>Bharat Petroleum Corporation

Positive GRM due to inventory gain…
Bharat Petroleum Corporation (BPCL) declared its quarterly results with revenues at | 54548.4 crore (our estimate: | 62925.3 crore) and a loss of | 8836.8 crore (our estimated loss: | 1541.9 crore). The reason for such a huge loss was no government compensation towards gross under recovery incurred in Q1FY13. BPCL had a net under-recovery of | 7944 crore during Q1FY13. We expect gross under-recoveries at ~| 1,86,142 crore and ~| 1,98,100 crore in FY13E and FY14E, respectively (our assumption for the exchange rate is | 54/dollar and Brent crude oil is $110/barrel). We expect the net under-recovery of BPCL to be at | 2315.4 crore and | 2383.1 crore in FY13E and FY14E, respectively, while revising our assumption of the share of downstream companies to 5% of gross under-recovery. We recommend a BUY rating on the stock with a price target of | 401.

􀂃 GRM surprise
The company reported a positive GRM of $2.6/barrel in Q1FY13, much better than its OMC peers, HPCL and IOCL, which reported negative GRMs. The positive GRM was mainly on account of inventory gain of | 130 crore. We estimate GRMs at $4.1/barrel for FY13E and FY14E, respectively.

􀂃 E&P story intact
The recent discovery at Atum (10-30 tcf of recoverable gas resources) in Mozambique by the BPCL-Anadarko consortium, in addition to exploration success at Golfinho and Prosperidade Complex, adds great value to the company. The consortium expects gas production in Mozambique to start in 2018. We have valued the Rovuma basin (Mozambique) at | 143.8/share and BM-C-30, Campos Basin (Brazil) at | 22.8/share. We recommend a BUY rating on the stock with a price target of | 401 (valuation based on average of P/BV multiple: | 411 per share and P/E multiple: | 390 per share).

>NIIT Ltd

WHAT’S CHANGED…
PRICE TARGET........................................................................... Changed from | 44 to | 37
EPS (FY13E)............................................................................. Changed from | 7.2 to | 6.6
EPS (FY14E)............................................................................. Changed from | 8.3 to | 6.7
RATING...............................................................................................................Unchanged

ILS weakness to continue…
We spoke with the management of NIIT Ltd to understand the industry trends and execution strategy. Earlier, NIIT reported its Q1FY13 numbers, which were below our estimates. Revenues came in at | 228 crore vs. our | 244.1 crore estimate led by a slowdown in the ILS business. Reported EBITDA of | 11.4 crore (5% margin) missed our | 27.3 crore (11.2%) estimate by a wide margin. PAT (including associate profit) of | 11.5 crore (core operations loss of | 2.3 crore) was also lower than our | 20.3 crore (| 9.8 crore) estimate despite the company having a tax provision reversal of | 34.1 crore related to Element K divestiture. The current backdrop of macroeconomic uncertainties and deferred IT-ITeS hiring influences our estimates and our HOLD rating.

ILS segment slowing down
A weakening economy and deferred IT-ITeS hiring led to ILS (66% of the total revenues) declining 11% YoY to | 107.4 crore. IT training enrolments declined 13% YoY. EBITDA declined by | 8.8 crore YoY led by cost overruns (| 6.6 crore), adverse revenue mix (| 1 crore), cost inflation (| 5.1 crore) partly offset by cost optimisation initiatives (| 3.9 crore). For the full year FY13E, the management commentary suggests ILS revenues could decline ~4-8% while EBITDA margins could fall by 500 bps from16.1% in FY12.

CLS & SLS outlook
The management indicated that the CLS business could grow 20% YoY on a continuing basis (excluding Element K contribution) led by ~40% growth in managed training services (MTS, 72% of CLS) while EBITDA margins could come in at around 10%. The SLS business is expected to be flat YoY as the company transitions from government schools to non government schools. Margins are expected to be around 9-10%.

Reducing estimates but maintain HOLD
We have adjusted our numbers to account for the weakness in the ILS business. We expect revenues and PAT to decline 13.7% and 10%, respectively, in FY13E and grow 10% and 2.2% in FY14E, respectively. We continue to value NIIT on an SOTP basis with a target EV/EBITDA multiple of 1.8x on our CY13E EBITDA to account for the current ILS slowdown and refilling of Element K revenues that remains crucial.

>OPTO CIRCUITS: 1QFY13 Result Update

WHAT’S CHANGED…
PRICE TARGET………………………………………………………………Unchanged
EPS (FY12E)……………………………………………...Changed from | 22.9 to | 24.2
EPS (FY13E)…………………………………………………………………Unchanged
RATING……………………………………………………………………...Unchanged

Performance intact amid rating concerns.…
Opto Circuits’ Q1FY13 results were above our expectations. Revenues grew 36% YoY to | 715 crore, higher than our estimates of | 643 crore on the back of 1) 38.3% growth in the medical equipment & consumables segment, 2) 34% growth in the interventional devices segment and 3) favourable currency. After a sharp decline in Q4FY12, EBITDA margins normalised during the quarter. On a YoY basis, however, EBITDA margins declined 30 bps to 27.9%, higher than our estimates of 26.5%. The effective tax rate increased by 440 bps to 9.1%, which restricted net profit growth to 26.3% at | 147.0 crore. We are maintaining our BUY rating on the stock, although we will keep a watch on Crisil’s credit rating due in September amid the Icra rating downgrade confusion.

