Fw: Investor's Eye: Pulse - Inflation declines to 6.55%; Update - Aditya Birla Nuvo, Eros International Media, Punj Lloyd, Fertilisers

 

 

Investor's Eye [February 14, 2012]  Summary of Contents PULSE TRACK Inflation declines to 6.55% The Wholesale Price Index (WPI)-based inflation for January 2012 came in at 6.55%, slightly lower than the Street's expectations. However, the inflation rate for November 2011 has been revised upwards to 9.46% from the provisional figure of 9.11%. Outlook Going ahead, inflation is likely to remain at around 7% due to the declining food prices as well as a higher base effect. The RBI reduced the cash reserve ratio (CRR) by 50 basis points in the third quarter review of the monetary policy. But it hinted at a reduction in the policy rates based on the inflation trend and the fiscal deficit situation. Inflation is trending down due to the softening of growth in the Index of IIP and GDP. This could pave the way for a reduction in the repo rates by the RBI in the mid-quarter policy review in March this year.   STOCK UPDATE Aditya Birla Nuvo  Cluster: Apple Green Recommendation: Buy Price target: Rs1,050 Current market price: Rs840 Resilient show despite challenging macro environment Result highlights Consolidated top line up 25.2% YoY; led by agri, ITES and telecom businesses: The consolidated revenues of Aditya Birla Nuvo (ABN) grew by 25.2% as a result of a strong growth in the fertiliser business (owing to increased trading of non-urea fertilisers) and buoyancy in the information technology enabled services (ITES) and telecommunications (telecom) businesses. The ITES and telecom businesses grew by 30% and 27% respectively during the quarter. The growth in the fertiliser and ITES segments could partly be attributed to the impact of favourable currency movement. Operating profit grew by 14.6% YoY: A strong revenue growth but cost pressure on the manufacturing front affected the operating performance. Thus, the operating profit grew by 14.6% year on year (YoY) led by the fertiliser, rayon yarn, telecom, and IT and ITES segments.  Margins contracted due to cost pressure across the board: Except for the rayon yarn and telecom segments, the PBIT margin contracted across the board as a result of the cost pressure in the manufacturing business, a challenging business environment in the financial services business, and an increased spent on distribution and agency in the life insurance business. As a result, the operating profit margin (OPM) contracted by 130 basis points YoY from 15.2% in Q3FY2011 to 13.9% in Q3FY2012. High interest and depreciation charges dragged adjusted earnings by 8% YoY: Despite a robust growth in the revenue and a decent growth in the operating profit, the high interest cost coupled with an increased depreciation charge (both were high on account of high working capital, increased 3G interest and amortisation) dragged the earnings downward. The earnings contracted by 8% on a year-on-year (Y-o-Y) basis.  Update on key businesses: The financial services business experienced pressure with contraction in the revenue/margin and earnings of the asset management and broking business. The favourable base effect of the last year started reflecting in the Q3 report card, which saw the new business premium grow at 3% YoY. The insurance business continues to be in a profitability mode (it posted a net profit of Rs102 crore vs a net profit of Rs127 crore in Q3FY2011). The manufacturing business posted a mixed trend with the agri and textile businesses showing an exceptional growth but the insulator and carbon black businesses experiencing pressure. The telecom business (Idea Cellular) continues to outperform the industry, growing its revenues, market share and margins steadily.  Valuation and view: We continue to like the strong positioning that ABN's businesses enjoy in their respective fields. ABN is amongst the top five players in the insurance, asset management, telecom (Idea Cellular-the fastest growing telecom company; third in ranking), and Madura Garments with its marquee brands, consistent and resilient growth, and a profitable set-up. Given the diverse businesses in which ABN is present, we value the company on a sum-of-the-parts basis, giving a piecemeal value to each business and then adjusting the same with the company's consolidated debt to arrive at a price target. Thus, our price target for the stock is Rs1,050 and we maintain our Buy rating on the stock.  Eros International Media  Cluster: Emerging Star Recommendation: Buy Price target: Rs298 Current market price: Rs210 Stellar performance in a seasonally strong quarter Result highlights Strong performance: For the quarter ended December 2011, Eros International Media Ltd (EIML) reported a strong set of numbers powered by a strong box office performance of its releases like "Ra.One", "Rockstar" and "Desi Boyz". The three releases taken together had a box office collection of about Rs330 crore. For the quarter, the company's revenues jumped by 46% year on year (YoY) to Rs408.4 crore, which is marginally below our expectations (due to lower revenues from catalogue sales; catalogue sales expected to happen in Q4FY2012). The stand-alone revenues (Hindi and regional films) surged 68% to Rs365.1 crore. The revenues from catalogue sales accounted for about 8% of the revenues for the quarter. Overall, the company released 19 films in the quarter including six in Hindi, 12 in Tamil and one in Punjabi.  