Wednesday, March 21, 2012

>Talwalkars Better Value Fitness Limited (TBVFL)

Company Overview
Talwalkars Better Value Fitness Limited (TBVFL), is the largest chain of health centers in India having 115 health clubs spread across 56 cities and patronized by 113,000 members. Currently, it is promoted by the Talwalkar and Gawande groups together. Out of the total number of health clubs, 79 are owned by TBVFL, 10 are legacy gyms, 10 are part of subsidiary companies wherein TBVFL has a 51% holding, 6 are part of the JV with Pantaloon Retail and the remaining 10 are purely franchisee outlets operating under the HI FI brand targeting the Tier II and III cities.

Investment Rationale
■ Introduction of HI FI Gyms results in accelerated expansion at zero capex cost
TBVFL is well positioned to increase its penetration into various parts of the country with launch of the HI FI concept which is mainly targeting the middle income population in the Tier II and III cities. This has helped the company to promote its brand and create an awareness in the smaller cities and also increase the total number of health clubs at a faster rate. In case of the HI FI format, TBVFL does not require capex though the royalty component is similar to the subsidiary model and additional upfront income of Rs. 1mn resulting in higher revenue at zero capex and a faster roll out of health clubs.

■ Healthy sales growth supported by fast paced expansion and demographic mix
TBVFL is focused on increasing its total number of gyms particularly in HI-FI segment which is leading to faster expansion on account of its attractive business model. TBVFL being benefitted from a surge in the number of people aged 35-50 years who form a major portion of the population. We expect rising awareness of the need to be healthy and maintain one’s physical appearance will be the major reason for increase in membership. As per our projections, the sales are expected to grow at a CAGR of 19% from
FY11 to FY14.

■ Focus on franchisee Model to support RoCE going forward
TBVFL has a large gym base, in which the amount of capex varies depending on the level of ownership. This optimal mix of owned, subsidiaries and franchisees on a pan Indian basis would support RoCE going forward. As Franchisee model does not require capex, we believe the company’s focus is on expanding its franchisee network to support RoCE.

Valuation and Outlook
The stock is currently trading at a P/E of 11.9x, P/BV of 2.1x and an EV/EBIDTA of 7.2x its FY13 estimates. We have taken a discount of 30% to the average EV/EBITDA (8.9x) of its international peers as TBVFL is in a growth phase and operates in an emerging market. Thus we have arrived at an EV/EBIDTA multiple of 6.2x for valuing the company. Considering the strong business model and expansion plans coupled with increasing awareness of health and fitness, TBVFL is well poised to deliver high growth rate in the coming years and we expect it to grow by 30% and 29.7% for FY12E and FY13E respectively. We initiate the company with a ‘BUY’ rating arriving at a target price of Rs. 205 (an upside of 37%.).

To read full report: TBVFL


Hercules Hoists Ltd. has reported net profit of Rs 72.64 million for the quarter ended on December 31, 2011 as against Rs. 57.05 million in the same quarter last year, an increase of 27.33%. It has reported net sales of Rs 297.11 million for the quarter ended on December 31, 2011 as against Rs 275.23 million in the same quarter last year, a rise of 7.95%. Total income grew by 12.38% to Rs 315.26 million from Rs. 280.52 million in the same quarter last year. During the quarter, it reported earnings of Rs 4.54 a share.

To read full report: HERCULES


Recent Financial Performance – Q3FY12
MUL came out with decent Q3FY12 results. The company reported net sales of Rs 81.09 crs in Q3FY12 as against Rs 68.84crs in Q3FY11 and Rs 76.19 crs in Q2FY12. The company has been witnessing consistent growth in its sales over the past 3 quarters. The operating profit of the company stood at Rs 13.76 crs in Q3FY12 as against Rs 11.79 crs in Q3FY11 and Rs 12.17 crs in Q2FY12. The Profit Before Tax of the company stood at Rs 12.45 crs in Q3FY12 as against Rs 10.88 crs in Q3FY11 and Rs 11.10 crs in Q2FY12. The PAT of the company for Q3FY12 stood at Rs 8.65 crs as against Rs 7.32 crs and Rs 7.45 crs in Q2FY12. The EPS of the company stood at Rs 15.77 in Q3FY12 as against Rs 13.53 in Q3FY11 and Rs 13.77 in Q2FY12. During the quarter the company earned a duty drawback on part of exports of Rs 0.47 crs, which was reported under the other operating income and interest on FD was reflected under other income for a total amount of Rs 0.58 crs. 