Non-invasive segment grows 18% on constant currency basis
Revenues from the non-invasive segment grew 38% to | 583.5 crore on the back of new tenders, resumption of distribution of Powerheart AEDs in Japan and favourable currency. The invasive segment also registered healthy growth of 34% YoY to | 126 crore on the back of improved presence in geographies like China & Indonesia and favourable currency.

My Sense Heart device launch to be in current fiscal
The company is planning to launch a wearable Holter cardiac monitor MySense Heart device in the US market by the end of Q3FY13, for which it had received USFDA approval. It is also in discussions with some retail chains to market this product in the US. It is planning to set up a back end office, which is used for analysing the data from those machines.

Concerns regarding WC, ratings likely to wane, remain lightweight
We expect sales, EBITDA and PAT to grow at a CAGR of 22%, 20% and 18% (adjusted net profit base for FY12), respectively, in FY12-14E. Improvement in working capital management, which was visible in Q4, was reflected in Q1 as well, vindicating the progress on that front. New
product launches in various geographies are expected to keep the growth momentum going. The shift of production to Vishakhapatnam and Malaysia is expected to compensate the pressure on margins on account of R&D charges to P&L henceforth. We have ascribed a value of | 256, based on 9x FY14E EPS of | 28.5. We maintain our BUY recommendation with a lightweight bias.


RISH TRADER

>ITC LIMITED: Ban on gutkha to aid cigarette volumes

FMCG losses declining; margins improve…


ITC’s Q1FY13 results were in line with our estimates with earnings witnessing growth of 20.2%. Cigarettes volume growth was flat on the back of ~15% price hike following the ~20% excise duty hike in the 2012 Budget. Based on our reverse calculations (through excise duty) we
believe there is a marginal de-growth in cigarette volumes. However, we expect cigarettes volumes to pick up in the rest of the year as the ban on Gutkha and Pan in six states would result in a shift in consumption from other tobacco products to cigarettes. FMCG revenues also witnessed 23% increase YoY led by 11-13% volume growth and ~10% price hike in selected products. We expect ITC to take further price hike in cigarettes in H2FY13E and break-even in FMCG business by FY14E; driving revenue and earnings growth, going forward. Maintain HOLD.


FMCG losses slide; cigarette volumes dip
In Q1FY13, FMCG losses declined ~50% YoY on the back of considerable price rise hikes and strong volume growth. However, cigarette volumes were flat due to ~15% increase in prices. We believe that cigarette margins improved led by a dip in raw tobacco prices. Agri business’s
earnings improved 16% YoY led by currency gains from export of raw tobacco. Hotel business earnings were down 50% due to an increase in operating expenditure after the commencement of Chennai property.


Ban on gutkha to aid cigarette volumes
Six state governments have already banned gutkha and pan masala. We believe other state governments would follow suit and implement the ban under the COTPA act. We believe this would shift consumption from other tobacco product to cigarettes hence driving ITC’s volume growth.


Continues to command 2x premium to Nifty
The stock is trading at a 120% premium to the Nifty compared to the historic average of 70% on PE multiples. With strong growth in the FMCG business and sustained margins in the cigarettes business, we believe ITC would continue to command this premium. We have valued the stock on an SOTP basis and maintained our target price of | 270 with HOLD rating.

>EXIDE INDUSTRIES LIMITED

WHAT’S CHANGED…
PRICE TARGET....................................................................................................Unchanged
EPS (FY13E)............................................................................. Changed from | 7.3 to | 7.7
EPS (FY14E)............................................................................. Changed from | 9.4 to | 9.5
RATING....................................................................................... Changed from Hold to Buy


Revenue growth a positive surprise…
Exide Industries’ (EIL) Q1FY13 results were far ahead of estimates on topline led by strong industrial and two-wheeler volumes. EBIDTA margin (excluding forex loss) came above our expectations. We have modified our revenue estimates considering the better than expected industrial/two-wheeler replacement growth. We expect the recent lead price fall to stabilise at ~$1.9/kg & | depreciation to get arrested in medium term thereby aiding margin expansion. It seems the right time to upgrade multiple for EIL as the underperformance (since last six quarters) is near its end with performance improving as in line with earlier
management commentary. We maintain BUY with upgraded TP of | 149.


Handsome volume growth; higher margins
EIL’s revenue surged ~25% YoY to | 1551 crore (up ~7.3% QoQ) driven by volume growth in the automotive replacement and industrial battery segments. The two-wheeler battery segment grew at 28% YoY in Q1FY13 to register ~3.9 million units on the back of strong replacement sales. In the four-wheeler segment, sales grew modestly at ~10% YoY at ~2.4 million units. Industrial sales remained strong with 19% growth. EBITDA margins, thus, came in at 15.6% (excluding forex loss of | 10.3 crore), which is ~100 bps higher QoQ) but lower than its historical average of ~18%. EIL declared PAT of | 152 crore (higher by 6.6% QoQ).


