Wednesday, December 28, 2011

>EDUCATION SECTOR: Aptech, Educomp Solutions, NIIT, Tree House Education & Accessories,GurukulOnline Learning Solutions ITM Group of Institutions,JBCN Education Pvt. Ltd.


■ Demand robust: All companies were unanimous over opportunities in the Education space. Key insights from various companies indicated enough scope for growth in the existing education landscape as the quality of education was substandard. There was greater acceptance of services offered by corporates which are introducing technology to enhance quality of education by means of multimedia to schools and virtual classrooms, among others.

 Companies’ interest shifts to skill development: Companies were cautious on bidding for ICT related projects as the business model was felt to be weak with high collection periods. Among government initiatives, Public Private Partnership for skill development has become the area of interest of companies. Of the listed companies, Everonn Education (15mn youth) and NIIT (7mn youth) have entered into partnership with National Skill Development Corporation (NSDC) to train youth for various skills by 2022.

 Asset light model in vogue: Most companies showed a preference for the asset light model and recurring revenue stream. This mainly stemmed from the fact that companies within each sub segment including formal education (K-12 and Higher education), multimedia to schools, vocational training, tutorial services etc prefer the opex model and management services model rather than incurring higher capital expenditure. Most expansions are expected through an asset light approach and the companies are shifting focus to cash flow generation.

 Strong interest across listed and unlisted companies: Based on investor response, we realised that investors were keen on understanding the competitive landscape and reasons for serious correction in multiples. From a business standpoint, companies were trying to curb higher capex and debtors days by shifting to the asset light model and segments offering steady revenue stream with lower collection periods such as managing brick and mortar K-12 schools and higher education.

To read the full report: EDUCATION SECTOR

>TRIVENI TURBINES LIMITED & GE Triveni Limited (GET) Joint Venture between General Electric and TTL (AMSEC)

Consolidating domestic presence, Ready for the global play

Triveni Turbine Limited – Set for the big leap

■ Well entrenched in 0-30MW segment
TTL enjoys ~60% of the domestic market share in the 0-30MW segment (market size of ~1,500MW). In the sub-20MW range, the company commands ~75% market share, while in the 20-30MW range it’s market share stands at ~35%.

■ Strategic partnership with GE – The game changer
To expand its product portfolio to the 30-100MW range and diversify its geographical reach, TTL partnered with GE Oil & Gas to form a 50:50 joint venture (JV) company, GE Triveni (GET). We believe the JV will enable TTL to leverage the GE brand name and technologies to scale up to the 30-100MW segment (domestic market size of ~2,500MW, global opportunity of ~20,000MW).

■ Attractive valuations – Poised for high growth
The GET JV is expected to propel TTL’s revenues and profitability, going forward.TTL is currently valued at 11x FY13E EPS (solely attributable to the 0-30MW segment). Given that TTL is operating at negative working capital, has robust operating cash flows, high return ratios and will be zero debt by 1HFY13, we have valued it at 15x FY13 EEPS. We recommend Buy, with a Target Price of `45.


 ■ Strong footing in domestic market, Export pie steadily expanding
- Enjoys dominant market share of ~75 % in the sub-20MW range. Market share in 20-30MW segment ~35%.
- Domestic market potential in 0-30MW range ~1,500MW (~USD 200mn) is growing at 10-15%.
- Exports constitute ~11% of turnover. Going forward, TTL expects to derive ~35% of product revenues from exports.
■ Strategic partnership with GE – The game changer
- Leveraging the GE brand name and technologies to scale up the 30-100MW segment.
- Domestic market potential in the 30-100MW segment is ~2,500MW (~USD 300mn) and is growing at 7-10%.
- Global opportunity ~20,000MW equivalent to USD 2.5bn.

Diversified presence across industries and geographies
- TTL’s steam turbine solutions has been installed across 18 industry segments.
- ~2,500 turbines installations in over 30 countries.
- Typical installations include sugar cogeneration, combined heat & power (CHP), waste heat recovery (WHR), captive power plants (CPP) and independent power projects (IPP).
■ Thriving after sales business
- Aftermarket services constituting ~16% of total revenues fetch superior EBITDA margins of ~45%.

 Robust financials
- Blended EBITDA margins of ~22%
- Operates at negative working capital
- Robust operating cash flows
- Set to become Zero debt by September 2012
- Generates high RoCE and RoE

To read the full report: TRIVENI TURBINES LTD

>INDIA STRATEGY: Rural steroid is ebbing - Underweight rural exhilarants

■ Supply glut inducing broad-based decline in farm sector realized prices
Of the 82 primary agricultural produce items, 72 items (or 88%) have shown decline in prices from their respective peaks since Dec’2009. Even APMC-level data suggests that prices of base and higher grade crops (weighted average) have declined by 13.4% in Dec’2011 over Dec’2009 and by 10.4% over Jan’2011. The gap between average market price (all grades) and average minimum support prices (MSP) of base grade grains has fallen from 52% in Dec’2009 to 16% in Dec’2011 due to oversupply and government’s restraint in buying (due to overstocking).

