Bharti Airtel Cluster: Apple Green Recommendation: Buy Price target: Rs450 Current market price: Rs338
Read through MTN results for Bharti
Over the last two days, two developments pertaining to Bharti Airtel (Bharti) have taken place- (1) MTN's results were declared which provided some understanding on the competitive scenario in Bharti's major African regions of operation and (2) the Telecom Regulatory Authority of India (TRAI) issuing a consultation paper on auction of spectrum. We present below the analysis of the same and their likely implication on Bharti Airtel.
Bharti to remain under pressure in short term: Taking cues from these two developments; viz consultation paper that talks of spectrum refarming, (that would entail high operational cost for incumbent players like Bharti and Idea those have substantial spectrum in the efficient 900MHZ band), coupled with MTN results that implicitly state that if Bharti Africa has to continue gaining market share in the African region, it has to up its ante on the capex front, would put some strain on its African cash flow position. Further the competitive and cost landscape in Africa would continue to remain though (as seen from MTN's results and comments). Thus we believe that Bharti Africa is likely to miss its stated objective of reaching 40% market share by FY2013 and attaining the same may get stretched by a 12-18 month time frame. In the absence of potential revenue enhancement as well as sentimental triggers, coupled with constant overhang and negative outcome of regulatory policy, we believe that Bharti is likely to remain under pressure in short term. We however continue to maintain our Buy rating on the stock with price target at Rs450 (8.1x FY2013EV/EBITDA). Further any clarity on pending regulatory issues is likely to drive stock performance in the near term.
Mahindra & Mahindra Cluster: Apple Green Recommendation: Hold Price target: Rs759 Current market price: Rs676
Tractor production cut in March 2012
Key points
Mahindra & Mahindra (M&M) has announced a cut in production of tractors amounting to two days in a week in the current month. This is to normalise the built up of excess inventory in the system. The production cut will be undertaken at the tractor plants located at Rudrapur, Nagpur and Jaipur. The management also predicted of a flat year-on-year (Y-o-Y) growth in March 2012 and guided for an 8% growth in FY2013.
The subdued volume sales figures in February 2012 and a rather muted expectation for March 2012 have vindicated our bearish stance. We believe that the consensus estimates would have to be revised downwards to factor in the slowdown in the tractor segment. We see two issues - an overall slowdown at the industry level and the second would be a loss of market share by M&M. Thus, we believe that the company might find it difficult to meet its 8-10% volume growth guidance for FY2013.
Consequently, we lower our estimates to 5% volume growth for FY2013 which leads to a cut of 5.4% in our already below consensus earnings estimates for FY2013 and FY2014. We believe that M&M would continue to underperform in the near-term. Thus, we maintain our Hold recommendation despite an upside to our target price of Rs759 per share.
Valuation We lower our estimates to 5% volume growth for FY2013 which leads to a cut of 5.4% in our already below consensus earnings estimates for FY2013 and FY2014. We believe that M&M would continue to underperform in the near-term due to growth concerns on tractors and an overhang of higher diesel tax on the automotive segment. Thus, we maintain our Hold recommendation despite upside to our target price of Rs759 per share.
SECTOR UPDATE
Fertilisers
Non urea fertilisers show improvement in consumption
Key points
Boost in consumption of non urea fertilisers: In February 2012, the aggregate sales of domestically produced fertilisers (by 15 leading manufacturers) declined by 4% as compared to that in the same period of the previous year. On the other hand, imports spiked up significantly during the month mainly due to the effect of a low base of last year. Import of diammonium phosphate (DAP), complex fertilisers and urea increased by 206%, 1562% and 30% respectively. Overall the consumption of fertilisers in the month of February 2012 has seen a 16% increase on a year-on-year (Y-o-Y) basis.
Government has cut non urea subsidy pay out for FY2013: The government has reduced subsidy payout per kg in the range of 10% to 35% for non urea fertilisers on account of a decline in their price of fertilisers in the international markets. The international prices of fertilisers have been seeing a declining trend in the recent period due to decrease in demand and high prices. The government has reduced subsidy payout on phosphorus for FY2013 by 32.6% to Rs21.8 per kg. The subsidy on potash has been reduced by 10.3% to Rs24 per kg and that on nitrogen has seen a reduction of 11.6% to Rs24 per kg. The reduction in the subsidy on non urea fertilisers are expected to bring down the government's total subsidy bill by 20% in the next fiscal.
Consumption of non urea fertilisers increases: During the month of February, the consumption of non urea fertilisers has increased on the back of higher import of DAP and complex fertilisers. The indigenous production of DAP has shown sign of revival as the availability of raw materials, mainly phosphoric acid, has improved. The production of indigenous DAP has improved by 76% in the current month while the import of complex fertilisers - DAP and urea has also improved on the back of better availability.
