Fw: Investor's Eye: Special - Q1FY2013 Banking earnings review; Update - Ratnamani Metals and Tubes, Orbit Corporation, ISMT, Telecommunications

 

 

Investor's Eye [August 17, 2012] Sharekhan www.sharekhan.com

Summary of Contents SHAREKHAN SPECIAL Q1FY2013 Banking earnings review  Divergence between the performances of private banks and public banks continues Earnings growth in line: During Q1FY2013, Sharekhan's banking universe reported an earnings growth of 24% year on year (YoY; ex State Bank of India [SBI]), which was in line with our estimate. However, the net interest income (NII) growth slowed to 17.6% YoY (from 22% in Q4FY2012 and 17.1% YoY in Q3FY2012) due to a decline in the net interest margin (NIM) and a slower business growth.  Pressure on margins to continue: The NIM on an average declined by 15 basis points QoQ in Q1FY2013 (Bank of India [BoI] and SBI posted the highest decline) led by a rise in the cost of funds, a decline in the yields and a reversal of interest on slippages. Going ahead, the reduction in the lending rates (in the retail, small and medium enterprises [SME] segments) and the relatively higher deposit rates will continue to put pressure on the margins which will affect the NII growth. Asset quality weakens though divergence continues (PSBs vs private banks): The slippages rose sharply for the public sector banks (PSBs; especially SBI, Punjab National Bank [PNB] and Union Bank of India [UBI]) leading to a rise in the non-performing assets (NPAs). The restructured assets also expanded across PSBs. However, the private banks largely maintained their asset quality at healthy levels. Top picks: ICICI Bank, Federal Bank and SBI: The Q1FY2013 results clearly reflect the impact of the worsening macro environment on the performance of banks. The gross domestic product (GDP) growth estimates are being revised downwards while the inflation estimates are being raised (due to a deficit rainfall, high fuel prices) which could increase the challenges for the banking sector in terms of business growth, NIMs and asset quality. This could ultimately affect the earnings growth of the sector. Going ahead, the slippages and restructuring will continue albeit at a lower pace for the PSBs and that is partly reflected in the valuations of banks. The private banks are likely to outperform the PSBs and maintain a decent earnings growth and asset quality. We prefer ICICI Bank (which sustained the improvement in its earnings and asset quality) and Federal Bank (whose valuations are attractive) among the private banks. Among the PSBs we prefer SBI (due to its strong core performance and attractive valuations after the correction in stock price. STOCK UPDATE Ratnamani Metals and Tubes Cluster: Ugly Duckling Recommendation: Hold Price target: Rs129 Current market price: Rs115 Downgraded to Hold Result highlights Revenues down due to sluggish performance of CS pipes: For the quarter ended June 2012, Ratnamani Metals & Tubes (Ratnamani) reported a mixed performance with the stainless steel (SS) pipes segment reporting a 24.8% year-on-year (Y-o-Y) revenue growth and the carbon steel (CS) pipes segment reporting a 28% Y-o-Y revenue decline. The net sales for the quarter dropped 2.5% to Rs282.3 crore. The overall volume fell whereas the realisation improved year on year (YoY) during the quarter.  OPM remains under pressure: The gross profit margin (GPM) improved by 600 basis points YoY to 39.1% on the back of an improvement in the realisations. The realisation for the SS pipes segment was up 30.5% YoY boosted by a delivery related to a nuclear plant deal. The realisation for the CS pipes segment increased by 14.2% YoY. The operating profit margin (OPM) was down by 190 basis points YoY to 16.8% due to the impact of a foreign exchange loss of Rs12 crore and freight charges, which are now borne by the company (effective from Q2FY2012).  Net profit down 24.7%: On account of a 12.8% fall in the operating profit, a 53.3% increase in the interest cost and a higher effective tax rate (32.6% against 30.1% in Q1FY2012), the net profit was fell 24.7% to Rs20.3 crore. The company's interest cost has been increasing quarter on quarter mainly due to the depreciating rupee because about 90% of its total debt of Rs255 crore is dollar denominated. Demand environment remains uncertain: The demand environment remains uncertain due to the existing volatile macro-economic environment. The export demand is resilient. The company's order book is improving. However, the pricing pressure remains. In the SS pipes segment, the demand for value-added products is improving. During the quarter under review, the volume of the SS pipes segment declined but its realisation surged mainly due to some deliveries relating to a nuclear plant deal. The deliveries under this deal would be recorded in Q2FY2013 as well. With regards the CS pipes segment, the demand remains volatile and the pricing continues to be under pressure. On the industry side, the company is witnessing demand from the refinery and power sectors. Downgraded to Hold: Ratnamani reported a soft performance for Q1FY2013 on account of the lower than expected performance of its CS pipes segment, the flat performance of its SS pipes segment and the higher interest cost. In view of the current quarter's performance and the domestic demand environment, we have tweaked our revenue estimates by 3.3% and 1.2% for FY2013 and FY2014 respectively. We have also revised our earnings estimates for FY2013 and FY2014 by 8.7% and 3.7% respectively. Accordingly, we have lowered our price target to Rs129 (5x FY2014E earnings). In view of the limited upside to the stock from the current levels, we have downgraded our rating on Ratnamani to Hold from Buy. The risk to our rating and price target remains a faster than expected revival in the demand environment. Orbit Corporation Cluster: Ugly Duckling Recommendation: Hold Price target: Rs60 Current market price: Rs46 Price target revised to Rs60 Result highlights Results below expectation: Orbit Corporation (Orbit)'s Q1FY2013 consolidated revenues came in at Rs85 crore, which is below our expectation. The revenues were flat year on year (YoY) and declined by 31% quarter on quarter (QoQ) mainly due to weak execution of projects and poor pre-sales during the previous