Tuesday, August 21, 2012

>MARUTI SUZUKI LIMITED: Manesar plant to resume production from August 21 under heavy security cover

Manesar plant to resume production from August 21 under heavy security cover
In a press conference today, Maruti announced that it will resume production at its Manesar plant from August 21 under heavy security cover. With this resumption, the shutdown will have lasted for around 1 month – broadly in-line with what we were building into our numbers. As per an investigation conducted by the company, they will fire 500 regular workers who were involved in the misconduct on 18 July. Further, the company will no longer employ contract workers on the production line; however, MSIL will keep 20% of the total workforce on short-term agreements. According to today’s announcement, current contract workers (1,869 employees) will be given an opportunity to join the company as regular (ie, permanent/non-contract) workers provided they meet the company requirements.

Production will get ramped up gradually
As per the company, about 300 workers will resume production from August 21; the company will aim to manufacture 150 cars daily initially as compared to full capacity of around 1,600 cars daily. Production will increase gradually as the company hires more workers, in our view. If everything goes smoothly, we believe the company may take another month to achieve full production. In our view, the company may be able to largely make up for lower production later on during the year. Hence, our estimates are unchanged at this stage.

Do not expect significant stock reaction; maintain Neutral
We believe expectations around the resumption of production have been built in to the share price from last week. Therefore, we do not expect any significant stock reaction on this announcement. Maintain Neutral.

To read report in detail: MARUTI SUZUKI


In line performance, JLR reported 110 bps YoY expansion in EBIDTA margin
As per our expectation TML reported healthy operating performance in Q1FY13 led by stellar performance in JLR business (110 bps YoY expansion in EBIDTA margin to 14.5%). However its standalone business showed muted performance (170 bps YoY contraction in EBIDTA margin to 6.6%).

Reported EBIDTA at `57.5 bn close to our estimates of `55.7bn
We believe that healthy volume growth in JLR business (34.4% YoY), favourable currency movement (average GBP/Re at 85.8 in Q1FY13 against 72.9 in Q1FY12) and increase in volumes in China (China contributed 21.5% to the total volumes in Q1FY13 against 15.7% in Q1FY12), helped TML to report healthy performance in Q1FY13. Revenue increased by 30.1% YoY to `433.2 bn (against estimates of `430.3bn).EBIDTA increased by 35.9% YoY to `57.5 bn (against estimates of `55.75 bn). EBIDTA margin expanded by 60 bps YoY to 13.3% (against our expectation of 13%).APAT increased by 30.6% YoY to `26.8bn (against our estimates of `27.2bn). It is to be highlighted that JLR board has proposed a dividend of GBP 150 mn to Tata Motors (parent company), which will likely to be paid off in August 2012.

Not offering discounts in JLR but indicated a caution on EBIDTA margin front
The management has indicated that currently they are not offering any kind of discounts (according to media reports, its competitors are offering) to its customers (including China market). However the management has not ruled out the possibility of increase in marketing cost in coming future due to increase in competitive pressure. Further management has shared a cautious optimistic outlook on EBIDTA margin front. Hence in anticipation of pressure on margin, we have tweaked our JLR’s EBIDTA margin expectation to 14.5% for FY13E.

Maintain outperform rating with target price of `297 
In Q1FY13 TML’s operating performance was in line with our expectation. Post Q1FY13 result, we maintain our FY13E volume estimates for JLR at 364k units and standalone business at 967k. However, we tweaked conso EBIDTA margin expectation to 12.6% (from 13%) for FY13E on lowering JLR’s EBIDTA margin expectation to 14.5% from 15.2% (in line with its current EBIDTA margin).With this we maintain our Outperform rating on the stock with target price of `297 (earlier `307). At our target price stock would trade at 5.0xFY13E conso EV/EBIDTA and 4.5xFY14E conso EV/EBIDTA.


>BHARTI AIRTEL: FY12 Annual Report

Key Highlights:
 While Africa business proforma revenue growth at aggregate level remained strong at ~25% in INR terms (~19% in USD terms) in FY12, there was significant divergence in the performance at the individual country-level. As per our proforma estimates, Bharti Africa witnessed ~35%+ USD revenue growth in Sierra Leone, Ghana, Uganda, and DRC (together contribute 18% of Africa revenue). However, proforma revenue growth is estimated to be single-digit/negative for Chad, Niger, Seychelles, Madagascar, Kenya, Malawi and Congo B (together constitute 21% of Africa revenue).

