Fw: Investor's Eye: Update - Unity Infraprojects, Selan Exploration Technology, PTC India

 

 

Investor's Eye [August 16, 2012]  Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE Unity Infraprojects Cluster: Vulture's Pick Recommendation: Buy Price target: Rs95 Current market price: Rs45 Price target revised to Rs95 Result highlights Muted revenue growth; margins maintained though: In Q1FY2013 the net sales of Unity Infraprojects (Unity) grew by just 5% year on year (YoY) and dropped by 45% quarter on quarter (QoQ) to Rs395 crore, which is below our expectation. The sales were affected by the delays in obtaining approvals/clearances for certain government projects (government projects form 85% of Unity's order book) which led to the slow execution of these projects. However, on the operational front the operating profit margin (OPM) was in line with our expectation at 13.6%, which shows an expansion of 60 basis points on a yearly basis. The OPM is also better than the Q4FY2012 margin of 12.5% mainly because raw material prices were stable during Q1FY2013. The operating profit thus rose by 9.5% YoY. Higher interest charge resulted in a decline in PAT: However, the moderate top line performance and the margin expansion were nullified by the escalating interest charge, which rose by 33% YoY, resulting in an 8% drop in the profit after growth (PAT) to Rs18 crore (which is below our expectation). The depreciation charge, however, reduced sequentially as the capital expenditure done in the machinery lying idle has not been accounted for. However, healthy order book provides revenue visibility: Unity has bagged fresh orders worth Rs470 crore in FY2013 so far. This along with the orders worth Rs2,850 crore secured in FY2012 takes the total order book to a respectable position of Rs4,180 crore, which is 2.1x its FY2012 revenues. Thus, there is good revenue visibility for the company over the next two years. Of the present order book, 48% is from buildings, 23% is from the water segment and the remaining is from the transportation segment. One of three road BOT projects starts execution; while real estate portfolio still moving slow: Unity currently has three road build-operate-transfer (BOT) projects in its portfolio. Out of these, financial closure has been achieved for the two-laning of the Chomu-to-Mahla project in Rajasthan (after a delay) and work has started on the project. In addition, the concession agreement has been signed for one project out of the two recently won road BOT projects; the agreement for the other one will be signed soon. The two projects will achieve financial closure four to six months after the signing of the concession agreement. On the other hand, the real estate project in Nagpur has finally signed the management agreement with Hyatt and will start execution work post-monsoon. All the necessary approvals for the project are in place. However, the project in Bangalore maintains the status quo and expects the final approval in one to two months, as the new government settles down.  Estimates revised downwards: We have revised our revenue estimates downwards by 4% each for FY2013 and FY2014 to factor in the slower project approval, which will hamper the execution of the order book. Further, in light of this we expect the working capital need to rise which would result in higher borrowings. Thus, we have also increased our interest expense estimates. As a result, the earnings estimates stand revised by 10% and 13% for FY2013 and FY2014 respectively.  Maintain Buy with a revised price target of Rs95: We continue to like the company due to its strong order inflow momentum and healthy order book position in an adverse macro-environment. We also like its diversification into the road BOT space with prudent caution. The successful mobilisation of funds from a private equity would remove some overhang on account of the real estate projects. We have not given any value to Unity's road BOT and real estate projects which would add to the valuation whenever they gain some momentum. We maintain our Buy recommendation on the stock with a revised price target of Rs95. At the current market price the stock is trading at a price/earnings multiple of 2.8x FY2013E and 2.3x FY2014E earnings respectively. Selan Exploration Technology Cluster: Ugly Duckling Recommendation: Buy Price target: Rs360 Current market price: Rs265 Price target revised to Rs360 Result highlights Performance remains flattish in absence of regulatory approvals: Selan Exploration (Selan) reported another quarter of a flattish growth in oil production in the absence of the regulatory approvals that are essential to take forward exploration and drilling activity and monetise the oil & gas assets (oil fields). The revenue growth of 15.2% year on year (YoY) was largely driven by the benefits of depreciation in the rupee and a marginal decline in the production volumes as part of the natural depletion of the resources in the existing wells.  Lower interest burden due to repayment of debt: At the profit after tax (PAT) level, the growth was marginally down YoY and grew by 11.4% sequentially due to the rupee's depreciation and a lower interest cost. The company utilised part of the cash on hand to repay its foreign currency debt and consequently it is practically debt-free now.  Looking at alternative means of utilising cash on hand: The upstream oil & gas companies in India have suffered due to the lack of regulatory approvals after the issues raised by the Comptroller and Auditor General of India (CAG) and the subsequent investigations by the law agencies. In the absence the approvals, the management indicated that it is actively looking at some proposals to acquire participatory interest in oil assets abroad. This would result in productive utilisation of the over Rs100 crore of cash left on the books after the repayment of its debt. We believe the management could also look at a buy-back in case it is not successful in carrying out an overseas acquisition.  