Fw: Sharekhan Special: Q4FY2012 Oil & Gas earnings review

 

 

Sharekhan Special [June 07, 2012] Sharekhan www.sharekhan.com

Summary of Contents SHAREKHAN SPECIAL Q4FY2012 Oil & Gas earnings review   Key points Higher crude prices improved realisation; GRM improved sequentially: As the average Brent crude oil price increased by around 13.3% year on year (YoY) in Q4FY2012 to around $119 per barrel, the gross realisation of the end-products of exploration and production also rose. However, due to an increase in the subsidy burden in FY2012 the net realisation for the public sector upstream companies like Oil and Natural Gas Corporation (ONGC) and Oil India could grow marginally on a year-on-year (Y-o-Y) basis (as against a double-digit growth in the gross realisation). On the refining front, the gross refining margin (GRM) of the refining companies improved on a sequential basis on account of the strong distillate cracks and improved gasoline cracks. However, the Arab light-heavy differential during the quarter contracted by $0.7 per barrel which partially offset the benefit of the improvement in the gasoline cracks. However, on a Y-o-Y basis the GRM for Q4FY2012 remained lower. In our coverage, RIL's GRM for Q4FY2012 stood at $7.6 per barrel (as compared with $6.8 per barrel in Q3FY2012).  Surge in under-recoveries; subsidy burden puts pressure on net realisation: An increase in the price of crude oil, depreciation in the rupee against the dollar and the government's inability to hike the prices of petroleum products inflated the under-recoveries to as high as around Rs140,000 crore in FY2012 as compared with Rs78,096 crore for FY2011. Among our coverage stocks, Oil India has allocated subsidy of Rs2,874 crore (higher by 79% YoY) for Q4FY2012 and Rs7,352 crore for FY2012 as against Rs3,293 crore in FY2011. Hence, the increase in the subsidy limited the net realisation growth. Further, GAIL has allocated subsidy of Rs1,390 crore (up 55% YoY) for the quarter. GAIL also witnessed pressure on the margins of its gas and liquefied petroleum gas (LPG) transmission segment whereas the petrochemical business of the company displayed an improvement in its profitability.  RIL's huge other income partially offset the impact of margin pressure: Reliance Industries Ltd (RIL) reported an operating profit margin (OPM) of just 7.7%, 584 basis points lower compared with the Q4FY2011 OPM. The profit before interest and tax (PBIT) margin of the refining segment contracted to 2.2% in Q4FY2012 as compared with 4% in Q4FY2011, primarily on account of a 17.4% Y-o-Y drop in the GRM to $7.6 per barrel. Moreover, the PBIT margin of the petrochemical division also contracted by 428 basis points YoY to 10.2%. The operating profit of RIL in Q4FY2012 decreased by 33.3% YoY to Rs6,563 crore. However, with the strong other income of Rs2,295 crore as compared with Rs917 crore in the corresponding quarter of the previous year, the decline in the net profit was limited to 21.2% as compared with the 33.3% decline at the operating level. The higher other income could be attributed to a significantly higher cash balance during the quarter. Oil India's performance in line with estimate: In Q4FY2012 Oil India posted a net profit of Rs444.8 crore, which was in line with our estimate (implied Q4FY2012). The reported net profit declined by 20.9% YoY on account of a surge in the subsidy burden to Rs2,873 crore vs Rs1,605 crore in Q4 of FY2011. With the increase in the price of crude oil during Q4FY2012, the gross realisation of the company increased by 15.1% YoY to $119.7 per barrel. However, with the increase in the subsidy burden the net realisation for FY2012 improved by just 2.2% to $59.8 per barrel. On the production front, the company reported a 1.5% Y-o-Y growth in its crude oil production and a 6.5% Y-o-Y growth in its natural gas production. We believe the production of crude oil and natural gas would grow at compounded annual growth rates of 4% and 7.5% respectively over FY2012-14.  GAIL's performance dented by higher subsidy burden: GAIL reported net sales of Rs10,488 crore, a 17.9% Y-o-Y growth that was largely in line with our estimate. However, the OPM contracted sharply by 699 basis points YoY due to an increase in the subsidy burden to Rs1,390 crore (higher by 55% YoY). A lower margin in the gas and LNG transmission segment also affected the OPM. On the volume front, the management targets 120-121mmscmd of gas transmission in FY2013 which excludes the LNG volume from the Dabhol terminal (likely to be commissioned in Q3FY2013). The import of LNG from the Tapi pipeline would start from 2016-17.  Outlook and valuation: We expect the under-recoveries to reduce in FY2013 on the back of the softening of crude oil prices, given the weak global economic outlook and the ramp-up in the output suggested by the authorities in Saudi Arabia. Moreover, we hope the government would finally take some corrective steps as the situation is getting precarious and it is pushed against the wall. In such a scenario, we expect the subsidy burden of the upstream oil companies to reduce going ahead. From a longer-term perspective, we like Oil India due to its recent initiatives to monetise its hydrocarbon assets, its strong balance sheet and attractive dividend yield. We maintain our Buy recommendation on the stock with a price target of Rs600.  On the other hand, GAIL could continue to underperform in the near term due to an overhang of regulatory issues and expectations of a weaker financial performance in the near term. However, a bulk of the concerns are already priced in and we maintain our Buy recommendation on GAIL with a price target of Rs410 based on the sum-of-the-parts valuation method.  In case of RIL, we have downgraded our earnings estimates to factor the Q4FY2012 performance of the company but retained our Buy rating with a price target of Rs890. We remain positive on the stock from a long-term perspective. There are no near-term triggers in the stock. However, the petrochemical business is already looking up and the refining margins should also improve in future. The company would gain from the expansion in both these businesses. The upstream business continues to be unpredictable. But at the current market price the implied valuation of the upstream business is already abysmally low and leaves scope for a positive surprise.     Click here to read report: Sharekhan Special 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: Sharekhan Special: Q4FY2012 Cement earnings review

