Fw: Investor's Eye: Special - Q1FY2013 earnings review, Q1FY2013 Auto earnings review, Q1FY2013 Telecom earnings review, Q1FY2013 Pharma earnings review

 

Investor's Eye [August 22, 2012]  Sharekhan www.sharekhan.com

Summary of Contents SHAREKHAN SPECIAL Q1FY2013 earnings review   A few sparks amid a soft quarter Double-digit earnings growth aided by oil companies (ONGC, GAIL) and SBI: On an aggregate basis the Sensex' earnings for Q1FY2013 grew by 10.3% year on year (YoY) against our estimate of 13%. However, the earnings growth was bolstered by a strong growth in the profit reported by State Bank of India (SBI; due to a low base of Q1FY2012) and a higher than expected earnings growth in the oil companies (ONGC and GAIL) due to a lower than expected provision for the subsidy burden. Excluding SBI, the aggregate earnings of the Sensex grew by 5.5% and excluding SBI and the oil companies (ONGC, GAIL) the earnings growth was flattish (-0.4%) YoY.  Top performers and losers: About one-third of the Sensex companies reported a year-on-year (Y-o-Y) decline in their adjusted net profit during the quarter. Among the top three Sensex companies that surprised positively were GAIL, ONGC and Mahindra and Mahindra (M&M). On the other hand, among the Sensex companies the key disappointments came from Tata Power, Jindal Steel & Power and Bharti Airtel. Revenue growth slips below 20%: The aggregate revenue growth of the Sensex companies was in line with our estimate at 17.4% YoY, which was lower than the 20.3% year-on-year (Y-o-Y) growth in Q4FY2012. The growth in the revenues was led by the pharmaceutical (pharma), information technology (IT) services and automobile (auto) sectors. Private banks continued to post a healthy performance though SBI's top line growth was affected by a decline in the margins.  No respite from margin pressure: During the quarter the EBITDA margin of the Sensex companies (ex banks) declined to 18.4% (vs our estimate of 18.3%) from 20.4% in Q1FY2012. The major stress was seen in metal and capital goods stocks as well as Reliance Industries Ltd (RIL). The decline in the output of the high-margin gas production significantly dented RIL's profitability during the quarter. However, the EBITDA margin in the auto and IT sectors remained stable as compared with Q1FY2012. Macro environment challenging; corporate earnings growth sustains at double digits: Despite the adverse business environment, the aggregate earnings of the Sensex continue to grow at a rate of over 10%. This is likely to sustain unless the consumption demand also deteriorates sharply. Moreover, in spite of the weak monsoon, the pace of the downgrades in the consensus earnings estimates was relatively low (0.6%) as compared with the steep downgrades seen post-Q4FY2012.   Q1FY2013 Auto earnings review    Drive with caution Auto sector reported flat growth for Q1FY2013; has given lacklustre returns in last six months: In our Thematic Report dated December 27, 2011, we had expressed concerns over the moderation in growth of the automobile (auto) sector with the full impact of the moderation expected in H1FY2013. As against the benchmark index' return of 13% between December 27, 2011 and August 21, 2012, the auto stocks under our coverage too gave an average return of 13%. The best return of 57% came from Apollo Tyres, our top pick for the last six months. The next highest return came from Maruti Suzuki at 22% due to the stock sell-off on account of the Manesar strike. Excluding these two stocks, the rest of the universe gave a negative return of 0.5% between December 27, 2011 and August 21, 2012. As we analyse the Q1FY2013 results, our coverage universe saw a profit after tax (PAT) growth of merely 2%. Our auto tracking universe of 15 companies, ex Tata Motors, saw a PAT growth of 2.5% year on year (YoY); that with Tata Motors saw a PAT growth of 11% YoY during the same period.  M&M added to our conviction list on robust Q1FY2013 performance: During the past six months, most of the stocks under our coverage except Apollo Tyres had been kept on Hold recommendation. We recently added Mahindra and Mahindra (M&M) to our Buy list as we see it as a proxy play on food inflation and best positioned to benefit from the reviving rural incomes (refer to our Stock Update report on M&M dated August 21, 2012).  Apollo Tyres, M&M and Tata Motors top revenue earners; Maruti, SKF laggards: Apollo Tyres saw its Q1FY2013 PAT growing the most, by 79% YoY, on a strong operating performance. Tata Motors, M&M and Suprajit Engineering also reported a 20% plus Y-o-Y earnings growth. The disappointment came from Maruti Suzuki and SKF India, both of which reported an earnings decline of over 20% YoY for the quarter.  Outlook and valuation: Going forward in H2FY2013 and FY2014, barring a few companies like Maruti Suzuki, which would grow on a low base, a large part of the earnings growth is expected on an improved operating performance in H2FY2013 and FY2014. The volume growth may remain modest, but the raw material pressure is expected to moderate for most companies in H2FY2013. After keeping most auto companies on Hold for the last six months, we have added M&M to our Buy list along with Apollo Tyres. The outlook on most other companies looks cautious as multiple factors related to competition, inventory build-up, global slowdown and fuel price hike continue to weigh on the auto sector.   