Wednesday, February 15, 2012

>HINDUSTAN PETROLEUM CORPORATION: Strong 3Q, but remains in red for 9M FY12

Strong 3Q result boosted by higher upstream disc. /govt. subsidy HPCL reported strong 3QFY12 PAT of INR27.3bn (1HFY12 had losses of INR64.5bn) ahead of our estimate of INR18.6bn. Higher upstream discount at ~47% or INR33.5bn (our est 33% or 22.6bn) and government subsidy at INR65.8bn (our est 65.5bn) boosted the bottom-line. Adjusted for higher upstream discount, numbers were broadly in-line.

Key highlights of 3Q results:
  Gross U/Rs at INR71.3bn increased 108% y-y, 52% q-q. But higher upstream discount and govt. subsidy resulted in improved bottom-line.
  During 3Q upstream companies were made to share higher 47% of gross U/Rs (share in 1HFY12 was 1/3rd).
  Similar to first two quarters of FY12, government agreed to provide INR150bn as compensation for under-recoveries. Oil marketing companies accounted for total INR300bn of government compensation in 3Q (HPCL share 65.8bn) including INR150bn support for 2Q which was announced post 2Q results.
  Operating performance was largely on expected lines.
  Refining margins at US$4.8/bbl also improved ~150% q-q.
  Sharp increase in interest cost at INR7.0bn (up 189% y-y, 131% q-q) is a key concern.

Yet, HPCL remains in red for 9MFY12 with net loss of INR37.2bn 
Despite strong 3Q result, HPCL remains in losses for 9M FY12 with net loss of INR37.2bn (vs 9MFY11 /FY11 PAT of INR 4.2bn / 15.4bn). Even as we believe that for the full year FY12, HPCL would come back in profits with govt. / upstream support, profits are likely to remain low and ad-hoc. More than operating performance, under-recoveries and the sharing mechanism continue to be the key determinants of profit (or loss) for HPCL, in our view. The bottom lines of oil marketing companies (OMCs) remain at the mercy of the government-dictated sharing mechanism. And the whole subsidy-sharing process remains quite adhoc and non-transparent, in our view.

Subsidy sharing remains a concern, Maintain Neutral
The ad-hoc, non-transparent and uncertain subsidy-sharing process remains a key concern for OMCs. We still believe that for OMCs to emerge as potential long-term investment ideas, further clarity is needed on future steps towards deregulation, as well as sharing mechanism. We remain NEUTRAL on HPCL.


>RELIANCE COMMUNICATION: Weak performance compared to peers

Reliance Communication’s (RCom) Q3FY12 results were below our estimates on operational parameters. While revenue was up 7% QoQ at Rs184.8bn, EBITDA at Rs59.3bn was 3.5% below our estimates. Minutes of Usage (MoU) were flat qoq to 219bn min, lower than our estimates. However, operating margin was in line with our estimates at 31.9%. Based on the 9MFY12 performance, we revise our estimate downward for minutes growth and nonwireless business. Accordingly, we downgrade our rating to Sell and bring down the target price to Rs78, implying 7.2x and 5.7x FY13E and FY14E EV/EBITDA respectively.

 Results below our expectation: Q3 result came below expectation. Revenue was flat at Rs50bn against our expectation of Rs52.9bn as minutes of usage remained flat qoq and so too revenue per minute. EBITDA margin came in line with estimates at 31.9%. Reported net profit was down 26% to Rs1.8bn on the back of higher interest and tax expenses during Q3.

 Non-wireless business fails to show growth: The non-wireless business revenue remained flat at Rs22bn on QoQ basis but witnessed 7.4% YoY decline during 9MFY12. EBITDA margin, however, remained flat during the aforesaid period.

 Wireless business shows weak performance compared to its peers: During Q3, the minutes of usage remained flat compared to 7.3% QoQ growth of Idea Cellular and 1%QoQ of Bharti Airtel. Both Idea and Bharti have shown growth in either minutes or revenue per minutes. Also, mobile number portability is not in favour of the company. The management expects growth to revive based on new plans launched such as ‘mera plan’.

 Estimates changed; Downgrade to Sell: We have lowered our revenue estimates for FY12E and FY13E by 2.8% and 4.1% considering lower than expected growth in minutes of usage and decline in revenue for non-wireless business during 9MFY12. Also, we have increased the interest rate assumption for FY14E to factor such increase for the company. At the CMP, the stock trades at 20.6x FY13E EPS, 7.7x EV/EBITDA. We downgrade our rating to Sell on the stock with a revised price target of Rs78 (earlier: Rs84), downside of 16.9% from the CMP. Key trigger for the stock would be stake sale in the tower
business which the company has been exploring.



Tough sailing continues, reiterate sell
SAIL reported subdued results as expected with a drop in net sales of ~5% YoY on the back of lower volumes of just 2.6 MT, down ~7% QoQ. EBITDA was propped up by increase in stock in trade (as steel inventories rose to ~1.3MT) which resulted in lower overall expenses and a margin of 14.7%, up 260 bps QoQ. PAT dropped ~43% YoY as MTM forex losses continued on account of rupee depreciation. We see challenges for SAIL in increasing volumes in competitive domestic market and also remain concerned over delays in its long pending expansion plans. We revise our FY13E/14E earnings estimate downwards to factor in lower volumes. Maintain sell.

