Fw: Investor's Eye: Thematic Report (Switch from HDFC Bank to HDFC); Update - Shiv-Vani Oil & Gas Exploration Services, Provogue India

 

 

Investor's Eye [February 17, 2012]  Summary of Contents THEMATIC REPORT Switch from HDFC Bank to HDFC Key points Tactical switch from HDFC Bank to HDFC: In the past one year, HDFC Bank has appreciated by close to 30% as compared to the 14% appreciation in HDFC in the same period. This has usually been the case in a rising interest rate scenario due to HDFC's dependence on bulk/wholesale deposits and corporate loans. On the other hand, HDFC Bank benefits from its strong retail deposit (current account/savings account) and asset base. However, it is the other way round when the interest rate cycle reverses. HDFC tends to outperform relative to HDFC Bank in a declining interest rate scenario. The empirical evidence from the past interest rate cycle supports our argument. Thus, we expect the discount in the valuation of HDFC Bank (vs HDFC) to revert to a mean of 20% plus (from around 6-7% now) over the next one year.  HDFC-relatively better placed to gain from the reversal in the interest rate cycle: As the interest rates ease out, HDFC's cost of funds is expected to decline relatively faster due to its dependence on wholesale funds that constitute 75% of its funding. Even on the assets side (advances), the bulk of its mortgage loans are on a floating rate. Plus, the advances under the dual rate home loan scheme (Rs22,000 crore of teaser loans with a lower interest rate for the initial two years) are scheduled to get re-priced over the next one year). Going ahead, as the operating environment improves the performance of the subsidiaries (insurance, asset management etc) should also improve, boosting the overall valuations and leading to a re-rating of the stock. In this note, we have revised our sum-of-the-parts (SOTP) based price target for HDFC to Rs785 per share (valuing the subsidiaries and investments at Rs235 per share) and upgraded our recommendation on the stock to Buyfrom Hold earlier. HDFC Bank-the best operational metrics among private sector banks but offers limited upside: While HDFC Bank is among the best private sector banks but tactically it can underperform HDFC in the next 6-12 months as seen in the past. This is due to the relatively slower rate of repricing of its assets and liabilities. The bank is essentially current account and savings account (CASA) funded for which the cost is fixed (4% for savings deposits) and is facing increased competition from the other private sector banks that are offering higher rates on saving deposits. The bank has also raised its deposit rates recently by 50-100 basis points to catch up with its peers; this will also affect its margins. In addition, 70% of its non-CASA deposits are from the retail segment where the cost is stickier. Further, the valuations have run up over the three-year mean and further upside seems limited from these levels. STOCK UPDATE Shiv-Vani Oil & Gas Exploration Services  Cluster: Ugly Duckling Recommendation: Buy Price target: Rs283 Current market price: Rs214 Price target revised down to Rs283 Key points A disappointing performance: The net sales of Shiv-Vani Oil & Gas Exploration Services (Shiv-Vani) largely remained unchanged at Rs379.2 crore (increased by 0.9% year on year [YoY]) during Q3FY2012. The sales figure also includes Rs28 crore from trading activity. However, on a sequential basis, the company reported a 13.2% growth in its net sales during the quarter. At the operating profit level the company registered a decline of 15.1% YoY to Rs153.8 crore on account of contraction of 765 basis points in the operating profit margin (OPM) to 40.6% due to higher raw material and lubricant prices, and expenses of Rs27 crore booked on trading activity. Sequentially, the OPM contracted by 269 basis points.  