Impressive margin performance: The EBITDA margin improved by 250 basis points YoY to 24.7% on the back of the strong revenue performance and higher catalogue sales in the Tamil film business. The EBITDA margin for the stand-alone business improved by 40 basis points YoY to 24.2% whereas that of the subsidiaries including the Tamil film business improved by 1,270 basis points to 29.4%. The resultant EBITDA grew by 62.4% to Rs101 crore. The effective tax rate for the quarter increased by 160 basis points YoY to 31.4%. The resultant net profit after minority interest surged by 66.7% YoY to Rs71.4 crore, which is above our expectations. On a reported basis, after the prior-period tax provisioning of Rs2.3 crore the net profit grew by 61.4% YoY to Rs69.1 crore.  Big releases lined up for CY2012: EIML has lined up strong releases for CY2012 including "Agent Vinod", which is to be released in March 2012, and "Housefull 2", to be released in April 2012. As per the current plan, the company has ten Hindi films, the Rajnikanth starrer Tamil 3D film "Kochadaiyaan" and the Vijay starrer "Yohan" (due for release in Q3FY2013) lined up for CY2012. It has maintained its annual capital expenditure (capex) budget of Rs600 crore with a target to release at least seven to eight big budget films and a mix of regional films. The company has full visibility of its film slate for CY2012 and CY2013 and some visibility for CY2014. Further, the company is in continuous discussion with the leading producers for co-production deals, which are expected to be finalised in the next couple of quarters boosting its film slate for the next two years.  Valuation: We remain positive about EIML's growth prospects for the coming years and derive comfort from the strong execution expertise of its management. The growing traction in the satellite rights and other media segments would provide further opportunity to de-risk its business model. At the current market price of Rs210, the stock is attractively available at reasonable valuation of 9x FY2013 earnings estimate. We maintain our Buy rating on the stock with a price target of Rs298. Punj Lloyd  Cluster: Apple Green Recommendation: Reduce Price target: Under review Current market price: Rs62 Poor operating performance continues Result highlights Strong revenue growth; but OPM shrinks: The Q3FY2012 consolidated revenues of Punj Lloyd grew by 29% year on year (YoY) to Rs2,694 crore (better than estimated) on account of strong execution and robust order inflow over the previous few quarters. The infrastructure and pipeline segments continued to dominate in terms of revenue contribution with a combined 64% share. But going forward, the pipeline business' share will reduce on account of a shrinking order book. Geography-wise, Asia-Pacific contributed 47% followed by South Asia at 44%. However, the operating profit margin (OPM) was down to a mere 0.3% due to one-off items worth Rs136 crore, adjusting for which the OPM stands at 5.3%. That is 190 basis points better compared to the Q3FY2011 OPM but 260 basis points lower sequentially. Thus, the EBITDA rose by 103% YoY but dropped by 23% quarter on quarter (QoQ). The one-off items include: (1) Rs36 crore on account of the write-back of work-in-progress (WIP) in case of the Libyan projects; and (2) Rs100 crore on account of the deconsolidation of its subsidiary, Simon Carves.  Other income boosted reported PAT: Despite a 103% growth YoY at the EBITDA level, Punj Lloyd reported a loss of Rs94 crore at the net profit level after adjusting for the one-time gains on the back of high depreciation and interest charges, a higher tax outgo and a lower other income. The interest cost went up 62% YoY on the back of a rise in the debt and interest rates. However, the reported profit after tax (PAT) came at Rs70 crore on account of Rs300 crore of extraordinary other income for the quarter. The extraordinary other income includes: (1) Rs183 crore on account of the deconsolidation of its subsidiary Simon Carves from the group financials as the same has gone into liquidation; and (2) a foreign exchange gain of Rs117 crore.  Healthy order book led by strong order inflow: Punj Lloyd's order book grew to Rs28,270 crore on the back of strong order inflow to the tune of Rs12,364 crore during the nine months of FY2012. The orders were spread across sectors like pipelines, process facilities, nuclear power, thermal power, railways, oil & gas, civil and construction. Going ahead, the management would focus more on the international market than the highly competitive domestic market as the former enjoys a high margin and sees comparatively lesser competition. The order book-to-sales ratio currently stands at 3.6x its FY2011 revenue which provides good revenue visibility. Estimates revised downwards: On account of better execution in M9FY2012, we have marginally revised our revenue estimates upwards by 3% each for FY2012 and FY2013. However, we have reduced our OPM estimates by 100 basis points to 7% for FY2012 and by 50 basis points to 8% for FY2013. Hence, the bottom line estimate for FY2012 stands reduced by 6% to Rs48 crore after factoring in the lower OPM, and the higher interest and depreciation costs. But the fall has been minimised on the back of one-time other incomes. However, for FY2013 the fall in the reported PAT would be much higher on account of a lower OPM, an escalating interest cost and a rising depreciation charge. Hence, the revised PAT estimate for FY2013 stands at Rs101 crore as against Rs173 crore earlier (a fall of 42%).  