 Gross debt remains largely USD denominated (70%) followed by INR (19%) and other currencies (11%). Debt schedule indicates relatively high re-payment in FY13 with 28% of overall gross debt (INR193b) having maturity period of less than one year. However leverage remains relatively comfortable with FY12 net debt/EBITDA at 2.75x.

 Only ~9% of the overall borrowings for Bharti are at a fixed rate implying that interest rates remain key earnings variable. Every 1% increase in USD (INR) interest rate would have impacted Bharti's FY12 PBT by INR4.8b (INR1b).

 Earnings sensitivity to exchange rate remains high as well with adverse impact of INR4.6b on FY12 PBT (7%) for a 5% appreciation in USD assuming all other variables remained constant.

 Contingent liabilities have increased significantly during FY12 largely due to increased tax-related disputes. Contingencies increased 81% YoY to INR55.5b in FY12.

 We expect 14% EBITDA CAGR for Bharti over FY12-14E. The stock trades at EV/EBITDA of 6.5x FY13E and 5.3x FY14E.

 Maintain Buy with a target price of INR370 based on 7.5x FY14 EV/EBITDA for India & SA business, 5x EV/EBITDA for Africa business and INR142b impact for potential regulatory outlay.

To read report in detail: BHARTI AIRTEL

>STRATEGY- Stratoscope: Show Me the Money

In the midst of the dividend payout season for Indian equities, we analyzed the payout policies of Corporate India and its relationship with stock price performances. We highlight key observations and stock ideas in the report.

 The median dividend payout ratio for the BSE 100 has remained stable over the last decade at about 20%. The flat trend is not satisfying from a minority shareholder perspective. But could be attributed to: a) the corporate sector in India being in a capital-intensive growth phase (both organic and inorganic), b) funding constraints post the global financial crises, c) increased competitive intensity has also resulted in a more cautious stance on sustainability of payouts.

 The cautious stance is reflected even in the payout policies of defensive sectors – Consumer Staples, Consumer Discretionary and Healthcare, wherein payout policies have remained stable or reduced. The payout of the IT services sector has almost doubled over the last decade. But it still remains around the broad market average. Payout of the Financials sector has also been limited to around the market average. The State-owned Banks have, however, seen a reduction in recent times due to capital constraints.

 It is also worth highlighting that only a few managements have a clearly articulated dividend payout policy. The state-owned companies typically try to adhere to Government guidelines which stipulate a payout of about 20-30% depending on the sector. Given the Government’s
fiscal constraints, we expect cash-rich, state-owned companies to continue to have a high payout policy.

 That said, managements wanting to enhance shareholder value would do well to have a consistent payout policy – with stable to rising dividends. Our analysis shows that companies with such a policy have consistently outperformed the benchmark over the last decade.

To read report in detail: STRATEGY

>AARTI INDUSTRIES LIMITED: Core strengths & Key developments(Q1 FY13)

  • Presence in high margin specialty chemicals with diverse applications 
  • Global Scale Units Manufacturing more than 125 products 
  • Ability to Supply Basket of products to Global Customers & MNCs 
  • Tagged as “Strategic Supplier” by various Global MNCs 
  • Backward Integration 
  • Latest Manufacturing Technology & World Class R&D 
  • Superior Cost Management Skills & Economies of Scale 
  • Capability to convert by-products into commercially viable product 
  • IPRs for Developing Customized Products & Products under Secrecy Agreements 
  • Captive Power Plants
To read report in detail: AIL


Short term blip in long term growth story
Raymond Ltd Q1 FY13 results were below street estimates, both on the topline and bottom-line front. In Q1 FY13, company's net sales increased 9.5% Y-o-Y however declined 12.5% sequentially to Rs. 8377.1 mn while the EBIDTA margin declined ~565 bps Y-o-Y and ~ 464 bps sequentially to 3.7%, primarily on account of lower margins in the Textile and Branded apparel business.

Textile and Branded apparel segment impacted due to poor consumer sentiments, higher input costs, inventory liquidation, lower contribution from high margin products … In the quarter, the textile division sales increased 6% Y-o-Y to Rs. 3.66 bn while that of the branded apparel segment declined 3% Y-o-Y to Rs. 1.71 bn, on account of a weaker demand profile due to poor consumer sentiment and a subdued wedding season. The EBIDTA margins of textile and branded apparel division declined ~ 1000 bps Y-o-Y and ~ 700 bps Y-o-Y to 5% and 6% respectively. The management expects the demand to recover in H2 FY13 on account of a strong wedding and festive season.