Automotive replacement, industrial drivers to lead growth
The industrial battery segment, which now contributes ~45% of total revenue, is expected to grow at 15-16% in FY13-14E. Home UPS segment is expected to record robust numbers in FY13E. We have emphasised for long about a strong two-wheeler replacement cycle expected to kick in FY13E that seems to have set in. We believe automotive growth would be replacement driven. EIL had announced a price hike of 2.5% in June for automotive batteries and is expected to hold prices in the near term alleviating any concerns on price wars in short term.


Re-rating in-sight as “battery king”
EIL has started gaining back lost market share in the replacement market. We believe the margin profile is improving, thereby leading to higher RoEs leading to our multiple upgrade. We value the stock on an SOTP basis with core business at | 133, valuing other subsidiaries/investments at | 16/share to arrive at a TP of | 149. Maintain BUY.


To read report in detail: EIL

>Bajaj Finserv Ltd

WHAT’S CHANGED…
PRICE TARGET....................................................................................................Unchanged
RATING...............................................................................................................Unchanged


Income, profit both up 51% YoY…
Bajaj Finserv continued its strong profitability trend with consolidated PAT of | 195 crore surging 51% YoY for Q1FY12. Considering the slower quarter, the PBIT performance has been strong for both insurance businesses. Retail financing also delivered profit growth of 53% to | 139 crore. The windmill business also exhibited profitability strength growing 33% to | 17 crore at the PBT level. Consolidated return ratios remained strong with ~30% RoE.


We maintain our HOLD rating on the stock with SoTP target price of | 716, considering it is a direct play on the insurance sector and NBFC. All subsidiaries contributing to quarterly performance


Consolidated gross revenues increased 12% YoY to | 3252 crore while consolidated income from operations jumped 51% to | 927 crore. Due to a 12% dip in GWP from life insurance and strong 22% jump in general insurance GWP, revenue growth was slower while income was higher as PBT of life and general insurance remained strong in Q1FY13. The finance business has growth rapidly with AUM growth of 60% YoY to | 14485 crore while profit grew a strong | 139 crore. On a segmental basis, it contributed 50% of Q1FY13 consolidated PBT. Plans for fund raising by Q3FY13 of ~| 750 crore for Bajaj Finance and | 500 crore (vs. | 1000 crore approved) for Bajaj Finserv have been incorporated in estimates.

RISH TRADER

>SHIPPING SECTOR JULY 2012: Update on Baltic Dry Index (BDI) & Dirty Tanker Index (BDTI)

• The Baltic Dry Index (BDI) improved marginally by 8% MoM and is currently inching upwards. The rates have consolidated during the month. However, China’s iron ore inventory remained at an elevated level, which continues to put pressure on the index. The Capesize index continued its negative trend and is down by 10% due to lower Chinese imports of iron ore from Brazil. The Baltic Supramax index rebounded strongly, increasing 21% over its previous month, compared to a decline of 6% in the month before


• The Dirty Tanker Index (BDTI) continued its slump and declined 5% MoM while the Clean Tanker Index also followed the weak trend and was down 7% MoM. The VLCC day rate fell significantly by 57% MoM and has been the worst sufferer in the segment. Suezmax rates fell 23% after making a comeback in May.
However, Aframax freight rates continued to rise (up 17% MoM) providing some relief to owners


• LPG freight rates improved marginally by 2% MoM in the higher end category and displayed a negligible fall in the medium carrier segment


• Utilisation levels for drill ships, semi-subs and jack-ups were at 91%, 91% and 83%, respectively, in June 2012 Outlook


Dry bulkers
Dry bulk rates, which suffered largely in May recovered this month albeit at a slow pace. China iron ore imports increased 11% on an MoM basis providing some relief to rates. The expansionary monetary policy followed by the People’s Bank of China to ramp up the economy is acting as an important factor for demand growth. Its impact on freight rates needs to be seen over the coming months. However, due to dry bulk carrier’s fleet capacity build up with H1CY12 net addition of 40 million dwt and another gross addition of 80 million dwt expected in H2CY12, which is approximately 12% of the total dead weight tonnage capacity in the dry bulk category, any significant upside is highly unlikely.


Tankers
Large tonnage tanker freight continues to suffer with rates dipping below the operating levels denting the margins of the owners significantly. Oil inventory in the US is already at a high level and strategic stock piling of China is happening according to its defined pace. Any significant change in these parameters can seriously ruin the hopes of revival in tanker freight rates. The geopolitical crisis in Iran continues to plague the segment as a drop in oil supplies impacts demand arising from the region.


LPG carriers
LPG rates remain stable with a marginal improvement over the previous month. Large segment vessels showed some strengthening of rates whereas middle segment rates remained mixed.


Offshore vessels
Offshore vessels continued to have high utilisation levels. Continued spending by major global oil exploration/drilling companies led to higher utilisation of offshore vessels.