Retain our Reduce rating but upgrade our outlook: The company has shown an improvement at the execution level over the last two to three quarters but its earnings performance remains under pressure with huge margin fluctuations and mounting interest burden. Further, though the situation has improved in Libya, the execution has yet to take off. It would take another few quarters for the same to kick off. However, the only positive thing emerging out of the result is the reduction in auditors' qualification which would now clear some of the dark clouds pertaining to the various issues that have been an overhang on the stock for long. The coming quarters would be keenly watched for (1) an improvement in the operational performance; (2) a reduction of debt; and (3) the start of execution of the Libyan orders. We retain our Reduce rating on the stock and keep our price target under review.  SECTOR UPDATE Fertilisers      Consumption shift toward cheap fertilisers Key points   Increase in import of NPK fertilisers (mainly low graded) and urea: In January 2012, the aggregate sales of the domestically produced fertilisers (by 15 leading manufacturers) declined by 17% as compared to that in the same period of the last year. In January 2012 the import of complex fertilisers and urea increased by 180% and 4% respectively. The DAP production was hit by a lower demand, an increase in the stock pile and the high cost of the other inputs. However, the shortfall was made up by the import of low-grade complex fertilisers, which are cheaper than DAP and MOP. Government to decrease subsidy pay-out for complex fertilisers: The government may reduce the subsidy pay-out range by 5 to 25% to complex fertiliser manufacturers in view of the decline in fertiliser prices in the international market. The prices of fertilisers have seen a declining trend in recent times due to a decrease in the demand. According to media sources, for FY2013 the government may reduce the subsidy pay-out on DAP by 24% to Rs15,000 per tonne (a decline of Rs4,763 per tonne) and that on MOP by 7% (a decline of Rs1,054 per tonne) to Rs15,000 per tonne.  Consumption of urea declined during the month: There was a decrease of 8% in the consumption of urea in January 2012 mainly due the low rainfall in coastal Andhra Pradesh, Rayalaseema and Telangana during the north-east monsoon rains. The total urea consumption decreased from 22.11 lakh tonne to 20.26 lakh tonne in January 2012. Urea is the largest fertiliser consumed in India as its price is still under government control. The fall in the consumption of urea was much lower compared with the non-urea fertilisers, which saw a fall of nearly 31% in January 2012 on account of higher prices and lower rainfall. Consumption of fertilisers has seen a marginal decline on YTD basis: For the first ten months of FY2012, the cumulative (including imports and domestic production) fertiliser sales declined slightly in the country. On a year-till-date (YTD) basis, the sales of the domestically produced fertilisers have seen a decline of 1.2% whereas the imports have declined by 14%. The reasons for the lower imports are the higher price in the international market, the low demand for MOP and DAP, and the huge pile of stock in the domestic market due to an increase in the prices of both nutrients.  Outlook-volume offtake to improve but margins to remain under pressure: We believe that going ahead, the production of urea and non-urea fertilisers will increase on the back of a good demand during the kharif season and a downward trend in the prices of raw materials in the international market due to moderation in the demand for fertilisers and the raw materials required to manufacture them. We have a positive view on the agri input companies mainly due to the declining trend in the prices of fertilisers in the international market and the upcoming kharif season.  Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article. Regards, The Sharekhan Research Team myaccount@sharekhan.com Manage your newsletter subscriptions

 

Fw: Investor's Eye: Update - State Bank of India, Sun Pharmaceutical Industries, Tata Chemicals, CESC; Viewpoint - Eicher Motors; Special - Q3FY2012 Capital Goods & Engineering earnings review

