>PRAKASH INDUSTRIES: Story remains unhampered

We hosted a conference call with Vipul Agarwal, Director of Finance, Prakash Industries (PKI). The management of PKI has categorically denied any indulgence in illegal activities as mentioned in the Times of India (9th September 2010 issue) with regard to selling coal in the open market from the Chotia mines. The management ascertained that the whole news article was published with malafide intent and entire allegations are baseless. The management also clarified that the Chotia
mine does not fall in the Hasdeo Arand “No Go” region hence, the company can continue mining coal from it as per the approved mining plan.

■ Mining from Chotia mine to continue undeterred
The management ascertained that mining from the Chotia mine will continue undeterred. It has also applied for two more coal blocks viz Madanpur and Fatehpur, which are under the approval stage. If the approval for these mines is delayed, PKI has the option to continue mining additional coal from Chotia subject to the approval of mining plan from the concerned ministry.

■ Future growth prospects remain intact
The expansion plans of the company in the sponge iron as well as merchant power are progressing on time. The company also has applied for two iron ore and coal mines each. The approval for these mines is at various stages and PKI expects to start the iron ore mining from Sirkaguttu mine (with reserves of ~10mn tonnes) by March 2011 as it has got the approval for the mining plan. It is waiting for the forest clearance. The said mine is under the jurisdiction of State government hence PKI expects to obtain clearances sooner than the Kawardah mine which is subject to the Central government’s approval. Besides, Sirkaguttu mine does not have forest cover as well and hence, can be operational within two months after getting the requisite approvals.

■ Continue to recommend BUY with a reduced target price of INR220 to account for iron ore mining delays.
We believe that the rationalization of steel operations and the foray into merchant power would fuel PKI’s profit margins in the coming years. The iron ore mining once it becomes operational will boost the profitability of the steel business. PKI management has guided for the start of Sirkaguttu iron ore mine from March 2011. To factor in delays in the iron ore mining, we have reduced our estimates for FY11 as well as FY12. Considering the growth prospects in the steel business, foray
into merchant power business and the cheap valuations the stock is trading at, we continue to maintain BUY recommendation on the stock. However, we reduce our target price to INR220 in line with reduction in our estimates.

To read the full report: PRAKASH INDUSTRIES

>JK CEMENT: Taxing times; Quaterly Update

■ Higher tax rate squashes bottom line
The operating performance of JK Cement (JKC) was in line with our expectations, but the lower net profit (due to a higher effective tax rate) was 15.2% below our estimates. JKC reported a 21.8% YoY growth in revenues thanks largely to a strong expansion in volume due to the addition of new capacities. The EBIDTA margin has declined by 1,280 bps YoY to 17.2%. The PAT for the quarter weakened 58% YoY (32.8% QoQ) to INR295mn.

■ Higher volumes, white cement shield profitability
Volume (including both grey and white) increased by 22.0% YoY to 1.34mn tonnes but blended realizations for the quarter were down by 0.2% YoY (1.2% QoQ) to INR3,882 per tonne as compared to INR3,889 per tonne in Q1FY10 due to sales in the low price South Indian market.
However, higher proportion of white cement sales (17.2% in Q1FY11 vs 16.3%in Q1FY10) helped cushion a sharp fall in realizations. Rising overall cost pressures were visible during the quarter as the cost per tonne increased 18% YoY (1.3% QoQ) to INR 3,214 as compared to INR 2,724 in Q1FY10. The EBITDA per tonne stood at INR668 as compared to INR1,165 in Q1FY10.

■ Maintain BUY with a target price of INR220
Though we expect margins for cement companies to be under pressure in the medium term due to the cost push and a decline in cement prices, JKC earnings are likely to be (partially) supported by stable white cement prices and a strong volume growth. Besides, the company is also trading at a more than 50% discount to its replacement cost as well as its large cap peers. Thus we are maintaining our BUY rating on JK Cement with an unchanged target price of INR220.

To read the full report: JK CEMENT

>UFLEX: Packaging profits (ELARA CAPITAL)

■ Strong foothold in packaging market
Uflex is the largest flexible packaging company as well as the lowest cost producer of packaging products in India with a 19% share of the organized market. The company operates as a converter of packaging products with a presence in both the plastic film and flexible packaging business. The unique strength of Uflex is its vertically integrated operations, offering ‘end to end’ packaging solutions to marquee FMCG companies like Unilever, Nestle, P&G, Britannia and Fritolay among others. Thus it captures margins across the value chain – from plastic film production to flexi-pack conversion and to the final packing of a variety of FMCG products.

