Thursday, August 9, 2012


Bharat Electronics (BEL) reported weak sales and order intake during Q1FY13. While sales dipped on continued deferrals and approval process delays from clients, order intake prospects remain bright for the coming one-two years on back of strong demand. Higher raw material costs coupled with unfavorable sales mix (low value adds items) impacted OPMs, which are expected to improve in balance FY13. Maintain ‘BUY’.

Approval delays hit sales volume; adverse sales mix impacts OPMs
BEL reported 15% YoY decline in revenue for the quarter due to approval delays and slow off take from clients. Management expects balance of FY13 to see decent pick up in both volumes and profitability driven by deliveries for Aakash missiles, Rohini radars and ground-based EW systems, and maintains its FY13 sales growth guidance of 15%. Also, low value add items and higher ToT sales (>20% of sales) impacted profitability. Higher input cost (sharp jump in RM to sales %) during the quarter is expected to come off in the coming quarters as indicated by the management on improved deliveries.

OI dips 22%, but revenue visibility and FY13-14E prospects good 
The company began the year with a quarterly OI of INR8.6bn versus INR11bn in Q1FY12, which is generally a non-material quarter both from execution and fresh awards perspective. Management remains positive on FY13E-14E intake quantum and quality, with sustained proportion of indigenised & DRDO based orders in WLR & EW systems and other missile systems. Also, management expects to form new JVs with a few foreign entities in FY13E which would provide fresh avenues for business wef FY14E & beyond. Company maintains FY13E fresh intake target at INR100bn (up 25 % YoY).

Outlook and valuations: Attractive; maintain ‘BUY’
BEL offers a decent long-term upside potential given its favourable positioning in the domestic defence market. The company has decent revenue growth visibility (book to bill at 3.8x on FY13E sales) and attractive prospects for a sustained order intake growth in the near to medium term with a strong balance sheet and cash in hand of INR65bn plus (67% MCAP). We maintain our ‘BUY/SO’ with a revised TP of INR 1617 (+33% upside), implying a PE of 9.5x on FY14E earnings.


>Gujarat Pipavav Port

􀂄 Container volumes down sharply: Container volumes witnessed a sharp decline of 26% sequentially to 122716 TEUs on account of Maersk shifting one of its lines to Mundra Port. Although this has been replaced by another line, it is much smaller in terms of volumes and is likely to take 2-3 quarters to scale up. Further, the uncertainty in the overall container trade situation proves to be of no help to volumes as well. Bulk volumes, though better than expectations at 0.87m TEUs, remain lacklustre due to lower coal imports.

􀂄 Weak EBITDA margins; other operating income props results: GPPV’s operating revenues declined 6% YoY and 7% QoQ on account of weak volumes. The company reported ‘Other Operating Income’ of Rs87m as duty benefits under the SFIS scheme which we have clubbed with other income. Excluding this, margins for the quarter stood at 41% as against 44.9% in Q1FY12. PAT (inclusive of other operating income) grew 44% YoY and 12% QoQ.

􀂄 Repaid debt post QIP: Post the QIP+ preferential issue of Rs3.5bn, the company has prepaid debt of an equal amount. It plans to raise Rs6.5bn through the ECB route to fund its expansion plan. Its expansion plan entails an investment of Rs11bn which shall be financed through equity of Rs3.5bn, debt of Rs4.5bn and the remaining through internal accruals.

􀂄 Reducing estimates for CY12: On account of the pressure on container volumes which has a direct impact on margins, we have reduced top-line estimates by 7.2%, EBITDA margins by 500bps and hence, PAT by 21.5%.

􀂄 Valuations: Although we see near-term challenges for the company on the container and bulk volume side, we retain our positive stance on the stock, given the favorable long-term volume growth prospects and resultant margin expansion expectations. Based on our DCF-based approach, our SOTP-based target price stands at Rs63/share. We (Prabhudas Lilladher) maintain ‘Accumulate’.


Restructured book to remain a cause of worry

 Loan book growth moderates
Allahabad Bank’s loan book grew at 11.9% YoY and remained flat on QoQ basis. Out of the total advances portfolio, Retail grew 15.5% YoY, agri grew 19.6% YoY and SME grew 11.7% YoY. Management expects to sustain loan growth of 20%+ going forward with major focus on retail book. We have factored in loan growth of 18.5% for FY13E and 18.4% for FY14E.

 NIMs decline sequentially
NIM stood at 3.17% in Q1FY13, as compared to 3.23% in Q4FY12 and 3.4% in Q1FY12 resulting from higher cost of funds coupled with decline in CASA ratio. Management has reiterated its guidance of maintaining NIMs 3%+ for FY13E. We expect NIMs to be at 3.1% for both FY13E and FY14E.