To read report in detail: SHIPPING SECTOR


RISH TRADER

>HAVELLS INDIA LIMITED: New product launch to aid future growth…

We met the management of Havells India Ltd (HIL) to get an insight into the business model and future plans. Established in 1983, HIL is a leading Indian electrical manufacturer focused on products including switchgear, cables and wires, consumer durable, lighting and fixtures. Havells enjoys market dominance across a wide spectrum of products, including domestic & industrial switchgear, cables & wires, motors, fans, modular switches, home appliances, electric water heaters, CFL lamps and luminaries. The company has focused on developing strong distributor relationships and operates through over 5,000 dealers and more than 1,00,000 retailers across India. HIL further plans to add ~700-800 dealers per annum to increase its dealer base.


Strong segment performance
Havells is well positioned in the organised switchgear market with the segment comprising domestic switchgears mainly miniature circuit breakers (MCB), modular switchgear and LV industrial switchgear (market share of 28%, 15% and 6%, respectively). Standalone revenue from the switchgear segment has grown at a CAGR of 13% in the last five years. In the domestic cable segment, HIL manufactures underground cables and wires with a market share of 9% with the segment’s revenues growing at a CAGR of 15% in the last five years. Under the lighting and fixtures segment, the company operates in the energy saving lamps (CFL) and luminaries markets (with market share of 11%). Revenues from this segment grew at a CAGR of 18% in the last five years.


Focus to expand consumer durables segment
In the fan industry, HIL has significantly increased its market share by gaining over 14% with revenue CAGR of 24% in the last five years. Consumer durable division sales were supported by new appliances launched during the year with growth in water heater sales. Havells’ advertisement expenses have increased at a CAGR of 16% during FY10- 12 mainly due to the creation of strong brands in the consumer durables segment. Further, HIL is expected to keep promotion & advertisement expenses at ~2-3% of sales, going forward, to promote its new launches.


View
HIL has been one of the well known players in the Indian branded electrical product space. The company’s standalone revenue has grown at ~24% CAGR over the last three years, supported by strong performance by consumer durable and lighting & fixtures segments. In addition, improvement in Sylvania’s performance in FY12 (PAT growth of 46% YoY) & entry into new product categories in the consumer durables segment will support revenue and profitability growth, going forward.


To read report in detail: HIL
RISH TRADER

>TELECOM: No easy solution to the spectrum row

Uncertainty continues...
With only about two months remaining for the August 31, 2012 Supreme Court (SC) deadline of conducting the spectrum auction, things are pretty uncertain right now as the industry tries to reach a consensus on various contentious issues pertaining to reserve price of 2G spectrum, spectrum re-farming, one-time spectrum charges, spectrum liberalisation, etc. Also, the auctioneer for conducting the auction has not been finalised as yet. Even the presidential reference, through which the government was going to ask for SC’s advice on crucial matters relating to cancellation of licenses, is pending. To make matters worse, the EGoM on spectrum pricing has been left in a limbo with Pranab Mukherjee resigning from government to contest the presidential election. We believe it may be very difficult to meet the August 31 deadline. Moreover, no easy solution to the spectrum row is in sight since various stakeholders are acting from different view points.


Reserve price undecided…
Trai had come up with a pan-India reserve price of | 3622 crore for 1 MHz of spectrum. DoT, correcting Trai, has increased the reserve price to | 4245 crore. While the operators have protested against such a huge reserve price arguing that it could result in a tariff hike of 24-90 paisa, Trai is of the opinion that such a reserve price would only lead to a tariff hike of 3-6 paisa. Eventually, the Empowered Group of Ministers (EGoM) is going to decide on the reserve price. New operators will be hugely affected by huge reserve price as DB Etisalat, STel and Loop (excluding Mumbai) have decided to shut down their operations while Uninor and SSTL have made it clear that they would not participate in the auctions should the EGoM accept Trai’s recommendations on the reserve price.


Incumbents to pay prospectively…but how much?
Another uncertainty prevalent in the industry is whether operators should be charged one-time spectrum fees over the remaining life of the license to liberalise the spectrum or should it be liberalised as and when licenses come up for renewal. Also, the government is unclear on the amount of spectrum beyond which one-time spectrum fees should be imposed. According to media reports, it is evaluating three options to impose one time spectrum fees viz. 1) on the entire spectrum held by an operator, 2)beyond start-up spectrum of 4.4 MHz for GSM and 2.5 MHz for CDMA and 3) beyond contractual spectrum of 6.2 MHz for GSM and 5 MHz for CDMA. However, the liberalisation would happen only after the operator pays the auction discovered price of the spectrum it holds.


Valuation
Until further clarity emerges on the situation, we rate Bharti and Idea (due to a sharp correction in the stock) as BUY and RCom as HOLD in spite of the correction in the stock, due to higher sensitivity to regulatory risks.

>Pantaloon Retail (India) Ltd

WHAT’S CHANGED…
PRICE TARGET....................................................................................................Unchanged
EPS (FY12E)........................................................................................................Unchanged
EPS (FY13E)........................................................................................................Unchanged
RATING........................................................................................Changed from Hold to Sell


Mission “debt reduction” continues!