Earnings deteriorated despite tax benefit: The interest cost during the quarter increased by 10.5% YoY to Rs70.1 crore. Hence, the profit before tax (PBT) of the company declined by 44.4% YoY to Rs45.9 crore as compared to a decline of 15.1% at the operating level. However, due to the tax benefit (a tax write-back of Rs10.3 crore in Q3FY2012), the adjusted profit after tax (PAT) declined by 30.8% YoY but increased by 22.1% on a quarter-on-quarter (Q-o-Q) basis. Further, on account of currency fluctuation, the company had a huge foreign exchange (forex) loss to the tune of Rs39.2 crore. Hence, the reported PAT declined to just Rs16.9 crore as compared to the reported net profit of Rs70 crore in the corresponding quarter of the previous year.  Order book remains at Rs2,600 crore (1.7x its FY2011 revenue): Currently, the company's order book is around Rs2,600 crore, which is close to 1.7x its FY2011 revenues. Out of the current order book, Rs100 crore of orders are for seismic study, around Rs400 crore worth of orders are from CBM and Rs600 crore worth of orders are from Oman. Based on this, the management expects to record revenue of around Rs1,600 crore in FY2013. In terms of order inflow, the company has not bagged any big-ticket order during M9FY2012 due to a lack of orders announced by the upstream companies like ONGC and Oil India. The company bagged a few small orders worth Rs500 crore in October and November 2011. The live bid of the company is around Rs3,000 crore and the management is optimistic about winning around Rs1,000-1,200 crore worth of orders in the next two to three quarters.  Downgrading earnings estimates for FY2012 and FY2013: We are downgrading our earnings estimates for FY2012 and FY2013 mainly to factor in the lower than expected revenue growth and higher than expected OPM. Consequently, the revised earnings per share (EPS) estimates for FY2012 and FY2013 now stand at Rs44.3 and Rs47.2 respectively.  Limited downside risk but lacks upside triggers; Buy retained: As a result of the cut in the estimates, the revised earnings growth estimate is likely to get reduce. Consequently, we reduce our price target to Rs283 from Rs300. The current market price discounts the FY2012 earnings by 4.8x and the FY2013 earnings by 4.5x. The stock is available at enterprise value (EV)/EBIDTA of 4.9x on FY2013 estimates. We maintain our Buy recommendation on the stock with a revised price target of Rs283.    Provogue India  Cluster: Ugly Duckling Recommendation: Buy Price target: Rs62 Current market price: Rs33 Deep value-maintain Buy; price target revised to Rs62 Q3FY2012 weak results; below expectation: Provogue India posted a weak performance for Q3FY2012 and the same was below our expectation. Though the revenue grew by 20.5% year on year (YoY), a sharp erosion in the operating profitability (led by an increased cost of goods sold) resulted in a 41.7% contraction in the operating profit and a 48.3% year-on-year (Y-o-Y) contraction in the net adjusted earnings for the quarter. Valuation and view Taking cognisance of the poor Q3FY2012 performance and the general slowing economy we have reduced our FY2012 earnings estimate by 18% and FY2013 estimate by 12%. Our revised EPS estimates for FY2012 and FY2013 stand at Rs2.8 and Rs3.6 respectively. Despite weak results and reduction in our estimates, we remain positive on Provogue India as we believe that the company provides an exciting opportunity to play the buoyancy in the domestic consumption space, with the brand Provgue and the retail-centric real estate business Prozone. We value Provogue India on a sum-of-the-parts (SOTP) basis. We value the core business on a PE basis at 10x FY2013 (Rs36 per share). Based on the net asset value (NAV) the share of the real estate business (Prozone) works out to Rs26 per share (we are discounting the NAV by 30% of the actual Rs37). Thus, we maintain our Buy recommendation on the stock with a revised price target of Rs62.   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 Manage your newsletter subscriptions

