Rs6,250.2 crore in Q1FY2013, driven by a 21% growth in the home and personal care (HPC) business. The food business' revenue growth remained at 11% YoY during the quarter. The stand-alone business' GPM improved by 216 basis points YoY to 46.1% and its operating profit margin (OPM) improved by 137 basis points YoY to 13.4%. Judicious price increases in the product portfolio, the benefits of a low-cost inventory and effective buying of the key inputs at the global level helped HUL to post a strong improvement in the GPM during the quarter. Hence, the operating profit grew by 26.7% YoY to Rs837.9 crore. However a higher than expected other income (including the other operating income) led to a 46% Y-o-Y growth in the adjusted profit after tax (PAT) to Rs848.8 crore. The other income (including income from other operations) stood at Rs347.2 crore in Q1FY2013 as against Rs126.1 crore in Q1FY2012. The surge in the other income was aided by a Rs71.7-crore profit on the sale of long-term investments and the interest on an income tax refund of Rs34.5 crore.  Upward revision in estimates: We have revised upwards our earnings estimates for FY2013 and FY2014 by 5.0% and 6.2% respectively to factor in the higher than expected OPM and other income during the quarter. With the prices of the key inputs showing a softening trend, we expect the OPM to stand in the range of 13.5-13.8% in the coming years. Outlook and valuation: Though the strong volume growth momentum sustained in Q1FY2013, we believe the volume growth has to be keenly monitored in the coming quarters in view of the poor monsoon and the persistent high food inflation. We believe HUL's portfolio of strong brands (catering to the masses as well as the premium end of the market) will help overcome the concerns and maintain the growth momentum in the coming quarters. Also, banking on the Indian consumer growth story the company has maintained its thrust on innovation and enhanced its distribution reach. These will be the key growth drivers for the company in the long run. We expect HUL's top line and bottom line to grow at a compounded annual growth rate (CAGR) of 17% and 19% respectively over FY2012-14. HUL has traded at an average one-year forward multiple of 27x in the uncertain market environment of the last twelve months. That is 6% above its four-year average multiple of 25.5x. We have revised our price target to Rs479 (valuing the stock at 27x its FY2014E earnings of Rs17.7). However, with a limited upside from the current level we maintain our Hold recommendation on the stock. At the current market price the stock is trading at 31.3x its FY2013E earnings per share (EPS) of Rs15.2 and 26.8x its FY2014E EPS of Rs17.7.    Larsen & Toubro Cluster: Evergreen Recommendation: Buy Price target: Rs1,584 Current market price: Rs1,355 Price target revised to Rs1,584 Result highlights Results exceed expectations; forex loss hurts margins: Larsen and Toubro (L&T)'s Q1FY2013 results were better than expected mainly on account of a robust performance by its engineering and construction (E&C) division and a higher other income. However, the good operating performance was shadowed by a foreign exchange (forex) loss of Rs267 crore. The order inflow registered a year-on-year (Y-o-Y) rise of 21% to Rs19,594 crore, led by the spill-over of the delayed orders from FY2012. The company has maintained its guidance of a 15-20% growth in both revenues and order inflow for FY2013. Order inflow boosted by spill over from FY2012: Of the total order intake of Rs19,594 crore, about Rs5,000 crore (~25% of total intake) is attributable to spillovers from the previous quarter; excluding which the order inflow for Q1 would show a de-growth of 10% on a yearly basis. The share of slow moving orders in the order book has risen to 10% since FY2012. The current order book stands at Rs1,53,095 crore (up 12% YoY and 5% quarter on quarter [QoQ]). The majority of the orders were received from the private players in the transportation, and building and factory segments. Going forward, the company expects good traction from the new markets like West Asia and South-East Asia. Cautious in taking BOT projects: The management indicated that they would be cautious in taking fresh build-operate-transfer (BOT) orders as their prime focus now in executing current projects on hand and want to keep equity investment requirement under check. They have not mentioned of any new projects in order inflows expected in FY2013.  Estimates marginally upgraded: In view of robust execution and order inflow in Q1FY2013 along with spectacular performance of "others" segment (mainly integrated engineering services) we have upgraded our earnings estimates by 4-5% for FY2013 and FY2014. We expect the company's stand-alone earnings to grow at a compounded annual growth rate (CAGR) of 9% over the next two years. Our revised consolidated earnings per share (EPS) estimate stands at Rs97.9 and Rs106.5 for FY2013 and FY2014 respectively. Its overseas business (exports) has increased to 17% this quarter from the past level of 11-12%, led by sound execution of orders bagged in FY2012. With such increasing contribution of its overseas business, we feel that the impact of fluctuations in foreign currencies on its performance could become more unpredictable in the coming quarters.  