quarters. Revenues were booked largely from Orbit Terraces with a 56% share followed by Orbit Residency Park with a 27% contribution. The quarter witnessed poor execution of a few projects that are stuck or have slowed down for want of clearances and approvals. OPM expands but higher interest cost spoils the play completely: The operating profit margin (OPM) expanded from 38.3% in Q1FY2012 and 35.7% in Q4FY2012 to 39.6% in the quarter under review due to a lower raw material cost. On the other hand, in spite of the margin expansion, an escalating interest burden (up 77.5%) completely eroded the bottom line and resulted in a loss of Rs2.2 crore for the company. The company raised additional debt of ~Rs50 crore during the quarter taking the debt/equity ratio to 1x. Looking at partial or full exit in a few projects: Orbit is looking to partially or fully exit a few of its projects, namely Orbit Grandeur, Santa Cruz (an SRA project), the Kilachand project at Napean Sea Road and Orbit Midtown at Lalbaugh, all in Mumbai. If Orbit manages to successfully close these deals, it will help the company to bring down the debt on the books which is currently at about Rs1,000 crore. The management is eyeing Rs300-400 crore from these deals. Estimates revised downwards: We are reducing our earnings estimates for FY2013 and FY2014 by 28% and 14% respectively to factor in the higher interest cost and the persistent slower pace of approvals and clearances. Even the management has indicated that for the next three to four quarters project execution would remain slow because of the delay in obtaining approvals and few new launches in the pipeline.  Reduce to Hold with a price target of Rs60: Poor sales across projects due to regulatory uncertainty and the absence of new launches on account of the pending approvals and clearances had taken a toll on the company as well as the industry. Though the regulatory environment has started to improve but it is yet to gain momentum and would take another three to four quarters to do so. Till then the execution of the existing projects and the new launches will be rolling at a snail's pace. This would keep the inventory and the debtor levels high which will keep the debt level high in the books. Thus, the key thing to watch out for going ahead will be the success of the company in exiting a few of its projects to bring down the working capital pressure slightly. Hence, we downgrade the stock from Buy to Hold with a revised price target of Rs60. At the current market price, the stock trades at 12.1x and 6.2x its FY2013E and FY2014E earnings respectively.    ISMT Cluster: Ugly Duckling Recommendation: Book out Current market price: Rs22 Book out Key points Unfavourable business environment: ISMT's performance has deteriorated with the softening demand environment and increased foreign exchange (forex) fluctuations. Over the last two quarters, the volumes in the steel segment have dropped by 27.2% year on year (YoY) in Q4FY2012 and by 20.5% YoY in Q1FY2013. The volumes in the tube segment have also dropped by 8.4% YoY in Q4FY2012 and by 6.1% in Q1FY2013. Going ahead, with the gross domestic product forecasts being downgraded to sub-6% levels, the domestic demand is expected to deteriorate which could lead to a further fall in the volumes. ISMT has also been unable to effectively manage forex fluctuations. In the last four quarters, the company has reported a total forex loss Rs50.8 crore, which is close to one-third of its earnings before interest and taxes (EBIT) of Rs146.3 crore in the same period. Limited benefit from its captive power plant: After a long delay in execution, ISMT commissioned its 40MW coal based captive power plant (CCP) in end May 2012. The company was expecting the CPP to save Rs60-65 crore in the power cost. However, it has been unable to secure coal supply at the indicated rates and the cost benefits of captive power supply are likely to get significantly reduced now. This was one of the major re-rating factors for the stock but has not played out well.  Valuation; cheap but could get cheaper: ISMT has got de-rated significantly due to a weak demand environment, margin pressure and its inability to manage forex fluctuation related losses. The long-awaited captive power plant finally got commissioned but in the absence of a secure coal supply at reasonable prices the cost benefits would get curtailed significantly. Thus, the financial performance is unlikely to improve materially in the coming quarters. The stock could continue to languish despite trading at 0.6x its book value. We are, therefore, suspending our coverage on the stock and would advise you to book out of it at the current levels.     SECTOR UPDATE Telecommunications Weak net adds; Uninor posts decline while Bharti leads In July 2012 the GSM operators across India (excluding Reliance Communications [RCom] and Tata Telecommunications [Tata Tele]) added a meagre 1.70 million subscribers, taking the cumulative GSM subscriber base to about 679.05 million, an increase of 0.25% over the June 2012 base.  The July 2012 net additions of 1.7 million represented a decline of about 63% month on month (MoM) following a 36% drop in the net additions in June 2012. This was the second consecutive month of a decline in the net additions. The decline in the net addition numbers was led by Uninor, which posted a decline of over 1 million in the total subscriber numbers for the month. The major incumbent operators, Bharti Airtel and Idea Cellular, also posted a significant drop in their net additions. View: The Indian telecommunications (telecom) space is plagued with a myriad of policy issues and regulatory uncertainty. The business environment also remains tough. We, therefore, maintain our cautious stance on the sector. However, amongst the listed telecom companies, Bharti Airtel appears to be the most resilient and agile to face the regulatory and competitive risks on account of its strong balance sheet. We, thus, prefer Bharti Airtel from a long-term perspective. Though in view of the business risk in the short term and the absence of any major triggers we have downgraded our recommendation on the stock from Buy to Hold and reduced our price target for it from Rs362 to Rs310.     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.