Investor's Eye [February 13, 2012]  Summary of Contents STOCK UPDATE State Bank of India  Cluster: Apple Green Recommendation: Buy Price target: Rs2,400 Current market price: Rs2,129 Price target revised to Rs2,400 Result highlights State Bank of India (SBI)'s Q3FY2012 results were ahead of our estimates as the net profits grew by 15.4% year on year (YoY; 16.1% quarter on quarter [QoQ]) to Rs3,263 crore. This was on account of a strong growth in the net interest income and a decline in the provision expenses. The net interest income (NII) grew by 26.7% YoY (10% QoQ) which was ahead of our estimates. The growth in NII was contributed by a sequential expansion in margins and a strong growth in advances. The domestic net interest margin (NIM) expanded by 32bps QoQ to 4.39%.   Business growth remained strong as the advances of the bank grew by 19.6% YoY (10% QoQ) led by a strong growth in international as well as agriculture advances. The deposits of the bank registered a growth of 13.9% YoY while the current account savings account (CASA) ratio was at 47.5% (47.6% in Q2FY2012). The non interest income of the bank declined by 35.8% YoY due to the losses (Rs1,090 crore) contributed by treasury, largely from the equity book. The fee income growth also remained subdued, partly contributed by a large base of Q3FY2011. The asset quality of the bank deteriorated on a sequential basis as the gross and net non performing assets (NPAs) increased to 4.61% and 2.22% respectively during the quarter from 4.19% and 2.04% in Q2FY2012. The provision coverage ratio (PCR) of the bank declined to 62.5% from 63.5%. The bank also restructured Rs2,188 crore of advances in Q3FY2012. Outlook SBI registered a robust growth in its core income, contributed by expansion in margins and growth in advances. Despite a lackluster non interest income, the bank posted a strong growth in profits. While slippages have been a cause of concern, the strong traction in core income supported by higher NIM will compensate for the credit costs. We have fine-tuned our estimates for FY2012 and FY2013 to factor higher NIMs, slippages and expect its earnings to grow at a compounded annual growth rate (CAGR) of 32.4% over FY2011-13. We also revise our sum of the parts (SOTP) based target price to Rs2,400 (valuing the standalone bank at Rs1,795). We upgrade our recommendation from Hold to Buy. Sun Pharmaceutical Industries  Cluster: Ugly Duckling Recommendation: Buy Price target: Rs692 Current market price: Rs552 Taro jacks up growth; price target set at Rs692 Result highlights Q3FY2012 results better than expected; guidance revised for FY2012: Sun Pharmaceutical Industries (Sun Pharma) in Q3FY2012 reported a 34% year on year (YoY) growth in net sales to Rs2,145 crore, which exceeds our estimates by 12%. The operating profit margin (OPM) swelled by 1,740bps YoY to 44.9% during the quarter, which helped the company register a 90% YoY rise in net profits to Rs668 crore. The better than expected result during the quarter is mainly on account of (a) an impressive performance by Taro Pharmaceutical Industries (Taro; 66.3% subsidiary of Sun Pharma) (b) favorable currency and (c) an upsurge in the bulk drug business (35% YoY rise in sales). The company's management has revised the revenue growth guidance to 32-34% for FY2012 from the earlier 28-30%. Impressive performance of Taro: During the quarter Taro reported a 44% YoY rise in net sales to $148 million on price increases in select product segments. This also helped the gross profit margin surge by 1,200bps YoY to 71.6% during the quarter. The net profit of Taro jumped by 278% to $62 million despite a $6.3 million loss on foreign exchange (forex).  We fine tune our estimates; also introduce FY2014 estimates: Taking cues from M9FY2012 results and our interactions with the management of Sun Pharma, we revise our revenue estimates upward by 9% and 6% for FY2012 and FY2013 respectively while our net profit stands revised upward by 7% and 5% respectively. Besides, we introduce estimates for FY2014.  We set a target price of Rs692 based on FY2014 estimates; maintain Buy: As we get close to the end of FY2012, we base our target price on FY2014 estimates. Our new target price at Rs692 implies 23x FY2013E earnings. We maintain our Buy rating on the stock. The stock is currently trading at 18.4x FY2014E earnings per share (EPS). Tata Chemicals  Cluster: Vulture's Pick Recommendation: Hold Price target: Rs400 Current market price: Rs362 Downgraded to Hold Result highlights Q3FY2012 results significantly higher than expectated: Tata Chemicals Ltd (TCL)'s revenue from operations during Q3FY2012 was significantly higher than our expectation mainly due to a higher than expected growth in the volume offtake and a higher realisation across segments. The operating profit margin (OPM) at 14.6% decreased by 70 basis points (as per our expectation) compared to the Q2FY2011 OPM due to an increased input cost. The adjusted profit after tax (PAT; after minority interest) increased by 76.4% to Rs249.9 crore on account of a lower than expected minority interest out go. During the quarter there were some extraordinary items, which included an unrealised loss of Rs7 crore on revaluation of an unhedged external commercial borrowing (ECB), impairment of assets worth Rs23 crore of bio fuel and Rallis (Turbhe plant), a voluntary retirement scheme (VRS) of Rs17 at Rallis India and a profit of Rs21 crore from the sale of assets.  Firm domestic demand drives overall revenue: The revenue for the quarter grew by 31.9% year on year (YoY) to Rs3,809.9 crore. The revenue from the chemical segment grew by 26.6% to Rs1,667.0 crore and the revenue from the agri input segment jumped by 34.5% to Rs434.4 crore driven by a 40.4% jump in the volume offtake in the fertiliser business. During the quarter the company took a mild price rise of $10 per tonne in soda ash across geographies which helped it to maintain its margin.  