Fw: Investor's Eye: Update - Unity Infraprojects, Selan Exploration Technology, PTC India

 

 

Investor's Eye [August 16, 2012]  Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE Unity Infraprojects Cluster: Vulture's Pick Recommendation: Buy Price target: Rs95 Current market price: Rs45 Price target revised to Rs95 Result highlights Muted revenue growth; margins maintained though: In Q1FY2013 the net sales of Unity Infraprojects (Unity) grew by just 5% year on year (YoY) and dropped by 45% quarter on quarter (QoQ) to Rs395 crore, which is below our expectation. The sales were affected by the delays in obtaining approvals/clearances for certain government projects (government projects form 85% of Unity's order book) which led to the slow execution of these projects. However, on the operational front the operating profit margin (OPM) was in line with our expectation at 13.6%, which shows an expansion of 60 basis points on a yearly basis. The OPM is also better than the Q4FY2012 margin of 12.5% mainly because raw material prices were stable during Q1FY2013. The operating profit thus rose by 9.5% YoY. Higher interest charge resulted in a decline in PAT: However, the moderate top line performance and the margin expansion were nullified by the escalating interest charge, which rose by 33% YoY, resulting in an 8% drop in the profit after growth (PAT) to Rs18 crore (which is below our expectation). The depreciation charge, however, reduced sequentially as the capital expenditure done in the machinery lying idle has not been accounted for. However, healthy order book provides revenue visibility: Unity has bagged fresh orders worth Rs470 crore in FY2013 so far. This along with the orders worth Rs2,850 crore secured in FY2012 takes the total order book to a respectable position of Rs4,180 crore, which is 2.1x its FY2012 revenues. Thus, there is good revenue visibility for the company over the next two years. Of the present order book, 48% is from buildings, 23% is from the water segment and the remaining is from the transportation segment. One of three road BOT projects starts execution; while real estate portfolio still moving slow: Unity currently has three road build-operate-transfer (BOT) projects in its portfolio. Out of these, financial closure has been achieved for the two-laning of the Chomu-to-Mahla project in Rajasthan (after a delay) and work has started on the project. In addition, the concession agreement has been signed for one project out of the two recently won road BOT projects; the agreement for the other one will be signed soon. The two projects will achieve financial closure four to six months after the signing of the concession agreement. On the other hand, the real estate project in Nagpur has finally signed the management agreement with Hyatt and will start execution work post-monsoon. All the necessary approvals for the project are in place. However, the project in Bangalore maintains the status quo and expects the final approval in one to two months, as the new government settles down.  Estimates revised downwards: We have revised our revenue estimates downwards by 4% each for FY2013 and FY2014 to factor in the slower project approval, which will hamper the execution of the order book. Further, in light of this we expect the working capital need to rise which would result in higher borrowings. Thus, we have also increased our interest expense estimates. As a result, the earnings estimates stand revised by 10% and 13% for FY2013 and FY2014 respectively.  Maintain Buy with a revised price target of Rs95: We continue to like the company due to its strong order inflow momentum and healthy order book position in an adverse macro-environment. We also like its diversification into the road BOT space with prudent caution. The successful mobilisation of funds from a private equity would remove some overhang on account of the real estate projects. We have not given any value to Unity's road BOT and real estate projects which would add to the valuation whenever they gain some momentum. We maintain our Buy recommendation on the stock with a revised price target of Rs95. At the current market price the stock is trading at a price/earnings multiple of 2.8x FY2013E and 2.3x FY2014E earnings respectively. Selan Exploration Technology Cluster: Ugly Duckling Recommendation: Buy Price target: Rs360 Current market price: Rs265 Price target revised to Rs360 Result highlights Performance remains flattish in absence of regulatory approvals: Selan Exploration (Selan) reported another quarter of a flattish growth in oil production in the absence of the regulatory approvals that are essential to take forward exploration and drilling activity and monetise the oil & gas assets (oil fields). The revenue growth of 15.2% year on year (YoY) was largely driven by the benefits of depreciation in the rupee and a marginal decline in the production volumes as part of the natural depletion of the resources in the existing wells.  Lower interest burden due to repayment of debt: At the profit after tax (PAT) level, the growth was marginally down YoY and grew by 11.4% sequentially due to the rupee's depreciation and a lower interest cost. The company utilised part of the cash on hand to repay its foreign currency debt and consequently it is practically debt-free now.  Looking at alternative means of utilising cash on hand: The upstream oil & gas companies in India have suffered due to the lack of regulatory approvals after the issues raised by the Comptroller and Auditor General of India (CAG) and the subsequent investigations by the law agencies. In the absence the approvals, the management indicated that it is actively looking at some proposals to acquire participatory interest in oil assets abroad. This would result in productive utilisation of the over Rs100 crore of cash left on the books after the repayment of its debt. We believe the management could also look at a buy-back in case it is not successful in carrying out an overseas acquisition.  