 Fee income continues to remain strong
Non-interest income of the bank declined 12.8% QoQ and increased 8.3% YoY to Rs 309.5 cr. Fee based income increased 15.5% YoY to Rs 239 cr in Q1FY13 and the bank showed a trading profit of Rs 55 cr vs 26 cr in Q1FY12. Management expects improvement in non-interest income in the coming quarters driven by higher recoveries. We expect non-interest income to grow at 8.5% for FY13E and 12.0% for FY14E.

 Restructured book remains a cause of concern in near term
Gross NPA of the bank increased by 5.0% QoQ and 34.8% YoY to Rs 2,162 cr. The bank witnessed slippage ratio of 2.14% vs slippage ratio of 2.4% in Q4FY12. The bank’s restructured book increased by Rs 4,777 cr and stood at around Rs 10,727 crs (9.7% of advances) from earlier 5.7% of advances. During the quarter the bank has restructured stressed accounts (SEBs worth Rs 3,100 cr of which UP Power stood at Rs 2,500 cr) and some accounts in the textile and chemical industry of ~Rs 300 cr each. Going forward Management expects restructuring of ~Rs 700-800 cr. We expect Gross NPA to be at 1.95% and 1.94% for FY13E and FY14E

Valuation & Recommendation
Given the current challenging macro-economic scenario, the bank’s strategy is to focus more on improving the asset quality rather than focus on growth and margins. We believe that the bank will continue to focus on strengthening its balance sheet. Being an attractive mid size public bank with above average credit growth, stable NIMs and comparatively healthy return ratios (RoE of ~20% and RoA of 1%+) we believe that Allahabad bank looks attractive at current levels.

At CMP, Allahabad Bank is trading at 0.65x and 0.55x of its FY13E & FY14E ABV whereas on PE it is trading at 3.26x and 2.66x in FY13E and FY14E respectively. We continue to maintain BUY on the stock with a target price of Rs 205.


>BANK OF BARODA: Asset quality disappoints

BoB’s Q1FY13 bottomline (Rs11.4bn, 10% YoY) came in below our estimates driven primarily by higher provisioning. Asset quality deteriorated with slippage rate at 1.7% and GNPA jumping by 20% QoQ although restructured assets were largely stable at 5.5% of loan book (vs ~8% for peers). Current valuations (0.8x FY14E ABV) largely factors in potential risks arising from the scheduled change in the management team. We recommend investors to Accumulate the stock around the stress case value of Rs650 with a revised price objective of Rs800.
Asset quality slips: BoB’s asset quality matrices deteriorated during Q1FY13 with GNPA jumping ~20% QoQ and reached 1.84% as slippage rate sustained at high level (1.7% vs 2% last quarter). However, restructured book inched up only marginally to 5.5% of loans book and remains below ~8% for most peers. While the asset quality matrices still remain better than peers, the poor show during Q1FY13 does remove some of shine off BoB.

NIM contracts by 25bps QoQ: Global NIM for BoB contracted by 25bps sequentially, which can be traced to lower loan yields while cost of deposits too inched up marginally (~10bps QoQ). From geographical perspective, domestic NIMs were stable QoQ while overseas NIMs were down 15bps QoQ.

Topline in line: BoB’s Q1FY13 performance on NII and non-interest income front was largely in line with expectations with Net total income growth of 21.5% YoY. Healthy credit growth of 23% helped counter the 25bps QoQ pressure on NIM. Meanwhile, the non-interest income growth (20% YoY) received a boost from strong recoveries (on YoY basis) and healthy forex gains.

Strong credit growth led by SME segment: The advances book grew by a strong 23% YoY primarily driven by the SME segment (21% YoY). The continued focus on SME segment for driving the loan book growth seems to be driven by desire to maintain strong yields and hence NIMs. The loan book growth benefitted from currency depreciation which propped the overseas loan book growth to 41% YoY.

Back to stress value, accumulate on low valuations,: At current market price of Rs673, the stock trades at 4.6x FY2014E EPS and 0.8x FY2014E ABVPS. In our view, current valuations are factoring in extreme negative expectations, likely due to scheduled change in the management team (CMD and ED retiring in mid-FY13). However, our stress case analysis suggests a stress value of Rs650 for BoB. During last few months, the stock has tested Rs650 levels on three instances and has witnessed a strong bounce back from the level. We continue to believe that at current valuations most of the risks arising from challenging operating environment are factored in. As a base case, we do not expect management change this year to lead to material change in asset quality profile other than the general pressure due to weak economic activity. We recommend investors to Accumulate the stock around stress case value of Rs650 with long term perspective and a revised price objective of Rs800.