■ Ambitious expansion plans to become a global player
The company is planning to aggressively grow over FY10-12E with an investment of over USD250mn. Uflex will setup plastic film plants in Egypt, Mexico and Dubai and a flexi-pack plant in the state of J&K. This would enable it to increase capacity by nearly 65% in the plastic business and over 50% in the flexi-pack vertical. We expect the top line and the bottom-line to grow at a CAGR of 22% and 27% respectively, over FY10-13E. The company plans to raise INR2bn by way of right issue in the current year and over INR8bn of debt. We expect net debt
levels to reduce to 0.5x by FY13E from current 1.2x.

■ Steep cost efficiencies, changing business mix to widen margins
The company’s cost efficient raw material conversion play has been the biggest differentiator vis-à-vis peers. It’s conversion price, after attaching profit margins, remains the conversion cost of other global peers. Considering an equal EBITDA margin, Uflex price per kg is nearly 25% lower than international peers, leaving a significant headroom for it to attract large global clients. The company strategy to hike the contribution from flexi-packs to total revenues and to tap the
high margin world markets will play a key role in augmenting EBITDA margins by about 100bps.

Valuation
At the CMP, Uflex trades at a P/E of 4.5x and 3.5x FY11E and FY12E earnings respectively. We believe the stock will undergo a significant P/E expansion on account of its strong foothold in the
packaging market, aggressive growth plans and expectation of improving margins. We have assigned Uflex a target multiple of 6x on its FY12E earnings of INR31.6 per share that derives a per share value of INR190. We initiate the coverage with a BUY rating and a target price of INR190 per share, providing an upside potential of 73% from the current market price.

To read the full report: UFLEX

>HCC: Gearing up for a full fledged ‘Dasve’ launch by Dec’10; Lavasa visit

We recently visited Lavasa and returned impressed by the preparation for the full scale commercial launch of ‘Dasve’ by Dec’10. Lavasa Corporation Ltd (LCL) has already sold 1,850 apartments and villas till date spanning over 3.5mn sq ft and is confident of handing over keys to buyers by Mar’11 at the latest. The first set of 200 keys was handed over to the customers during Q4FY10. Phase I would have an additional 600 residential units, out of which the soft launch of 250- 300 units is expected to be announced over the next couple of months.

Among other significant developments since our last visit in Dec’09 have been formal launches of ‘Dasvino Town & Country Club’, 50 bed Apollo Hospital, 130 keys Mercure Hotel and an International Convention Centre (1,500 capacity). The Dasvino Town and Country Club has been established via a management agreement with International Leisure Consultants (ILC), Hong Kong and includes a Spa, Gymnasium, floodlit courts for tennis and squash, children’s playroom, specialty restaurants, a business lounge and a pub.

Lavasa listing on cards by Q1FY12
HCC had plans for a potential listing of LCL by Oct-Nov’10. However, given the volatile market conditions that are not conducive for realty IPOs, the same has been postponed to early 2011. The company presently holds a 65% stake in the entity via its wholly owned subsidiary, HCC Real Estate Ltd (HREL). Avantha Group, Venkateshwara Hatcheries and some large private investors together hold the remaining equity. Additionally, eight banks and financial institutions hold ~11% (at an EV of Rs100bn) in the company via DDCDs. We believe the eventful listing of Lavasa shall play a major role in determining HCC’s stock price performance over the next 12months. We retain our BUY recommendation on the stock with a SOTP based price target of INR170.

Lavasa valuation
As per our DCF calculation, LCL has a potential value of Rs57.7bn (~Rs123/share for HCC). While the company expects to execute the project over next 12-15 years, we have taken a longer execution period of ~20 years. We have also assigned a holding company discount of 20% to the final NAV of LCL. Key assumptions for Lavasa valuation are:

• We have assumed a sale model for the entire area available (~163 mn sqft) given the lack of clarity on the future revenue stream of SPVs; LCL though shall hold a strategic 26% stake in all commercial, hospitality, leisure and social SPVs thereby becoming a perpetual partner in their growth.
• We have taken a capital value at an average of Rs3,500/sqft for sale of residential development. For land/plot sales, we have assumed a rate of Rs100/sqft. From FY11 we have escalated capital values at ~10% CAGR.
• Construction cost at Rs1,800/sq ft, escalated at 5% CAGR fromFY12 onwards.