Price target revised to Rs1,584: While the company reported overall robust results for the quarter, the achievement of yearly order inflow guidance would be highly subjective to an uptick in infrastructure development activities in the country and in the Middle East region. Moreover, excluding BOT projects might limit the growth in order inflow, especially in the public private partnership (PPP) projects. At the current market price the stock is trading at 12.7x its FY2014 consolidated estimates. Our sum-of-the-parts (SOTP) based price target stands revised upwards to Rs1,584 on account of revised estimate of the standalone business. We continue to believe that L&T is the best proxy play on India's infrastructure growth theme and hence maintain our Buy rating on the stock.     Torrent Pharmaceuticals Cluster: Ugly Duckling Recommendation: Buy Price target: Rs760 Current market price: Rs662 Strong performance; forex loss spoils the show Result highlights Q1FY2013 results in line with expectations: During Q1FY2013 the net sales of Torrent Pharmaceuticals (Torrent) grew by 20.4% year on year (YoY) to Rs736 crore on the back of a 33% year-on-year (Y-o-Y) rise in the international business and a 13% Y-o-Y increase in the domestic formulation business. The operating profit margin (OPM) excluding the foreign exchange (forex) loss was 82 basis points higher YoY at 20.3%. Moreover, the other operating income jumped by 179% YoY to Rs31.2 crore, which included Rs15 crore of non-recurring revenues. This led the profit before tax (PBT) to jump by 48.3% YoY to Rs165 crore. However, the profit after tax (PAT) remained flat at Rs102 crore mainly due to a forex loss of Rs24.7 crore. Excluding the forex loss the PAT would grow stronger by 53.4% to Rs127 crore. The revenues and profit are largely in line with our expectations.  Better rupee realisation and new launches in key markets drive growth: During the quarter, the revenues from the USA jumped by 88% YoY to Rs78.9 crore while the revenues from Brazil, which witnessed three product launches during the quarter, recorded a 26% growth YoY (from a high base due to the spill-over effects in Q1FY2012) to Rs135.5 crore. The revenue growth in the international market can partly be attributed to a 15% better rupee realisation (Rs55/dollar in Q1FY2013 vs Rs47-48/dollar in Q1FY2012). However, new launches in the US and emerging markets also played a vital role in driving the strong revenue growth. We maintain our estimates, price target and recommendation: The Q1FY2013 performance has been in line with our expectations. Therefore, we maintain our estimates for FY2013 and FY2014. We maintain our Buy recommendation with the old price target of Rs760 (implies 13x average earnings for FY2013-14).    Polaris Financial Technology Cluster: Ugly Duckling Recommendation: Buy Price target: Rs163 Current market price: Rs115 Price target revised to Rs163 Result highlights Revenues in line: In Q1FY2013, Polaris Financial Technology (Polaris)'s revenues were up 3.9% quarter on quarter (QoQ) to $107.6 million (in line with our expectations of $106.7 million). On a constant currency basis, the revenues were up 5.6% QoQ to $109.3 million. IT services' (including BPO) revenues were up 3.2% QoQ to $83.1 million, whereas Intellect revenues were up 6.4% QoQ to $24.5 million.  Margins disappoint: The margins continued to disappoint; despite rupee benefits for the quarter and absence of wage hikes. The EBITDA margins declined by 20 basis points to 12.2% in the quarter. Adjusting for hedging loss of Rs12.4 crore in the revenue line (company has adopted Accounting Standard 30 with effect from April 1, 2012), the EBITDA margins look more decent at 14.1%. Going forward, the management expects margins to move in a narrow range in the coming quarters as currency benefits would be offset by wage hikes and incremental research and development (R&D) investments in the products space.  Net income in line, includes profit on real estate sale: The adjusted net income for the quarter excluding one offs stood at Rs51.2 crore, up by 32.5% QoQ. However, the reported net income including profit on sale of real estate of Rs10 crore and one offs of Rs22.5 crore in Q4FY2012 (pertaining to sale of real estate of Rs15 crore and tax benefit on merger of Optimus business of Rs7.5 crore) remained flat at Rs61.2 crore.  