…However, Other segments showed robust performance
In Q1FY13, Raymond Zambaiti - JV net sales increased 29% Y-o-Y to Rs. 0.68 bn while the EBIDTA margin of the business increased ~ 400 bps Y-o-Y to 14%. The capacity utilization of the 21.6 mnpa plant improved to 76% and likely to be fully utilized by FY13.

In the quarter, Indian denim business net sales increased 3% Y-o-Y to Rs. 1.98 bn while the EBIDTA margin which increased ~ 200 bps Y-o-Y to 13%. The plant operated at 100% capacity utilization. The segment is likely to continue its robust performance on account of a good order book.

In the quarter, the Tools and Hardware sales increased 30% Y-o-Y to Rs.0.91 bn while the margin expanded 200 bps Y-o-Y to 13%. The auto component sales increased 20% Y-o-Y to Rs. 0.39 bn while the EBIDTA margin ~ 200 bps Y-o-Y to 17%.

Emphasis on core brands, cost rationalization and retail network expansion continues…
In the quarter, the company added 28 stores taking the total count of stores to 867. In Q1 FY13, the company added 21 EBO while the retail space increased 11% Y-o-Y to 1,681 thousand square feet. For FY13, the company is likely to add 80-100 stores. In the quarter, company reported exceptional expense of Rs. 129.2 mn on VRS payments for 140 employees. The company is likely to carry out further employee rationalization which may put pressure on the bottom-line in the short term but is positive in the long term.

Valuations and outlook
We cut the EBIDTA estimates of FY13 by 7.8% to factor in the subdued Q1 FY13 results. At the
CMP, Raymond is trading at an Adjusted P/E of 13.0x FY13E and 9.6x FY14E EPS of Rs. 27.4 and Rs. 37.1 respectively. Over FY12-14E, we expect the company's sales and EBIDTA to grow at CAGR of 12% and 13% to Rs. 45.45 bn and 5.9 bn respectively. Raymond is trading at an EV/EBIDTA of 6.5x FY13E. We value the company at an EV/ EBIDTA multiple of 8.0x FY13E, a ~25% discount to its historical average; we arrive at a revised target price of Rs. 480 per share. The company's ~ 125 acres Thane land could fetch Rs. 15.0 -18.75 bn (implying valuation of Rs. 244- 305 per share) at conservative land valuation of Rs 120-150 mn per acre. However we do not factor the land valuation in arriving at our target price. We believe any sale of land would substantially reduce the debt and strengthen the balance sheet and would drive further re-rating in the stock. We have not factored in valuation of land in arriving at our target price. Any form of real estate value unlocking would be value accretive.



Kalpataru Power’s (KPP) Q1FY13 numbers were above our estimates adjusting for INR130mn of forex (mark to market) loss. While revenue grew 20% YoY, margin declined 60bps YoY to 10.8% (adjusting for forex loss) primarily due to higher input cost. Order inflow dipped 33% YoY to INR6bn in the absence of any big-ticket order during the quarter. The company has lowered its FY13 EBITDA margin guidance for JMC from 7-8% to 6-7% on back of increased volatility in commodity prices. Maintain ‘HOLD’ with revised target price of INR 78 (earlier 84).

Margin pressure sustains; execution remains steady
KPP’s revenue grew a healthy 20% YoY, better than estimate. Margin (adjusted for forex loss) fell 60bps YoY to 10.8%, owing to higher input costs. Adjusted PAT increased 20% YoY to INR404mn. At JMC, revenue surged 51% YoY to INR5.7bn. However, margin plunged 290bps YoY to 5% due to high volatility in commodity prices primarily in cement and steel. For JMC, management has trimmed its FY13 margin guidance to 6-7% from 7- 8% earlier. KPP’s capital employed increased 16% YoY as the infra division’s capital employed doubled on increased debtor balance.

New orders down 33 % YoY; order book flat at INR 60.5 bn YoY
The company’s order inflow declined 33% YoY to INR6bn, owing to weak project awards. KPP stated that the order pipeline is healthy and it anticipates orders from MEENA region and CIS countries apart from PGCIL. The company’s standalone and consolidated order backlog stands at INR60.5bn (flat YoY) and INR116bn (up 10% YoY), respectively.

