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| STOCK UPDATE Selan Exploration Technology
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs500
Current market price: Rs285 Realisation driven growth; volume ramp up awaited Result highlights -
Realisation drives growth; production volume flat: In Q4FY2012, Selan Exploration Technology (Selan)'s net revenues (adjusted for the petroleum profit) grew by 23.2% year on year (YoY), backed by a 28% year-on-year (Y-o-Y) improvement in the realisation. The blended realisation was boosted by a combination of higher crude oil price and depreciation of the rupee. However, the oil production volume remained flat Y-o-Y at 42,484 barrels during the quarter. The operating profit grew at a relatively lower rate of 20% due to margin contraction on the back of higher overhead expenses as a percentage of sales. The reported profit after tax (PAT) grew by 49% YoY but by 9% QoQ, which includes a foreign exchange (forex) gain of Rs1.9 crore in Q4FY2012 and a forex loss of Rs2.4 crore in Q3FY2012. -
Annual performance - driven primarily by higher realisation: Even on an annual basis, the growth in net sales of 34% was largely driven by a higher blended realisation as the production volumes declined by 12% to 1,68,041 bbl as compared to FY2011. However, despite lower production volumes, the operating profit margin (OPM) expanded by 270 basis points on the back of a jump in blended realisation (52% growth in realisation), which is a combination of increase in the price of crude (by 41%) and appreciation of the dollar against the rupee (by 10%). Consequently, the operating profit per barrel of production also jumped by 54% YoY to Rs3,568/bbl in FY2012. Hence, its reported PAT grew by 38% YoY to Rs44 crore, translating into an earnings per share (EPS) of Rs25.9 for FY2012. -
Healthy balance sheet position: We like the strong balance sheet and impressive cash generating ability of the company. Currently it has net cash of Rs57/share, that is 21% of the current market price of the share. Further, the company is generating significant cash flow from operations to support its future growth plans. Hence, we believe that the low leverage position is likely to be sustained. -
Fine-tune estimates; awaiting regulatory approvals for next round of production ramp up; reiterate Buy: Post the declining production volume trend since FY2009, Selan was expected to begin the next phase of development of its fields and show a ramp-up in production volumes from FY2012. The same has been postponed due to delay in regulatory approvals. However, the management is quite confident of commencing its next phase of growth and has guided for an annual production volume of 5,00,000-7,00,000 bbl in the next two years. Our volume assumption at 4,47,000 bbl for FY2014 is much lower than the management's guidance. Hence, we remain positive on the stock and continue to rate it as Buy with a target price of Rs500. Orbit Corporation
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs70
Current market price: Rs39 Regulatory environment easing, execution holds the key Result highlights -
Q4FY2012 revenue boosted by sale proceeds from Ocean Parque: Orbit Corporation (Orbit)'s consolidated revenues in Q4FY2012 came in at Rs123 crore, up 80% year on year (YoY) and 71% quarter on quarter (QoQ) mainly due to booking of Rs65 crore from the Ocean Parque (Napean Sea Road, Mumbai) deal which took place earlier this fiscal. However, there was an impairment of Rs13 crore in the sales value of the World Trade Centre (WTC) project in Bandra Kurla Complex (BKC), Mumbai which impacted the company's revenue during the quarter. Thus if we adjust these two items, the revenue for the quarter grew by 3.5% YoY and was down 1.5% QoQ. The same was due to poor execution across projects with construction activity having slowed down for want of clearances and approvals. -
Q4FY2012 PAT below expectation; OPM takes a hit: The adjusted net profit fell by 75% YoY to Rs4.8 crore on the back of a sharp contraction in the operating profit margin (OPM) and higher interest cost. The OPM contracted from 77.9% in Q4FY2011 and 54.1% in Q3FY2012 to 35.7% for the quarter under review. The contraction is on account of impairment booked in case of WTC, adjusting for which, the margins would have stood at 51.5%. Further the budgeted cost has been increased during the quarter for three projects under development. During the quarter the company paid further tax of Rs9.7 crore pertaining to the previous years, which resulted in a net loss of Rs4 crore at the reporting level. Additionally the auditors have qualified the report that Orbit has not provided for income tax demand including interest amounting to Rs157 crore for previous assessment years. However, the management is contesting the same and is confident of much lower tax liability. -
Presales marginally lower sequentially but expect a rebound in H2FY2013 as approvals gain pace: Presales for the quarter stood at 29,654 sq ft (Rs44.4 crore in value terms), ie slightly lower than Q3FY2012 volume of 32,921 sq ft (Rs71.1 crore in value terms) but much better than Q4FY2011 volume of 11,249 sq ft (Rs50 crore in value terms). The fire sale at Orbit Residency (Andheri) and Orbit Terraces (Lower Parel) supported the volume. However in value terms they are much lower since no sales booking took place in any of the Napean Sea Road projects which command high premium. Going ahead, the management is looking at launching a couple of projects in Napean Sea Road and the first phase of Mandwa by Dussera-Diwali time as approvals and clearances have started kicking in for the stalled projects. -
Execution set to improve; though downgrading FY2013 and FY2014 estimates: The regulatory environment has started improving where clearances and approvals have started coming in. Orbit has already received clearances for Orbit Terraces, Orbit Enclave and Orbit Haven where the execution can now resume on full swing. It is expecting more clearances which will help it launch more projects in H2FY2013. However, we are reducing our earnings estimate for FY2013 and FY2014 by 27% and 21% respectively on the back of lower revenue recognition. The execution will pick up post monsoon only, which will result in lower revenue recognition. A stake sale in a few projects and improvement in cash collection hold the key for smooth execution going ahead. Debtors collection has been very poor in FY2012 which has impacted the working capital. -