>SUN TV NETWORK: Subscription revenues to bounce back

Subscription revenues to bounce back
Sun TV Network posted 6.2%YoY decline in revenues on the back of degrowth in analog subscription revenues and movies business. However, ad revenue growth was the best in the last 5 quarters. The tie-up with Arasu cable for carriage of all Sun TV channels in Tamil Nadu state coupled with the expectation of it becoming a pay channel in Chennai city post digitisation would benefit the bottom line significantly. We have lowered our estimates by ~5% for both FY13/FY14 but maintain our BUY rating on the stock.

Q1FY13 results in-line: Sales for the company de-grew by 6.2% YoY to Rs4258mn on the back of 46% de-growth in analog subscription revenues and no revenues form movies business. Operating profit was down 11.7% YoY to Rs3230mn as margins contracted by 474bps. Profitability was down by 12.4%YoY to Rs1643mn in-line with our expectations.

Subscription revenues to grow: Earlier, analog subscription revenues degrew by 46% YoY to Rs300mn as the channels were not being carried by Asasu cable and the company lost Rs100mn/month. However from 1st August the company entered into an agreement with Asasu where all their channels would be carried for ~Rs25-30mn/month. This would significantly benefit the company not only in terms of analog revenues but also in advertising as the rating would increase going forward. Also, the company plans to become a pay channel in the city of Chennai post digitisation from 1st Nov 2012 which would further increase subscription revenues. DTH revenues were up by 6% YoY to Rs89mn and are expected to post double digit growth in FY13. International subscription revenues grew by 30%YoY on the back of currency gain and increase in reach and deeper penetration.

Advertisement revenues bounce back: Advertisement revenues grew by 5%YoY which was the best growth posted by the company in the last 5 quarters. As 60% of the revenues of the company comes from FMCG companies which have increased spending, we believe growth would be healthier in coming quarters.
Margins decline: Operating margins declined by 474bps as the company invested more in in-house programming. Three non-fiction serials aired by the company during the quarter increased the cost by 65%YoY. Management believes this will normalize from Q2 onwards. EBIT margins too declined by 327bps as the company spent more than Rs710mn on movies’ content. This cost would only increase going forward as the movies’ acquisition cost has significantly increased in the past few years due to increasing competition among broadcasters.

Estimates lowered; Maintain BUY: We have decreased our FY13/FY14 estimates by 5.7% and 5.2% respectively on the back of lower advertisement growth, lower broadcasting revenues and higher analog subscription revenues. The stock is currently trading at 14.5x and 12.8x FY13E and FY14E respectively. We continue to value the stock at 15x FY14E with our target price of Rs317 and maintain BUY rating on the stock.


>V‐Guard Industries: Stable copper prices help margin expansion

Robust growth in top‐ and bottom‐line: V‐Guard’s top‐line grew by 36% YoY to Rs. 3,272mn in Q1FY13 due to strong growth in stabilizers, pumps, water heaters and digital UPS. The company has increased EBITDA by 51% YoY to Rs. 343mn and expanded the margin by 99 bps to 10.5% due to higher pricing in PVC wires and stabilizers and lower advertising expenses. Net income increased by 67% YoY to Rs. 207mn.

Summer and power cuts help top‐line growth: Sales of stabilizers grew by 38% YoY to Rs. 803mn due to extended summer and delay monsoon across India as the demand for air conditioners has increased. Top‐line of UPS and digital UPS grew by 34% and 151% due to power availability & supply issues, further worsened by extended summer in Q1. Sales of other products such as PVC cables, pumps and electric water heaters grew by 26%, 36% and 37% due to higher dealer mining and inherent demand of the products.

Stable copper prices help margin expansion: V‐Guard has increased EBITDA margins in PVC wires and stabilizers by 510bps and 400bps respectively. Margin expansion in PVC wires is mainly due to stabilized copper prices as against sudden decrease in copper prices in H1FY12, which forced the company to reduce its prices. Better pricing and higher turnover and reduced A&P expenses have increased margins stabilizers. However, margins of UPS and Digital UPS decreased due to imported components and the company was not able to pass on the price hikes to end customers. Margin of solar water heaters declined as the company follows cash accounting for subsidies portion on solar water heaters.

Outlook & Valuation: We believe that the company will register 30% and 26% revenue growth in FY13E and FY14E respectively. We expect the net income to grow by 48% and 34% in FY13E and FY14E respectively. At CMP of Rs. 402, the stock trades at 15.9x of FY13E and 11.9x of FY14E earnings. We maintain our “BUY” recommendation and revised our target price to Rs. 473, which has a potential upside of 18%. We have increased our FY14E target multiple to 14x due to expected sales and net income CAGRs of 28% and 39% during FY12‐14E.