Q1FY2013 Telecom earnings review    Competition intensifies, regulatory risk persists; cautious view maintained  Weak results fail to meet expectations: The Q1FY2013 results of the telecommunications (telecom) companies tracked by us, ie Bharti Airtel and Idea Cellular, were below expectations on all the fronts, viz revenue, margin and earnings. Bharti Airtel's performance was weak in both South Asia (including India) and Africa. The company's consolidated top line grew at 3.3% on a quarter-on-quarter (Q-o-Q) basis, with the operating profit and the net earnings showing a sequential decline of 6.2% and 24.2% respectively. For Idea Cellular, the top line grew at 2.5% quarter on quarter (QoQ) while the adjusted operating profit and the earnings witnessed a sequential decline of 4.8% and 1.5% respectively. The margin of both the players took a solid hit-Idea Cellular's margin was down 200 basis points QoQ (from 28.1% in Q4FY2012 to 26.1% in Q1FY2013) while Bharti Airtel's consolidated margin contracted by 310 basis points QoQ from 33.3% in Q4FY2012 to 30.2% in the quarter under consideration.  Volumes expand; profit contracts: As expected the traffic momentum remained strong during the quarter, with both Idea Cellular and Bharti Airtel registering a sequential volume expansion of 3.9% and 5% respectively. This good volume growth was achieved on the back of the already solid Q4FY2012 volumes, but at the cost of profitability. Both the players experienced a decline of 2.5% in the average realised rate on a sequential basis which was the prime reason for the fall in the profitability, as visible in the report card. Business competition intensifies, this time the leader leads: The competition in the Indian wireless industry has intensified. The price increases taken by the players earlier have not been sustainable and the price war has started again in the market, this time led by the industry leader itself, ie Bharti Airtel. Bharti Africa-targets realigned with reality: On the African business front as well, Bharti Africa's Q1 performance was dissatisfactory with a flat revenue growth and a 200-basis-point Q-o-Q contraction in the margins. In the conference call of Bharti Airtel, the management confirmed that the business environment in Africa is also facing challenges on multiple counts, ranging from the euro zone crisis and volatile commodity prices to the general political environment in each African country. It echoed our longstanding stance that it would be difficult for the African business to achieve its stated revenue and EBITDA guidance of $5 billion and $2 billion respectively in FY2013 and postponed the guidance. Regulatory environment weighs heavy on fundamentals and stock price movement: The Indian telecom sector is passing through a phase of high policy uncertainty, where various contentious issues that could affect the earnings/cash flow and competitive positioning of the players remain unsettled (read, licencee renewal norms, spectrum refarming process etc). Further, the cabinet's decision of fixing the all-India 2G base price at Rs14,000 crore would hurt the operators, investors and consumers. We believe that the news flow in this sector would be very fluid. Hence, any positive or negative development would swing a stock's performance in the northward or southward direction respectively. Reduced estimates and downgraded rating: Taking cognisance of the changing business environment and the unhealthy regulatory developments, we have reduced our estimates for both Bharti Airtel and Idea Cellular. Bharti Airtel has missed analysts' expectations for around seven to eight quarters in a row for various reasons ranging from a competitive environment to regulatory issues. We expect Bharti Airtel to continue to safeguard its subscriber base and revenue market share at the cost of profitability. This is likely to keep the South Asian business' margin under pressure in FY2013. Further, the African business is also not showing the required elasticity and agility. Thus, we have downgraded our EBITDA and earnings estimates for FY2013 and FY2014. Our new earnings per share (EPS) estimates for FY2013 and FY2014 are Rs11.9 (vs Rs14.3 earlier) and Rs15.7 (vs Rs18.8 earlier) respectively. Based on the new estimates and looking at the tough competitive as well as ambiguous regulatory environment, we reduce our target EV/EBITDA multiple for Bharti Airtel from 7x to 6.5x its one-year forward FY2014E earnings to arrive at a new price target of Rs310 (against Rs362 earlier) and downgrade our rating on the stock from Buy to Hold.   