Outlook and valuations: Cautious; maintain ‘HOLD’
While we do not expect any upside in KPP’s operating profitability in the near to medium term, rising input cost in key subsidiary (JMC Projects) remains a concern, with limited pricing power. We maintain our ‘HOLD/SP’ recommendation with a Target price of INR 78(earlier 84) as we remain cautious on the company’s incremental order intake and margin profile given rising competition and higher working capital issues. The stock, on consolidated basis, is currently trading at P/E of 5.1x and 4.3x on FY13E and FY14E, respectively.

Key conference call highlights
• Forex loss: KPP stated that there was a forex loss (mark to market) of INR130mn on account of USD denominated loan and commodities, of which INR50mn has been charged to other operating expenses and INR80mn to interest cost.

• FY13E guidance: Management has reduced JMC margin guidance of 7-8% to 6-7% for FY13E on back of increased volatility in commodity prices with revenue guidance of 35-
50%. The company maintains its capex guidance for FY13E at around INR2bn (INR1bn
for KPP, INR 0.4-0.5 bn for JMC and INR400-500mn for Shri Subham Logistics etc).

• Infra projects update: The company has achieved financial closure of all 4 road BOOT projects viz., Rohtak Bowel (COD expected by Q4FY13), Agra–Aligarh (COD expected by Q2FY14), Bagpur Waiganga (COD expected by Q2FY15) and Rewa MP project (COD
expected by Q4FY15).

• Update on Subham Logistics- Subham Logistics posted revenue growth of 15% in Q1FY13 with EBIDTA margin of 14% and PBT of INR0.7mn. FY13E management guidance stands at 35 % revenue growth with EBIDTA levels at 15-16 %.

• Capex at INR 2 bn for FY13E- The company’s new tower manufacturing plant at Raipur is on track and is expected to start by September 2012 with INR 1 bn as capex. Also, JMC & Subham logistics will have capex equally at INR 500 mn.

• KPP stated that while ~60% of its order book is covered by price variation clause, ~40% is fixed price book.

• The company targets to maintain its debt (consol) at INR13-14bn by end FY13E, which currently stood at INR 15 bn and is likely to come down by FY13E end.

• 0% tax rate in JMC in Q1FY13 due to exemption in case of certain infra projects.


>RELIANCE POWER: Projects: Sasan start-up by Dec, Chhatrasal awaits formal FC

1QFY13 normalized EBITDA, PAT a tad below our forecast
At Rs2.27bn, Reliance Power’s (RPWR’s) 1QFY13 normalized net profit was ~3% below our forecast (marginally above consensus); reported PAT was higher at Rs2.4bn on the back of prior period adjustments. RPWR’s top line surprised on the back of third-party power purchases and sale (to meet PPA supply commitment from its Butibori facility), but normalized EBITDA (at Rs3.5bn) was 3% below our/consensus forecast despite sharply lower ‘other opex’. Treasury gains surprised yet again (Rs1.16bn vs our forecast of Rs0.7bn), but were offset by higher-than expected depreciation and interest outgo.

Rosa: RoE remains healthy at 30.7%, albeit down 150bp QoQ
In the first quarter where the entire 1200MW capacity was in commercial operation, the drop in Plant Availability (PAF) from ~92% to 81% led to a 150bp drop in RoE (normalized for prior period revenue) to 30.7%. As per the management, [1] coal mix during the quarter was 51% linkage, 39% imports and 10% domestic market-procured); [2] the receivables cycle remains in check; a combined escrow facility of Rs3.5bn for the entire 1200MW capacity (Phase-I,II) is in the works.

Projects: Sasan start-up by Dec, Chhatrasal awaits formal FC
[1] Coal production from Sasan-linked coal mines is expected to begin shortly; commissioning of Unit-1 (800MW) at Sasan is scheduled in Dec-2012. [2] Formal grant of Forest Clearance (Stage-I) for the Chhatrasal coal block, which would enable RPWR to commence construction of its Chitrangi facility, is awaited. [3] Tato-II (700MW) hydropower project has secured key clearances (TEC, FC) enabling start-up of construction activities. [4] On coal production in Indonesia. RPWR is in the process of awarding contracts for each component of the evacuation chain.