To read the full report: HCC

>HOSPITALITY (ELARA CAPITAL)

Room for more
■ Secular uptrend likely in tourist arrivals
With the economic revival on the anvil, we expect a mature uptrend of in-bound tourist arrivals to resume with CAGR of 7.7% for the next ten years. Interestingly, tourist arrivals had nosedived in 2001-02 before recovering and clocking a CAGR of 16.3% in 2003-08. It subsequently hit a trough in November 2008 as a result of the worsening global slowdown only to capitulate with the 26/11 terror attack. Now with a reversal in these trends, we anticipate the growth momentum to sustain.

■ Demand supply sweet-spot to repeat during 2012-15
We see the mismatch in demand-supply to reemerge in line with an economic revival and a delayed supply pipeline. Increase in repeat journeys and an extension in length of stay by guests would be the real multiplier of demand. Occupancy levels are set to rebound to 68%-72% while average room rates (ARRs) are set to spike to INR8700- 11200 in FY11E, driven by a reinforced economy. Growth in demand is seen across business as well as leisure destinations.

■ Spotting the winner
We find players with a significant supply addition and a diverse geographical spread during 2009-12 to be the biggest beneficiaries of the impending upturn. We also find the branded mid-market players to gain from the growing domestic tourism. IHCL emerges a clear winner with the spread increasing by 38% during 2010-12 across the country along with ‘Ginger’ to cater to value conscious guests. With a significant portion of their topline coming from overseas operations, IHCL is expected to benefit from a revival in the US and UK economies. Hotel Leela is also expected to reap benefits of new property launches, and its distributed geographical spread.

■ Valuation
We believe EV/room is a better measure to value hotel stocks as it captures the effects of a changing capital structure along with operating efficiencies on a per room basis. The EV/room valuation should be considered attractive with a significant upside when a player is available, cheaper than the average replacement cost of INR12-15mn per room, invested in the premium category and around INR6-8mn in the Four-Star category. Indian Hotels, our preferred bet, trades at an FY12E EV/room of INR9.6mn, EIH at INR18.3mn and Hotel Leela at an FY12E EV/room of INR25.7mn.

To read the full report: HOSPITALITY

>Asia tilts scales in global steel market (ELARA CAPITAL)

■ Global demand set to rebound from CY09 lows
Steel production worldwide is showing a steady revival after suffering a major setback in Q3CY08 due to the financial turmoil. Going ahead, we expect China and India to lead the demand growth for steel in CY10 and CY11. The World Steel Association (WSA) estimates the steel demand growth to be 12.4% in CY10, primarily driven by China with the developed world likely to register a muted expansion in demand.

■ Demand – supply balance seen in China and India
With the rising demand in the developing world, we expect the Chinese as well as the Indian mills to continue to operate at a healthy utilization levels of 85 – 90%. With no new large greenfield capacity visible in the near term, coupled with the fact that the Chinese regulations are compelling small and inefficient blast furnaces to shut down, we expect the Chinese and Indian steel markets to remain in balance. Although the developed world is expected to operate at 65 - 70% utilization levels, the high cost structure in those parts of the world makes the movement of steel into the developing world unviable at the current prices.

■ Steel prices to nudge upwards by 10-15%
We expect steel prices in the Chinese region to settle at least 10 – 15% higher, driven by the cost push factor as well as the market dynamics which indicate that steel markets in the region would remain in balance with little threat of overcapacity. We believe that steel prices in CY10 would settle at a higher level riding the following: (a) an increased cost of output thanks to higher contract price settlements for iron ore and coking coal (b) no oversupply scenario in the developing world and (c) a sustained higher cost of production in the developed world which nullifies the import threats from these regions (despite a lower capacity utilization level).