■ Cost of cultivation remains elevated
Cost of cultivation has gone up by 68% during FY08-FY12E, a 14% CAGR. Elevated labor costs and increase in costs of several inputs, including fertilizers, fuel and electricity have had substantial impact on agri sector economics. 

■ Farm sector P&L to witness stress: Profitability could decline below FY05 levels
With the terms of trade (ToT) turning adverse from FY10 and the recent price decline accelerating the downtrend, we estimate that the cash margins may have declined by 1,150bps in FY12E to 39%. Assuming 10% YoY drop in average realised price and inelastic cost structure, cash margins could decline to 32% in FY13E, i.e, lower than the FY05 level of 37%. This sharp drop in profitability would imply that farmer’s cash profits could decline by as much as 29% CAGR over FY11-13E with cash profit declining to Rs9225/hectare in FY13E as compared to Rs18180/hectare in FY11. We note that over the past five years farmer’s cash profit had grown at a CAGR of 26% from Rs5691/hectare in FY2006 to Rs18180/hectare in FY11.

■ Agri sector NPA can spike up sharply
Significant rise in Agri sector indebtedness (institutional credit/GDP at 90% and around 130% inclusive of informal lending) and weakening repayment culture pose structural credit risk for PSU banks. Decline in farm sector cash flows will trigger significant spike up in Agri NPA and prompt banks to focus more on recovery than on lending.

■ Economic returns for agri sector are eroding
The broad base impact of decline in value of produce against the total cost of cultivation (cash+imputed) suggests that in FY12E, the economic returns (value of produce/overall cost of cultivation) may have already declined to 101% from the FY08 peak of 134%. A further 10% fall in realized price in FY13E could imply economic returns declining to 90% (implying negative returns).

 Policy support hitting multiple constraints
Apart from storage capacity issues, limiting constraints are also emerging on the financial side. With seasonally adjusted buffer stock of around 60MT of foodgrain with FCI (close to the 61MT target of food security bill), it is likely that incremental build up of buffer, net of offtake will be low. Rising food subsidy and exponential rise in bank food credit to an all time high of Rs 800bn, against the backdrop of difficult government fiscal conditions imply that policy support behind rural growth theme has hit multiple constraints. Hence, in our view, consensus expectations that government’s support to the theme will remain strong may prove to be misplaced optimism.

■ Steroids behind the rural theme are fading
In our view, the confluence of adverse developments like (1) adverse economics for farm sector, (2) limited policy support and (3) rising default risk on agri credit will reinforce the expected cash flow problem for the farm sector. Hence, steroids fueling rural growth for the last 5 years seem to be ebbing.

■ FY01-03 like scenario relapsing
Historical comparison indicates a relapse of conditions prevailing during 2000-2003, when buffer with FCI rose to 60mt, food subsidy & food credit spiraled and subsequently, led to oversupply conditions. The similarity between the two episodes provides the basis for expecting similar outcomes in the current phase, ie further erosion in prices, decline in farm sector ToT, volatility in farm income and increase in debt default. In our view, given the steep rise in agri sector credit over the past 5-6 years, the default risk on farm credit is significantly higher than the 2002-04 and 2006-07 episodes.

■ What does the relapse mean for sectors?
The relapse of FY01-03 like scenario can reverse the substantial gains enjoyed by various sectors during FY09-11. The sectors that significantly outperformed on the rural steroid theme over the past 18 months are FMCG, autos (particularly two wheelers and tractors) and agri input stocks. Hence, given our macro view of moderating rural exuberance, we believe that the significant out performance of these sectors itself will weigh on their future performance.

■ Themes to play - Underweight rural exhilarants
The adverse impact of cash flows on rural consumption theme is likely to overweigh the positive effect from decline in food prices. Hence, stress for durables and passenger vehicles will accentuate and spill over to two wheeler sales as well. The expected slowdown in agri credit growth in response to credit concerns can impact demand for these sectors. Auto sector could be exposed to a period of growth moderation for two wheelers, passenger cars and tractors. FMCG companies dependent on agri inputs should benefit from the cost side. Agri sector indebtedness poses credit risk concerns for PSU banks in the medium term. Latest data shows that for high risk prone banks, the NPA ratio has already spiked up to over 7%. Our theme is likely to play out on Agri input sectors-seeds, fertilizers and agro chemicals in the form of top line growth moderation and decline in pricing power.

To read the full report: INDIA STRATEGY

>CANARA BANK: Focus remains on Non-Performing Asset (NPA) Recovery (KJMC Insitutional Research)

 Loan book to grow by 20% CAGR during FY11-13E: CBK has a very strong track record of loan book growing above industry standards by 24% CAGR FY09‐11 while deposits grew by 25.4% CAGR FY09‐11. We believe loan book to grow moderately by 20% CAGR FY11 – 13E given the global scenario looking bleak. CBK will continue to maintain higher than industry growth rates supported by strong sanction pipeline in infrastructure segment.

■ Stress on asset quality to remain; expecting strong recoveries: CBKs asset quality has been stable and best in its peer group. With bank moving to system based NPA recognition, Gross and Net NPA increased to 1.7% and 1.4% respectively which is still better as compared to its peers. We believe stress on asset quality will continue to remain in next two quarters given the fact of higher interest cost and slowdown in the world economy.