We met the management of Pantaloon Retail Ltd (PRIL) to get an insight into the impact of the series of announcements focusing on debt reduction and also to understand the company’s strategy, going forward. While the Street was expecting the stake sale in Future Capital, the news on the stake sale in the flagship ‘Pantaloon’ format came as a surprise. Debt reduction continues to remain the key focus at the helm. However, the management is disheartened (yet not losing hope) about the subdued consumer sentiment. Some of the key triggers for the Indian retail sector remain – rolling out of goods & services tax (GST) and opening up of the multi-brand retail sector to foreign direct investment (FDI).


Addressing the mountain of debt
PRIL was facing the double trouble of inventory pile-up and rising debt levels. The management, being consciously aware of this, had clearly stated their intent of addressing these concerns. The company started to make announcements one after the other from early May 2012. Going by what has been announced, we expect PRIL’s debt to remain in the range
of | 3,400 – 3,600 crore (excluding the insurance stake sale). Cautious on space addition plans; could be revised on demand revival PRIL has, in the recent past, lowered its space addition guidance from 2.0-2.5 million sq ft to 1.5 million sq ft considering the slowdown in demand and abysmally low same store sales growth. This step is also being taken to curtail the piling inventory. However, the management has also guided that this target could be revised upwards in case there is a turnaround in consumer sentiment.


Valuation
The stock has witnessed a significant up move on the back of the series of news announcements relating to debt reduction. However, we are maintaining our target price and will the revise the same (if necessary) after monitoring the performance of the company, going forward. A revival in demand and improvement of consumer sentiment will also warrant an upwards earnings revision. We have valued PRIL at 0.6x FY13E EV/sales (based on 20% discount to Shoppers Stop) to arrive at a target price of | 148. Any investors holding the stock can book profits at current levels and consider re-entering the stock on any fall.

>Allcargo Global Logistics: Buyback announced…

The Board of Directors of Allcargo Logistics Ltd at its meeting held on June 20, 2012 has approved the buyback of equity shares of the company under the open market mechanism at a price not exceeding | 142.5 setting aside a consideration of not more than | 75 crore for such a buyback. If the company utilises the entire | 75 crore on buying back shares, the equity base would reduce by ~ 4%. The company does not have an aggressive capex plan for FY13E, which could be one of the reasons for the company to go for a buyback in this year. The buyback limits the downside of the stock price and shows the confidence of the

promoter in the company’s operations. However, it does not impact the fundamentals of the company and such a low quantum of buyback is unlikely to generate investor’s interest.

􀂃 Outlook

The new CFS facility at JNPT with a capacity of 1,00,000 TEUs is expected to be operational by the end of July. In the CFS business, the company experienced a slowdown in terms of volumes in Q4FY12. However, in April, it experienced a rebound and volumes are back to pre-January levels. The project and engineering division has an order book of ~ | 300 crore for the next 12-18 months. The company is yet to take a decision on the way in which the demerger of the NVOCC segment will take place.

Valuation

At the current price of | 130, the stock is trading at a P/E multiple of 6.5x FY13E EPS of | 17.2. We believe the demerger of the NVOCC segment would be positive for the company. We have revised our estimates and lowered our P/E multiple to factor in the global slowdown and its impact on the company’s business. We recommend a HOLD rating on the stock with a target price of | 138, 8.0x FY13E EPS.

RISH TRADER

>Siyaram Silk Mills Limited

Suited for growth…
We met the management of Siyaram Silk Mills Ltd (Siyaram) to understand the company’s business and its plans, going forward. Siyaram, a mid-segment textile player, commenced operations in 1978. The company, promoted by the Poddar group (comprising companies like Balkrishna Tyres and Siyaram Silk Mills), started off as a fabric manufacturer and later forward integrated into ready-made garment manufacturing. The fabric segment (primarily polyester blended fabrics) comprises ~80% of the total turnover. The current fabric capacity stands at 50 million metre and the company plans to add another 22.5 million metre over the next two to three years. Siyaram has strong brands like Siyaram, MiStair, J Hampstead, MSD, Oxemberg, Featherz and Little Champ in its portfolio. Over the years, the company has improved its operational performance significantly (the operating margin improved from 8.0% in FY09 to 12.1% in FY12) and has been able to increase the return on equity from single digits to over 20%. Also, considering that the company is a textile player having its own manufacturing facilities, the leverage at sub 1.0x seems quite comfortable.


Healthy improvement in operational performance
Over the years, Siyaram has managed to increase the operating margin from ~8% in FY09 to 12.1% in FY12. This has been possible on the back of lower fixed expenses (branding costs, employee costs, etc). Also, an increasing share of ready-made garments (currently ~15% of sales) has aided this margin expansion.


Strong brand portfolio
On the back of strong branding efforts undertaken by the company, Siyaram has been able to build a strong portfolio of brands. Siyaram (the flagship brand contributing ~50% to sales), MiStair and Featherz are its fabric related brands. Even in the ready-made garments segment, the company has built strong brands like Oxemberg, MSD and J Hamsptead. Comfortably leveraged and healthy return ratios Siyaram is comfortably leveraged with the debt to equity standing at 0.8x (FY12E). The company has a conservative approach towards capacity addition and associated leveraging. Hence, Siyaram has lower debt/equity ratio as compared to its peers. Also, with improving operational performance and better utilisation of enhanced capacities, the company’s return ratios are commendable.


