>V-Guard Industries Ltd.: Launched induction cooktops and domestic switchgears in Kerala

 Management re-iterates 25% growth in revenues during FY13
V-Guard management has re-iterated guidance of 25% growth in revenues in FY13. Growth will come from across product categories. Management has indicated Non-South markets will grow at a higher pace as compared to the South markets in FY13. During Apr-May, 2012 it has witnessed descent growth which has further given it confidence to achieve its yearly guidance.


 OPM to be maintained at ~10% for FY13
The management has maintained its guidance of ~10% OPM for FY13. It had taken price hikes in March, 2012 (~3%) which will ensure margin maintenance. Also, as the company derives only ~6% of its revenues from imported products, it will not get significantly impacted due to the rupee depreciation and thus maintain its margins.


 Non-South India to contribute ~40% of revenues over next 4-5 years
V-Guard’s is looking to derive ~40% of its revenues from Non-South India markets over the next 4-5 years. It believes this can be achieved by increasing its dealer network and launching complete range of products in these geographies. Also, it is enhancing its team strength in these geographies which will enable it to further penetrate these markets


 New product launched in FY12 to do meaningful contribution only in next 4-5 years
V-Guard has launched induction cooktops and domestic switchgears in Kerala during FY12. The company plans to do a pan South India launch over the next 18-24 months. It also plans to introduce mixer-grinders by CY12. The management believes it will be able to leverage its brand and service capabilities to be able to enter the kitchen appliance market. It targets revenues of Rs 1bn from these businesses over the next 4-5 years. Manufacturing of all these products will be outsourced.


 Production: Outsourcing mix to remain similar
V-Guard manufactures its requirement of cables, LT cables and solar water heaters (SWH) in-house. It also manufactures ~10% of its pumps, fans and electric water heaters requirement. The other products such as stabilizers, UPS, DUPS are completely outsourced. On a blended basis, it manufactures ~40% of its sales. Management believes this ratio of manufacturing to outsourcing will continue to remain similar going ahead too.


 Working Capital cycle to reduce further
V-Guard is trying to reduce its working capital days by ~15-20 days in FY13. It will do so by engaging in supplier financing (similar to its peers such as Bajaj Electricals and Havells India). By engaging in supplier financing it will reduce its working capital requirement and thus generate free cash flows. Going ahead, the management expects to get ~60-70% of its supplier under this scheme.


 Outlook and valuation
V-Guard has been delivering robust growth over many years and now with increased focus on improving working capital; we believe its growth will be qualitative too. V-Guard is currently trading at a PER and EV/EBIDTA of 9.7x and 6.5x FY14E which is attractive given an earning CAGR of 19% during FY12-14. We continue to remain positive on the growth prospects of the company and the space in which it operates. Maintain BUY and price target of Rs266 (11x FY14E).


To read report in detail: V-Guard
RISH TRADER

>BANKING SECTOR: Corporate Debt Restructuring (CDR) picks up pace; serves as worrying lead indicator for non-CDR restructured assets

High interest rates, waning business confidence and subdued macroeconomic environment has precipitated increase in restructuring cases over the last couple of quarters. In Q2FY12, total cases referred under Corporate Debt Restructuring (CDR) increased to 19 vs. 16 in Q1FY12. The total CDR amount involved however, went up over 5x QoQ – from Rs56.7 bn to Rs288.9 bn in Q2FY12. Though Q2FY12 figure constitutes only 0.7% of total banking sector advances, the worrying aspect is that CDR may serve as a coincidental indicator for non-CDR cases. Over FY04-FY11, non-CDR restructuring has averaged ~5x the CDR amount. Total amount involved under CDR in H1FY12 was Rs345.6 bn, highest since last 8 years. Further looking at the pace of increase in CDR cases, total restructuring (CDR + Non CDR) is expected to put significant stress on the banking system.