Lack of regulatory approvals raises risk of de-rating of valuation multiples: The company had commenced drilling operations in Q1FY2012 and had brought in a seasoned professional team to speed up the process of monetising of its oil fields in the Cambay Basin, Gujarat. However, the policy inertia in government departments has resulted in unexpected delays in the regulatory approvals, which are essential to take forward the exploration and drilling programme. Though the management remains hopeful of receiving the approvals (at least partially in some fields) and is contemplating alternative means to productively utililise the cash on hand (it generates Rs35-40 crore of free cash annually at the current production level), the continued delay in the approvals could result in the de-rating of the valuation multiples. We are reducing our production volume estimates for FY2013 and FY2014 to factor in the concerns. Accordingly we revise down our target multiple of 4x EV/EBITDA (FY2014E) and hence downgrade our price target to Rs360.  PTC India Cluster: Apple Green Recommendation: Buy Price target: Rs71 Current market price: Rs60 Price target revised to Rs71 Result highlights Q1FY2013 results affected by lower rebate income: PTC India's Q1FY2013 results were significantly below expectations led by a fall in the rebate and treasury incomes. The company started selling power under power tolling agreements during this quarter and made an operating profit of Rs12.5 crore (approximately Re1/unit). Its management indicated that the sustainability of the profit of the power tolling business could be determined only after some time as the business is currently at a very nascent stage. The payment from the Tamil Nadu State Electricity Board (SEB) has started coming in. The company has already received over Rs175 crore from the SEB and expects to receive the balance (Rs450 crore) by the end of CY2012. However, the company is yet to receive the timeline for the payment due (over Rs450 crore) from the Uttar Pradesh SEB.  Top line fell by 20%: The top line of the company fell by 20% year on year (YoY) driven by a 18% year-on-year (Y-o-Y) fall in the realisation/unit while the trading volumes were in line with our expectation. The number of power units sold under the long-term contracts was stable at around 1 billion units on a yearly basis. The company started selling power under power tolling agreements (for the Simhapuri power project of 200MW) in this quarter and sold ~121.7  million units.  Fall in rebate and treasury incomes mars profitability: The operating profit margin (OPM) fell to 1.6% from 1.9% in Q1FY2012. This was mainly due to a drop in the rebate income, which declined to Rs2.2 crore in the quarter from Rs23.4 crore in Q1FY2012. The overall operating profit fell by 33% on a yearly basis. The core trading margin (excluding the surcharges and rebates) dropped to 4 paise/unit from 4.7 paise/unit in Q4FY2012 owing to increased competition in the short-term trading market. The company is estimated to have earned a profit of Re1/unit on the power sold under the tolling agreements. It charges a 2% rebate on the payment in case of early payment while it charges a surcharge @ 15% per annum on delayed payments.  Net profit dropped by 49%: The other income decreased by 88% YoY led by a fall in the investments-the treasury income declined to Rs1.6 crore in Q1FY2013 as against Rs17.3 crore in the corresponding quarter of the last year. The positive surprise was the fall in the interest cost (became almost nil) as the debt level was maintained at zero throughout the quarter. Further, led by a higher tax rate, the profit after tax (PAT) fell by 49% to Rs22.9 crore, which is lower than our expectation of Rs40 crore.  Receivables remain high at Rs2,700 crore: For the quarter, the net cumulative receivables from the Tamil Nadu and Uttar Pradesh SEBs remained high at Rs930 crore with only Rs100 crore of payment received. The total receivables further increased from Rs2,581 crore in Q4FY2012. However, the company is sitting on a surcharge of over Rs150 crore on account a delay in receiving payments from the SEBs; this would boost the future profitability as and when the dues are received. Estimates downgraded by 10%: We have further downgraded our estimates for FY2013 and FY2014 by 10% each in view of the impending competitive margin pressure, the falling short-term trading volumes and the other income assumption. We expect the profit from the core trading business to post a compounded annual growth rate of 14.1% over FY2012-14. PTC India Financial Services (PFS) has reported a strong performance for the quarter (with its PAT up 124% on a yearly basis) led by a rise in its interest income from loan financing during the quarter. One of its power tolling projects aggregating 200MW was commissioned in early FY2013 and boosted its revenue and profitability during the quarter.  Price target revised to Rs71: We expect the overall power traded volumes to significantly increase on the back of the long-term power purchase agreements (PPAs) in the next two years when the undersigned power projects would start commercial operation. However, the recovery of payments from the SEBs and an improvement in the execution of power projects have become essential for keeping PTC India's growth story intact. We have increased our target valuation multiple of PTC Energy to 2x its FY2012 book value (from 1 x earlier) as the revenue from it's first power tolling projects started flowing in from Q1FY2013. However, on account of our downgraded estimates for the core power trading business, our sum-of-the-parts (SOTP) based price target has been revised downwards to Rs71. As the stock's current valuation still looks attractive at 0.7x FY2014 estimated book value, we maintain our Buy rating on PTC India.   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.