Depreciation and interest costs rose as a consequence of the capitalization of expansion plans. MUL reported a forex loss of Rs.1.52 crs in Q3FY12 vs. a gain of Rs.0.36 crs in Q3FY11.

Capacity expansions to help MUL in growing its business
Exactly a year ago, MUL had overall capacity of 1.4 mn mtrs with 3 lines installed at a plant near Jaipur. The company installed the 4th line, which has enhanced the overall capacity to 1.9 mn mtrs. The 4th line started its production from December 2011 onwards and started functioning full fledged from the 1st week of February 2012. The company is also planning to start a 5th line of production and for the same purpose it has purchased land about 15 kms away from the current location. Post the completion of this line (which is expected to be completed by December 2012), the company expects its capacity to be enhanced to 2.5 mn mtrs per month. The 5th line is expected to be completed at a capex of Rs.22 crs while the 4th line was completed at a capex of 10-12 crs. The higher cost of the 5th line is mainly due to the fact that the line is being implemented at a new site.

With the demand for synthetic leather rising consistently, capacity expansion of the company could be handy and could augur well for the smooth growth of its business in the coming years.

Backward integration through production of fabrics
As mentioned earlier, the company has purchased a new plot of land, about 15 kms away from the current plant near Jaipur. The company along with planning a 5th line of production is also in the process of starting a fabric production unit which will manufacture raw material for the synthetic leather unit of MUL and hence is a backward integration initiative. The company has already started work and could start trial runs from Sept 2012. The capex incurred for this is about Rs.25 crs for production of Rs.45 crs worth fabric (at full capacity). The fabric plant will go into production in two phases (in terms of processes). This will help the company to register an increase in its margins and also help in reducing the rejection rate of its final products in export markets as it will have total control over the quality of a key raw material.

To finance these two initiatives, MUL could borrow about Rs.20 crs worth loans (including a large portion from Textile up gradation fund which is available with 5% interest subsidy). The rest could be raised from internal accruals.

To read full report: MAYUR UNIQUOTERS


To read full report: TYRE SECTOR


>HDFC BANK: Focusing on improving operating efficiencies

■ Loan growth targeted to be 4-5% above the industry rate and be balanced across segments: Management expects loan growth to be 4-5ppt higher than the industry loan growth rate, which it expects to be about 17% in FY13. Although loan growth in 3Q FY12 for the corporate segment was low at 15% compared with the overall growth rate of 22%, management expects growth to be more balanced going forward.

■ Management expects the competitive environment in the deposits market to ease as interest rates start to fall. This should enable HDFC Bank to maintain its NIM at about 4%. HDFC Bank expects the large banks to maintain savings deposit rates at 4%, which it sees as an equilibrium price (given that the savings bank deposits involve transaction costs of 2-3% and short-term deposits rates are less than 7%).

■ Credit costs to move up from cyclical lows, but this should be offset by lower countercyclical provisioning: Credit costs (at 0.5% for FY11) have been at cyclical lows due to lower NPA formation and recoveries from written-off pools, but management expects costs to move up to normal levels of 1.2-1.4% in the next 2-3 years. However, it expects the increase to be offset by lower countercyclical provisioning. In FY11, the bank also made higher countercyclical provisions at 0.5% of average advances.

