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STOCK UPDATE Oil India
Recommendation: Buy
Price target: Rs650
Current market price: Rs587 Price target revised to Rs650 Result highlights -
Net profit increased by 71.9% YoY; better than estimate: In Q4FY2013, Oil India Ltd (OIL) posted a net profit of Rs764.5 crore (a growth of 71.9% year on year [YoY]), which is better than our estimate on account of a lower than expected subsidy burden (Rs1,850 crore as compared with our estimate of Rs2,216 crore) and also lower than the expected effective tax rate (30.7% as against expectation of 33%). On the revenue front, the company posted a growth of 37.2% YoY due to a better net realisation ($55/barrel in Q4FY2013 as against $39/barrel in Q4FY2012) as the subsidy burden has decreased. However, the company continued to disappoint with a degrowth in the production of crude oil and a muted growth in the production of natural gas. -
Production of oil and gas continued to be affected during the quarter: During the quarter, the production of crude oil and natural gas was adversely affected due to an external environmental issue and was unable to support the revenue growth of the company. The crude oil production and sales volume for the quarter declined by 8.8% YoY and 9.3% YoY respectively. On the natural gas front, the company posted a muted production growth of 1.4% YoY, whereas the sales volume increased by 2.6% YoY to 0.51 billion cubic meter (bcm) in Q4FY2013. Going ahead, in FY2013-15, we expect the company's oil and gas to grow at a compounded annual growth rate (CAGR) of 3% and 4% respectively. -
Net realisation supported by lower subsidy burden: With the correction in the crude oil price during Q4FY2013, the company's gross realisation declined by 6.9% YoY to $111.4/barrel. However, with the decrease in the subsidy burden (to make up for the loss incurred by the oil marketing companies) to Rs1,850 crore as compared with Rs2,874 crore in the corresponding quarter of the previous year, the company's net realisation improved by 42.4% YoY to $55.4/barrel. Further, with the depreciation of the rupee against the dollar, the net realisation improved by 53.4% YoY in rupee terms. On the margin front, the operating profit margin (OPM) of the company expanded sharply by over 8 percentage points YoY to 39.5% (compared with our estimate of 40.8%) on account of a lower subsidy outgo, which results in better net realisation. -
Other income supported by huge cash balance: During the quarter, the company's other income remained strong and increased by 9% YoY to Rs369.4 crore. It is well supported by the company's huge cash balance. As on March 2013, the company has a cash balance of Rs12,133 crore. Going ahead, this cash could be utilised for the acquisition of oil and gas assets, which could provide an inorganic growth to the company. -
Partial de-regulation of diesel and a likely increase in the gas price augurs well: The oil ministry has initiated a move to partially de-regulate the diesel price by allowing the oil marketing companies to increase the price by Rs0.50/litre on a monthly basis and eventually make diesel a completely de-regulated product. The move will result in a reduction in the subsidy outgo of the company and will improve the net realisation and earnings of the company. In addition to this, the oil ministry has moved a cabinet note for increasing the price of natural gas. Hence, the move will further increase the profitability and earnings of the company going ahead. However, currently, we are not incorporating impact of these developments into our earnings estimate and would like to wait a little longer for better clarity. -
Marginally downgrading earnings estimates for FY2014 and FY2015: We are marginally downgrading our earnings estimates for FY2014 and FY2014 mainly to incorporate lower than expected production in the crude oil and gas. The revised earnings per share (EPS) estimates now stand at Rs62.8 and Rs72.7 for FY2014 and FY2015 respectively. -
Maintain Buy with revised price target of Rs650: We continue to hold our bullish stand on OIL because of its huge reserves and healthy reserve/replacement ratio (RRR), which would provide a reasonably stable revenue growth outlook. Further, the move to de-regulate the diesel price and a likely revision in the natural gas price augurs well for the company. In terms of valuation, the fair value of OIL works out to Rs650 per share (based on the average fair value arrived at using the discounted cash flow [DCF], price earnings [PE] and EV/EBIDTA valuation methods). In our fair value computation we have not incorporated the impact of a partial de-regulation of diesel and the new gas pricing, which could provide a further upside to our revised price target of Rs650. Hence, we maintain our Buy recommendation on OIL with a revised price target of Rs650 (roll forward on FY2015 earnings). At the current market price, the stock trades at PE of 9.4x its FY2014E EPS of Rs62.8 and 8.1x its FY2015E EPS of Rs72.7. Crompton Greaves
Recommendation: Hold
Price target: Rs105
Current market price: Rs94 Price target revised to Rs105 Result highlights Restructuring pain and margin pressure kept results below expectations
In Q4FY2013 Crompton Greaves Ltd (CGL) reported a net profit of Rs25 crore, which is significantly lower than our estimate. Though, the sales numbers reported by the company were in line with our estimate. The performance failed to meet expectations for two factors: a slower than expected recovery in the international business (mainly the European subsidiary) and the mounting pressure on the power system segment of the stand-alone business.
