Sunday, August 8, 2010

>BGR ENERGY: BTG JV with Hitachi supports growth prospects; maintain Buy

What's changed
BGR has signed today two JV agreements with Hitachi for design and manufacturing of Boiler-Turbine-Generator (BTG) sets for Thermal power plants in India. These JV’s would involve a total investment of Rs4,400cr (BGR’s share at Rs3,200cr) and would have capacity of c.4,000MW starting from end-2012. This arrangement is on expected lines in terms of total project costs and planned capacities, but slightly ahead of our expectations in terms of aimed commissioning.

The signing of the JV reiterates our view on the company’s ability to secure such a partnership and also its ability to win future orders in the super-critical thermal sets category. However, the impact of any such orders on revenues would only be visible starting FY13E as most of these orders will be for commissioning of plants in the later half of XIIth five-year plan (2012-2017). So, our current 12m TP of Rs874 (based on 18.6X P/E on average of FY11E and

FY12E EPS) does not include these subsidiaries.
BGR’s share of investment would mean an equity capex of Rs960cr (assumed 70:30 D/E) spread across three years. Based on our cash flow estimates, we believe the company is adequately funded to make this capex from internal accruals without need for external fund raising.

BGR currently trades at FY12E P/E of 14.8X, still at significant 33% and 26% discount to FY12E P/E of bigger peers like BHEL and L&T. Given our expectations of better growth and margin profile for BGR, at 39% EPS CAGR over FY10-12E, vs. 2-yr median EPS CAGR of 17% for its Indian peer group, we continue to view current valuations as attractive and reiterate our Buy rating. We fine tune our numbers for FY11E-FY13E on the back of earnings.

Key risks
1) Relatively new business in BTG space, 2) aggressive bidding for orders.

To read the full report: BGR ENERGY

>INDIA CEMENTS: 1QFY2011 Result Update

India Cements’ net sales de-grew by 8.1% yoy during 1QFY2011 on account of the substantial decline in prices in Andhra Pradesh, which contributes around 45% of the company’s overall revenues. The net plant realisation NPR) for the quarter stood at Rs2,501/tonne, down 21% yoy. The management indicated that it is looking at increasing the proportion of its sales volume from Tamil Nadu and Kerala to 60% (from the current 50%) to achieve better realisation. We maintain a Buy on the stock.

Operating profit down 71.2%: On the operating front, the company’s margins fell by 2,244bp yoy to 10.3% (32.7%) on account of the fall in realisations and increase in raw material and freight costs. The company’s operating profit stood at Rs91cr, down 71.2% yoy. Net profit dropped 82.7% yoy to Rs25cr primarily due to the poor operating performance. Bottom-line was however, bolstered by the Rs26.4cr of profit booked from the stake sale in Bharati Cement. Adjusting the foreign exchange translation loss of Rs11.6cr (Rs21cr gain in 1QFY2010) and exceptional income from stake sale, net profit stood at Rs Rs10.2cr.

Outlook and Valuation: We expect the pricing pressure in the southern region to continue over the next few quarters on the back of excess capacity and lack of demand particularly in Andhra Pradesh due to reduced government spending on infrastructure and housing projects. We maintain a Buy on the stock with the SOTP-based Target Price of Rs139.

To read the full report: INDIA CEMENTS

>Southwest Monsoon (EMKAY)

Sustained recovery
The advancement of the southwest monsoon has seen sustained momentum from last week. The rainfall for the week ended 04 August, 2010 was, ~16% above its long period average (LPA). The cumulative rainfall for the week ended 04 August, 2010 stood at ~2% below its LPA. The number of divisions experiencing excess/normal rainfall increased to 31 from 28 of last week, while those experiencing scanty rainfall dropped to 5 from 8 of last week.

Rain dependent and rain-fed areas cumulatively improve
For the week ended 04 August, 2010, cumulative rainfall in rain dependent areas stood at 1.5% above their LPA and rain-fed areas improved to 6.3% below LPA. Weekly rainfall also improved for rain-fed areas at ~13% above LPA.

Parts of north and east India cumulatively deficient
Cereal producing regions: east Uttar Pradesh, Bihar and West Bengal are cumulatively below their LPA by more than ~25%. Excepting West Bengal, weekly rainfall for these regions is deficient/scanty. Jharkhand, Assam & Meghalaya are also receiving deficient rainfall.

Reservoir levels pick up
The current reservoir levels are at 34% of their full reservoir level (FRL) against their LPA of 37% of FRL. The current storage level is ~92% of its 10 year average as opposed to ~82% last week.

Forecast rainfall for parts of central and east India
Madhya Pradesh, Chattisgarh and Orissa are likely to experience normal/excess rainfall over the coming week. While the southern states may receive poor rainfall the coming week, the west coast would see considerable rainfall.

Steady increase in the sowing of rice and cereals
Cropped area under rice and cereals are increasing in a steady manner. Area sown for all the major crops, excepting oilseeds is ~10-15% higher than the same period last year. Deficient rainfall in some of the cereal producing regions may affect the rate of sowing; unless the next couple of weeks, off-sets this.

To read the full report: SOUTHWEST MONSOON

>ABB: Second quarter current year 2010 (RESULT UPDATE)

ABB reported tepid 2QCY2010 results with revenues of Rs1,447cr and net profit at Rs38cr. The current quarter had to bear the impact of the exit cost from the rural electrification business in addition to the forex losses. Though revenues reported marginal fall of 3.9% yoy, the impact of the exit cost, forex provisioning and increasing pricing pressure eroded the profit margins resulting in a 54% fall in profit. We maintain Neutral on the stock.

Revenues stagnant, but net declines: Despite declining order accretion rate for the past few quarters, ABB India reported marginal 3.9% yoy fall in top-line to Rs1,447cr (Rs1,505cr) for 2QCY2010. As a major portion of the order backlog consists of large projects with long gestation periods, the company was able to report flattish revenue growth both sequentially and annually on the back of steady execution rate. The numbers at the operating level were hit by the 16.7%
increase in other expenditure, which could be attributable to the exit cost from rural electrification business. Besides the increasing pricing pressure, the company had to bear losses on account of exchange rate variations amounting to Rs23cr (Rs21cr) for 2QCY2010. EBIDTA margins, as a result, pruned back to 3.5%(8.5%) leading to a sharp 61% dip in EBITDA to Rs50cr (Rs129cr). Consequently, net profit dipped by 56.4% to Rs38cr (Rs84cr) for 2QCY2010. For 1HCY2010, the company posted 72% yoy de-growth in bottom-line to Rs45cr (Rs162cr).

Outlook and Valuations: ABB has been reporting disappointing results over the past several quarters amidst heightened competitive pressures. Although the economic scenario has been improving, we believe that current valuations factor in the same. At the current price, the stock trades at 34.7x and 26.1x CY2010E and CY2011E EPS, respectively. We maintain Neutral on the stock.

To read the full report: ABB