Fw: Investor's Eye: Stock Idea - AGC Networks; Update - Sun Pharmaceutical Industries, India Cements, Godrej Consumer Products, Fertilisers

 

 

Investor's Eye [August 13, 2012]  Sharekhan www.sharekhan.com

Summary of Contents STOCK IDEA AGC Networks Cluster: Ugly Duckling Recommendation: Buy Price target: Rs400 Current market price: Rs265 Spreading its network Key points  Spreading wings to reap large industry opportunity: AGC Networks (AGC; formerly known as Avaya Global Connect) has transformed its business from a single-partner (Avaya) relationship into a diversified business with multi-level global partners (Cisco, Juniper, HP, IBM, Dell, Polycom etc) to significantly multiply the addressable market and growth opportunities in its focus area of IT network infrastructure and related services. Currently, it gets around 80% of its business from India, where the addressable product & services target market was close to Rs30,000 crore in FY2011 and is growing at 20% per annum. However, with its renewed strategy (named as 10^3) the company is spreading its wings through a multi-solution, multi-alliance and multi-geography strategy, which augurs well as it will provide much more diversified revenue traction in the coming years.  Parent Aegis adds muscle to AGC's growth prospects: AGC's parent Aegis is ranked among the top Indian BPO companies with presence in 13 countries, 55 locations and over 300 clients across verticals, such as BFSI, telecom, healthcare, travel and hospitality, consumer goods, retail and technology. AGC would be leveraging the strong presence of Aegis and get access to the parent's elite client base across geographies. After being acquired by Aegis in May 2010, AGC has significantly grown its product portfolio, geographical markets and partners. Over the last two years after coming to the fold of Aegis, AGC has transformed from a single-product (unified communications[UC]) and single-partner (Avaya) entity into a diversified integrated player with multiple partners and businesses spread across geographies.  Solid financials, healthy prospects ahead: In the last two years AGC has reported a strong growth in the top line and the bottom line. Going forward, with diversified product offerings and a wider client base, the company is well poised to raise its growth trajectory. We estimate an over 40% CAGR in its earnings over FY2012-14 with a 33% revenue CAGR over the same period. We expect the OPM to remain stable at 10% over the next two years with a judicious mix of products (70%) and services (30%) in the revenues. Further, with an increase in the addressable market opportunities and the successful implementation of the 10^3 strategy, the management aspires to reach $1 billion in revenues (Rs5,500 crore) by 2015 through both organic and inorganic initiatives.  Undemanding valuation, rich dividend play: AGC is a distinguished player in the enterprise communications space in India and its pertinent focus on delivering industry-specific solutions with customised services proves to be a key differentiator from the others. With increasing clients and an expanding geographical network through the Aegis legacy and own sales and marketing initiatives, the company is well poised to witness significant traction in profitability in the coming years. At Rs265 the stock is currently available at undemanding valuations of 3.9x and 3x FY2013E and FY2014E earnings respectively. Further, the company is a strong dividend play in FY2012 150% dividend, 33.5% pay-out). Going forward, with the company all set to receive a windfall of Rs97 crore through the sale of the Aegis stake (5.7 million shares at Rs170 per share) by December 2012, its per-share value works out to Rs68. Thus, there is a higher prospect of a special dividend pay-out in FY2013 over and above the usual dividend. We initiate coverage on AGC with a Buy rating and a 12-month price target of Rs400. At our price target the stock would be valued at modest 4.5x FY2014E earnings.  STOCK UPDATE Sun Pharmaceutical Industries Cluster: Ugly Duckling Recommendation: Buy Price target: Rs743 Current market price: Rs682 Price target revised to Rs743 Result highlights Better than expected performance: For Q1FY2013 Sun Pharmaceuticals (Sun Pharma) reported a 62.5% year-on-year (Y-o-Y) rise in its net sales to Rs2,658.1 crore, which is 12% higher than our estimate. The operating profit margin (OPM) jumped by 1,231 basis points to 45.8%, which is substantially higher than our estimate of 38.6%. The quarter's OPM is better than the margin achieved in the previous 14 quarters. Despite a foreign exchange (forex) loss (netted off in the other income) and a higher effective tax rate (17.3% in Q1FY2013 vs 2.5% in Q1FY2012), the net profit jumped by 58.8% year on year (YoY) to Rs796 crore during the quarter. The net profit exceeds our estimate by 19%.  Strong results of Taro and exclusive supplies of Lipodox help: The better than expected performance was driven by three main factors: (1) stronger revenues (up 42% YoY to $159 million) and higher profit (up 110% YoY to $62.9 million) from Taro Pharmaceuticals (Taro); (2) better revenue and profitability from the supplies of Lipodox (through Caraco Pharmaceuticals [Caraco]; opportunity arose out of a drug shortage in the USA); and (3) a strong growth in the emerging markets (ex Taro the growth stood at 45% YoY). Besides, Sun Pharma's base business also seems to have grown impressively during the quarter.  