>No rain, only dark clouds; we identify areas of safety/vulnerability

Monsoon data to date suggests rainfall 20% below normal
Monsoon data from the Indian Meteorological Department (IMD) indicates that rainfall is 20% below normal for the season to date. In the past, deficient rainfall in June-July has been a strong indicator of deficient rainfall for the season as a whole. In this note, we analyze the potential impact of a deficient monsoon on the sectors under our coverage.

Still early, but data suggests a wide area of deficient rainfall
Regional data indicates three of the four major meteorological divisions and 21 of 36 sub divisions have rainfall below normal, including key agricultural areas of Punjab, Haryana, Maharashtra, Uttar Pradesh, Bihar, among others. Also, reservoir levels are 24% below the 10-year average.

Data suggests rainfall affects real GDP growth from agriculture
Data suggests that deficient rainfall has a negative impact on real GDP growth from agriculture, although the impact on the overall GDP has reduced in recent years. This is in line with the reducing share of agriculture as well as the growing share of food-grain production from the rabi (spring) crop which has a lower correlation to monsoon rainfall. However, we note that the impact on nominal GDP is more muted due to government response, such as raising minimum support prices (MSP). Our Global ECS team has cut its FY13 forecast for GDP from agriculture to - 0.6% from 2.3% earlier and overall GDP to 5.7% from 6.6% earlier. Autos (cars and tractors), consumer staples (foods), utilities (hydro) likely to see the most negative impact

Sectors like autos and consumer staples may see a slowdown in the rural growth seen over the past few years in case the rainfall is significantly below normal, as rural consumption may fall. In addition, companies may also not be in a position to pass on the higher costs due to the removal of growth stimulus with lower fiscal spending and increased competition. Infra (Construction and roads) likely to see a larger construction
window, utilities (thermal) to benefit from power deficits

Some sectors such as construction and roads may benefit in the near term from lackluster rainfall as the period for construction increases. Thermal utilities may benefit from higher tariffs due to power deficits from a cut in hydropower generation.


>CONGLOMERATES: Container port volume at top 8 ports decelerated to 3% yoy in July

Port volume growth slowdown dragged by international trades According to, throughput growth at China’s top eight container ports decelerated to 3% yoy in July from 7% yoy in 1H12, driven by weaker international trade which fell 1% yoy (vs. +5% in 1H12). Domestic trade maintained its momentum, up 18% yoy (vs. +21% in 1H12). Reflecting their greater international trade exposure, Yangtze River (YRD) and Pearl River Delta (PRD) regions reported 1% and 2% port throughput decline in July, while Bohai Rim region’s volume held up at 16 % yoy. We continue to observe divergent performance among the ports within the PRD region, with Guangzhou Port losing its strong momentum since mid 2011, reporting 6% yoy volume decline in July (vs. +8% in 1H12). COSCO Pacific, which holds 39% interest in Guangzhou Nansha Phase 2, attributes this to its refocus on higher-yielding international boxes, since Nansha Phase 2’s utilization already exceeds 90%. As a result, some domestic cargos might have gone over to Shekou which reported 20% yoy volume recovery last month. Overall, both East and West Shenzhen reported 1% yoy port throughput growth in July (vs. 2% in 1H12).

Lackluster port volume in 2H. Earnings risk from China Merchants
As discussed previously (“Focus on earnings quality and prefer those with visible catalysts”, July 31, 2012), both leading indicators we monitor (China industrial power consumption and Canton Fair Trade orders) suggested lackluster container port volume growth in 2H12. At the post-result investor meetings, HPHT said that China’s international trade growth could have been weaker than the reported 5% yoy in 2Q, without the boost of factory orders for the London Olympic Games. Given the macro uncertainties and retailers’ cautious stance, we do not expect significant volume pickup in the upcoming peak season. Though not conclusive at this point in time, our recent discussion with SIPG indicated that its port volume in the first week
of Aug averaged 90,000 TEU per day, comparable with 92,000 TEU in July.

We prefer HPHT and COSCO Pacific over China Merchants (144.HK; Neutral), for which we flag earnings risk in its interim results. Excluding container manufacturing and exceptional items, we forecast 4% port earnings decline in 1H12, dragged by 15% less contribution from SIPG affected by a 2-month delay in VAT by the gov’t and 12% yoy port volume decline in MTL HK. Our 2012-13E earnings estimates for China Merchants are 17%-19% below Bloomberg consensus.