Price hikes mitigate impact of rising input cost: The price hike implemented across locations during the quarter helped the company to maintain its margin and limit the increase in the input cost. In Q3FY2012 the volume growth in the chemical segment moderated across geographies with Africa being the worst affected (volumes down 14.7%). In contrast, TCL's domestic volumes declined marginally by 2.9% during the same period. The African (Magadi) operations were mainly affected due to a power outage and a lack of rakes. During Q3FY2012 TCL's European operations witnessed an improvement in utilisation due to a delay in the onset of winter. The domestic soda ash business also saw a good growth (a price rise of Rs500 per tonne in Q3FY2012) in volume and realisation due to a higher demand from across sectors.  Outlook weak due to softening of demand and margin pressure: The margins in the fertilier and inorganic chemical divisions are expected to remain under pressure due to the firm prices of the inputs, such as lime stone, coke and phosphoric acid. On the other hand, the urea business would get affected by a planned shutdown of a plant in March and April this year. The outlook for soda ash and its prices would depend on the Chinese demand, which could soften in the coming months. There are signs of slower volume offtake in the North East Asia, China and Japan. Downgraded to Hold with price target of Rs400: We have largely kept our consolidated earning estimate unchanged for FY2012, however we are marginally reducing our revenue and earnings estimates for FY2013 to factor lower than expected volume growth due to planned shutdown of urea plant in April 2012. On the valuation front, we value TCL at 9.3x FY2013E earnings per share (EPS) and investment value of Rs45 per share and arrive at fair price of Rs400. Given the limited upside from the current level and relatively weak outlook, we downgrade our recommendation to 'Hold' rating for the stock. CESC  Cluster: Ugly Duckling Recommendation: Buy Price target: Rs405 Current market price: Rs270 Price target revised to Rs405 Result highlights Sales reported lower than estimated on lower generation and realisation: CESC's sales in Q3FY2012 grew by 11% year on year (YoY) but declined by 17% quarter on quarter (QoQ) to Rs1,032 crore, 5% lower than our estimate. During the quarter, against our estimate of 2,038 million units, power sent out was 2,005 million units, 3% higher Y-o-Y and 14% lower Q-o-Q. We learned that the tariff order for 2011-12 is awaited; hence consumers are billed based on the existing tariff regulations (which don't adjust the recent rise in operation and maintenance [O&M] expenses).  Higher fuel cost and provisioning for O&M expense pressurised operating margin: Fuel cost as a percentage of sales surged from 36% in Q3FY2011 and 37% in Q2FY2012 to 42% in Q3FY2012, indicating higher cost for fuel coupled with lower volume. The per unit cost of generation grew by 17% YoY while declined by 10% QoQ. On an absolute basis, there is a decline of Rs40-50 crore at the operating profit level, both Y-o-Y and Q-o-Q.  Lower sales impact operating and net profit on absolute basis: The reported sales came in around Rs56 crore lower than our estimates during Q3FY2012; a similar quantum of impact was also observed at the operating profit level (Rs48 crore) and the profit before tax (PBT) level (Rs50 crore). With an effective tax rate of approximately 20%, the PAT recorded a decline of 33% YoY and 35% QoQ to Rs74 crore, against our estimate of Rs113 crore.  We fine tune estimates and target price: Based on the M9FY2012 numbers, we have fine tuned our estimates for FY2012. We have revised down our sales estimate by 3% in both FY2012 and FY2013. However, to factor in a higher operating cost, we have trimmed down our operating profit by 8% and 6% respectively in FY2012 and FY2013. Effectively, we cut our PAT estimate by 15% in FY2012 and 13% in FY2013. Consequently, we cut our target price from Rs413 to Rs405 (factoring a cut of Rs8 in the existing power business valuation based on book value [BV]).  Spencer's sustained store level profitability: The total number of Spencer's outlets by the end of M9FY2012 is 195 and the total trading area remains at 1,017,000 sq ft by the end of M9FY2012. The same store sales have increased from Rs1,000/sq ft in M9FY2011 to Rs1,159/sq ft in M9FY2012, which is a growth of 15.9%. The average sales have increased from Rs964/sq ft in M9FY2011 to Rs1,087/sq ft in M9FY2012, a growth of 12.76%. Spencer`s retail has sustained store level profitability since last year. In M9FY2012, it recorded an EBITDA of Rs35/sq ft per month (against Rs31/sq ft in H1FY2012). Currently the store level EBITDA margin is hovering around 3.5%, which the management aims to take to 4% in FY2013; the same would be a key monitorable.  