Business restructuring and full control of Taro to help sustain the strong growth: Sun Pharma is in the process of restructuring its business. It has announced a plan to spin off its domestic formulation business (which contributes about 22% of its revenues) to its wholly owned subsidiary called Sun Resins and Polymers Pvt Ltd with effect from March 31, 2012. This is being done with a view to enhance the focus on the business and to allow for quicker responses to the competitive market conditions. Besides, the company has announced a plan to acquire the entire stake in Taro which will give it a stronger foothold in the USA and Europe. We revise our earnings estimates and price target; maintain Buy: Despite an impressive performance in Q1FY2013, the management has maintained its guidance of an 18-20% revenue growth for the base business in FY2013. We have revised our earnings estimates upward by 14% each for FY2013 and FY2014, in view of Sun Pharma's plan to gain full control of Taro (which will result in a lower minority interest) and the operational synergies that would result from such a move. Accordingly, our price target stands revised by 14% to Rs743. We maintain our Buy rating on the stock.    India Cements Cluster: Ugly Duckling Recommendation: Buy Price target: Rs110 Current market price: Rs85 Operating performance in line with estimates Result highlights Operating performance in line with estimates; adjusted net profit below estimates: In Q1FY2013 India Cements posted an adjusted net profit of Rs82 crore (a decrease of 21.9% year on year [YoY]). The same is below our estimate on account of a higher than expected interest cost of Rs95 crore (an increase of 63% YoY) and a foreign exchange (forex) loss of Rs25 crore. However, the operating profit of the company is much in line with our estimate at Rs277.7 crore (higher by 14.9% YoY).  Revenue growth driven by healthy realisation and IPL income; in line with estimates: The net sales of the company grew by 13.7% YoY to Rs1,201.4 crore (largely in line with our estimate), which also includes revenues from the Indian Premier League (IPL), wind power and shipping businesses. The revenues from the cement division (cement is its core business) improved by 10.8% YoY to Rs1,062.9 crore largely driven by a 7.6% growth in the average cement realisation. However, on the volume front, the southern region continues to witness a lacklustre demand environment. Hence, the volume grew by just 2.9% YoY to 2.38 million tonne (mt). On the other hand, the revenues from the IPL division jumped to Rs122 crore as against Rs84.8 crore in the corresponding quarter of the previous year. The shipping division booked Rs12.5 crore of revenues during the quarter.  Cost pressure largely offset the benefit of improvement in cement realisation: On the margin front, in spite of a 7.6% improvement in the cement realisation YoY, the continued cost pressure-in terms of (a) a higher power & fuel cost (up 16.8% on per tonne basis); (b) higher freight charges (up 21% YoY); and (c) higher employee cost (up 23.6% YoY to Rs78.7 crore)-largely offset the benefit of the increased realisation. Hence, the operating profit margin (OPM) could expand marginally by 25 basis points YoY to 23.1%. The overall cost of production on a per-tonne basis increased by 8.4% YoY and the EBITDA per tonne increased by 5% YoY to Rs1,033. Consequently, the operating profit of the company increased by 14.9% YoY to Rs277.7 crore.   Surge in interest cost due to forex loss: The interest cost increased by 63% YoY to Rs94.9 crore on account of an increase in the borrowings at a higher rate to redeem the outstanding foreign currency convertible bonds and a forex loss of Rs25 crore. The total borrowings of the company stood at Rs2,880 crore as compared with Rs2,700 crore at the end of FY2012. Further, a one-time expense of Rs20 crore was incurred on account of the operations of the IPL franchise. Hence, the reported net profit declined by 39.2% YoY to Rs62 crore whereas the adjusted net profit works out to Rs82 crore (a decline of 21.9% YoY).  CCI has imposed a penalty of Rs187.5 crore; the company will appeal against the CCI order: The Competition Commission of India (CCI) has imposed a penalty on around 11 cement companies for making a cartel and managing cement prices at higher levels. As per the CCI order, India Cements will have to pay Rs187.5 crore as a penalty. However, based on the legal opinion the company will appeal against the order before the Tribunal. Accordingly, the company has not made any provision for the CCI penalty.  Fine-tuned earnings estimates for FY2013 and FY2014: We have fined-tuned our earnings estimates for FY2013 and FY2014 mainly to incorporate the higher than expected cost pressure (a higher freight cost) and a lower than expected volume growth. We have also factored in the higher than expected cement realisation in our estimates. Consequently, the revised earnings per share (EPS) estimates for FY2013 and FY2014 are Rs9.6 and Rs11 respectively.  Maintain Buy with price target of Rs110: The demand for cement in the key market (southern region) of India Cements is likely to witness a partial recovery driven by the private sector housing industry and a pick-up in the rural demand. Further, in order to get better volumes and realisations the company is trying to change its market mix in favour of the non-Andhra Pradesh states and the western region. On the realisation front, the cement price in the southern region stands at a healthy level and we expect the average realisation in FY2013 to remain higher compared with that in FY2012. Moreover, with the commissioning of its captive power plant (CPP) the company will benefit by saving cost and gaining a regular supply of power. However, in order to deliver higher volumes the realisation could come under pressure. Cost pressure in terms of any adverse movement in the price of imported coal and a higher freight cost would partially offset the positive impact of the increased realisation and the savings from the CPP. We maintain our Buy recommendation on the stock with a price target of Rs110. At the current market price the stock trades at a PE of 7.7x discounting its EPS for FY2014 and EV/EBITDA of 4.4x its FY2014E earnings.   