| Summary of Contents
| STOCK UPDATE IL&FS Transportation Networks
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs330
Current market price: Rs185 Meets order inflow target; thus allaying concern Key points -
Recent order wins help ITNL meet its annual order inflow target: For FY2012 so far, IL&FS Transportation Networks (India) Ltd (ITNL) has bagged projects worth Rs4,815 crore of which 86% orders came during Q4FY2012. Throughout the year the management guided for an order inflow target of about Rs5,000 crore which until Q4FY2012 seemed like a herculean task as the company had managed to pocket only Rs674 crore worth of projects by then. This goes to show the well-chalked-out strategy of the management to wait and not aggressively bid for projects at the cost of lower margins. -
Concerns over EPC revenue visibility fade out: During Q4FY2012 the company bagged build-operate-transfer (BOT) projects worth Rs4,140 crore that will be constructed over a period of 24-30 months. The recent projects will add about 50% to the company's existing order book of Rs8,160 crore as at the end of Q3FY2012. Thus, the bagging of the orders allays the concerns with regards the revenue visibility of the engineering, procurement and construction (EPC) segment in FY2013 and beyond. It will also provide a fillip to the project management fee income over FY2013 and FY2014. -
Kiratpur Ner-Chowk project to achieve a financial closure soon: The company had won the Kiratpur-Ner-Chowk project in January 2012 and as per its management, the financial closure is expected by the first week of April this year. This reiterates the excellent management capabilities and strong parentage enjoyed by the company. Further, prudent bidding also helps in achieving a financial closure fast. The Kiratpur-Ner-Chowk project is located in Himachal Pradesh and is to be executed on a toll basis with a concession period of 28 years including the construction period of three years; it is worth Rs1,900 crore. The company had quoted a grant of Rs134.57 crore for the project. -
NHAI set to meet its FY2012 target; chalks another ambitious target for FY2013: For year till FY2012 the National Highways Authority of India (NHAI) has awarded 5,457km of projects as against a target of 7,300km. The remaining 1,500-2,000km of projects are set to be awarded in a couple of days by the end of March 2012. Bids for the same have already been called for. Further, in the Budget for FY2012-13 the government has set an ambitious target for NHAI to award 8,800km of road projects, the highest ever in history. Given the intent of the government and the commitment shown by the NHAI in the current year to meet its target, the road sector is on the brink of a huge opportunity to be witnessed in FY2013. -
Competitive intensity fading: An analysis of the projects awarded over the past three months reveals that the number of bidders for a particular project has come down. Earlier the figure would touch nearly 20 but now it's down to maximum nine to ten. However, the difference between the top two bids as well as the lowest and the highest bidder remains high. -
Maintain Buy: The recent project wins are very positive as the company had not won any big road BOT project since May 2010. Thus, the absence of any new win was the key concern and an overhang on the stock. ITNL had not been bidding aggressively unlike the other players to bag projects. This, we believe, was a prudent step. Now these project wins have allayed the concerns and provided revenue visibility. However, we are not factoring these project wins in our estimates currently and would do so as and when these projects achieve the financial closure. Further, given its strong balance sheet, the company is also looking at inorganic growth, like the recent acquisition of a Chinese project. We believe that given its strong parentage and scale of operations, the company stands to gain from the expected consolidation in the sector. We maintain our Buy rating on the stock with a price target of Rs330. At the current market price the stock is trading at 7.8x and 6.3x its FY2012E and FY2013E earnings respectively.
SECTOR UPDATE Fertilisers Sector dynamics weak; prefer SSP and urea players Weak volume offtake of complex fertilisers; urea gains from price differential: After a robust growth of 16% in the first 11 months of FY2011, the growth in the volume offtake was sluggish at 2.7% in the first 11 months of FY2012. The volume offtake in the complex fertiliser segment has fallen by 7.7% against the strong growth of 26% seen in the same period of the last year. The complex fertiliser manufacturers have suffered due to the rising prices of complex fertilisers globally, the widening price differential with urea (urea prices controlled in India) and the lower imports due to the logjam between the Indian importers and the global manufacturers of MOP. However lower availability and high price of DAP and phosphoric acid in the international market resulted in lower indigenious production and import of DAP. Among the complex fertilisers, the demand for DAP and MOP have seen a decline of 12% and 33% respectively year on year (YoY). The prices of DAP and MOP have seen a steep increase of 87% and 101% respectively which has affected the demand for these fertilisers.
Subsidy cut to put more pressure on volume sales of complex fertilisers; cautious on complex fertiliser companies like Coromandel, Rashtriya Chemicals and Fertilizers (RCF) but positive on SSP manufacturers (Rama Phosphates and Liberty Phosphate): The government has reduced the subsidy pay-out to non-urea fertilisers discounting the decline in the prices of the raw materials in the international market. The reduction in the subsidy was in the range of 10% to 33% for potash and phosphorous respectively. If the raw material prices do not stabilise at lower levels, the complex fertiliser manufacturers would have to increase the effective selling prices which would further weaken the already subdued demand environment for complex fertilisers.
Partial decontrol of urea is positive for urea players: An increase in the consumption of urea will force the government to increase the price of urea and consider the partial decontrol of the urea to bring its price in line with that of the other non-urea fertilisers. An increase in the price of urea will help the government to reduce the subsidy on domestic and imported urea. We view this as a positive move and the announcement of the same would provide a trading opportunity in urea stocks like Chambal Fertilisers and Chemicals, Zuari Industries, Nagarjuna Fertilisers and Chemicals, and National Fertilisers. Thus, we maintain a cautious view on complex fertiliser companies like Coromandel, RCF and Tata Chemicals to some extent.
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