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 | | | |
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