 

Fw: Investor's Eye: Update - Marico, Bajaj Holdings & Investment, Ratnamani Metals and Tubes

 

 

Investor's Eye [February 16, 2012]  Summary of Contents STOCK UPDATE Marico  Cluster: Apple Green Recommendation: Hold Price target: Rs186 Current market price: Rs162 Price target revised to Rs186 Key points Event: Marico will acquire Set Wet, Livon, Zatak and certain other personal care brands from Reckitt Benckiser (RB) for an undisclosed sum (media reports put the deal value in the range of Rs450-500 crore). These brands are the top three in the domestic hair gel, leave-on hair serum and male deodorant categories respectively, and are growing at around 25% per annum. The brands collectively are expected to achieve around Rs150 crore of revenues in FY2012 (around 4% of Marico's estimated consolidated revenues for FY2012). The gross profit margin (GPM) of these brands is much higher than Marico's GPM. Though this acquisition is positive from longer-term perspective, we don't expect the same to add to the bottom line of Marico in the near term. Details about the transaction: The transaction includes the transfer of all key assets including intellectual property rights, supply agreements and third party manufacturing agreements (Paras Pharmaceuticals' personal care business). The acquisition is likely to be completed in the middle of Q1FY2013. After the completion of the transaction, RB will provide distribution support to Marico for three months.  Rational behind the acquisition The acquisition provides Marico entry into low penetrated and strong growing categories such as deodorants and styling gels.  The brands will plug the gap in Marico's personal care portfolio.  Marico could leverage on the brand positioning to launch some of the products from its international portfolio (especially in the male grooming category) into the domestic market. The brands will also help Marico to participate in tailwind categories over time. Marico will also earn around 20% of the distribution reach of Paras Pharmaceuticals' personal care business. Funding of acquisition: Though the company has not disclosed the deal value, the media reports indicate that the deal value is in the range of Rs450-500 crore (3.0-3.3x sales of three brands). The funding of the acquisition would be done through a mix of (domestic) debt, equity and internal accruals.  Outlook and view: This acquisition of brands will help Marico to enter into strong growing categories (such as deodorant and male grooming products). Also, this acquisition will help Marico to reduce its dependence on commodity-linked products such as coconut oil and edible oil. Though there are synergetic benefits, which Marico can obtain in the long run, we don't expect these brands to add significantly to the consolidated bottom line in the near term. Having said that, more clarity would emerge once the company discloses the key financials of the deal.  We are introducing our FY2014 earnings estimate and revising the price target to Rs186 (22x its FY2014E earnings per share [EPS] of Rs8.4) in this note. At the current market price the stock trades at 22.8x its FY2013E EPS of Rs7.1 and 19.2x its FY2014E EPS of Rs8.4. We maintain our Hold recommendation on the stock.     Bajaj Holdings & Investment  Cluster: Apple Green Recommendation: Buy Price target: Rs1,051 Current market price: Rs804 Price target revised to Rs1,051 Q3FY2012 result highlights The consolidated income of Bajaj Holdings and Investment Ltd (BHIL) declined by 76.4% year on year (YoY) to Rs62.4 crore against Rs265 crore reported in the corresponding period of the previous year. During each of the last four quarters the company had reported a lacklustre top line of under Rs100 crore. The subdued equity market had presented limited profit booking opportunities for the company in the last few quarters.  The company's income from associates grew 27.5% YoY. This moderated the profit after tax (PAT) decline to 28.8% YoY, lower than the top line growth. During Q3FY2012, the total market value of the company's investments declined by 2.3% sequentially while there was no major change in the cost of the investments.  The market value of the equity investments in the subsidiary company and the joint venture declined by 16% quarter on quarter (QoQ). One of the reasons for the same is the 6% fall in the share price of Maharasthra Scooters in which the company has a 24% stake.   Valuation Bajaj Auto is the key investment of BHIL and has been valued at 12.5x FY2013 earnings per share (EPS). The company reported good quarterly numbers, but there are concerns of sharp moderation in the domestic demand for its products. Our price target for Bajaj Finserv has been derived using the sum-of-the-parts (SOTP) valuation method.  Given the strategic nature of BHIL's investments, we have given a holding company discount of 50% to BHIL's equity investments. The liquid investments have been valued at cost. Our price target of Rs1,051.4 implies a 31% upside for the stock. We maintain our Buy recommendation on the stock.   Ratnamani Metals and Tubes  Cluster: Ugly Duckling Recommendation: Buy Price target: Rs132 Current market price: Rs110 Strong revenue performance Result highlights Revenues surge: Ratnamani Metals & Tubes (Ratnamani) reported another strong quarter in terms of revenue growth-in Q3FY2012 its revenues grew by 74.2% on a year-on-year (Y-o-Y) basis to Rs280.7 crore. The sales growth was backed by a 140% growth year on year (YoY) in the carbon steel tube and pipe (CS pipe) segment and a 57% Y-o-Y jump in the stainless steel tube and pipe (SS pipe) segment. The company is experiencing strong traction in the export business with exports contributing about 50% of the revenues.  OPM affected by forex loss: The gross profit margin (GPM) dipped by 180 basis points YoY to 36.7% despite an increase in the realisation mainly due to a higher raw material cost. The realisation for CS pipes increased by 29% YoY whereas that for SS pipes improved by 18.6%. The operating profit margin (OPM) was down by 560 basis points YoY to 14.9% despite a surge in the revenues. The fall was due to a foreign exchange (forex) loss of Rs12 crore on marked-to-market (MTM) forex denominated loans.  Net profit grows by 19.2%: On the back of a 70% fall in the other income and a 54.8% increase in the tax outgo (with the effective tax rate up by 520 basis points to 29.6%), the net profit growth was at 19.2% to Rs19.8 crore. Marginally tweaked estimates: In view of the volume and revenue performance of the quarter, we have tweaked our estimates for FY2012 and FY2013. Our revenue growth estimates have increased by 3.9% and 4.6% for FY2012 and FY2013 respectively while our earnings estimates have increased by 5.4% and 4.5% for FY2012 and FY2013 respectively.  Valuation: Through the first nine months of FY2012, the company has reported a strong revenue performance. However, its margins have trended down consistently. The management commentary remains encouraging in terms of the potential opportunities in the oil & gas sector. Going forward, we expect the company's revenues and profits to grow at a compounded annual growth rate (CAGR) of 30% and 15.6% respectively over FY2011-13. At the current market price, the stock is attractively trading at a price/earnings (PE) multiple of 4.7x its FY2013E earnings. On an enterprise value (EV)/EBITDA basis, it is trading at 3.5x FY2013E EBITDA. We maintain our Buy rating on the stock with a price target of Rs132.   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 Manage your newsletter subscriptions