Godrej Consumer Products Cluster: Apple Green Recommendation: Hold Price target: Rs665 Current market price: Rs631 Downgraded to Hold; price target revised to Rs665 Result highlights Q1FY2013 results-strong growth momentum sustained: The Q1FY2013 results of Godrej Consumer Products Ltd (GCPL) are in line with our expectations largely on account of a higher than expected revenue growth during the quarter. The strong growth momentum of the previous quarters was sustained with the revenues growing by 39.2% year on year (YoY) and the adjusted profit after tax (PAT) growing by 47.9% YoY during the quarter. Q1FY2013 is the fourth consecutive quarter of a strong double-digit volume growth in the company's domestic soap segment, an above 20% growth in its domestic household insecticide (HI) business, and a more than 25% year-on-year (Y-o-Y) revenue growth in its Indonesian business. The strong growth could be attributed to adequate media spends as well as innovations and renovation in the respective portfolios. Results snapshot: In Q1FY2013 the consolidated net sales of GCPL grew by 39.2% YoY to Rs1,388.6 crore. The robust revenue growth was largely driven by a 24.3% Y-o-Y growth in the domestic business and a 67.5% Y-o-Y growth in the international business (an organic growth of 31% YoY). The consolidated gross profit margin (GPM) improved by 64 basis points YoY to 52.2% while the operating profit margin (OPM) stood flat at 14.7%, largely on account of it being a weak quarter for the HI business in India and seasonally the weakest quarter for the Latin American business. Thus, the operating profit grew by 38.2% YoY to Rs202.3 crore (the growth is in line with the revenue growth). This along with a lower incidence of tax resulted in a 48% Y-o-Y growth in the adjusted PAT (before the minority Interest) to Rs151.8 crore. The foreign exchange (forex) loss stood at Rs17.6 crore in Q1FY2013 as against a forex gain Rs2.4 crore recorded in Q1FY2012. Upward revision in earnings estimates: We have revised upwards our earnings estimates for FY2013 and FY2014 by 5.5% and 7.9% respectively to factor in the higher than expected revenue growth in Q1FY2013 and the lower tax rate indicated by GCPL's management in its commentary.  Outlook and valuation: Q1FY2013 was yet another quarter of a strong operating performance and a strong start to the fiscal year 2013. According to the management, there are no signs of a slowdown in the categories in which GCPL has a strong presence in the domestic market. It has maintained its thrust on innovation-led and distribution-led growth in the domestic and international markets. We expect GCPL's top line and bottom line to grow at compounded annual growth rate (CAGR) of 22.8% and 32.1% over FY2012-14. We have revised our price target for the stock upwards to Rs665 (based on 23x its FY2014 earnings of Rs28.9 per share). However, due a limited upside (of 5.3%) from the current level we have downgraded our recommendation on the stock from Buy to Hold. At the current market price the stock trades at 26.7x its FY2013E earnings per share (EPS) of Rs23.7 and 21.8x its FY2014E EPS of Rs28.9. SECTOR UPDATE Fertilisers Fertiliser sales hit by lower production  Key points Lower production of non-urea fertilisers weighed on total fertiliser sales: In July 2012, the aggregate sales of fertilisers (by 15 leading manufacturers) declined by 24% year on year (YoY) led by a steep decline in the sales of the non-urea fertilisers. In July 2012 the production and import of non-urea fertilisers, mainly di-ammonium phosphate (DAP), and complex fertilisers declined drastically on account of the non-availability of phosphoric acid and price negotiation by the Indian importers for DAP (imported). The imports of DAP and complex fertilisers decreased by 59% and 43% respectively during July 2012 mainly on account of lower production and lower imports by Coromandel International, India Potash and IFFCO. The imports of MOP and urea were higher by 69% and 48% respectively in the same month. YTD sales of fertilisers decline: The year-till-date (YTD) sales of fertilisers declined by 17% as compared with the sales in the same period of the previous year. The decline in the fertiliser sales volume was largely driven by the lower both production and import of non-urea fertilisers on account of a tight supply of phosphoric acid and the expiry of the contracts for the import of DAP. The sales of DAP, urea and complex fertilisers were lower by 59%, 1% and 43% respectively whereas the sales of MOP increased by 69% mainly due to higher imports by the Indian importers (potash plays an important role in a drought-type scenario). The imports of urea on a YTD basis declined by 50% to 2.71 lakh tonne as compared with that in the same period of FY2012.  Outlook: We maintain our cautious outlook on non-urea fertiliser manufacturers mainly due the lacklustre demand for these fertilisers on account of price hikes, margin pressure due to higher raw material cost and a demand shift towards cheaper fertilisers like urea and SSP. We prefer a pure urea manufacturer like Chambal Fertiliser as well as SSP manufacturers like Rama Phosphates and Liberty Phosphate in view of the existing demand-supply scenario.   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.