Valuation and view: Currently, the stock is trading at 0.6x its FY2012 and 0.5x its FY2013 standalone book value. Given the revision in our estimates, we revise down our target price from Rs413 to Rs405 (affecting BV of existing business). However, we continue to rate CESC as "Buy" as we believe it is one of the cheapest utility stocks available in the Indian market, trading at a significant discount to its book value and the average multiple of the comparable companies.  VIEWPOINT Eicher Motors        Consolidating before the next leap Consolidated business reports strong operating performance for Q4CY2011 The revenues grew strongly on both Y-o-Y and Q-o-Q bases on account of a better volume growth and a higher realisation in both VECV and the two-wheeler business. The consolidated margin at 9.8% exceeded expectations on the back of the strong operational performance of VECV. The net profit at Rs85.4 crore grew at a higher rate than the revenue in both the business. Valuation For VECV, we estimate a volume growth of 8.9% and 20.2% in CY2012 and CY2013 respectively. We have assumed a 95% capacity utilisation level giving advantage to a low product base and the available opportunity for a pan-India spread. We expect the OPM to stabilise around 9% after considering the increased competitive scenario in the industry as well as the company's market development initiatives. Our EPS expectations for VECV during FY2012 and FY2013 are estimated at Rs70.7 and Rs85.7 respectively.  The stand-alone motorcycle business is expected to report a volume growth of 23.3% and that of 45.8% in CY2012 and CY2013 respectively. We have assumed the maximum capacity utilisation as we see a waiting period of 6-12 months for the company's motorcycles. Our EPS expectations for the motorcycle business under stand-alone reporting are Rs54.2 and Rs76.6 for CY2012 and CY2013 respectively  We arrive at the consolidated EPS estimates of Rs125 and Rs162 for CY2012 and CY2013 respectively after adjusting for the minority interest. Given the bright prospects of the company after its association with Volvo, the stock can trade at 10x CY2013E earnings. We give only a book value per share of Rs100 to the Volvo engine venture on account of the longer than expected gestation period of the business. Even as the current price factors in the positives, we are bullish on the business with a longer-term investment perspective.  SHAREKHAN SPECIAL Q3FY2012 Capital Goods & Engineering earnings review  Key points Good growth in revenue: Most of the companies in our capital goods and engineering universe reported revenues better than our expectation for Q3FY2012. The performance was led by a good execution of projects, and also by a favourable effect accruing from currency fluctuations. These caused the top line to be 4% higher than expected. Conventionally in the capital goods space, the third quarter accounts for 20-25% of the yearly sales and therefore contributes lower revenues.  Margins under pressure, as expected: We were already expecting the margins to be subdued for Q3FY2012, driven by a rise in the input cost and the competitive pricing pressure in a subdued demand environment. Overall, the margins at 11.9% were lower than our expectation of 12.7% (also way below the Q3FY2011 cumulative margin of 14%). Overall, the cumulative profit after tax (PAT) for our coverage companies was 3% lower than our estimates. Many companies continued reporting a rise in inventories which lowered the negative impact of the rise in their raw material costs. However, the same could lead to distress selling if the industry starts facing an oversupply situation. Moreover, the recent increase in the prices of metals like copper is likely to put the margins under stress in the coming quarters also.  Order inflow continues to fall: The order inflow during the quarter remained lackluster and fell by 33% year on year (YoY) marred by negative order booking (order cancellation) in case of Bharat Heavy Electricals Ltd (BHEL). Most management commentaries indicated that order awarding activities were low during the first nine months of FY2012, particularly in the power equipment sector. However the managements expect the ordering scenario to improve post state elections in FY2013. The book-to-bill ratio for most companies, which had been stagnant, has now started falling, thereby aggravating the concerns of growth in future. The recent development of the government arriving at a consensus on slapping of an anti-dumping duty to curb overseas competition is positive for the domestic players like BHEL and Larsen & Toubro (L&T) though it lacks clarity in terms of quantum and the timeline for the imposition of a duty.  