■ Focusing on improving operating efficiencies: With network growth moderating, management plans to improve the C/I ratio by 2-3ppt to 45-46% in the next three years. This should be possible since the burden placed by new branches will be lower. Although HDFC Bank plans to open about 250 branches each year, these will account for a smaller and smaller share of the total network over time.

To read full report: HDFC BANK

>STEEL SECTOR: Mining tax in Australia and its impact on total taxes paid

Mining tax in Australia could escalate costs yet again

The Australian senate has passed the resolution of 30% mining tax (Mineral resource rent tax-MRRT) on iron ore and coal which would become law from July 2012 and affect the profitability of all major miners including BHP Billiton and Rio Tinto. We see this development as a negative for the Indian steelmakers as we believe that coking coal prices (which had come down substantially during the last 6-9 months) would start moving upwards again and could escalate costs hurting profitability. We maintain our cautious stance on the sector and retain sell recommendation on Tata Steel and SAIL. We downgrade JSW steel to hold from buy.

 30% mining tax announced on iron ore and coal mining: The proposed tax would be applicable at EBIT level after allowance for capital investment at long term bond rate and would also allow credit for state royalty (~7.5% of sales price). Corporate tax rate would be applicable after taking into account the mining tax calculation. The Australian government estimates an additional tax of ~US$11.2bn from mining tax over the next three years. We see net additional impact of 15-20% on total taxes paid on mining of coal and iron ore in Australia. (See mining tax calculations below)

 Coking coal prices could see progressive upward movement: We see mining companies resorting to higher prices to recover higher cost of taxation and expect coking coal prices to start moving up again progressively. Our calculations on mining tax indicate that ~10% price hike can be profit neutral for the miners. Coking coal prices had seen sharp correction over the last 12 months correcting from US$330/tonne to US$210/tonne. We do not rule out coking coal prices above US$250/tonne in H2CY12E once the mining tax becomes law.

 Steel prices could also get support if raw material prices move upwards from here: We see the possibility of global steel prices getting support at current levels and even move higher if raw material prices of iron ore and coking coal gets pushed up due to higher prices from Australia. But we remain skeptical on this as steel prices would also be determined by global demand supply dynamics and China’s production run rate going forward and prices have remained weak in recent week due to higher supply.

 Profitability of domestic steelmakers is directly linked to global coking coal price: Domestic steel companies remain exposed to cost escalations on coking coal front as the backward integration remains low and imports are primarily from Australia. We have currently built in coking coal contract price assumptions of US$230/tonne and US$240/tonne in FY13E and FY14E for our coverage universe. We maintain our estimates as of now but acknowledge upward risk to our assumptions. We see EBITDA fall of between 9-13% on an increase of US$20/tonne in our coking coal cost assumptions.

 Maintain cautious stance: We do not change our estimates and target prices downwards as of now but maintain our cautious stance on the sector with concerns remaining on domestic demand growth, steel price sustenance in global markets and rising raw material costs on coking coal post mining tax in Australia. Maintain sell on Tata Steel and SAIL. Downgrade JSW steel to hold from buy. 

Mining tax calculation suggest that 10% price increase can happen from miners
We have tried to do a rough cut calculation for the total taxes paid and subsequent profits made by the mining companies on the mining of iron ore and coal. We have assumed a Capex of US$200mn and loans of US$100mn for a iron ore/coal miner having a sales revenue of US$100mn and operating cost of US$35mn. We have also demonstrated a calculation for new mining tax (on the basis of current understanding of its applicability) which allows for deduction of some part of capex and state royalties. We conclude that total taxes paid (including corporate tax, state royalties and new mining tax) would increase by ~20% post the new mining tax. We also note that 10% higher prices at the same cost and new tax structure could result in neutral to positive effect on the net profits of the miners from the mining of coal and iron ore. We would like to state that the calculations would differ from miner to miner as well as from project to project with new projects getting higher benefits on deduction for capex. Overall we conclude that the miners would be required to pay higher taxes and would be looking to pass the effect of the same to consumers in a progressive manner. As a result we see price of coking coal moving higher in the near future.