 

Fw: Settlement Merger

 

Dear Customer, On account of General Elections of Brihan Mumbai Mahanagar Palika, multiple settlements scheduled on February 21, 2012. The Exchange has decided to merge the pay-in /pay-out date for settlement numbers 2012032 & 2012033 [NSE] and 1112220 & 1112221 [BSE]. NSE Obligation Settlement and Sell Against Receivable Schedule Settlement No. From To Pay In Sale against Receivables Availability 2012031 14-Feb-2012 14-Feb-2012 17-Feb-2012 Yes 2012032 15-Feb-2012 15-Feb-2012 21-Feb-2012 No 2012033 16-Feb-2012 16-Feb-2012 21-Feb-2012 Yes Deliveries taken in settlement number 2012032 will not be available for selling in settlement number 2012033 as the Pay-in for both the settlements are on February 21, 2012. BSE Obligation Settlement and Sell Against Receivable Schedule Settlement No. From To Pay In Sale against Receivables Availability 1112219 14-Feb-2012 14-Feb-2012 17-Feb-2012 Yes 1112220 15-Feb-2012 15-Feb-2012 21-Feb-2012 No 1112221 16-Feb-2012 16-Feb-2012 21-Feb-2012 Yes Deliveries taken in settlement number 1112220 will not be available for selling in settlement number 1112221 as the Pay-in for both the settlements are on February 21, 2012. Regards Team Sharekhan Registered Office: Sharekhan Limited, 10th Floor, Beta Building, Lodha iThink Techno Campus, Off. JVLR, Opp. Kanjurmarg Railway Station, Kanjurmarg (East), Mumbai – 400 042, Maharashtra. Tel: 022 - 61150000. Sharekhan Ltd.: SEBI Regn. Nos. BSE Cash-INB011073351; F&O-INF011073351; NSE - INB/INF231073330; CD - INE231073330; MCX Stock Exchange: CD - INE261073330; United Stock Exchange: CD - INE271073350; DP: NSDL-IN-DP-NSDL-233-2003; CDSL-IN-DP-CDSL-271-2004; PMS INP000000662; Mutual Fund: ARN 20669. Commodity trading through Sharekhan Commodities Pvt. Ltd.: MCX-10080; (MCX/TCM/CORP/0425); NCDEX -00132; (NCDEX/TCM/CORP/0142); for any complaints email at igc@sharekhan.com ; Disclaimer: Client should read the Risk Disclosure Document issued by SEBI & relevant exchanges and Do's & Don'ts by NCDEX, and the T & C on www.sharekhan.com before investing

Fw: Investor's Eye: Pulse - Inflation declines to 6.55%; Update - Aditya Birla Nuvo, Eros International Media, Punj Lloyd, Fertilisers

 

 

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 Manage your newsletter subscriptions