>Grid failures – catalyst for power sector reforms?

As per the Ministry of Power, the grid failure in the Northern, Eastern and Northeast regions on Tuesday afternoon (July 31) resulted in power supply disruption in 22 states (out of 28) of India. These grids are inter connected and the grid failure today is the consequence of failure of the Northern grid on Monday. Consequently, 40% of capacity of NTPC (14,000MW) located in these regions ceased to generate power. The Ministry of Power and the Power Grid Corporation (PGCIL - which manages the grid) expect that power supply could be restored by evening and that the situation may normalize by Wednesday.

While we are still waiting for the government’s official clarification, our discussion with power companies and various news flows suggest that the grid failure was due to 1) overdrawing power from states such as Uttar Pradesh and Punjab due to the sudden spike in demand, and 2) imbalance in grid frequency due to excess supply of power from the Western region. We believe these power outages (the worst in the last decade) underscores the urgency of reforms in the power sector mainly through: 1) addressing fuel supply issues which would drive higher utilization levels for generation capacities; and 2) cleaning the balance sheets of state-owned distribution companies which should help fund high cost power supplies and enable increased capex to strengthen the intra state transmission & distribution (T&D) infrastructure. As per Power Grid, total T&D spend for 12th plan (FY13-17) is budgeted at US$88bn - US$22bn for inter state transmission, US$10bn for intra state transmission and US$55bn for distribution. While we witnessed significant investments in the power generation segment due to private sector participation, and inter state transmission segment by PGCIL, we believe capex in intra state T&D segment is not keeping pace and could continue to be a drag on the entire value chain.

While we expect these grid failures to act as a catalyst for power sector reforms, we believe reforms in the distribution segment could take time as it involves 28 states and some are going to the polls over next 6-8 moths. Among stocks under coverage, we expect Adani Power, Tata Power and NTPC to benefit on the resolution of fuel supply issues and Crompton Greaves and Havells India to benefit on the increase of intra state T&D spend.


>INDIAN BANK: Q1FY13 Result Update

Positive surprise on asset quality drives PAT beat

INBK’s Q1FY13 operating performance was in-line even though the bottomline beat our estimates materially led by sharply lower provisions. Sequential improvement in GNPA (16% absolute, 40bps relative decrease) led with meaningful recoveries and upgrades while slippages were contained at 1%. Restructured book (10% of loan – on borrower basis) is behaving well with one of the lowest slippages (~10% of restructured assets). The stock should reverse the de-rating suffered post Q4FY12 results given rebound in return ratios and positive surprise on asset quality. We maintain Buy on the stock led by inexpensive valuations (0.7x FY14E), strong capital (tier-1 ratio of 10.7%) and healthy NIMs (~3.2% levels) which should act as a cushion against the potential rise in slippages/restructuring.

Reported NIM expands 15bps QoQ while loan growth slows to 14%: NII grew by a moderate 12% yoy (in-line) to Rs11.5bn as a healthy NIM expansion (15bps QoQ) helped offset moderation in credit growth to 14% YoY. The NIM expansion is primarily led by ~40 bps QoQ expansion in loan yields which was partly offset by lower investment yields and slightly higher cost of funds sequentially. The moderate loan growth can be traced to lower traction in MSME and the corporate segment as the bank has turned more cautious and
selective in credit origination given the operating environment.
Asset quality surprises positively: After material surprise in Q4FY12, INBK improved its asset quality position and delivered on its guidance. The GNPA improved sequentially by 16% in absolute terms and 40 bps on relative terms. The improvement, importantly, was the result of higher recoveries and upgrades during the quarter as the bank had stepped up recovery efforts post Q4FY12’s negative surprise. Restructured loans increased by Rs15bn to 10% of loan book (on borrower basis) with cumulative slippages contained at ~10% (one of the best among PSB peers). Notably, nearly half of the restructured assets are performing and hence the restructured assets will shrink to 4.5% of loans if the recommendations of the working group on restructuring are implemented.

Non-interest income remained weak: In an otherwise healthy performance, the non-interest income performance was quite weak with 11% YoY degrowth. The moderation in fee income stream is broad based with treasury and fx lines contributing the most.

Accumulate: Notwithstanding the difficult operating environment, we remain positive on the stock led by inexpensive valuations (0.7x FY14E), strong capital (tier-1 ratio of 10.7%) and healthy NIMs (~3.2% levels) which should act as a cushion against potential rise in slippages/restructuring. Given the strong rebound in return ratios led by part reversal of asset quality pain in Q4FY12, we believe that the management has delivered on its guidance. In line, we expect the de-rating suffered since Q4FY12 results to reverse gradually with stock likely to move back to Rs230-240 range in the near term. We recommend investors to accumulate the stock on declines with a revised target price of Rs240 (from Rs270 earlier).