■ Pressure on NIMs to ease in FY13E: In H1 FY12 NIMs of the bank were under pressure due to high interest rates. We expect pressure to ease out in FY13E once inflation will come down giving room for RBI to cut repo rate. We expect NIMs to fall by 27bps to 2.4% in FY12E and improve in FY13E to 2.5%

■ Bank delivering consistent return ratios: CBK has been consistent in delivering strong return ratios RoANW and RoAA above 20% and 1% respectively in last two years. In FY11, RoANW and RoAA stood at 23.2% and 1.3% respectively reflecting its strong performance in the bottom line. However, we expect decline in both RoANW and RoAA in FY12E to 17.3% and 1.0% respectively due to higher interest cost impacting bottom line which will improve back in FY13E to 21.2% and 1.2% respectively.


>SINTEX INDUSTRIES LIMITED: Will significantly cut capex and slow down execution of its working-capital-intensive monolithic business.

Looking to improve the balance sheet profile, but at a cost of lower growth; cut PT to Rs115

 Looking to improve its balance sheet profile as the operating environment becomes more challenging: We expect SINT to significantly cut its capex over the next two years, while slowing down the execution of its monolithic projects to preserve working capital, as payments from the government have slowed considerably over past 1-2 quarters.

 Monolithic business likely to slow down sharply: Execution for the monolithic business is slowing down, as payments from the government are being delayed, and delays in government clearances and site handovers are adding to the slowdown. We reduce our monolithic business growth estimates for FY12/13 from 30% to 5%.

 Receivables cycle getting stretched, but cash flows to improve: We believe that while working capital in FY12 is likely to deteriorate at the margin on account of the delay in government payments, free cash generation should improve aided by slower growth of the working-capitalintensive monolithic business and lower capital expenditure.

 Comfortable on FCCB repayment: Management is comfortable on the FCCB maturing in Mar 2013. The repayment of US$278MM will be partly met through US$170MM of US$-denominated cash deposits. The remaining US$110MM will likely be refinanced through a US$-denominated ECB.

 We reduce our PT to Rs115: We cut our FY12-FY14 EPS estimates by 14%-20% to incorporate lower growth for the monolithic business. We also reduce our Sep-12 PT to Rs115 based on 7x FY13E P/E (from Rs208 based on 10x FY13E P/E). We cut our target multiple from 10x to 7x to factor in the lower growth outlook; our target multiple is in line with the domestic peer group average. Key risks include deteriorating working capital, nonrelated ventures, and a further slowdown in the European business.


>PERSISTENT SYSTEMS: Macro uncertainty, no upside triggers

  • Persistent continues with it’s focus on growing business through partnerships/’sell with’ (~10% of revenues currently) which per company comes at better than co margins as well
  • Aligning sales force accordingly as company targets to improve mining within existing client base for traditional OPD basis along with the thrust on new business areas
  • FY12 guidance lowered to US$ 205-210 mn (V/s US$ 220 mn earlier) as expected. EPS outlook revised to Rs 31.3-33
  • We lower US$ rev estimates, however lower currency resets limit FY13E EPS cuts to ~3% to Rs 33.3. Valuations at ~9x FY12/13 remain inexpensive but we see no positive catalysts

■ Continuing to focus on new technologies, ‘sell with’ business
Persistent management reiterated it’s key focus in the areas of cloud computing, Enterprise Collaboration, Mobility and Analytics. It continues to align it’s sales force along the revised strategy of targeting growth through the ‘sell with’ business through partnerships with global technology players like Cisco, amongst others. The company remains confident of gaining further traction with the partnership approach as it helps it to gain entry into several marquee names as well as provides better than co wide margins. Within the core OPD business, Persistent intends to mine the existing client base effectively and grow the top accounts. (we note that Persistent’s revenues from top 5 clients have grown by ~40% CAGR V/s 15% for company over FY09-11, refer table below)

■ Revenue guidance cut as expected, PAT outlook lowered to Rs 1250-1350 mn
As expected, Persistent lowered it’s FY12 revenue guidance to US$ 205-210 mn (V/s ‘atleast US$ 220 mn ‘earlier) citing consolidation in some top accounts and delays led by macro uncertainty. Profit outlook has been revised lower to Rs 1,250-1,350 mn (implying EPS of Rs 31.3-33) V/s flat profits despite lower currency aid. We believe a volatile and weak spending environment impacts players like Persistent much more given the nature of work. In this context, we highlight that Persistent intends to go slow on hiring indicating cautiousness on client spending ahead

■ Another cut in earnings, retain HOLD
We moderate our US$ revenue estimates further, however lower currency resets (we reset our US$/INR assumptions for FY13 to Rs 49.5/$ V/s Rs 48/$ as per our economist’s revised currency estimates) limit cut in FY13E earnings to <3% to Rs 33.3. Valuations at ~9x FY13/14E earnings remain inexpensive; however we see no catalysts for any upsides. HOLD, TP Rs 320 (V/s Rs 310 earlier)