Prefer performers for now: After a major downgrade in our earnings estimates during Q2, the third quarter saw some upgrades. We feel that companies with a diversified exposure to the infrastructure sector like L&T are likely to do better than pure manufacturing bets like BHEL. BHEL, which has singular focus towards power equipment, is likely to languish amid the follow on public offering (FPO) hangover and competition concerns. Most of the stocks in the capital goods space have been thrashed badly on a yearly basis. Concerns over competition, slow order booking, and margin pressures look already priced in, like in the case of PTC India. Hence any good news from here like an uptick in manufacturing activity, better order inflow and imposition of import duty should provide positive triggers to the sector. In terms of Q3 performance, L&T and V-Guard were the outperformers and remain our top picks in the capital goods space. In this note, we have introduced our FY2014 earnings estimates for the stocks under our coverage. We have also revised the price target for CGL to Rs164 on rolling over the target multiple for the stock to an average of the FY2013 and FY2014 earnings estimates. In terms of Q3 performance, L&T and V-Guard were the outperformers and remain our top picks in the capital goods space. Positive triggers for the sector would be (1) the imposition of an anti-dumping duty to curb the rising Chinese competition, (2) a pick-up in the order awarding activity and in execution of power projects, (3) further cooling off of metal prices and containment of inflation.    Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article. Regards, The Sharekhan Research Team myaccount@sharekhan.com Manage your newsletter subscriptions

 

Fw: Investor's Eye: Pulse - IIP growth declines to 1.8% in December 2011; Update - Orbit Corporation, ISMT

 

Investor's Eye [February 10, 2012]  Summary of Contents PULSE TRACK IIP growth declines to 1.8% in December 2011 In December 2011 the Index of Industrial Production (IIP) grew by 1.8%, which is a tad lower than the market's expectations. The relatively subdued performance was led by a weak performance in the manufacturing sector and a sharp decline in the capital goods sector. On a year till date (YTD) basis, the IIP growth stands at 3.6% as against 8.3% in the corresponding period of FY2011. Outlook After showing some recovery in November, the IIP growth has dipped in December on account of subdued growth in the capital goods segment. Going ahead we expect the IIP numbers to remain subdued due to the general slowdown in the economy as high interest rates have slowed investments. In its Q3 monetary policy review the RBI has already reduced the CRR by 50bps and indicated at a reduction in policy rates based on the inflation trend and fiscal deficit situation. Going ahead, the softening of IIP and GDP growth could build a case for reduction in repo rates by the RBI in the March mid-quarter policy review. STOCK UPDATE Orbit Corporation  Cluster: Ugly Duckling Recommendation: Buy Price target: Rs70 Current market price: Rs53 Price target revised to Rs70 Result highlights Slow execution & poor pre sales mar revenues: Orbit Corporation's consolidated revenues in Q3FY2012 came in at Rs71.5 crore, down 37% year on year (YoY) and 31% sequentially due to weak execution across projects and poor presales in M9FY2012 so far. Project wise, Orbit Haven (Napean Sea Road) contributed the highest during the quarter at Rs22.6 crore followed by Orbit Residency Park (Andheri-Saki Naka) at Rs20 crore and Villa Orbit Annex (Napean Sea Road) at Rs10.6 crore. Orbit Enclave (Prarthna Samaj) could not reach the threshold of 25% completion during the quarter. So no revenue was recognised from the project. However, with 19% completion status, it is expected to contribute from Q4FY2012. Sharp rise in margins, but escalating interest cost dents PAT: The operating margin was up 125bps YoY to 54% mainly on account of higher revenue booking from the Napean Sea Road premium properties which garnered high margins. There is a huge sequential improvement of 20% in margins as Q2FY2012 was hit by an increase in the cost of projects and lower margins booked in its Ocean Paeque asset sale. However poor performance at the top line along with escalating interest burden, which grew 21% YoY, and a higher tax payout completely negated the strong margin expansion. As a result, the profit after tax (PAT) declined by 86% YoY and 20% on a sequential basis.  Presales improve sequentially but still a long way to go: Presales for the quarter stood at Rs71.1 crore (32,921 sq ft) which are better compared to Q2FY2012's presales of a measly Rs2.41 crore (9,034 sq ft) but poor as against Rs133.5 crore (62,158 sq ft) of presales attained in Q3FY2011. The poor performance on the presales front is on account of absence of new launches during the quarter which are stuck up for clearances and approvals. The company resorted to some discount in Orbit Laburnum (Gamdevi, of ~2.5%) and Orbit Residency (Andheri-Saki Naka, ~14.5%) projects. On the contrary the Lower Parel and Tardeo properties witnessed price appreciation in the range of 10-20%.  Downgrading estimates for FY2012 but retaining FY2013's: We have kept our revenue booking estimates for FY2012 and FY2013 unchanged. However for FY2012 we are lowering our EBITDA by 3% on account of lower margins. Further with a rise in interest cost for the company and a dip in margins we are reducing our FY2012 earnings by 17%. But we keep our FY2013 estimates unchanged and expect the demand to revive towards the end of H1FY2013. The management intends to bring in a strategic partner in two to three of the company's projects which will help it to keep a check on its debt and speed up execution.  