>GAIL: Lower subsidy burden

Lower subsidy burden, better gas trading and petchem offset muted transmission performance

GAIL reported superior earnings during Q1 backed by lower subsidy burden at Rs7bn, higher petchem realisations, expanded gas trading margin despite muted transmission performance with 5% QoQ decline in transmission volumes from 116mmscmd to 110mmscmd. However, transmission tariffs were robust probably due to take or pay component. We believe the performance in Q1 was better due to one offs and incrementally the performance is likely to be under pressure due to declining transmission volumes and higher subsidy burden. GAIL is likely to face multiple headwinds in FY13 which is likely to affect its performance with decline in earnings. Thus we maintain our ‘Neutral’ rating on the stock.

Revenues buoyed by lower subsidies, higher petchem realisations: GAIL reported 25.0% YoY and 5.9% QoQ jump in revenues at Rs111.1bn backed by lower subsidies at Rs7bn and higher petchem realisations at Rs85,303/ton despite lower transmission volumes and petchem sales.

Trading margins benefit performance: Natural gas trading business benefitted from earlier spot LNG inventory which was at lower cost thus aiding margin expansion. However, declining KG D6 volumes along with overall lower spot LNG imports led to 5.0% QoQ decline in transmission volumes at 109.8mmscmd. Petchem realisations and profitability was robust due to rupee depreciation and averaged Rs85,303/ton despite 44.1% QoQ decline in sales volumes at 66,000tons.

Asset capitalisation leads to higher depreciation and interest outgo: GAIL’s depreciation and interest outgo jumped by 21.7% and 182.7% YoY at Rs2.2bn and Rs588mn due to capitalisation of pipelines during Q4FY12 and capitalisation of Bawana-Nangal pipeline in Q1. However, lower subsidies, better petchem and gas trading performance led to 15.1% YoY and 134.6% QoQ jump in profitability at Rs11.3bn.

No near term catalyst for the stock: GAIL’s transmission volumes are likely to remain depressed in FY13E owing to declining KG D6 volumes before reviving in FY14E owing to incremental LNG re-gasification capacity (Dahej and Kochi). However, rupee depreciation is likely to support petchem performance despite international polymer prices remaining stable. Natural gas trading business is likely to come back to normalcy from Q2 with lower margins. Capitalisation of new pipelines without any meaningful contribution to revenues is likely impact earnings by inflating the depreciation and interest costs going forward. We have lowered our transmission volume and tariff assumptions while raising petchem price assumptions. Growth drivers for GAIL are likely to play out only after FY14E and hence we do not expect any trigger for the stock in the near to medium term. We thus maintain ‘Neutral’ on the stock with a revised SOTP based price target of Rs349 (earlier Rs373).


>SAIL: Expansion projects to start coming on-stream from H2FY13E

Concerns over pushing volumes comes to the fore

SAIL’s steel sales volumes stood at a dismal 2.5 MT in a competitive domestic market and operational performance remained lacklustre with EBITDA at Rs15.1bn and margin of 14.1% (higher QoQ mainly on account of huge negative expense of stock in trade which was led by 0.5 MT inventory increase). Adj. PAT stood at Rs8.7bn (adjusted for forex loss of Rs2.57bn). Realisations showed a marginal increase sequentially on account of better value added product mix on a lower base. Progress of expansion projects also remains slow and inventory build up might delay commissioning further in our view. We continue to believe that SAIL’s competitive strength remains low among large domestic steel producers and see higher risk to volumes and realizations even if there are no further delays in various expansions. We have revised our volume estimates lower for FY13E/14E but pegged EBITDA estimates marginally higher on account of stable realizations and lower coking coal costs. Due to sustained correction in stock price we upgrade our rating to Neutral with a target price of Rs90.

Volumes plummet and realisations improve: Steel sales volume stood at a dismal 2.5MT (our est. ~2.8 MT), lower by ~9% YoY and ~22% QoQ. Sales volumes remained lower than production of ~3 MT as the company continued to find it hard to push volumes in a competitive domestic steel market. Realizations improved by 0.8% sequentially despite pressure on steel prices globally due to rupee depreciation and better value added product mix on a lower base.

Inventory remains high, EBITDA higher due to stock in trade: SAIL’s inventory stood at ~1.4 MT as on Mar’12 and rose further by 0.5 MT in Q1FY13. EBITDA stood at Rs15.2bn (margin of 14.1%), higher sequentially on account of lower overall expenses due to inventory addition creating a high negative stock in trade expense. Power, fuel and other operational costs remained high and SAIL continued to remain the highest cost converter among the large domestic steel players on account of high operational costs. Inventory sales going forward could hit margin in the coming few quarters.