Q1FY2013 Pharma earnings review   Weaker rupee and key launches drive growth Pharma universe's performance better than expected: Most of the players in Sharekhan's pharmaceutical (pharma) universe reported better than expected results during Q1FY2013. The universe reported a 39.7% year-on-year (Y-o-Y) rise in its revenues as compared with our estimate of a 34.7% growth. The operating profit margin (OPM) jumped by 412 basis points year on year (YoY) to 27.6%, which is 270 basis points higher than our estimate. However, due to a sharp jump in the fixed costs and marked-to-market (MTM) foreign exchange (forex) losses, the reported profit rose by 9.6% YoY for the pharma universe during the quarter. However, excluding the forex losses or gains and the exceptional items, the adjusted net profit increased by 18.5% YoY, which is better than our estimate of a 7.4% growth for the universe. The profit growth was mainly led by Ipca Laboratories (Ipca; up 93% YoY), Divi's Laboratories (Divi's Labs; up 63% YoY) and Sun Pharmaceuticals (Sun Pharma; 59% YoY).  Higher fixed costs and effective tax rate affects bottom line: Despite the impressive performance at the operating level, the profit of the key players weakened on a sharp rise in the interest and depreciation charges. During the quarter, the interest cost rose by 143% YoY while depreciation jumped by 30% YoY on an aggregated basis. Moreover, the imposition of the alternate minimum tax (AMT) on partnership-based manufacturing units resulted in a sharp rise in the effective tax rate of the pharma universe. The effective tax rate of the universe jumped to 19.8% during the quarter from 11.2% in Q1FY2012. Most affected by the new tax were Sun Pharma (a rise of 1,482 basis points YoY to 17.3%) and Cadila Healthcare (Cadila; a rise of 1,354 basis points YoY to 24.4%) due to the imposition of AMT on their Sikkim-based manufacturing plants. Management of most of key players maintain FY2013 guidance: Most managements maintained their revenue guidance for FY2013 despite an impressive performance in Q1FY2013. We expect the growth to moderate in the subsequent quarter mainly due to a slower growth in the domestic formulation business (from a relatively higher base) and slower depreciation in the rupee against the dollar (up 11% YoY). Nonetheless, strong product pipelines, improved utilisation of the newly commissioned facilities and the contribution from the newly acquired entities would continue to ensure the long-term growth of the pharma universe. Our top pick: We prefer Sun Pharma in the large-cap space due to the strong traction in its US business and its increased focus on the domestic branded formulation business (which has been divested for increased focus). We pick Divi's Labs in the contract research and manufacturing services (CRAMS) space due to the increased traction in the company's CRAMS business and currency benefits. We like Cadila in the mid-cap space for its strong research and development (R&D) for its expected ramp-up in the USA after the US Food and Drug Administration (USFDA) cleared of the company's Moraiya facility and R&D base.   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: Special - Q1FY2013 Banking earnings review; Update - Ratnamani Metals and Tubes, Orbit Corporation, ISMT, Telecommunications

 

 

Investor's Eye [August 17, 2012] Sharekhan www.sharekhan.com

Summary of Contents SHAREKHAN SPECIAL Q1FY2013 Banking earnings review  Divergence between the performances of private banks and public banks continues Earnings growth in line: During Q1FY2013, Sharekhan's banking universe reported an earnings growth of 24% year on year (YoY; ex State Bank of India [SBI]), which was in line with our estimate. However, the net interest income (NII) growth slowed to 17.6% YoY (from 22% in Q4FY2012 and 17.1% YoY in Q3FY2012) due to a decline in the net interest margin (NIM) and a slower business growth.  Pressure on margins to continue: The NIM on an average declined by 15 basis points QoQ in Q1FY2013 (Bank of India [BoI] and SBI posted the highest decline) led by a rise in the cost of funds, a decline in the yields and a reversal of interest on slippages. Going ahead, the reduction in the lending rates (in the retail, small and medium enterprises [SME] segments) and the relatively higher deposit rates will continue to put pressure on the margins which will affect the NII growth. Asset quality weakens though divergence continues (PSBs vs private banks): The slippages rose sharply for the public sector banks (PSBs; especially SBI, Punjab National Bank [PNB] and Union Bank of India [UBI]) leading to a rise in the non-performing assets (NPAs). The restructured assets also expanded across PSBs. However, the private banks largely maintained their asset quality at healthy levels. Top picks: ICICI Bank, Federal Bank and SBI: The Q1FY2013 results clearly reflect the impact of the worsening macro environment on the performance of banks. The gross domestic product (GDP) growth estimates are being revised downwards while the inflation estimates are being raised (due to a deficit rainfall, high fuel prices) which could increase the challenges for the banking sector in terms of business growth, NIMs and asset quality. This could ultimately affect the earnings growth of the sector. Going ahead, the slippages and restructuring will continue albeit at a lower pace for the PSBs and that is partly reflected in the valuations of banks. The private banks are likely to outperform the PSBs and