 

 

Sharekhan Special [June 07, 2012]  Sharekhan www.sharekhan.com

Summary of Contents SHAREKHAN SPECIAL Q4FY2012 Cement earnings review   The earnings of the domestic cement players in Q4FY2012 were largely ahead of the street's estimates. The companies with larger exposure to south India saw their bottom lines improve significantly as their realisation surged due to a supply discipline followed by the manufacturers in the region. On the other hand cement offtake, which was sluggish during M9FY2012, showed signs of revival during the quarter. Hence the impact of cost pressure during Q4FY2012 got partially offset by healthy realisations for most of the companies. Consequently we have marginally upgraded our earnings estimates for most of the cement companies under our coverage to factor in the better than expected cement realisations and improvement in cement offtake. Going ahead, with the price hike undertaken in the month of April 2012, we expect companies to post better profitability and earnings in the coming quarter. Our top pick in the sector is Grasim Industries in the large size space on account of its strong balance sheet, diversified business model and attractive valuation. In the mid size space we prefer Orient Paper & Industries (Orient Paper) due to its attractive valuation and value unlocking accruing through the de-merger of its cement business.  Key points Cumulative revenue grew by 14.7%: In the quarter under review, the cumulative revenues of the cement companies under Sharekhan's universe grew by 14.7% year on year (YoY) to Rs20,916.9 crore. The revenue growth was supported by realisations which grew 11.4% YoY and by a volume growth of 9.6% YoY. Among the companies in the Sharekhan cement universe, Shree Cement, Madras Cements and Orient Paper have posted revenue growth in the range of 23% to 38% whereas the revenue of other companies grew in the range of 10-18%. The large players like ACC and Ambuja Cements posted an impressive revenue growth of around 20%.  Mixed volume growth of cement universe; Shree Cement takes the lead: The cement companies under our coverage posted a mixed volume growth during the quarter. Shree Cement reported a volume growth of 20.5% due to stabilisation of its new capacity and better demand environment in the northern region. On the other hand Madras Cements and Orient Paper also posted impressive volume growth in the range of 11-13%. UltraTech and India Cements posted a volume growth of 2-8%. Among the large players operating on a pan India basis, ACC and Ambuja Cements posted volume growth in the range of 7-9%.  Cumulative realisation increased by 11.4%, supported by supply discipline: The cumulative realisation of the cement makers under our coverage increased by 11.4% YoY during the quarter. The cumulative growth in realisation was supported by the supply discipline mechanism followed by the cement players. Among the companies in our Sharekhan cement universe the average realisation of south India based companies like Madras Cements, Orient Paper and India Cements increased in the range of 11-18% on a Y-o-Y basis whereas the average realisation of other players increased by 4-10%. Further, the cement price has increased by Rs10-12/bag during the month of April 2012 which will reflect in the coming quarters.  Cost pressure partially offset by surge in realisation; margins contract: On the operating profit margin (OPM) front, the cumulative OPM of the cement companies under our coverage contracted by 36 basis points to 22.5% during the quarter under review on account of cost pressure in terms of surge in the power & fuel cost (due to increase in coal price on a Y-o-Y basis) and higher freight cost (due to increase in lead distance). Grasim, Madras Cements and Shree Cement reported relatively higher margin pressure, whereas companies like India Cements and UltraTech displayed expansion in their margin on the back of surge in the realisation which offset the cost pressure. However, in the coming quarters we expect the margin to improve sequentially due to the recent increase in the price of cement. Earnings improve by 8% due to revenue growth: A better than expected revenue growth (supported by growth in realisation as well as volume) has resulted in a better than expected earnings growth during the quarter. Further, an impressive performance by the non-cement division of Jaiprakash Associates also supported the overall earnings growth. On a cumulative basis the Sharekhan cement universe has registered an 8% growth at the adjusted net profit level.   Click here to read report: Sharekhan Special 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: Sharekhan Special: Q4FY2012 Telecom earnings review