Maintain Buy, price target revised to Rs70: Poor sales across projects due to regulatory uncertainties and absence of new launches due to pending approvals and clearances took a toll of the company and the overall industry. However there have been amendments in Development Control Rules (DCR) which now create a level playing field for developers and provide regulatory clarity. This will result in pending projects now getting approved. Further with the clear timeline set for sanctioning approvals, the process will speed up. Thus as and when the company manages to gain some traction on the new launches front and on the execution, the performance would eventually reflect on the stock. The next couple of quarters need to be keenly watched in terms of the cut in interest rate cycle and the progress on the approvals front for the company. We like Orbit Corporation given its presence in the key property market- Mumbai-where it caters to the luxury segment which is relatively stable in terms of pricing. Hence we maintain our Buy rating on the stock. We factor in strong execution and sales from H2F2013 onwards in our net asset value (NAV) and reduce our discount given to NAV to 50% which results in a revision of the target price upwards to Rs70 from Rs50 earlier. At the current market price, the stock trades at 7.2x its FY2013E earnings. ISMT  Cluster: Ugly Duckling Recommendation: Buy Price target: Rs36 Current market price: Rs30 Price target revised to Rs36 Result highlights   Steady revenue growth: ISMT reported steady revenue numbers for Q3FY2012 with its net sales rising by 22.5% year on year (YoY) to Rs464.5 crore on the back of a volume growth and an improvement in the realisation. The tube segment reported a 14.7% YoY volume growth and a 6.8% YoY improvement in its realisation. The steel segment reported a 13.9% YoY growth in its volume and a 7.4% YoY improvement in its realisation during the quarter.  OPM declines: Despite the volume growth and realisation improvement, the EBITDA margin contracted by 510 basis points YoY to 11.4% mainly due to input cost pressures. The raw material cost as a percentage of sales increased from 45.2% in Q3FY2011 to 51.4% in Q3FY2012 which led to a 16.5% YoY fall in the EBITDA to Rs53.6 crore. The company also saw an adverse impact of about Rs2 crore due to change in the Duty Entitlement Pass Book (DEPB) rules leading to 25.1% lower other operating income to Rs7.4 crore. On a segmental basis, the profit before interest and tax (PBIT) margin of the steel business declined sharply to 5.4% as compared to 15.6% in Q3FY2011 whereas that of the tube division fell by 225 basis points to 7.7%. We expect the margins to improve gradually as the cost pressures ease and the company passes on some of the impact of the input cost pressures to its customers.  Bottom line affected by forex charge: On the back of the rupee's depreciation from Rs48.98 as of September 30, 2011 to Rs53.05 on December 31, 2011 against the dollar, the company booked a foreign exchange (forex) loss of Rs6.9 crore against a gain of Rs2.9 crore in the previous quarter. The loss pertains to the repayment of foreign currency convertible bonds (FCCBs) done in the quarter and the realisation difference in imports and exports. The company has also changed its accounting policy adopting accounting standard 30 for hedge accounting and also exercised the option as per Para 46A of accounting standard 11 for long-term monetary liabilities. The changes have boosted the profit after tax (PAT) by Rs27.9 crore. On the back of a tax credit of Rs4.5 crore, against tax provisioning of Rs10 crore in the corresponding quarter of the previous year, the fall in the net profit was restricted to 87.9% at Rs1.8 crore against a 111% fall in the profit before tax (PBT). Power plant to be operational from April 2012: The company has announced that its 40MW power plant was successfully synchronised during the quarter. Our interaction with the management indicates that the power plant would be commissioned by the end of March 2012 and the benefit of the same would be seen from Q1FY2013. Despite the management's reassurance, we have assumed the power plant would be commissioned by the end of June 2012. Also, we have assumed a lower plant load factor (PLF) in the first year of operation. For FY2013, we are now expecting savings of Rs35.8 crore.  To raise ECBs to repay FCCBs: On December 1, 2012 the company redeemed FCCBs totaling to $20 million along with a premium on redemption. The company raised external commercial borrowings (ECBs) of about $20 million at a cost of about 5.25% to repay the FCCBs.  Valuation and view: The company has maintained a steady revenue performance but due to cost pressures it has seen a consistent fall in its margins as it has been unable to pass on the same to customers. In view of the cost pressures we have lowered our margin estimates to 12.7% and 14.3% for FY2012 and FY2013 respectively. Going forward, with the power plant expected to be operational in Q1FY2013, we expect the margins to improve. We have downgraded our earnings estimates by 33% and 14.3% for FY2012 and FY2013 respectively. At the current market price, the stock is available at 5x FY2013 estimated earnings. We maintain our Buy rating on the stock with a revised price target of Rs36 (6x FY2013E earnings).  Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article. Regards, The Sharekhan Research Team myaccount@sharekhan.com Manage your newsletter subscriptions