Fw: Investor's Eye: Update - Tata Chemicals (Annual report review), Transmission and distribution (PGCIL's ordering trend shows competition remains intense)

 

 

Investor's Eye [August 29, 2012]  Sharekhan www.sharekhan.com

Summary of Contents Tata Chemicals Cluster: Vulture's Pick Recommendation: Hold Price target: Rs338 Current market price: Rs305 Annual report review  Key points Stable performance after a gap of two years: In FY2012, Tata Chemicals Ltd (TCL) posted a recovery in its financial performance with a growth of over 20% each in the consolidated revenues (to Rs13,806 crore) and the consolidated adjusted net profit (to Rs838 crore). The operating profit margin (OPM) also remained stable at 16.7% in FY2012 as compared with 16.9% in FY2011. Part of the revenue growth was aided by incremental inflows of Rs316 crore (Rs250 crore from an increase in the stake in British Salt; Rs66 crore from the acquisition of Metahelix Life Sciences [Metahelix] under Rallies India) from the inorganic initiatives taken in Q4 FY2011. All geographies performed well with over 20% growth each in the stand-alone Indian entity, Tata Chemicals North America Inc, and the Kenyan and UK operations.  Increase in working capital puts pressure on free cash flows: In the Indian operations, the cash flows from operations after working capital adjustments declined to Rs341 crore in FY2012 as compared with Rs424 crore in FY2011 largely due to an increase in the inventory and receivables. However, the company was able to maintain the debt: equity ratio at 0.9 despite an increase of Rs832 crore in the total debt during the year. The company's net debt increased by Rs498 crore to Rs4,268 crore as on March 31, 2012.  Return ratios improve; dividend pay-out ratio declined in FY2012: The company's return ratios rose from the levels of FY2011 and remained higher during FY2012. The return on equity (RoE) stood at 13.1% while the return on capital employed (RoCE) stood at 15.7% during the year as against 12.0% RoE and 14.0% RoCE in the previous year. The dividend pay-out ratio for the company declined from 37% in FY2011 to 30.4% during FY2012.  Outlook and valuation: Given the input cost pressure across segments and the lower sales volumes in the fertiliser segment, TCL is expected to show a relatively muted performance on the earnings front going ahead. Consequently, we maintain our Hold recommendation on the stock with a price target of Rs338. At the current market price the stock is trading at 10.9x and 10.5x its FY2013E and FY2014E earnings respectively. SECTOR UPDATE Transmission and distribution PGCIL's ordering trend shows competition remains intense  Key points PGCIL's ordering surges on a lower base: The order awarding activity of Power Grid Corporation of India Ltd (PGCIL) picked up in June this year boosted by an 800KV HVDC order worth Rs2,495 crore. In FY2013 year till date (YTD; till July), PGCIL has awarded projects worth Rs4,327 crore excluding the HVDC order (a sharp rise on a low base). Historically, the first half is weaker for the company in terms of ordering and accounts for merely 20-30% of the annual orders.  Foreign players corner higher share: Foreign players (mainly Chinese and Korean) continued to increase their market share in the reactor and sub-station segments where most of the ordering took place in FY2013 YTD. Their market share rose substantially to 32% in the overall ordering from 10% in FY2012.  Intense competition raises uncertainty for domestic players; we remain cautious: Uncertainty over the order inflow activity amid intense competition and margin pressure would keep the sentiment bearish for the transmission and distribution (T&D) stocks. This trend is also reflected in the falling success rate of the bids of the key T&D companies like Crompton Greaves Ltd (CGL) and Bharat Heavy Electricals Ltd (BHEL). Both these companies have yet to win an order in FY2013. The continuous presence of the overseas companies, mainly Chinese, and the intensifying competition locally are likely to eat into the market share of the traditional T&D stocks, such as ABB, Siemens, CGL and Alstom T&D India. Hence, we maintain our cautious stand on these stocks. 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.