Margins to remain in narrow range due to investments in R&D and hedging losses in revenues line: Polaris' management indicates at stable EBITDA margins for the coming quarters and for FY2013 despite rupee benefits. The lower margins performance could largely be attributed to hedging losses in the revenues line (revenue of around $25 million hedged at around Rs50.34 for the next eight quarters). Thus there will be around Rs11-12 crore of hedging loss per quarter in the revenue line. This coupled with incremental investments of Rs95 crore towards product R&D for FY2013E would restrict any meaningful margin improvement in the coming quarters.  Valuation and view: We reset our currency estimates to Rs53.2 and Rs53.1 and also tweak our margins estimates to 12.6% and 13.2% for FY2013 and FY2014 respectively. Consequently we have lowered our earnings estimates by 5.2% and 8.6% respectively for FY2013 and FY2014. We continue to remain optimistic on Polaris' Intellect side of the business. However macro uncertainties might pose some hindrance in the medium term. The stock has corrected close to 24% in the last three months and at the current price of Rs114, it is available at attractive valuation of 4.7x FY2013 and 4.2x FY2014 earnings estimates. We maintain our Buy recommendation on the stock with a revised price target of Rs163.   SECTOR UPDATE Telecommunications Weak reported net adds; Bharti continues to lead In June 2012 the GSM operators across India (excluding Reliance Communications [RCom] and Tata Telecommunications [Tata Tele]) added 4.64 million SIM cards, taking the overall base to approximately 677.3 million. That is an increase of 0.7% over May 2012's base. On the net additions front, the June net additions (of about 4.64 million) reported a 36.1% decline than that reported in the previous month. After May witnessing a robust growth in net adds, the industry subscriber addition dipped again in June led by weak performance from the new players. The overall subscriber base grew by a mere 0.7% month on month (MoM; on a restated basis) taking the aggregate GSM subscriber base across India (excluding RCom and Tata Tele) to 677.3 million. View: The Indian telecommunications space is plagued with a myriad of policy issues and regulatory uncertainty. We believe that constant media news on the sector with regards issues like 2G spectrum auction, base pricing, spectrum refarming, excess payment of spectrum charges beyond 6.2 MHz and the new 4G spectrum are weighing on the sector. Thus telecom stocks could be under pressure in the near term. However, we remain positive on Bharti from a long-term perspective in view of its valuation. We maintain our Buy recommendation and price target of Rs362 on Bharti.   VIEWPOINT Idea Cellular        Displays competitive intensity amid regulatory uncertainty Idea Cellular (Idea)'s Q1FY2013 results were below our as well as the street's expectations on the revenue/margin as well as the earnings front. The key performance indicators showed a mixed trend. The volume growth came in at 5.3% quarter on quarter (QoQ), while a strong competitive environment continued to exert pressure on the realised rate.  What happened in the quarter gone by? Muted top line growth; misses estimates: Idea's Q1FY2013 revenue showed a modest 2.5% sequential growth that was lower than our as well as the street's expectations. We expected a 5.2% revenue growth. The lower revenue growth was on account of pricing pressure (the average revenue per minute [ARPM] saw a 2.4% dip on a sequential basis) with no elasticity (flat minutes of usage on a sequential basis; stood at 379 minutes per user). Reported operating profit up 5.8% QoQ; while on an adjusted basis the same contracted 4.8%: The leveraging advantage was missing in Idea's Q1FY2013 performance; prima facie on a reported front though the operating profit showed an uptick of 5.8% on a Q-o-Q basis. The same was a result of an exceptional expense of Rs150 crore booked in Q4FY2012. Adjusting for the same, the operating profit showed a contraction of 4.8%; consequently the adjusted margin too contracted by 200 basis points. Earnings miss estimates as well: The net earnings too missed expectations in line with the miss on revenue and operating performance fronts. The net earnings for Q1FY2013 came in at Rs234 crore (-2% QoQ; +32.1% year on year [YoY]).  Our view: Idea's Q1FY2013 quarterly performance displayed strong competitive forces playing on the industry. The same was visible from the limited elasticity (2.4% QoQ decline in the realised rate); flat minutes of usage (MoU) and a 2.5% decline in ARPU. Despite strong execution capabilities, Idea failed to deliver on margin expansion. In fact on an adjusted basis, the operating profit margin (OPM) contracted by 200 basis points on a sequential basis. Along with a challenging operating environment, the regulatory risk and ambiguity continue to plague the sector and Idea in specific. Thus we believe that the stock's performance is more likely to be directed by regulatory moves and despite a decent valuation (at 13x 1 year forward price earning ratio [PER] and 5x EV/EBITDA) we continue with our neutral stance on the stock.     Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.