View
At the CMP, the stock is trading at a P/E of 4.3x (FY12 EPS – | 60.5) and 0.9x FY12 book value of | 285.0. Considering the healthy financials and a strong presence in the Tier II and III cities, we believe Siyaram can be a beneficiary of growing rural incomes.

>MONETARY POLICY UPDATE (JUNE 2012)

Maintains status quo as indicated in April policy…
No major announcement or indications on future stance were made as June policy is a mid-quarter review. Repo rate, CRR were kept unchanged as per their earlier indications but led to market disappointment as consensus of 25 bps cut in repo rate had been built aggressively in prices. 10 year Gsec yields also reacted negatively with new series rising 7 bps to 8.14%.


Extending some relief to exporters, there was an easing of the limit of export credit refinance from 15% to 50% of outstanding export credit of banks. This will release | 300 billion of liquidity, thought to be equivalent to a 50 bps CRR cut. However, the benefit will not flow to all banks equally but more to large export credit exposure banks. A CRR cut would have had a positive rub-off on all banks.


Under this refinance window, banks can borrow at repo rates under LAF as announced from time to time. Hence incremental borrowing cost on these funds will be lower by 100-150 bps. Refer Exhibit 3.

RBI has maintained its stance - inflation remains critical. It stated that… ‘Assessment of the current growth-inflation dynamic is that there are several factors responsible for the slowdown in activity, particularly in investment, with the role of interest rates being relatively small.


Consequently, a further reduction in policy interest rate at this juncture, rather than supporting growth, could exacerbate inflationary pressures.’ ‘Estimates suggest that real effective bank lending interest rates, though positive, remain comparatively lower than the levels seen during the high growth phase of 2003-08. This suggests that factors other than interest rates are contributing more significantly to the growth slowdown.’


We expect the RBI to make major policy announcements in its July policy meet with respect to revised GDP growth and inflation projections along with change in policy interest rates, if any.



Monetary/Liquidity Measures Announced
 No change in cash reserve ratio (CRR) of scheduled banks at 4.75% of their NDTL


 Policy repo rate under the liquidity adjustment facility (LAF) unchanged at 8.0%


 The reverse repo rate remains unchanged at 7%, and MSF rate and the Bank Rate at 9%


For augmenting liquidity and increase credit flow to the export sector, RBI increased the limit of export credit refinance from 15% of outstanding export credit of banks to 50%, potentially releasing additional liquidity of over Rs.300 billion, equivalent to about 50bps reduction in the CRR.

>MERCATOR LINES: Expenses on the damaged vessel and higher dry docking

WHAT’S CHANGED…


PRICE TARGET……………………………………………….Changed from | 34 to | 18
EPS (FY13E)............................................................................. Changed from | 4.6 to | 1.3
EPS (FY14E)………………………………………………………….Introduced at | 2.3
RATING……………………………………………………………………...Unchanged


Slide in operating margin continues…
Mercator Lines (Mercator) reported a below estimate performance on both the revenue and profitability front. On a QoQ basis, revenues declined 7% to | 1019.5 crore (I-direct estimate: | 1122.6 crore) mainly on account of lower realisation of coal and lower fleet utilisation of its
shipping and dredging fleet. In spite of a 5% increase in coal volumes to 2.29 million tonnes, coal revenues declined due to a decline in coal realisation by 10% QoQ to | 3000 per tonne. EBITDA declined 31% to | 115.9 crore (I-direct estimate: | 178.3 crore) due to a 410 bps decline in EBITDA margin to 11.4%. The decline in EBITDA margin can be mainly attributed to lower fleet utilisation and higher repairs and dry dock expenses. One of Mercator’s tankers, which had met with an accident in December 2011, has not been operational and two dredgers were under dry docking during the quarter. Expenses on the damaged vessel and
higher dry docking expense on dredgers has led to the decline in EBITDA margin. In spite of an extraordinary gain on forex to the tune of | 30.08 crore, lower EBITDA generation and higher interest cost (up 10.7% to | 59.5 crore) led to Mercator reporting a net loss of | 24.3 crore.


Lower fleet utilisation impacts revenues and EBITDA margin
During Q4FY12, two dredgers of Mercator were dry docked while one tanker was not operational as it had met with an accident in December 2011 leading to low fleet utilisation. Mercator now operates 18 dry bulk carriers, eight tankers, seven dredgers, one MOPU and one FSO.


Valuation
Considering the significant ramp up in coal trading volumes (low margin business) and pressure on margin in the shipping segment, we expect the EBITDA margin to decline from 15.8% in FY12E to 13.4% in FY14E. Consequently, we have revised downward our EPS estimates for FY13E from | 4.6 to |1.3. We have valued the stock at a 45% discount to global
average of 0.3x at 0.18x FY14E book value of | 101 to arrive at a price target of | 18. We recommend a HOLD rating on the stock. Existing investors can also hold the stock.


