Bharti Airtel Cluster: Apple Green Recommendation: Buy Price target: Rs450 Current market price: Rs338
Read through MTN results for Bharti
Over the last two days, two developments pertaining to Bharti Airtel (Bharti) have taken place- (1) MTN's results were declared which provided some understanding on the competitive scenario in Bharti's major African regions of operation and (2) the Telecom Regulatory Authority of India (TRAI) issuing a consultation paper on auction of spectrum. We present below the analysis of the same and their likely implication on Bharti Airtel.
Bharti to remain under pressure in short term: Taking cues from these two developments; viz consultation paper that talks of spectrum refarming, (that would entail high operational cost for incumbent players like Bharti and Idea those have substantial spectrum in the efficient 900MHZ band), coupled with MTN results that implicitly state that if Bharti Africa has to continue gaining market share in the African region, it has to up its ante on the capex front, would put some strain on its African cash flow position. Further the competitive and cost landscape in Africa would continue to remain though (as seen from MTN's results and comments). Thus we believe that Bharti Africa is likely to miss its stated objective of reaching 40% market share by FY2013 and attaining the same may get stretched by a 12-18 month time frame. In the absence of potential revenue enhancement as well as sentimental triggers, coupled with constant overhang and negative outcome of regulatory policy, we believe that Bharti is likely to remain under pressure in short term. We however continue to maintain our Buy rating on the stock with price target at Rs450 (8.1x FY2013EV/EBITDA). Further any clarity on pending regulatory issues is likely to drive stock performance in the near term.
Mahindra & Mahindra Cluster: Apple Green Recommendation: Hold Price target: Rs759 Current market price: Rs676
Tractor production cut in March 2012
Key points
Mahindra & Mahindra (M&M) has announced a cut in production of tractors amounting to two days in a week in the current month. This is to normalise the built up of excess inventory in the system. The production cut will be undertaken at the tractor plants located at Rudrapur, Nagpur and Jaipur. The management also predicted of a flat year-on-year (Y-o-Y) growth in March 2012 and guided for an 8% growth in FY2013.
The subdued volume sales figures in February 2012 and a rather muted expectation for March 2012 have vindicated our bearish stance. We believe that the consensus estimates would have to be revised downwards to factor in the slowdown in the tractor segment. We see two issues - an overall slowdown at the industry level and the second would be a loss of market share by M&M. Thus, we believe that the company might find it difficult to meet its 8-10% volume growth guidance for FY2013.
Consequently, we lower our estimates to 5% volume growth for FY2013 which leads to a cut of 5.4% in our already below consensus earnings estimates for FY2013 and FY2014. We believe that M&M would continue to underperform in the near-term. Thus, we maintain our Hold recommendation despite an upside to our target price of Rs759 per share.
Valuation We lower our estimates to 5% volume growth for FY2013 which leads to a cut of 5.4% in our already below consensus earnings estimates for FY2013 and FY2014. We believe that M&M would continue to underperform in the near-term due to growth concerns on tractors and an overhang of higher diesel tax on the automotive segment. Thus, we maintain our Hold recommendation despite upside to our target price of Rs759 per share.
SECTOR UPDATE
Fertilisers
Non urea fertilisers show improvement in consumption
Key points
Boost in consumption of non urea fertilisers: In February 2012, the aggregate sales of domestically produced fertilisers (by 15 leading manufacturers) declined by 4% as compared to that in the same period of the previous year. On the other hand, imports spiked up significantly during the month mainly due to the effect of a low base of last year. Import of diammonium phosphate (DAP), complex fertilisers and urea increased by 206%, 1562% and 30% respectively. Overall the consumption of fertilisers in the month of February 2012 has seen a 16% increase on a year-on-year (Y-o-Y) basis.
Government has cut non urea subsidy pay out for FY2013: The government has reduced subsidy payout per kg in the range of 10% to 35% for non urea fertilisers on account of a decline in their price of fertilisers in the international markets. The international prices of fertilisers have been seeing a declining trend in the recent period due to decrease in demand and high prices. The government has reduced subsidy payout on phosphorus for FY2013 by 32.6% to Rs21.8 per kg. The subsidy on potash has been reduced by 10.3% to Rs24 per kg and that on nitrogen has seen a reduction of 11.6% to Rs24 per kg. The reduction in the subsidy on non urea fertilisers are expected to bring down the government's total subsidy bill by 20% in the next fiscal.
Consumption of non urea fertilisers increases: During the month of February, the consumption of non urea fertilisers has increased on the back of higher import of DAP and complex fertilisers. The indigenous production of DAP has shown sign of revival as the availability of raw materials, mainly phosphoric acid, has improved. The production of indigenous DAP has improved by 76% in the current month while the import of complex fertilisers - DAP and urea has also improved on the back of better availability.
However, consumption is still down on YTD basis: On a year till date (YTD) basis (for FY2012), the cumulative fertiliser sales (including imports and domestic production) have declined slightly due to lower production and lesser import of DAP and muriate of potash (MOP). On a YTD basis, sales of domestically produced fertilisers have seen a marginal to negative growth of 0.8% whereas imports have declined by 7%.