Big-ticket projects still subject to policy diktats; maintain REDUCE
Valuation remains expensive (22.4x FY14F P/E and 1.3x FY14F P/B) and one-half of the FCFE-based fair value remains concentrated in projects (Chitrangi, Sasan-II, Samalkot) wherein operational timelines and profitability remain subject to regulatory diktats and fuel supply risk

To read report in detail: RELIANCE POWER

>APOLLO TYRES: Rubber tailwinds

International rubber prices have declined by over 30% since the beginning of May in rupee terms with futures contracts suggesting that weak prices are likely to sustain. While domestic prices have declined a more modest 9%, historic trends suggest that they will converge in the
coming weeks. This bodes well for Apollo given that a 10% change in natural rubber prices implies a 270+ bps increase in India margins and 30%+ increase to consol EPS. Rubber is a much more critical driver for Apollo than volumes and suggests upside risks to FY13-14 earnings. BUY.

Rubber prices have been under pressure in recent weeks
International natural rubber prices have declined over 30% since early May in rupee terms to sub Rs140/kg while the December-January futures point to prices sustaining around the Rs140 mark. While the correction in domestic prices has been more modest so far (~9%), the historic correlation between the two suggests a pull back in domestic prices ahead. Domestic spot prices have already slipped to Rs178/kg. Given the historic premium of ~8% over international prices, a fall to around the Rs160/kg mark seems likely.

Significant positive for Apollo
Rubber is a key component of raw materials for Apollo (65% of India business RM in FY12). Within this, over 60% is natural rubber as the product mix is geared towards CV tyres. A 5% reduction in natural rubber costs points to a 14% increase in domestic Ebitda, 137bps improvement in margins and 16% increase in consol EPS. Factoring in a natural rubber price of 170/kg would imply a 45%+ increase to our consol EPS estimates.

Sensitivity to rubber higher than to volumes
While the soft domestic economic backdrop has raised worries about volumes, this is less critical for Apollo than rubber. A 5% reduction in our domestic volume estimate implies a 13% reduction in domestic Ebitda and 15% reduction in consol EPS estimates. This is actually less than the sensitivity to a 5% change in rubber despite being much less volatile than rubber prices.

Upside risks to earnings, maintain BUY
Given the tailwinds from rubber and the uptick in Europe margins visible in 1QFY13, we see significant upside risks to our estimates for Apollo Tyres. Even on current estimates, valuations are reasonable at 7.7x FY13 PE/1.3x FY13 PB. We reiterate our BUY recommendation on Apollo with a price target of Rs110, 25% upside. We see the worries around CCI as being overdone.

To read report in detail: APOLLO TYRES


Nava Bharat Ventures’ (NBV) Q1FY13 adjusted standalone earnings came in at INR684mn, higher than our estimate of INR511mn. Earnings from the power business were up due to higher merchant realization of ~INR5/kwh (estimated INR4/kwh) while the sustained performance of the ferro alloys division aided profits further. Commissioning of pipeline capacities and a scale up in Zambia mines will boost earnings, going forward. Maintain ‘BUY’ with target price of INR290/share.

Adjusted PAT better than estimates
NBV’s standalone revenue at INR2.7bn was in line with our estimates of INR2.6bn though the adjusted PAT at INR684mn (INR33mn of forex losses) was better than our estimate of INR511mn. Power segment performance was robust on the back of a better‐than‐expected net merchant realisation of ~INR5/kwh during the quarter against our full year average estimate of INR4/unit. While costs for the Ferro alloy division have gone up, realizations have also increased 18% YoY to INR60K/t, improving the performance of the division. The management is guiding for a sale volume of 75KT of silico manganese and a 50KT conversion agreement with Tata steel.

Projects in pipeline on track
The under construction Orissa 64MW unit is expected to be synchronized in Q4FY13 post approval from the Orissa Power Transmission Company. Zambia coal mines have begun sale of high grade coal locally (sold ~6K tonnes, yielding PBT of @USD10/tonne in Q1) and are likely to scale up from 400KT in FY13 to 1MT by the end FY15. The older Orissa 64MW plant, which was under Section 11, has resumed operations and is selling ~20MW to GRIDCO and the balance on merchant (through the exchange).

Outlook and valuations: Near term trigger; maintain ‘BUY’
With the commissioning of Orissa 64MW project as the near term trigger and higher merchant prices tied up in the short term, we expect earnings to be firm. At CMP of INR191/share, the stock is trading at an attractive multiple of 7x and 6x FY13E and FY14E earnings respectively. Maintain ‘BUY’ with SOTP based TP of INR290/share.

To read report in detail: NAVABHARAT VENTURES