 Volumes disappoint yet again: Steel sales volume stood at ~2.6MT (our est. ~2.7 MT), lower by ~19% YoY and ~7% QoQ. Sales volumes were affected adversely in the month of November and the company found it hard to push volumes in a competitive domestic steel market with demand from infrastructure and construction remaining low. Realizations improved sequentially as value added products formed a higher portion of sales mix.

 Inventory build up continues, EBITDA cushioned by higher stock in trade: SAIL’s inventory build up continued in Q3FY12 (~0.4 MT addition) with total steel products inventory reaching ~1.3 MT on Dec’11. EBITDA stood at Rs15.8bn (margin of 14.7% vs 12.1% in Q2FY12), propped up mainly by Rs12.5bn addition to stock in trade on account of inventory build up which in turn reduced overall expenses. Power, fuel and other operational costs remained high and SAIL continues to remain the highest cost converter among the large domestic steel players on account of high operational costs.

 Expansion progress remains slow, revise estimates lower: SAIL’s expansion projects continue to progress at a slow pace and capex during 9mFY12 stood at a lower-than-expected Rs7.3bn. The company has guided towards 1MT of additional production in FY13E on the back of expansions at IISCO and Bokaro steel plants during FY13E. We remain concerned on the slow progress of expansion projects and have apprehensions over the ability of the company to sell higher quantities amidst a fiercely competitive domestic market with new capacities brought on-stream by all large domestic steel players before SAIL. We revise our earnings estimate lower factoring in lower steel volumes, flat to subdued realizations and lower coking coal prices. We revise our FY13E/14E EBITDA lower by 2.7%/7.3%.

 Maintain sell: We believe that SAIL has now completely lost the first mover advantage in terms of increasing capacity and remain skeptical on the company’s ability to push volumes in a tough market going forward and simultaneously maintain margin and realizations. We shift our valuation base to FY14E and value the company at 4.5x FY14E EV/EBITDA (discount of 20% to global average) and FY14E expected outstanding CWIP at 0.7x to arrive at a target price of Rs94. Maintain Sell.


>BAJAJ HINDUSTHAN: Increase in cane crushing and sugar production during the Q1SY12

Bajaj Hindusthan’s Q1SY12 result was significantly below our estimates with Revenue at Rs5.6bn (49.6% below our estimates of Rs11bn), EBITDA at Rs633mn (71.5% below our estimates of Rs2.2bn) and adjusted loss at Rs444mn (vs. estimated profit of Rs117mn). The primary reason for lower than- estimated revenue and profit was a steep decline in sugar sales volume. Sugar sales volume declined 54.3% YoY (and 35.7% QoQ) to 16.5 lac quintals (est. 33 lac quintal). Led by a significant decline in sales volume, Sugar segment reported EBIT level loss of Rs846mn against a profit of Rs1,189mn in Q1SY11. Revenue from distillery segment too declined 61.5% YoY (and 46.1% QoQ) to Rs5.4bn primarily due to 54.3% YoY (and 53.7% QoQ) decline in sales volume to 68.5 lac litres. We believe that the profitability of the company
would be under pressure given the higher State Advised Price (SAP) (Rs240/quintal vs. Rs205/quintal in SY11) fixed by the Uttar Pradesh State government and pressure on sugar prices as higher production is expected in SY12E. The stock has appreciated by 21% since our last update post Q4SY11 results driven by positive news flows like a) allowance of further export of 1mt by the Central government (approval of poll committee is needed due to ongoing state elections in Uttar Pradesh) and b) A committee formed by the Prime Minister to look into the sugar de-control issue. However, we expect that in the near-term the stock could be under pressure as we expect the company to report losses in SY12E and SY13E due to higher sugarcane prices and lower realization as the sugar inventory in India is expected to increase in SY12E We downgrade our rating on the stock to Sell from Hold with a target price of Rs30 (earlier: Rs31), downside of 12.7% from CMP.

■ Disappointing performance of the sugar segment: Revenue from the sugar segment declined 61.5% YoY (and 46.1% QoQ) to Rs5.4bn primarily due to significant 54.3% YoY (and 53.7% QoQ) decline in sales volume to 16.5lac quintals. Realization of open market sugar increased 5.8% YoY (and 6.5% QoQ) to Rs30.1/kg. Led by lower sales volume and rise in sugarcane price, the segment reported EBIT level loss of Rs846mn against a profit of Rs1,189mn in Q1SY11. Recovery rate of sugar was at 8.1% against 8.5% in Q1SY11.

 Lower sales impacts distillery business’ performance: Led by 78% YoY (and 75.8% QoQ) fall in distillery sales volume, revenue from the distillery segment declined 72.8% YoY (and 72.1% QoQ) to Rs220mn. Realization of Alcohol increased 24.3% YoY (and 8.8% QoQ) to Rs31.4/litre. EBIT of the distillery segment declined 80.7% YoY (and 64.3% QoQ) to Rs65mn and EBIT margin declined 12pp YoY (and 6.4pp QoQ) to 29.5%.

■ Increase in cane crushing and sugar production during the quarter: Sugarcane cane crushing by the company increased 30.9% YoY to 3.1mn tonnes during the quarter and sugar production increased 24.5% YoY to 0.39mt. Recovery rate was 42bps lower at 8.1% during the quarter, however, recovery rate is expected to improve going forward as the crushing of new crop starts in February.

 Downgrade to Sell: The stock is trading at 0.58x SY12E P/BV and 0.71x SY13E P/BV. We downgrade our rating on the stock to Sell from Hold due to 21% appreciation post our last recommendation with target price of Rs30 (earlier: Rs31), downside of 12.7% from CMP.