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 | | | |
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