However, consumption is still down on YTD basis: On a year till date (YTD) basis (for FY2012), the cumulative fertiliser sales (including imports and domestic production) have declined slightly due to lower production and lesser import of DAP and muriate of potash (MOP). On a YTD basis, sales of domestically produced fertilisers have seen a marginal to negative growth of 0.8% whereas imports have declined by 7%.
We write to inform you that pursuant to the previous intimation received from the Exchange with respect to introduction of Call Auctions the Pre Open session timings for Equity, Futures & Option were changed from 9:00am to 9:15am - Click here for complete details.
Taking the above into consideration and via circulars CIR/MRD/DP/ 01/2012 and CIR/MRD/DP/ 02/2012 dated January 20, 2012 the Exchange has now decided to extend the Call Auction mechanism to IPO's (New and Relisted Scrips) on the first day of trading /re-commencement.
Important things to know;
What is Call Auction in Pre Open session for IPOs (New listing) and Re-listed Scrips? It is basically a mechanism to determine the Opening Price based on aggregated supply and demand for the underlying on the first day of trading/ re-commencement of trading.
What are the timings for the Call Auction Pre Open session for IPOs (New listing) and Re-listed Scrips? The session would commence for 60 minutes between 9:00am and 10.00 am out of which order placement in the Pre Open session would be allowed for the first 45 minutes only. The rest of the time would be utilized for exchange related functions as illustrated in the indicative schedule mentioned below.
SESSION
TIME
ACTION
EXCHANGE STATUS
Exchange Call auction in Pre Open session for IPOs (New listing) and Re-listed Scrips Order Entry Period.
9:00am - 9:44/45am (approx)
Orders for new listings (IPO) and re-listed scrip's can be placed /modified /cancelled in the Call auction in Pre Open session.
Open
Exchange Call auction Pre Open session for IPOs (New listing) and Re-listed Scrips Order Matching & Confirmation Period.
9:45am - 9:55am
Order placement /modification /cancellation in the call auction in Pre Open session will be stopped.
Opening price determination, order matching & trade confirmation starts at Exchange.
Open
Buffer Period.
9:55am - 10:00am
To facilitate transition between call auction in pre open and continuous trading session.
Open
Continuous Trading for IPOs (New listing) and Re-listed Scrips
10:00am - 3:30pm
Exchange would move all unmatched market orders to the continuous session at the opening price.
Open
Kindly feel free to contact our customer service department at 1800-22-7500 /39707500 or write us at myaccount@sharekhan.com in case of queries. Alternatively you could also get in touch with your nearest Sharekhan Branch
The event: West Bengal Electricity Regulator approves 13% hike of CESC: West Bengal Electricity Regulatory Commission (WBERC) has allowed CESC to hike the tariffs for FY2012 by 13% with retrospective effect from April 2011.
Second tariff hike in FY2012; effectively 24% tariff hike allowed during FY2012: The company had been allowed to raise tariffs by 46 paise per unit in April 2011; hence CESC was charging at Rs5.19 per unit (Rs4.73 + 0.46 paise). In July 2011, CESC had filed a tariff petition with the regulator for the next multi-year tariff starting from 2012 to 2014. Yesterday, WBERC allowed it to charge an average tariff of Rs5.88 per unit for FY2012 (against the figure of Rs5.98 per unit filed by the company), that is a hike of 13.3%. Including the previous hike of Rs0.46 per unit in April 2011, effectively the company has been allowed a total hike of 24.3% in FY2012.
Impact on our estimates: As the revised tariff will be retrospectively effective from April 2011, there would be additional revenue of around Rs450 crore (the differential of Rs0.69 per unit charged to the total units sold in M9FY2012) as prior-period sales. We believe the company would book all the prior period revenue in Q4FY12 and adjust the same as receivable in which would be recoverable from customer in a spread of 48 months.
Based on this, we have fine-tuned our estimates. We have revised our sales estimates for FY2012 and FY2013 by 11 and 12% respectively. Also, we have revised PAT estimates by 9% (factoring healthy tariff revision and booking the revised revenue in Q4FY12) FY2012. However, we retain our FY2013 earnings estimates, as we expect higher cost adjustment (allowed by the regulator) to neutralize the tariff hike. We remain positive on the stock and continue to rate it as a Buy and retain our price target of Rs405.
SECTOR UPDATE
Oil & Gas
Crude hardens on Iran crisis
Key points
Geopolitical issue in Iran results in surge in crude oil prices: The crude oil price has risen by around 12% in the last one month to $125 per barrel on account of a geopolitical issue in Iran. Iran is the second largest oil producer in the Organization of Petroleum Exporting Countries (OPEC) with an output of around 3.5 million barrels per day (mbpd), that is almost 4% of the global oil production. The USA has been engaged in isolating Iran over its nuclear weapons programme. It also has passed a law that will punish any financial institution that enters into any business with the Central Bank of Iran. In addition, the USA has recommended oil importing countries to stop their oil imports from Iran. Hence, with the supply of crude oil uncertain, the price of the commodity has surged by around 13% to $123 per barrel.