The consolidated net profit declined by 75% year on year (YoY) to Rs25 crore while the sales grew by 10% in Q4FY2013 as the power system segment (which contributes 60% of the revenues) continued to be in red with Rs59 crore of loss at the profit before interest and tax (PBIT) level. The other two segments, industrials and consumer, were relatively stable, though the consumer segment also witnessed margin contraction YoY in Q4FY2013. Sequentially, there was an improvement as the business turned from loss-making to profit-making, since in Q3FY2013 it had borne the brunt of restructuring related huge one-off expenses. Even in Q4FY2013, at the PBIT level the loss of the international operations had hovered around Rs60 crore. The PBIT margin of the power system at the consolidated level recovered from a 6% loss in Q3FY2013 to a 3% loss in Q4FY2013. That was largely because of the continued loss of the power system segment at consolidated level (a 10% loss at the PBIT level in Q4FY2013) as the recovery after the restructuring is in process. Steady order backlog growth to reflect on sales, but profitability and pace of recovery would be monitorable
The consolidated order book grew by 9% YoY and declined by 1% quarter on quarter (QoQ) to Rs9,126 crore at the end of FY2013. The order book traction was largely noticed from the Middle-Eastern and African region (power system), which will be serviced by the Indian facility. Based on this, the management expects the sales to grow at 8-10% in FY2014 while the profitability could be unpredictable given the possible negatives from the liquidation damages of the European operations (related to restructuring). Moreover, the rising competition is building margin pressure in the domestic power system segment. The industrial and consumer segments should have a healthy sales growth of 10% and 20% respectively but the sustainability of the double-digit margin (at the PBIT level) would be the key monitorable in FY2014. View and valuation
Earnings estimates downgraded; price target revised down to Rs105: We have lowered our earnings estimates for FY2014 and FY2015 by 35% and 11% respectively to build in the slower than expected recovery post-restructuring and the mounting pressure on the margin of the domestic power system business. Based on the revision, we have downgraded our price target to Rs105 (12x its FY2015E earnings). The stock currently trades at 20x and 10x its estimated earnings of FY2014 and FY2015 respectively and 8x and 5x its EV/EBITDA for FY2014 and FY2015 respectively. We believe the restructuring is behind us and the company should stabilise gradually. Hence, we have maintained our Hold recommendation on the stock.
VIEWPOINT Bharat Forge Demand weakness to sustain in near term Q4FY2013 conference call takeaways Demand to remain under pressure in H1FY2014, expect better outlook for H2
BFL has been witnessing demand pressure from the last two quarters with the revenues declining by about 30%. For FY2013, BFL's revenues declined by 15%. The demand deterioration is across the geographies (domestic market, the USA and Europe). In addition to the declining truck sales both in the stand-alone and the export markets, BFL is seeing a considerable slowdown in the non-automotive segments (oil and gas, construction and mining) due to a weak macro-economic growth in the key markets of India and Europe.
BFL expects the demand to remain subdued in H1FY2014 as there is no marked improvement expected in the key markets. BFL expects a meaningful recovery in H2FY2014 on account of an improved outlook for its key customers both in the automotive and the non-automotive segments. Margin under pressure on operating deleverage and unfavourable mix
BFL has been witnessing margin pressure on account of a subdued demand. The margin in the last two quarters declined from 24-25% range to about 21%. The operating deleverage caused by a lower capacity utilisation has impacted the margin. The capacity utilisation levels dropped to 60% in Q4FY2013 as against 68% for FY2013, impacting the margin. Further a drop in the machining mix (due to demand slump in the oil and gas, and mining sectors) has put further pressure on the margin. The margin is likely to inch higher in H2FY2014 once the demand recovers and there is an improvement in the machining mix. Subsidiaries performance improves in Q4FY2013
The profitability of BFL's overseas subsidiaries (excluding the US subsidiary, which discontinued operations) improved despite the challenging demand environment. The cost rationalisation initiatives and productivity improvements improved profitability. At the profit before tax (PBT) level, the subsidiaries contributed profit of Rs14.4 crore as compared with a loss in Q3FY2013. New customer additions and focus on high technology products to drive growth in long term
BFL recently won a global passenger vehicle original equipment manufacturer (OEM) order for supply to its new platform. Going ahead, BFL plans to focus on the passenger vehicle space and increase the market share globally. Also, BFL has witnessed new orders in the non-automotive segments (oil and gas, construction and railway). The revenues from the new orders are likely to commence from 2015.
BFL thrust on technology (increasing mix of newly introduced aluminium forgings), which provides significant benefits to the automotive players, is likely to boost the revenues and margin in the long run. Further, focus on the high value products (higher machining on account of increased contribution from the non-auto segments) would help BFL to improve performance in the long run. Valuation
We expect the demand pressure to continue in the near term and expect the revenues for FY2014 to decline marginally. We expect FY2015 to witness a strong demand with the revenues growing in the double digits. The margin is expected to remain under pressure in FY2014 on account of a sluggish demand. We expect the margin to decline by 40 basis points in FY2014. We have estimated EPS of Rs12.6 and Rs16.9 for FY2014 and FY2015 respectively. The stock can trade at 13x FY2015 earnings and can also incorporate a book value of investments in the subsidiaries and joint ventures estimated at Rs22 per share. We have a Neutral view on the company.
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