Lack of regulatory approvals raises risk of de-rating of valuation multiples: The company had commenced drilling operations in Q1FY2012 and had brought in a seasoned professional team to speed up the process of monetising of its oil fields in the Cambay Basin, Gujarat. However, the policy inertia in government departments has resulted in unexpected delays in the regulatory approvals, which are essential to take forward the exploration and drilling programme. Though the management remains hopeful of receiving the approvals (at least partially in some fields) and is contemplating alternative means to productively utililise the cash on hand (it generates Rs35-40 crore of free cash annually at the current production level), the continued delay in the approvals could result in the de-rating of the valuation multiples. We are reducing our production volume estimates for FY2013 and FY2014 to factor in the concerns. Accordingly we revise down our target multiple of 4x EV/EBITDA (FY2014E) and hence downgrade our price target to Rs360.  PTC India Cluster: Apple Green Recommendation: Buy Price target: Rs71 Current market price: Rs60 Price target revised to Rs71 Result highlights Q1FY2013 results affected by lower rebate income: PTC India's Q1FY2013 results were significantly below expectations led by a fall in the rebate and treasury incomes. The company started selling power under power tolling agreements during this quarter and made an operating profit of Rs12.5 crore (approximately Re1/unit). Its management indicated that the sustainability of the profit of the power tolling business could be determined only after some time as the business is currently at a very nascent stage. The payment from the Tamil Nadu State Electricity Board (SEB) has started coming in. The company has already received over Rs175 crore from the SEB and expects to receive the balance (Rs450 crore) by the end of CY2012. However, the company is yet to receive the timeline for the payment due (over Rs450 crore) from the Uttar Pradesh SEB.  Top line fell by 20%: The top line of the company fell by 20% year on year (YoY) driven by a 18% year-on-year (Y-o-Y) fall in the realisation/unit while the trading volumes were in line with our expectation. The number of power units sold under the long-term contracts was stable at around 1 billion units on a yearly basis. The company started selling power under power tolling agreements (for the Simhapuri power project of 200MW) in this quarter and sold ~121.7  million units.  Fall in rebate and treasury incomes mars profitability: The operating profit margin (OPM) fell to 1.6% from 1.9% in Q1FY2012. This was mainly due to a drop in the rebate income, which declined to Rs2.2 crore in the quarter from Rs23.4 crore in Q1FY2012. The overall operating profit fell by 33% on a yearly basis. The core trading margin (excluding the surcharges and rebates) dropped to 4 paise/unit from 4.7 paise/unit in Q4FY2012 owing to increased competition in the short-term trading market. The company is estimated to have earned a profit of Re1/unit on the power sold under the tolling agreements. It charges a 2% rebate on the payment in case of early payment while it charges a surcharge @ 15% per annum on delayed payments.  Net profit dropped by 49%: The other income decreased by 88% YoY led by a fall in the investments-the treasury income declined to Rs1.6 crore in Q1FY2013 as against Rs17.3 crore in the corresponding quarter of the last year. The positive surprise was the fall in the interest cost (became almost nil) as the debt level was maintained at zero throughout the quarter. Further, led by a higher tax rate, the profit after tax (PAT) fell by 49% to Rs22.9 crore, which is lower than our expectation of Rs40 crore.  Receivables remain high at Rs2,700 crore: For the quarter, the net cumulative receivables from the Tamil Nadu and Uttar Pradesh SEBs remained high at Rs930 crore with only Rs100 crore of payment received. The total receivables further increased from Rs2,581 crore in Q4FY2012. However, the company is sitting on a surcharge of over Rs150 crore on account a delay in receiving payments from the SEBs; this would boost the future profitability as and when the dues are received. Estimates downgraded by 10%: We have further downgraded our estimates for FY2013 and FY2014 by 10% each in view of the impending competitive margin pressure, the falling short-term trading volumes and the other income assumption. We expect the profit from the core trading business to post a compounded annual growth rate of 14.1% over FY2012-14. PTC India Financial Services (PFS) has reported a strong performance for the quarter (with its PAT up 124% on a yearly basis) led by a rise in its interest income from loan financing during the quarter. One of its power tolling projects aggregating 200MW was commissioned in early FY2013 and boosted its revenue and profitability during the quarter.  Price target revised to Rs71: We expect the overall power traded volumes to significantly increase on the back of the long-term power purchase agreements (PPAs) in the next two years when the undersigned power projects would start commercial operation. However, the recovery of payments from the SEBs and an improvement in the execution of power projects have become essential for keeping PTC India's growth story intact. We have increased our target valuation multiple of PTC Energy to 2x its FY2012 book value (from 1 x earlier) as the revenue from it's first power tolling projects started flowing in from Q1FY2013. However, on account of our downgraded estimates for the core power trading business, our sum-of-the-parts (SOTP) based price target has been revised downwards to Rs71. As the stock's current valuation still looks attractive at 0.7x FY2014 estimated book value, we maintain our Buy rating on PTC India.   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.