>POWER GRID CORPORATION OF INDIA: Low-risk exposure to India’s s power sector

■ We initiate coverage with an anti-consensus Buy rating
Power Grid Corporation of India (Power Grid) is the government-appointed central
power transmission utility. We estimate India will add 100,000MW of generation
capacity in FY11-17, a three-fold increase, and that transmission and distribution
capex will reach 80% of generation capex by FY15 (compared with the historical
average of 40-45%). We think Power Grid will be a key beneficiary of this growth;
it already has more than a 50% market share and we expect this to increase.

■ Natural monopoly business, Power Grid is the central transmission utility
Power transmission is a natural monopoly and Power Grid’s status as the central
transmission utility means it is also the co-ordinator of private sector participation in
the sector. This is the key difference from generation where no utility has this role.

■ Low-risk business model, 17-18% assured ROE
Power Grid has a low-risk business model, earning a regulated ROE of 17-18% on
operating assets. We estimate it will invest approximately Rs600bn in transmission
capex over the next five years, funded 70:30 through debt:equity, with the equity
contribution coming from internal accruals. As a government-owned company,
debt funding is not a concern. Power Grid has an ROIC of approximately 12% on
its transmission investment, with all costs as pass through.

■ Valuation: price target of R135.00
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool, assuming 10.1% WACC.
Based on FY12E P/BV, Power Grid is trading at a 5% discount to National
Thermal Power Corp (NTPC), which we think makes it particularly attractive.

To read the full report: POWER GRID

>IPCA LABORATORIES: 1QFY2011 Result Update | Pharmaceutical

Ipca Labs (Ipca) 1QFY2011 performance was below expectations impacted by subdued performance by the anti-malarial segment, and higher employee and promotional expenses. However, going forward, management expects recovery in the anti-malarial formulation segment and gradual increase in the productivity of the newly recruited sales force (1,000 MRs). We maintain Neutral on the stock owing to fair valuations.

Results disappoints on the operating front: Ipca reported net sales of Rs414.5cr (Rs357.8cr), which was in line with our estimates. On the domestic front, formulation sales grew 16.1% to Rs168.2cr (Rs144.9cr) driven by the CVS and NSAID segments, but was lower than estimated due to subdued performance by the anti-malarial segment. Exports surprised and offset the partial underperformance on the domestic front. The company clocked OPM of 16.3% (19.8%), which was below our estimates of 20.0% on account of higher employee and promotional expenses. Ipca reported net profit of Rs38.8cr (Rs49.7cr), down 21.9% impacted by lower OPM and forex losses. Excluding forex losses, recurring profit de-grew 4.1% to Rs41.8cr (Rs43.6cr).

Outlook and Valuation: We expect net sales to post 17.4% CAGR to Rs2,150cr and EPS to register 20.0% CAGR to Rs23.7 over FY2010-12E, driven by the US and domestic markets and the API segment. The stock is currently trading at fair valuations of 14.4x and 11.8x FY2011E and FY2012E earnings, respectively. We maintain Neutral on the stock.

To read the full report: IPCA LABORATORIES

>JBF INDUSTRIES: Margins to improve in Financial Year 2011

JBF Industries (JBF) reported strong YoY revenue growth on the back of significantly higher sales realisation in the Polyester chips and POY segment. Revenues for Q1FY11 were higher by 26% at Rs 849.2 crore. In spite of raw material cost to sales ratio increasing by 50 bps YoY to
79.5%, JBF has been able to maintain its EBITDA margin owing to improvement in realisations. However, Q1FY11 net profit has declined by 38.6% YoY to Rs 31.6 crore mainly on account of absence of extraordinary profit on buyback of FCCBs to the tune of Rs 17.5 crore.

■ Significantly higher realisations
In Q1 FY11, polyester chips volume (including bottle grade chips) increased YoY by 1.7% to 82011 tonnes while the POY volume increased by 26% YoY to 40884 tonnes. The average realisation of chips (including bottle grade chips) improved by 16% to Rs. 62.6 per kg, while that of POY segment was higher by 9% at Rs 74.

■ EBITDA margin to improve in FY11
JBF’s EBITDA margin which had declined in Q4FY10 to 9.1%, has shown considerable improvement in Q1FY11 with a 120 bps improvement to 10.3% due to easing of raw material prices . We expect EBITDA margin to improve further in FY11 to 10.7% as the company enhances sales of higher margin bottle grade chips.

Valuation
At CMP of Rs. 137, the stock trades at 4x and 3.5x FY11E and FY12E earnings of Rs 34.4 and Rs. 39.1 per share. The expansion plan provides the much required growth visibility to the company and introduction of value added segments would improve the profitability going forward. We value the stock at 4x FY12E earnings with a target price of Rs 156 and assign a Buy rating to the stock.

To read the full report: JBF INDUSTRIES