 

 

Sharekhan Special [June 07, 2012]  Sharekhan www.sharekhan.com

Summary of Contents SHAREKHAN SPECIAL Q4FY2012 Telecom earnings review    Key points Strong operating performance: For the telecommunications (telecom) sector, the Q4FY2012 results were good at the operating level with both Bharti Airtel and Idea Cellular showing a strong performance on the revenue and operating profit front. Bharti Airtel's South-Asian mobile business reported a 3.3% sequential revenue growth while Idea Cellular reported a 6.7% sequential improvement in its revenues. For Bharti Airtel the operating profit as well as the margin expanded on a sequential basis for all the segments except the enterprise business segment. The consolidated margin for Bharti Airtel showed a 107-basis-point expansion on a sequential basis from 32.2% in Q3FY2012 to 33.3% for the quarter under consideration. In case of Idea Cellular, the reported margin was 145 basis points lower than that in Q3FY2012. This was due to the booking of a one-time charge of Rs150 crore in the network operating cost; adjusting for the same the operating profit margin (OPM) expanded by 50 basis points on a quarter-on-quarter (Q-o-Q) basis. Traffic growth momentum seen: Traffic growth momentum was strongly visible for both Bharti Airtel (up 5% sequentially) and Idea Cellular (up 9.1% sequentially). Bharti Airtel's traffic growth came on the back of a change in its strategy of gaining subscribers as well as revenue market share by intervening in the tariff rates. As a result, the revenue per minute (RPM) showed a 1.8% decline on a sequential basis. For Idea Cellular, a 9.1% growth in the volume came on the back of a strong 7.3% volume growth in Q3FY2012. Bharti Africa-trailing slow steps: On the African venture, the incremental growth process in terms of revenue and profitability continued (though the revenue grew at a slower pace). The margin expanded by 111 basis points sequentially. With such a snail-paced margin improvement, we have doubts if the African business would be able to attain its stated guidance of revenue and margin growth for FY2014. Factoring the same into our estimates we have lowered our FY2013 estimates for Bharti Airtel and have introduced our FY2014 earnings estimate. Our earnings per share (EPS) estimates for FY2013 and FY2014 stand at Rs14.6 and Rs19.2 respectively. Regulatory environment weigh heavy on fundamentals and stock price movement: The Indian telecom sector is passing through a high state of policy uncertainty, where decision on various contentious issues-that could affect the earnings/cash flow and competitive positioning of the players--remain undecided and unknown (read pricing of excess 2G spectrum charges, licence renewal norms, spectrum refarming process etc). On the back of this, the new recommendation of the Telecom Regulatory Authority of India on the auction and reserve price for the cancelled 2G licences spells trouble for the sector. We believe that the news flow in this sector would be very fluid. Hence, any positive or negative development would swing a stock's performance in the northward or southward direction respectively. Fundamentally and valuation-wise, we believe Bharti Airtel is best placed to capture the Indian as well as African telecom wave. Hence, we maintain our positive stance on the stock with a Buy rating and price target of Rs362.   Click here to read report: Sharekhan Special Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.