Spare capacity of crude oil is not adequate to replace Iranian oil: As stated earlier, the USA has recommended oil importing countries stop their imports from Iran. In order to follow the US recommendation, the oil importing countries need to look at alternate sources of crude oil to cater to their needs. However, the spare capacity of the other non-OPEC members is not adequate to replace the Iranian crude. Hence countries like India and China have continued to import crude oil from Iran. However, uncertainty in terms of normal supply of crude oil from Iran will remain a key concern. Hence we believe crude oil prices will remain strong in the near term. This augurs ill for the domestic oil marketing companies (OMCs) due to their mounting under-recoveries and the increased subsidy burdens of the upstream companies like Oil and Natural Gas Corporation (ONGC), GAIL and Oil India.
Average daily under-recovery increased to Rs465 crore; under-recoveries for FY2012 likely to be around Rs1,40,000 crore: According to the data from the Petroleum Planning & Analysis Cell, the average daily under-recoveries incurred by the OMCs during February 2012 increased to Rs465 crore. In terms of products, the under-recoveries are (a) diesel: Rs10.94 per litre; (b) kerosene: Rs28.77 per litre; and (c) LPG: Rs378 per cylinder. The total under-recoveries for FY2012 are expected to be around Rs140,000 crore as compared to Rs79,000 crore during FY2011. Further, looking at the supply constraints we believe the under-recoveries will remain at a higher level till the first half of FY2013.
Government to announce price hike of petroleum products in near term, positive for OMCs: In spite of a surge in the crude oil prices, the prices of petroleum products like petrol, diesel and kerosene have not increased in the last four months due to the recently concluded assembly elections in five states. However with the end of the elections, the price of petrol, which is de-regulated, is expected to increase by around Rs5 per litre (as per media reports). In addition to the expected increase in the price of petrol, the OMCs also seek price hikes in case of regulated products like diesel, kerosene and LPG cylinders. We believe the government will announce price hikes in the near term which could provide some relief to the OMCs and reduce the subsidy burden (marginally) of the upstream companies.
Outlook The surge in the crude oil prices due to the geopolitical crisis in Iran has resulted in mounting under-recoveries in the current fiscal. In addition to the pressure on the OMCs, the uncertainty over the subsidy sharing mechanism has raised the risk for the upstream PSUs like ONGC, GAIL and Oil India. However, a likely increase in the price of petroleum products like diesel, petrol, kerosene and LPG cylinders in the near term could provide some relief mainly to the OMCs and also to the upstream PSUs like ONGC, GAIL and Oil India.
The government will present its budget for financial year 2013 on March 16, 2012 amid concerns of a drop in the growth rates and severe strain on the expenditure side due to high oil prices and subsidies. This year the focus will tilt on the core issues, namely (a) containing the ballooning fiscal deficit; (b) reviving the economic growth, and (c) encouraging the capital inflows. Though the assembly election in the states would be over but the social sector spending will continue to beat anti-incumbency in the 2014 elections. Meanwhile we do not expect any fireworks in the budget this year as the implementation of the Direct Tax Code (DTC) and the Goods and Services Tax (GST) are likely to be pushed ahead due to implementation issues.
Fiscal consolidation to be the focal point: The market would be keenly following the fiscal deficit guidance, which has expanded substantially compared with the guidance of 4.6% mainly contributed by the high crude oil prices. Given the limited room for manoeuvre due to the resurgence in crude oil prices and the spiraling expenditure (food security etc) amid falling tax receipts, the deficit could rarely be bridged. Further, the Reserve Bank of India (RBI)'s stand on easing the policy rates hinges on the credible steps taken by the government on reducing its fiscal deficit.
Expanding the revenues-a tall order in current scenario The revenue collections fell short of the estimates as tax collections dropped on slowing of the economy and higher refunds. Further, the disinvestment target planned by the government has not materialised, resulting in increased borrowings to meet the shortfall. The tax-to-GDP ratio had dropped to around 9.1% till Q3FY2012 from 12% in FY2008. The government would explore new avenues to garner tax revenues probably by increasing the import duties and widening the services tax net among other measures. The government would again set lofty targets for non-tax revenues (disinvestment, spectrum auction etc) in a bid to reduce the fiscal deficit. However, the major structural reforms-DTC and a uniform GST-are unlikely to see the light of the day in the upcoming budget.