To read report in detail: MERCATOR LINES


RISH TRADER

>GMR INFRASTRUCTURE

Power, airport segment drag bottomline…
In Q4FY12, GMR Infrastructure (GMR) reported net losses that were higher on account of poor power (due to lower PLF, forex losses for loans of Homeland Energy, etc.) and airport segment performance (cash basis accounting of NACIL, one time charges at DIAL, incentives at SGIA and one time interest on DF). During the quarter, DIAL was also granted a 352% tariff hike on aero charges wef May 15, 2012. As a result, DIAL is expected to break even at the net profit level in FY13. With the anticipation of better profitability for DIAL and attractive valuation (0.7x P/BV), we have upgraded it to BUY with a price target of | 23.


Higher losses due to poor power segment performance, one-offs…
GMR’s net sales declined by 0.7% to | 1948.3 crore in Q4FY12 owing to poor power segment performance on account of lower PLF. The EBITDA came at 13.8% vs. our estimate of 25.5% mainly on account of forex losses of | 79.7 crore (mainly attributed to restatement of foreign currency loans amounting for Homeland Energy), poor performance of DIAL and lower EBITDA of power plants. Consequently, GMR reported a loss of | 366.2 crore due to lower EBITDA, higher interest expenses and one-time interest on loans against development fund of | 162.1 crore as the same was disallowed by AERA as a regulated asset base.


Tariff hike order received… granting hike of 352% on Aero charges
Recently, GMR received approval for DIAL tariff hike of ~352% from May 15, 2012, which was largely on account of losses incurred during the first three years of regulatory period (April 1, 2009 to March 31, 2014). As a result, DIAL’s losses are expected to get wiped off in FY13E and the management expects DIAL to break even at the bottomline level during the same year.


Valuation
While the power segment is expected to remain a drag, airport is expected to report profitability in coming quarters. At the CMP, the stock is currently trading at an attractive valuation of 0.7x P/BV. Additionally, the stock has corrected ~37% since our last HOLD recommendation. Hence, we have upgraded it to BUY recommendation with a price target of | 23 based on our SOTP based valuation methodology. Lack of fuel for the power projects remains a key risk to our call.


To read report in detail: GMR INFRASTRUCTURE
RISH TRADER

>PTC INDIA

Balance sheet woes receding…


PTC India reported a volume decline of 16% YoY, which was below our expectations of 13% YoY growth. Hence, the volumes traded in Q4FY12 stood at 4.4 billion units (BUs) (I-direct estimate: 5.9 BUs). Muted volume growth in Q4FY12 led to a flattish volume growth performance in FY12 at 24.3 BUs. Calculated trading margins for the quarter stood at 8.7 paisa owing to recovery of surcharge from Bihar and Jharkhand SEBs to the tune of | 15 crore. Otherwise, normalised trading margins came in at 4.7 paisa for Q4FY12.


■ Volatility in short term markets leads to flattish FY12
Short-term volumes declined 28% YoY in Q4FY12, which led to 16 decline in the overall traded volumes for Q4FY12. However, a pick-up in long term volumes (up 43% YoY) provides encouraging signs that volatility in volumes, going ahead, will be limited as PTC expects 580 MW and 3164 MW worth of long term arrangements to fructify in FY13E and FY14E, respectively. Though this will lead to some decline in margins, it will ensure steady volume growth for the company. We have built in volumes of 28.8 BUs and 36.5 BUs in FY13E and FY14E, respectively.


■ Uptick in payments from SEB to gradually improve perception risk UPPCL and TNEB owe ~| 1900 crore to PTC. Out of these, PTC has received | 150 crore from | 750 crore due from TNEB while the remainder will be paid by Q1FY13, as per the management. Even payments from UPPCL are expected to commence in H1FY13. This, we believe, will lead to a decline in the perception risk that PTC was facing with respect to non payment of dues. Also, during Q4FY12, PTC has repaid all working capital loans.


Valuation
Commencement of payments from SEBs will improve sentiments and outlook towards the stock as clearing of loans will lead to interest cost savings in FY13E and FY14E. Hence, we have revised the earnings by 22% and 25% for FY13E and FY14E, respectively. We have revised our target price to | 68 per share (from | 62 earlier).

RISH TRADER

>JET AIRWAYS: Q4FY12 results

WHAT’S CHANGED…
PRICE TARGET....................................................................................................Unchanged
EPS (FY13E)............................................................................................................... -| 159
EPS (FY14E)............................................................................................................... -| 125
RATING....................................................................................... Changed from Buy to Hold


Earnings in line but challenges remain…
Jet Airways’ (JAL) Q4FY12 results were better than our expectations at operating levels. Its topline growth remained more or less in line with our estimates. Capacity reduction by other private carriers helped the company to improve load factors and yields especially in the domestic segment despite operating in the lean business season compared to the last quarter (i.e. Q3FY12). As a result, its revenue and market share both increased by 2.4% and 280 bps, sequentially. The company reported an operating revenue of | 4578 crore vs. estimated revenue of | 4680 crore. However, higher domestic fuel prices and weak rupee led to operating loss of | 55.2 crore and | 40 crore for Jet’s domestic segment and JetLite, respectively. On the other hand, the international segment’s performance remained healthy and it reported operating profit of | 182 crore. This, in turn, led to net consolidated operating profit of | 86 crore for the quarter vs. our estimated net operating loss of | 77.1 crore. However, at the PAT level, JAL reported a net loss of | 354 crore vs. | 196.5 crore last year due to higher depreciation & interest costs. Going ahead, we believe, operating environment for the company will continue to remain challenging in the wake of higher fuel prices & depreciating rupee despite growth in revenues. Hence, we downgrade our rating to HOLD from BUY.