Expansion projects to start coming on-stream from H2FY13E: SAIL’s expansion projects continued to progress at a slow pace and capex during Q1FY13 stood at Rs20bn. The company lowered its capex guidance to ~Rs120bn for FY13E (earlier ~Rs145bn) towards modernization and expansion activities and expects commissioning of blast furnaces of IISCO and Bokaro expansions during H2FY13E. Interest costs for SAIL has remained lower due to non-capitalization of expansion projects as of now but is expected to pick up in FY14E. We remain concerned on the slow progress of expansion projects and have apprehensions over the ability of the company to sell higher quantities in a competitive domestic market (trend clearly visible from dismal Q1FY13 sales volume) with new capacities brought on-stream by all large domestic steel players well before SAIL. We further downgrade our volume estimates for SAIL for FY13E/14E to 12MT/13.7MT. However, with reduced costs on coking coal front and realizations in domestic market supported by weak rupee, we have revised our realizations and cost assumptions lower. We revise our FY13E/14E EBITDA higher by 3.0%/4.2%.
Valuations, upgrade to Neutral due to continuous stock price fall: We have remained bearish on SAIL since long on account of reduced competitive capability and high operational cost structure in a tough environment. We remain skeptical on the company’s ability to push volumes in a competitive market going forward and simultaneously improve margin and realizations significantly despite lower raw material costs. We value the company at 5x FY14E EV/EBITDA (discount of 10% to global average) and FY14E expected outstanding CWIP at 0.5x to arrive at a target price of Rs90. We upgrade the stock to Neutral from Sell on account of valuations coming down on continued correction in stock price.


>IRB INFRASTRUCTURE DEVELOPERS: Strong execution drives growth

Earnings above estimates, margins expand: For Q1FY2013 IRB’s consolidated revenues grew by 22% YoY and 15.5% QoQ led by a strong execution in the EPC segment and consistent toll collection across projects. The OPM improved sharply on account of margin expansion in the EPC segment to 43.4% vs 41.1% in Q1FY2012. However, the PAT growth was restricted to only 5.7% YoY to Rs142 crore due to an 80% surge in the depreciation and a 31% increase in the interest charge.

Strong performance by EPC segment; BOT continues to be stable: The EPC vertical posted a strong growth of 27% YoY led by robust execution across projects. The margins expanded to 27.9% against 22.8% in Q1FY2012 due to range-bound raw material prices. The PAT was up 37% YoY. The BOT division continued to be stable with revenues up 10.4% YoY largely led by (i) 6% toll revision at the Tumkur- Chitradurg project; and (ii) a strong traffic growth across a few projects YoY. The OPM improved by 110 basis points YoY to 88.2%. Due to a sharp jump in the depreciation the PAT fell by 35% YoY but rose by 13% QoQ.  Thus earnings estimates revised upwards: We have revised our earnings estimates upwards by 15% and 7% for FY2013 and FY2014 respectively to factor in the expansion in the EPC margin in Q1FY2013.

Maintain Buy with price target of Rs175: With a mature portfolio now, the management plans to reward the shareholders with a dividend of up to 20% of the PAT. Further, it is also looking at growing inorganically by acquiring operational projects. Notwithstanding the legal tangle of its promoter and the recent Maharashtra Navnirman Sena attack on its Mumbai-Pune Expressway, we believe the sharp correction offers a compelling buying opportunity. At the current price the stock is trading at 7.6x and 8.4x its FY2013E and FY2014E earnings respectively.




Performance remains subdued: Infosys continues to disappoint the Street with its lacklustre quarterly numbers. For Q1FY2013 the disappointments were written all over with a lower than expected performance in revenues, margins and profitability as well as full year guidance. The company’s revenues in dollar terms were down by 1.1% QoQ to $1,752 million. However, adjusted for a $15-million write-off in the revenues pertaining to project cancellation from an European client and a $13-million impact on account of cross-currency movement, the revenues were $1,780 million. The blended volume growth was up by 2.7% QoQ whereas the pricing declined sequentially by 3.3% onsite and by 3.8% offshore.

Pricing decline, higher employee expenses restrict margins: Despite a 9.7% depreciation in the rupee vis-à-vis the dollar during the quarter, Infosys has reported a 190-basis point fall in the EBIT margin to 28% on the back of higher employee expenses and pricing decline (of 3.8% QoQ). The net profit for the quarter was down by 1.2% QoQ to Rs2,289 crore (lower than our expectation of Rs2,421 crore).