Fw: Investor's Eye: Update - Bharti Airtel, Mahindra & Mahindra, Oil India, Punj Lloyd, V-Guard Industries

 

 

Investor's Eye [August 08, 2012] Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE Bharti Airtel Cluster: Apple Green Recommendation: Buy Price target: Rs362 Current market price: Rs274 Q1FY2013 results: First-cut analysis Result highlights Bharti Airtel's Q1FY2013 results flash: Misses estimates; depressed operating performance of India and Africa businesses  In Q1FY2013 Bharti Airtel's consolidated performance was lower than expected on all counts, viz revenue, operating profit and earnings. The earnings stood at Rs762.2 crore, that is 33% lower than our estimate of Rs1,140 crore. The lower operating profit (down 6.2% sequentially) and the higher losses in the Africa business (a loss of Rs670 crore) were the prime reasons for the sharp drop in the earnings. Q1FY2013 result highlights During the quarter the consolidated income from operations grew by 3.3% on a sequential basis while the revenue growth in the South Asia mobile business was in line with expectation (up 1.7% sequentially). In constant-currency terms, the revenue growth of the Africa business contracted by 0.5% sequentially. On a consolidated basis, the cost structure showed a rise with an increase in the three key cost components, viz selling, general and admin expense; network operating cost; and employee cost which rose 13%, 9.2% and 5.5% respectively. This dragged the operating performance (the operating profit fell 6.2% sequentially) and caused the operating profit margin (OPM) to contract sharply by 310 basis points quarter on quarter (QoQ). The weak operating performance along with an increase in the depreciation charge and a higher effective tax rate resulted in a 24.2% sequential decline in the earnings.  Valuation and view: Bharti Airtel has missed analysts' expectations for around seven to eight quarters in a row. We believe that the Indian business environment remains challenging for the company. The Africa business is also not showing the required elasticity and agility. Against this backdrop, the ambiguous regulatory environment continues to keep the sector and the stock subdued. At present we have a Buy rating on Bharti Airtel with a price target of Rs362. In the light of the Q1FY2013 performance, we would review our earnings estimates for the company and come out with a detailed note shortly. At the current market price the stock is ruling at 6x its FY2014E EV/EBITDA and 14.5x its FY2014E price/earnings ratio.     Mahindra & Mahindra Cluster: Apple Green Recommendation: Hold Price target: Rs777 Current market price: Rs722 Price target revised to Rs777 Result highlights Result highlight: Q1FY2013 PAT grew 22% YoY on strong operating performance  For Q1FY2013 Mahindra and Mahindra (M&M) has reported a net profit of Rs726 crore, which is significantly above our and the Street's estimates. Cost control measures led to the better than expected operating performance, which boosted the profitability. Lower depreciation and interest charges improved the profitability further, leading to a significant outperformance vis-a-vis the expectations.  Highlights of Q1FY2013 results The company's revenues are in line with our estimate. The realisation of both the automotive segment and the farm equipment (FE) segment improved compared with that in Q1FY2012. The company had taken price increases of 1.5% in the automotive segment and of about 3% in the tractor segment during April 2012. A 180-basis-point sequential improvement in the automotive business (M&M + MVML) was commendable. The EBIT margin at 13.9% was the highest in two quarters. By maintaining the profitability of the tractor segment in the face of adverse macros and cost pressures the company boosted its profitability. The tractor segment's EBIT margin at 15.7% remained flat sequentially. The other expenditure/sales at 8.2% was among the lowest in the last few years. Cost control initiatives enhanced the profitability. Lower than expected depreciation and finance cost further helped the profitability during the quarter.  Valuation: We maintain our original assumption of a flat tractor growth for FY2013 but increase our automotive volume assumption for FY2013 from 16% to 19%. We are also revising our margin expectation for FY2013 and FY2014 slightly upwards, given the positive surprise in the Q1FY2013 results. Our sum-of-the-parts (SOTP) valuation estimates the M&M stock at Rs777; indicating an upside of 7% from the current levels. Given the aggressive headwinds in the tractor business, we maintain our Hold rating on the stock.     Oil India Cluster: Apple Green Recommendation: Buy Price target: Rs600 Current market price: Rs482 Q1 earnings ahead of estimates  Result highlights Net profit grew by 9.5% YoY to Rs930 crore: In Q1FY2013 Oil India Ltd (OIL) posted a net profit of Rs930 crore (an increase of 9.5% year on year [YoY]), which is ahead of our as well as the Street's estimates. The net profit growth was ahead of expectations on account of (1) a lower than expected subsidy burden (Rs2,016 crore vs our expectation of Rs2,141 crore); and (2) a lower than expected other expenditure (down 43.9% YoY to Rs125.9 crore) during the quarter. The net sales grew by 8.2% YoY to Rs2,439.6 crore during the quarter.  