maintain a decent earnings growth and asset quality. We prefer ICICI Bank (which sustained the improvement in its earnings and asset quality) and Federal Bank (whose valuations are attractive) among the private banks. Among the PSBs we prefer SBI (due to its strong core performance and attractive valuations after the correction in stock price. STOCK UPDATE Ratnamani Metals and Tubes Cluster: Ugly Duckling Recommendation: Hold Price target: Rs129 Current market price: Rs115 Downgraded to Hold Result highlights Revenues down due to sluggish performance of CS pipes: For the quarter ended June 2012, Ratnamani Metals & Tubes (Ratnamani) reported a mixed performance with the stainless steel (SS) pipes segment reporting a 24.8% year-on-year (Y-o-Y) revenue growth and the carbon steel (CS) pipes segment reporting a 28% Y-o-Y revenue decline. The net sales for the quarter dropped 2.5% to Rs282.3 crore. The overall volume fell whereas the realisation improved year on year (YoY) during the quarter.  OPM remains under pressure: The gross profit margin (GPM) improved by 600 basis points YoY to 39.1% on the back of an improvement in the realisations. The realisation for the SS pipes segment was up 30.5% YoY boosted by a delivery related to a nuclear plant deal. The realisation for the CS pipes segment increased by 14.2% YoY. The operating profit margin (OPM) was down by 190 basis points YoY to 16.8% due to the impact of a foreign exchange loss of Rs12 crore and freight charges, which are now borne by the company (effective from Q2FY2012).  Net profit down 24.7%: On account of a 12.8% fall in the operating profit, a 53.3% increase in the interest cost and a higher effective tax rate (32.6% against 30.1% in Q1FY2012), the net profit was fell 24.7% to Rs20.3 crore. The company's interest cost has been increasing quarter on quarter mainly due to the depreciating rupee because about 90% of its total debt of Rs255 crore is dollar denominated. Demand environment remains uncertain: The demand environment remains uncertain due to the existing volatile macro-economic environment. The export demand is resilient. The company's order book is improving. However, the pricing pressure remains. In the SS pipes segment, the demand for value-added products is improving. During the quarter under review, the volume of the SS pipes segment declined but its realisation surged mainly due to some deliveries relating to a nuclear plant deal. The deliveries under this deal would be recorded in Q2FY2013 as well. With regards the CS pipes segment, the demand remains volatile and the pricing continues to be under pressure. On the industry side, the company is witnessing demand from the refinery and power sectors. Downgraded to Hold: Ratnamani reported a soft performance for Q1FY2013 on account of the lower than expected performance of its CS pipes segment, the flat performance of its SS pipes segment and the higher interest cost. In view of the current quarter's performance and the domestic demand environment, we have tweaked our revenue estimates by 3.3% and 1.2% for FY2013 and FY2014 respectively. We have also revised our earnings estimates for FY2013 and FY2014 by 8.7% and 3.7% respectively. Accordingly, we have lowered our price target to Rs129 (5x FY2014E earnings). In view of the limited upside to the stock from the current levels, we have downgraded our rating on Ratnamani to Hold from Buy. The risk to our rating and price target remains a faster than expected revival in the demand environment. Orbit Corporation Cluster: Ugly Duckling Recommendation: Hold Price target: Rs60 Current market price: Rs46 Price target revised to Rs60 Result highlights Results below expectation: Orbit Corporation (Orbit)'s Q1FY2013 consolidated revenues came in at Rs85 crore, which is below our expectation. The revenues were flat year on year (YoY) and declined by 31% quarter on quarter (QoQ) mainly due to weak execution of projects and poor pre-sales during the previous quarters. Revenues were booked largely from Orbit Terraces with a 56% share followed by Orbit Residency Park with a 27% contribution. The quarter witnessed poor execution of a few projects that are stuck or have slowed down for want of clearances and approvals. OPM expands but higher interest cost spoils the play completely: The operating profit margin (OPM) expanded from 38.3% in Q1FY2012 and 35.7% in Q4FY2012 to 39.6% in the quarter under review due to a lower raw material cost. On the other hand, in spite of the margin expansion, an escalating interest burden (up 77.5%) completely eroded the bottom line and resulted in a loss of Rs2.2 crore for the company. The company raised additional debt of ~Rs50 crore during the quarter taking the debt/equity ratio to 1x. Looking at partial or full exit in a few projects: Orbit is looking to partially or fully exit a few of its projects, namely Orbit Grandeur, Santa Cruz (an SRA project), the Kilachand project at Napean Sea Road and Orbit Midtown at Lalbaugh, all in Mumbai. If Orbit manages to successfully close these deals, it will help the company to bring down the debt on the books which is currently at about Rs1,000 crore. The management is eyeing Rs300-400 crore from these deals. Estimates revised downwards: We are reducing our earnings estimates for FY2013 and FY2014 by 28% and 14% respectively to factor in the higher interest cost and the persistent slower pace of approvals and clearances. Even the management has indicated that for the next three to four quarters project execution would remain slow because of the delay in obtaining approvals and few new launches in the pipeline.  