Maintain Buy, outlook improves: Poor sales across projects due to regulatory uncertainty and absence of new launches due to pending approvals and clearances had taken a toll on the company and the overall industry. However the regulatory environment has started improving and the clearances have started coming in for the stalled projects. This will result in a pick up in execution and launch of new projects. A stake sale in few projects along with improved cash collection hold the key. Thus with improved outlook, we maintain our Buy rating on the stock with price target of Rs70. We have rolled forward our net asset value (NAV) to FY2013 and lowered the discount to NAV from 50% to 40%. At the current market price, the stock trades at 7.3x and 4.4x its FY2013E and FY2014E earnings respectively. Crompton Greaves
Cluster: Apple Green
Recommendation: Hold
Price target: Rs123
Current market price: Rs110 Price target revised downwards to Rs123 Result highlights -
Results marred by inventory write-off/losses in subsidiaries: Crompton Greaves Ltd (CGL)'s Q4FY2012 consolidated results were severely below our expectations mainly because of the net loss of Rs41 crore booked in its subsidiaries, while the standalone business saw operating margin pressure. The company is seeing severe pricing pressure, sub optimal capacity utilisation as well as cost overruns in its overseas power systems business. For FY2013, the company expects its sales to grow by 12-14% supported by a healthy order inflow growth of 15%. Margins are expected to be in the range of 8-9% (FY2012 operating profit margin [OPM] at 7.1%). -
Weak order inflows: The order inflow for the quarter was subdued at Rs2,896 crore, which is a fall of 8% year on year (YoY). The consolidated order backlog position for the quarter stood at Rs8,366 crore which is a growth of about 17% on a yearly basis. Further, the standalone order intake and order book position of the company stand at Rs1,793 crore (up 5.1% YoY) and Rs2,584 crore (down 26% YoY) respectively. India has contributed 50% (Asian countries contributed 9%) to its order inflow, during the quarter. The management believes that there is a huge potential in the Indian market in the EHV segment. Europe still lags and any pickup in demand in this market looks uncertain at this point of time. Off-shore wind market presents a potential in Europe. Also its management indicated that the prices in power orders have bottomed out and are now starting to show an upward trend. -
No respite on margins in near future: The management has guided for consolidated operating margins to be in the range of 8-9% for FY2013, which is much lower than the 12-14% annual range for the past few years. Now, in FY2012, the consolidated margin was at 7.1% which was earlier guided to be in the range of 8-10%. We feel that achieving an OPM level of even 8-9% would be difficult, given the current competitive scenario in the Indian power sector and slowdown in Europe. -
Focus on improving margins in the next three years: The company unveiled its three-year plan to improve margins which includes
- Offering more engineering services for utilities and adding new geographies like the Middle East and Brazil among others.
- Increasing material sourcing from low cost countries like China, India and other south-east Asian countries.
- Consolidating manufacturing capacities in Europe by 2013. The company is gradually shifting its orders from Belgium to Hungary in order to take advantage of the cost benefits (relatively lower
production cost). Also it is aiming at increasing its transformer capacity in India to over 50,000 MVA in the next few years. -
Estimates sharply downgraded: In FY2012, the company has grossly underperformed its guidance given at the start of the year. Even in the concall following the Q3FY2012 results, the management had shown confidence in terms of improvement in margins in overseas business, which hasn't been witnessed in Q4FY2012. Further, in view of the severe competitive margin pressure in the power systems business and tough business environment, we have sharply downgraded our FY2013 and FY2014 estimates by 34% and 32% respectively. Overall, we are now expecting the company to post a yearly growth rate of 32% over FY2012-14E on a low base of FY2012. However, a better off-take in the overseas orders, uptick in Power Grid Corporation of India (PGCIL) order awarding activities, stability in the input cost especially in metals like copper, aluminum and steel could provide some respite from margins dragging down the overall net profitability in the coming quarters. -
Price target revised to Rs123: While the FY2012 numbers were disappointing, it's the lack of timely indication from the management's side in its recent commentary on the impending margin pressure that has caused more worry to the investors. Moreover, the increasing competition in the power transmission and distribution (T&D) segment remains a worry for the company's power business (which accounts for over 40% of its stand-alone revenue and has seen a muted growth in recent times). Further, a slowdown in consumer durable demand has raised concerns with regard to its cash-generating consumer durables business also. A slowdown in capital expenditure (capex) in India and overseas market (mainly Europe) also doesn't augur well for the company. We believe that the turnaround will take at least a few more quarters and the stock would continue to languish in the meantime. Overall, we have revised our price target to Rs123 (12x FY2014 estimated earnings). The current valuation at 10.8x FY2014E earnings provides limited upside to our target. Hence, we maintain our Hold recommendation on the stock.
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