Production of oil and gas affected due to technical issue in exploration: The production of crude oil and natural gas was affected during the quarter due to a technical issue faced by the company during April and mid May of 2012. However, the company has resolved the issue and achieved its normal monthly run rate of production. The crude oil production and sales volume for the quarter declined by 2% and 3.3% YoY respectively. On the natural gas front, the company reported a decline of 2.3% in the production to 0.63bcm in Q1FY2013 whereas the sales volume was lower by 4.5% YoY. As the company has resolved the issue and recovered its normal monthly run rate, we expect the production of oil and gas to grow by 3% and 6% YoY respectively in FY2013. Realisation affected by correction in crude oil prices: With the crude oil prices correcting during Q1FY2013, the gross realisation of the company declined by 5.6% YoY and by 8.3% quarter on quarter (QoQ) to $109.8/barrel. Further, with the increase in the subsidy burden (to make up for the loss incurred by the oil marketing companies) to Rs2,016 crore from Rs1,780 crore in Q1FY2012, the net realisation of the company declined by 9.6% YoY to $53.8/barrel. However, in rupee terms the net realisation of the company improved by 9.4% YoY to Rs2,913/barrel on account of the depreciation in the rupee. On the margin front, though the operating profit margin (OPM) contracted marginally by 91 basis points YoY to 49.3%, the same is better than our estimate.  Other income supported by huge cash balance: During the quarter the other income increased by 25.8% YoY to Rs377.2 crore. The other income was well supported by the company's huge cash balance. In March 2012 the company had cash balance of Rs10,935 crore. Going ahead, this cash could be utilised to acquire oil and gas assets that could provide inorganic growth to the company.  Maintain Buy with price target of Rs600: We largely maintain our earnings estimates for FY2013 and FY2014. We also maintain our bullish stance on OIL because of its huge reserves and healthy reserve/replacement ratio (RRR), which would provide a reasonably stable revenue growth outlook. Further, the stock is available at attractive valuation and is trading at a discount to its historical average valuation. The fair value of OIL works out to Rs600 per share (based on the average fair value derived using the discounted cash flow [DCF], price/earnings [P/E] and EV/EBIDTA valuation methods). Hence, we maintain our Buy recommendation on OIL with a price target of Rs600. At the current market price the stock trades at a P/E ratio of 7.8x its FY2013E earnings per share (EPS) of Rs62 and 7.3x its FY2014E EPS of Rs66. Punj Lloyd Cluster: Apple Green Recommendation: Hold Price target: Rs60 Current market price: Rs52 Price target revised to Rs60 Result highlights Revenues below estimate, but OPM expands: In Q1FY2013 the consolidated revenues of Punj Lloyd Ltd (PLL) grew by 20% year on year (YoY; but dropped by 10% sequentially) to Rs2,707 crore. The same was lower than our estimate because the company executed slightly lesser projects than expected during the quarter. In terms of segmental contribution, the infrastructure and pipeline segments continued to dominate with approximately a 60% share (combined) in the total revenues. Geography-wise, South Asia and Asia Pacific remained the leaders by contributing 36% each to the total revenues. The highlight of the quarter came in the form of margin expansion to 8.1% from 7.4% in Q1FY2012 and 7.6% in Q4FY2012. The operating profit margin (OPM) improved on account of the withdrawal of the financial support to Simon Carves (now in administration), thanks to which the low-margin legacy orders are now out of the order book and the company is more efficient. Subsequently, the EBITDA of PLL shot up by 32% YoY during the quarter. Earnings disappoint due to escalating depreciation and interest charges: In spite of a good top line growth and margin expansion the company reported a loss of Rs13.4 crore (vs our expectation of a Rs3-crore loss) for the quarter. This was because of high interest and depreciation charges both of which surged by 61% YoY and 52% YoY respectively during the quarter. The depreciation charge in particular increased by 34% on a sequential basis because in Q4FY2012 the company had witnessed some write-back on account of the revised lifeline of its rigs. The interest cost zoomed due to higher borrowing during the quarter. Currently, PLL's debt stands at Rs5,701 crore, which is Rs100 crore more than its debt in Q4FY2012 and translates into a debt/equity (D/E) ratio of 1.9x. Further, the company also made a higher tax provisioning during the quarter which also eroded the bottom line. Debt reduction and restructuring may take another two to three quarters: PLL's debt has been constantly increasing (denting its net profit to a great extent) on account of its higher working capital needs and new project investments. It plans to reduce its debt by selling some real estate assets and replacing the domestic loans with foreign loans. However, it expects these to materialise over the next six to nine months by when the macro economy is expected to stabilise. These steps would help in lowering the debt burden as well as reducing the cost of debt. The company is also exploring the option to list its subsidiary, Sembawang, in a year or so.  