Reduce to Hold with a price target of Rs60: Poor sales across projects due to regulatory uncertainty and the absence of new launches on account of the pending approvals and clearances had taken a toll on the company as well as the industry. Though the regulatory environment has started to improve but it is yet to gain momentum and would take another three to four quarters to do so. Till then the execution of the existing projects and the new launches will be rolling at a snail's pace. This would keep the inventory and the debtor levels high which will keep the debt level high in the books. Thus, the key thing to watch out for going ahead will be the success of the company in exiting a few of its projects to bring down the working capital pressure slightly. Hence, we downgrade the stock from Buy to Hold with a revised price target of Rs60. At the current market price, the stock trades at 12.1x and 6.2x its FY2013E and FY2014E earnings respectively.    ISMT Cluster: Ugly Duckling Recommendation: Book out Current market price: Rs22 Book out Key points Unfavourable business environment: ISMT's performance has deteriorated with the softening demand environment and increased foreign exchange (forex) fluctuations. Over the last two quarters, the volumes in the steel segment have dropped by 27.2% year on year (YoY) in Q4FY2012 and by 20.5% YoY in Q1FY2013. The volumes in the tube segment have also dropped by 8.4% YoY in Q4FY2012 and by 6.1% in Q1FY2013. Going ahead, with the gross domestic product forecasts being downgraded to sub-6% levels, the domestic demand is expected to deteriorate which could lead to a further fall in the volumes. ISMT has also been unable to effectively manage forex fluctuations. In the last four quarters, the company has reported a total forex loss Rs50.8 crore, which is close to one-third of its earnings before interest and taxes (EBIT) of Rs146.3 crore in the same period. Limited benefit from its captive power plant: After a long delay in execution, ISMT commissioned its 40MW coal based captive power plant (CCP) in end May 2012. The company was expecting the CPP to save Rs60-65 crore in the power cost. However, it has been unable to secure coal supply at the indicated rates and the cost benefits of captive power supply are likely to get significantly reduced now. This was one of the major re-rating factors for the stock but has not played out well.  Valuation; cheap but could get cheaper: ISMT has got de-rated significantly due to a weak demand environment, margin pressure and its inability to manage forex fluctuation related losses. The long-awaited captive power plant finally got commissioned but in the absence of a secure coal supply at reasonable prices the cost benefits would get curtailed significantly. Thus, the financial performance is unlikely to improve materially in the coming quarters. The stock could continue to languish despite trading at 0.6x its book value. We are, therefore, suspending our coverage on the stock and would advise you to book out of it at the current levels.     SECTOR UPDATE Telecommunications Weak net adds; Uninor posts decline while Bharti leads In July 2012 the GSM operators across India (excluding Reliance Communications [RCom] and Tata Telecommunications [Tata Tele]) added a meagre 1.70 million subscribers, taking the cumulative GSM subscriber base to about 679.05 million, an increase of 0.25% over the June 2012 base.  The July 2012 net additions of 1.7 million represented a decline of about 63% month on month (MoM) following a 36% drop in the net additions in June 2012. This was the second consecutive month of a decline in the net additions. The decline in the net addition numbers was led by Uninor, which posted a decline of over 1 million in the total subscriber numbers for the month. The major incumbent operators, Bharti Airtel and Idea Cellular, also posted a significant drop in their net additions. View: The Indian telecommunications (telecom) space is plagued with a myriad of policy issues and regulatory uncertainty. The business environment also remains tough. We, therefore, maintain our cautious stance on the sector. However, amongst the listed telecom companies, Bharti Airtel appears to be the most resilient and agile to face the regulatory and competitive risks on account of its strong balance sheet. We, thus, prefer Bharti Airtel from a long-term perspective. Though in view of the business risk in the short term and the absence of any major triggers we have downgraded our recommendation on the stock from Buy to Hold and reduced our price target for it from Rs362 to Rs310.     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 - 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.