FROM SHAREKHAN'S DESK Perils of timing the market The equity markets continued to build on the gains of January 2012 in February also. Many common investors missed out on the rally because they were waiting on the sidelines either in a bid to time the market or because they were simply petrified by a slew of negative news flow globally.
MARKET OUTLOOK
Policy push needed for the next leg up
March cluttered with events-poll results, budget, RBI policy: This March has several key events like election results (March 6, 2012), the Reserve Bank of India (RBI)'s policy review (March 15, 2012) and Union Budget (March 16, 2012) in addition to the usual liquidity pressure driven by the advance tax payment. The high turnout in the Uttar Pradesh elections and media surveys suggest a possible gain in vote share by Samajwadi Party (SP) and Congress Party at the expense of the ruling Bhahujan Samaj Party (BSP), which could lead to an alliance of the Congress Party and SP at the state level and a possible extension of the same at the Centre. This would reduce the ruling United Progressive Alliance (UPA)'s dependence on Mamata Banerjee's Trinamool Congress (TMC) and enable the government to push forward reforms. Though no fireworks are expected from the budget, the key triggers to watch out for are: a credible roadmap for fiscal consolidation and some definitive steps to boost the investment cycle.
Inflation and economic growth moderate sharply but firm crude prices cast a shadow on the trajectory of monetary easing by RBI: The sharp run-up of 17% to $125 per barrel in the crude oil prices since January this year, fuelled by the rising geopolitical tensions and easy liquidity conditions globally, has brought back the fears of its damaging impact on inflation and economic growth globally. India's dependence on imports for its crude oil needs and lack of reforms in its oil sector make it more vulnerable in such a scenario and could result in the reallocation of funds by foreign investors away from India to resource-rich countries (like Brazil, Russia, Indonesia) within the emerging markets. Moreover, the RBI could delay the much-awaited policy rate cuts in view of the inflationary pressure emanating from the rising crude oil prices.
Q3 earnings growth below expectations but pace of earnings downgrades slowing down: While the Q3FY2012 earnings growth was in low single digits, the revenue growth momentum remains strong driven by a healthy growth in volumes, better price realisation and a favourable currency. Since April 2011 the Sensex' earnings estimates have been downgraded by 7.5% and 14.8% for FY2012 and FY2013 respectively. But the pace of the earnings downgrades has slowed down considerably with a marked improvement in the earnings upgrades/downgrades ratio in the third quarter of FY2012. However, the revival in the corporate earnings upgrade cycle is possibly still a couple of quarters away and would depend on the RBI and the government's policies.
Short covering blip behind us; fundamentals would come to fore again: The BSE small-cap index appreciated by 25% compared to the 14% upmove in the benchmark indices. The short covering in view of the surge in the market has resulted in more than 50% rise in many debt-laden high beta stocks. This has provided an opportunity to churn portfolios in favour of quality stocks, not necessarily from the defensive sectors. With the technical blip behind us, we expect the fundamentals to come to the fore again.
Need policy push for further re-rating of multiples: After the recent run-up, the Sensex' valuations have expanded from around 12x to close to 14x FY2013 earnings estimate which is close to its long-term average multiple. The global scenario is much more conducive now with the injection of huge liquidity through the Long-Term Refinancing Operation (LTRO) in Europe and improving economic data points in the USA. However, for the liquidity-driven rally to sustain, there is a need for domestic triggers in the form of adequate support from the government policies (in power, infrastructure, subsidy, foreign direct investment [FDI] etc) accompanied by monetary easing from the RBI. Our base case assumption is a likely consolidation phase around the current level before another leg of the rally unfolds.
SHAREKHAN TOP PICKS
Sharekhan top picks
STOCK IDEA
Gateway Distriparks: Ahead of the pack
STOCK UPDATE
Andhra Bank: Price target revised to Rs140
Bharti Airtel: Price target revised to Rs450
CESC: Price target revised to Rs405
Eros International Media: Stellar performance in a seasonally strong quarter
GlaxoSmithKline Consumer Healthcare: PAT largely in line with expectations
India Cements: Price target revised to Rs105
Ipca Laboratories: Strong traction in international business
ISMT: Price target revised to Rs36
Madras Cements: Price target revised to Rs138
Mahindra & Mahindra: Price target revised to Rs740
Marico: Price target revised to Rs186
Orbit Corporation: Price target revised to Rs70
Pratibha Industries: Large order win translates into strong revenue
Provogue India: Deep value-maintain Buy; price target revised to Rs62
PTC India: No respite on SEBs' woes, price target revised to Rs71
Ratnamani Metals and Tubes: Strong revenue performance
State Bank of India: Price target revised to Rs2,400
Sun Pharmaceutical Industries: Taro jacks up growth; price target set at Rs692
Tata Chemicals: Downgraded to Hold
Unity Infraprojects: Price target revised to Rs107