Revise estimates downwards: We are revising our earnings estimates for FY2013 and FY2014 downward by 11% and 2% respectively to factor in the higher depreciation and interest charges, and tax provisions. However, taking into consideration the recent margin expansion, we have incorporated in our estimates a 40-basis-point margin expansion and a slightly higher other income during FY2013 which should restrict the fall in the bottom line in the fiscal.  Hold with a revised price target of Rs60: PLL witnessed a strong order inflow in FY2012 which has improved the revenue visibility for the next two years. It has shown an improvement at the execution level and margin expansion over the last five quarters. The company recorded a stable OPM of 7-8% in this period except for in Q3FY2012. Even the Libya situation is slowly improving though it has not stabilised so far. Thus, the worries for PLL now remain bringing the debt under control and reducing its working capital requirement. These steps would help to lower the interest burden and cause the operating profit to percolate to the net level. Hence, any success in lowering the cost of debt or improving the working capital days will add to the growth at the net profit level. Thus, we maintain our Hold recommendation on the stock as the visibility is improving. But there is not much upside from the current level. We place a price target of Rs60 (earlier Rs63) on the stock based on the enterprise value (EV)/EBITDA of 6x its FY2014 estimate.    V-Guard Industries Cluster: Ugly Duckling Recommendation: Hold Price target: Under review Current market price: Rs401 Growth on track, downgraded to Hold on recent rally Result highlights Top line growth led by non-south region and products like stabilisers, pumps and digital UPS: In Q1FY2013, V-Guard Industries (V-Guard) continued to achieve some new milestones by recording its highest quarterly revenue. During the quarter, its revenues grew by 36% year on year (YoY) to Rs327 crore (11% higher than expected). The revenue growth was driven by a growth in the sales of stabilisers (up 38% YoY), pumps (36% YoY) and digital uninterrupted power supply (UPS) systems (up 151% YoY). Further, the non-south region, which accounts for 27% of the company's total sales, demonstrated a robust growth of 46% in Q1FY2013.  Improvement in margin to 10.4%: The raw material cost decreased to 70.8% as a percentage of sales from 71.4% in Q1FY2012 mainly led by an increase in the inventories. Lower selling and distribution expenses (in Q1FY2012 the selling cost had included Rs6.3 crore of advertising cost related to the Indian Premier League event) further boosted the operating profit margin (OPM) to 10.4% vs 9.5% in Q1FY2012. The product-wise margins varied across categories, ranging from 4-6% in products like cables and fans to as high as 17-19% in stabilisers and solar water heaters. Segments like UPS systems and digital UPS systems reported slight pressure on the margin for the quarter. On the other hand, the cable and wires segment reported an uptick in profitability on account of a fall in the price of copper.  Adjusted PAT rises by 68% YoY: A lower increase in the interest and depreciation expenses contributed towards a profit after tax (PAT) of Rs20.7 crore (up 68% YoY). The same is 37% higher than our expectation. The tax rate was lower during the quarter at 25.1% (as compared with 27.7% in Q1FY2012) because of the increased contribution from the company's new Kachipuram plant, which enjoys tax benefits.  Estimates fine-tuned: The company has marginally upgraded its revenue growth target for FY2013 to over 30% YoY from 25% estimated earlier and indicated an OPM of 9.5-10.0% for the same period. We have fine-tuned our earnings estimates for FY2013 and FY2014 after incorporating the robust growth outlook for stabilisers, inverters and the recently launched products (like induction cookers and domestic switchgears) as well as the lower tax rate. We are now expecting a compounded annual growth rate (CAGR) of 29% in the company's revenue and a CAGR of 35% in its earnings over FY2012-14.  Downgraded to Hold on recent rally: The company has delivered results in line or ahead of its growth guidance in recent quarters. In Q1FY2013 its margin improved in spite of a slowdown in the consumer durables space and a fierce competitive landscape. The company's foray into product segments like induction cookers and switchgears also holds promise. V-Guard has remained our preferred play on the Indian consumption boom since we initiated coverage on the company in September 2010 and has given an upside return of 148% so far. However, after the rally in the stock price in the past few days the stock's valuations at 16.6x and 12.9x its FY2013 and FY2014 expected earnings look a bit stretched and offer limited upside from the current level. Hence, we downgrade our recommendation on V-Guard from Buy to Hold and put the price target under review.       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.