Valuation and view: A difficult macro environment coupled with the convergence of client-specific issues is causing concerns for Infosys. We have revised our EPS estimates for Infosys by 3.1% and 1.7% on account of currency reset to Rs54.5 and Rs54 for FY2013 and FY2014 respectively. Though the stock has already corrected by 8% post announcement of the results, but we do not see any major upside trigger for the stock in the near to medium term. We maintain our Hold rating on the stock with a price target of Rs2,440. We maintain our preference for Tata Consultancy Services over Infosys


>BHEL: Q1FY2013


In Q1FY2013, the turnover of BHEL grew by 18% YoY, led by good execution in the industrial and power divisions, which grew by 19% and 17% YoY respectively. The company reported a higher OPM of 13.1%. The adjusted net profit rose to Rs920.9 crore for Q1FY2013.

During Q1FY2013, the company’s order book stood at Rs132,900 crore (down 17% YoY) while the order inflow was Rs5,590 crore (up 126% YoY on a low base). The book/bill ratio declined further to 2.6x, aggravating concerns about its growth. The management maintained its order inflow guidance of Rs60,000 crore for FY2013.
We had sharply downgraded our earnings estimate in FY2012. However, after the decent Q1 results, we maintain our estimates of a negative compounded annual growth rate (CAGR) of 1% in the top line and that of 2% in the adjusted earnings over FY2012-13.

Overall, the company’s performance was outstanding but it continued to disappoint with a sluggish order inflow. The long awaited import duty on power equipment has been recently approved by the government. However, the move is perceived to be too late as most of the ordering for the 12th Five-Year Plan has already taken place and is likely to benefit once the ordering for the plan starts. While the supercritical orders expected from NTPC could boost BHEL’s order book in the coming quarters, these orders are largely priced in now. Due to a lack of any near-term trigger we see limited upside from the current level and maintain our Hold rating on the stock. At the current market price, the stock trades at 7.6x FY2014E earnings. Our price target remains Rs250 (9x FY2014E)


>LUPIN: Plans to launch 9-10 oral contraceptive

Robust quarter

Lupin’s results for Q1FY13 were better than our expectations. The company reported 44%YoY growth in revenues, 150bps improvement in EBIDTA margin and 34%YoY growth in net profit. Sales growth was across all major geographies. Notably among them were: 63% YoY growth in the US market and 100%YoY growth in the Japanese market due to the acquisition of I’rom. Lupin is likely to benefit from the $170bn (Rs9,350bn) patent expiry opportunity till 2015. The company’s 20 out of 42 generic products are market leaders in the US. Lupin has entered the
US generic market in oral contraceptive (OC) segment with a range of products. We have a Buy rating on the scrip with a revised target price of Rs699 (based on 22x FY14E EPS) from the earlier target price of Rs635 (based on 20x FY14E EPS).

Excellent sales growth: Lupin reported 44% YoY growth in revenues from Rs15.68bn to Rs22.54bn due to excellent growth in major markets and benefit of rupee depreciation against the dollar. The sales growth in various geographies was, India formulations 25%, US formulations 63%, Europe 14%, Japan 100% (due to the acquisition of I’rom), S. Africa 13% and RoW 54%.  Strong growth in US revenues: Lupin has achieved 63%YoY growth in revenues from Rs4.93bn to Rs8.02bn due to the launch of Suprax 400mg capsules and generic ziprasidone in the US generic market during the quarter. Lupin is the market leader in 20 out of 42 products in the US generic market. The company is likely to benefit from its oral contraceptive (OC) segment portfolio in the US market.

Improvement in margin: Lupin’s EBIDTA margin improved by 150bps from 18.8% to 20.3% mainly due to the reduction in material cost. Material cost declined by 310bps from 39.4% to 36.3% of total revenues due to the change in product mix with higher sales in US market.

Leading player in OC segment: Lupin has plans to launch 9-10 oral contraceptive (OC) products in the US market in FY13. The company has filed 21 ANDAs with US FDA and the addressable market size is ~$4bn (Rs220bn).

Valuations: We expect Lupin to benefit from the strong global generic business in US, Japan and other emerging markets. The company is likely to benefit from excellent growth in the domestic market. At the CMP of Rs586, the stock trades at 22.8x FY13E EPS of Rs25.7 and 18.4x FY14E EPS of Rs31.8. We have a Buy rating on the scrip with a revised target price of Rs699 (based on 22x FY14E base EPS of Rs31.8) from our earlier target of Rs635 (based on 20x FY14E EPS).