■ Valuation
Indian steel companies are likely to see benefits of firm steel prices and a no-surplus market in FY11 and FY12 despite the big capacity additions. We like the ‘volume story’ and expect large players with big expansions to benefit from the favorable steel pricing scenario. JSW Steel with its healthy volume increment remains our top pick as we believe that such a spurt in volumes would offset its lesser level of integration as compared to peers. We recommend a Sell / Switch on SAIL to JSW as we are circumspect of its ambitious expansion programme, the timeline and continuous upward revisions in its capex plan. We are neutral on Tata Steel and see an overhang of Corus on the consolidated performance.

To read the full report: INDIA STEEL

>JYOTI STRUCTURES LIMITED (ELARA CAPITAL)

Key Takeaways

■ In line with our expectations Net Sales for FY09 stood at Rs 1,717.1 crores (Elara estimate Rs 1717.3 crores) against Rs 1,370.4 crores in FY08 (up 25%).

■ The order book for the company as at end of FY09 stands at Rs 3,606 croes (2.1x FY09 sales) with new order intakes of Rs570 crores (2.1x FY09 sales) with new order intakes of Rs570 crores in Q4FY09 from PGCIL (Rs 247 crores) and Maharashtra State Electricity Distribution (Rs 323croes). Of the current order book 65% are for tranmission lines, Substations 15% and Rural Electrification 20%. The order book addition was subdued in the H2FY09 but we expect it to improve with order visibility of up to Rs 3,000 crores for the sector in next two months. JSL would also bid for orders worth Rs 1,300 - 1,500 crores internationally for Gulf Jyoti and JSL Africa.

To see full report: JYOTI STRUCTURES LIMITED

>Infosys Technologies (ELARA CAPITAL)

Key Highlights

Infosys today declared full year FY09 and Q4Fy09 results with consolidated income of Rs 21,693 crores (up 30.0% YoY0 and Rs 5,635 crores (down 2.65 QoQ and up 24.1% YoY) respectively. EBITDA of Rs 7,195 crores (up 37.4% YoY) and Rs 1,891 crores (down 6.9% QoQ and up 27.9% YoY) respectively, and PAT of Rs 5,988 crores (up 28.5% YoY0) and Rs 1,613 crores (down 1.7% QoQ and up 29.1% YoY) respectively.

* Negative Growth in Q4 FY09 Revenue was led by volume decline of 0.94% QoQ (decrease of 0.77% in offshore volumes and decrease o1.4% in onsite volumes), currency depreciation (INR/USD) of 4.1% QoQ qand pricing in constant currency terms declined 2.1% QoQ (decline of 3% in offshore and decline of 1% in onsite). The companies expects the pricing decline in the range of 6% - 6.5% in FY10.

* Operating Profit Margins for the full year FY09 improved 180 bps. The margins for Q4 FY09 increased 110 bps YoY but declined by 150 bps QoQ. The improvement was led by reduction in selling & marketing expenses and general & administrative expenses as a percentage of sales to 5.09% and 7.51% in FY09 against 5.49% and 7.97% in FY08.

* PAT margins for the full year FY09 were stable with an improvement of 20 bps. The margins for Q4 FY09 improved 70 bps with higher non-operating income of Rs 252 crores. The management expects a likely fall of 200 bps in the PAT margins. The Eps increases to Rs 104.6 for full year FY09 from Rs 8.15 in FY08, YoY growth of 28.4%.

To see full report: INFOSYS

>Strategy Note (ELARA CAPITAL)

Elara Strategy Note - March 2009

Fundamental View....

The impact of the global financial meltdown is now clearly visible on the healthy of majority of Indian companies with deceleration of both the top line and bottom line. Sales growth for many companies ia at record low levels with negative price and volume growth. The reported profits for the listed companies have declined by almost 20% by almost 20% in Q3 FY09. We expect poor numbers again in Q4 FY09 resulting in a lower than expected growth in FY09.

The revised Sensex earnings (post the constitutent changes in the index) have fallen 13% in Q3 FY09 hinting at poor pricing power with declining volumes.Reported profits are also down 11%. The TTM EPS is down to Rs 704 at the end of Q3 FY09 from Rs 809 as at Q2 FY09.

With expectations of decelerating revenue and profit numbers in Q4 FY09, we expect Sensex earnings to be below Rs 700 for FY09. At 8,600, Sensex is trading 12.3x TTM earnings. Considering the other emerging equity markets in the world, Indian equity markets look expensive on a PE basis. Given the increased correltaion of Indian markets with other global markets, Sensex is likely to see a downward bias.

To see full report: Strategy Note