 ■  Fuel, weak rupee dent margin despite better topline growth
Fuel prices and rupee depreciation continued to remain a cause for concern during this quarter as ATF prices have increased by 5.7% QoQ and the rupee continued to slide further on a sequential basis. As a result, the company was unable to improve its profitability despite better growth in total revenues.


Valuations
We believe revenue growth would moderate as a rise in fleet supply by other players poses risk, going forward. We expect FY12-14E revenue CAGR of 14% vs. revenue CAGR of 18% during FY10-12. Also, we believe the operating environment will continue to remain challenging in the wake of higher fuel prices and a depreciating rupee in the near term. Hence, we have downgraded our rating from BUY to HOLD and maintain our target price of | 330 (i.e. 0.7x FY14E EV/Sales). A near term upside risk includes positive policy reforms like allowing 49% FDI by foreign carriers. However, that would mainly be sentimental.

RISH TRADER

>SUN TV: Q4FY12 results

WHAT’S CHANGED…
Price Target ........................................................................... Changed from | 348 to | 300
EPS (FY12E)......................................................................... Changed from | 20.5 to | 18.8
EPS (FY13E)..........................................................................................Introduced at | 22.1
RATING...............................................................................................................Unchanged


Slowing economy darkens Sun…
Sun TV reported its Q4FY12 results, which were in line with our estimates. The topline stood at | 427.0 crore representing de-growth of 7.3% YoY as the topline for Q4FY11 was inflated by a one-time revenue from the movie Endhiran. Ad revenues de grew by 9.5% to | 234.0 crore
owing to the slowdown in the economy and fall in the TRPs of the channels. EBITDA for the quarter stood at | 328.2 crore against our estimate of | 330.7 crore. The EBITDA margin stood at 76.9% contracting by 216 bps YoY due to higher other expenses. The PAT stood at | 159.0
crore against our expectation of | 165.1 crore. In light of a continuous decline in TRPs, which will pressurise ad revenues, going forward, we have cut our revenue/PAT estimates for FY13 by 0.4%/8.4%, respectively. We continue to rate the stock as BUY with a target price of | 300.


Declining TRPs
The quarter was marked by a decline in the TRPs of the channels once again owing to competition from Arasu Cable, which has not carried Sun TV channels as yet and a power crisis in South Indian states. The management has indicated that talks with Arasu Cable have reached a final stage and a deal could be struck anytime soon. This is expected to address the decline in TRPs.


Ad revenue de-grows again
Ad revenues continued to de-grow for the second straight quarter due to a decline in TRPs and a challenging macroeconomic environment. Though a decline in TRPs is expected to be arrested soon, the macroeconomic environment is expected to remain challenging. We have
factored in a 13.3% and 14.8% growth of ad revenue for FY13 and FY14, respectively, in our calculations.


Valuations
We have valued the stock at 16x FY13E EPS and arrived at a target price of | 300, implying an upside of 20% from the CMP. The political pressure may have an overhang on the stock. We continue to rate Sun TV as BUY.

RISH TRADER

>CONTAINER CORPORATION OF INDIA

Operating margins decline…
Container Corporation (Concor) reported its Q4FY12 numbers with a topline of | 1071.1 crore and PAT of | 227.1 crore. Revenues, which grew 7.6% YoY, were marginally above our estimates mainly on account of better-than-expected Exim (| 843.3 crore vs. expected | 833.6 crore) and domestic sales (| 227.8 crore vs. exp. | 206.7 crore). Exim volumes stood at 535575 TEUs, exhibiting a 3.4% YoY increase while domestic volumes of 124907 TEUs continued to exhibit a downward trend by declining by 10.4% YoY. Domestic volumes have reduced considerably since the sharp hikes in haulage charges on certain commodities and due to private players chipping away at Concor’s market share. The EBITDA margin of 20.9% in Q4FY12 contracted by 251 bps due to yearend discounts, higher other expenses on account of break van charges paid to Railways and higher empty running cost. Other income grew 49.3% YoY due to higher interest income, increased number of auctions to clear old containers and dividend payment from JV partners.


Outlook for Concor
Concor’s FY12 Exim volumes increased 5.8% while domestic volumes decreased 13.9% due to a change in rail haulage structure and competition from private companies. Going forward, we expect 8% and 6.3% CAGR in Exim and domestic volumes, respectively, factoring in inclusion of pig iron and sponge iron in notified commodities. We expect lower EBITDA margins of 23.5% and 23.6% in FY13E and FY14E, respectively


Valuation
Concor maintains its market leadership and has the strongest balance sheet among its logistics peers. However, privatisation of container haulage has put pressure on its operating margin and put its market dominance at risk. We recommend a BUY rating on the stock based on 13x FY14 EPS with a target price of | 994.

RISH TRADER