CDR referral delays stress asset recognition and provisioning

Corporate Debt Restructuring (CDR) framework ensures timely and transparent mechanism for restructuring the corporate debts of viable entities facing problems, outside the purview of BIFR, DRT and other legal proceedings, for the benefit of all concerned. The scheme covers

• Only multiple banking accounts, syndication/consortium accounts, where all banks and institutions together have an outstanding aggregate exposure of Rs100 mn and above.
• Involves approval by super-majority of 75% creditors (by value) which makes it binding on the remaining 25% to fall in line with the majority decision.

Once a case is referred to CDR, a ‘standstill’ period of 90/180 days is revoked. Within the ‘standstill’ period, both the borrower and lender agree to keep things as they are (standstill) and commit themselves not to take recourse to any legal action during the period. ‘Standstill’ is necessary for enabling the CDR System to undertake the necessary debt restructuring exercise without any outside intervention, judicial or otherwise.

Due to the ‘standstill’ clause, the category of the asset continues to remain as it is in the books of the banks. This prevents banks from making additional provision on account of restructuring (for standard assets) and also help them ‘gain’ additional time period (in the form of standstill period) before the provisioning on restructured accounts hit their profitability.

The accounts of borrowers engaged in industrial activities (under CDR Mechanism, SME Debt Restructuring Mechanism and outside these mechanisms) continue to be classified in the existing asset classification category after restructuring. This benefit of retention of asset classification on restructuring is not available to the accounts of borrowers engaged in non-industrial activities except SME borrowers.

India banking restructured book set to expand

We undertook an exercise to analyze and gauge the cases being referred to CDR cell so as to get a sense on the medium term outlook of banking sector in India, which we believe is troublesome. Number of cases that has been referred to CDR has increased from 35 in the first half of FY12 as compared to 22 in the same period last year. Corresponding amount of loan referred has also increased to Rs345.6 bn in H1FY12 as compared to Rs51.8 bn in H1FY11. However, there is a one-off in H1FY12 due to the total debt of Rs226.2 bn of GTL group (Chennai Network India Limited, GTL Ltd and GTL Infrastructure). Excluding the total debt of GTL group, the total figure still stands at Rs119.4 bn, which is ~2x compared to last year.

In Q2FY12, total amount referred under CDR was Rs288.9 bn. We have tried to estimate the increase in restructuring by various banks in the coming quarters (see table below). Out of the above Rs288.9 bn, our analysis covers only Rs180 bn of debt due to lack of complete data, which is not public.

To read the full report: BANKING SECTOR

RISH TRADER

>INDIA CONSTRUCTION SECTOR: Concerns overdone; risk-reward ratio favourable

Strong order inflows, improved credit scenario and better execution capabilities are expected to accelerate revenue momentum for India construction sector in the coming quarters. We expect our coverage universe to report 16%/23% YoY growth in revenue for FY11/12 (8% in FY10).
With the recent correction, the risk-reward ratio for select construction companies has turned favourable, in our view. Revival in execution and pick-up in industrial/international orders will be the key triggers for construction companies in the near to medium term. Simplex Infrastructure (SINF) and Nagarjuna Construction (NJCC) are our top-picks in the sector with 20%+ potential upside from current levels.

Investment Highlights
■ Ordering opportunity for construction players pegged at US$109 bn between FY10-12E
We peg the ordering opportunity for construction companies at US$109 bn over the next two years led by acceleration in awarding of national highway projects and increasing opportunities in the power sector. Road/power/irrigation/railway sector are expected to contribute 40%/24%/14%/13% of the total orders.

■ Infrastructure investment robust despite slippages
Despite slippages in meeting target, infrastructure investment (ex-storage, oil & gas and telecom) has seen a 17% CAGR in the past five years. In FY10, infrastructure spending increased to US$69 bn or 5.8% of GDP (5.0% in FY04). As per revised projections, US$349 bn (ex-storage, oil & gas and telecom) is expected to be invested in the 11th Plan (US$170 bn in the 10th Plan), with private sector contribution expected at 25% (22% in the 10th Plan).

■ Strong order inflows in H2FY10 to accelerate revenue growth in H2FY11/FY12
Economic slowdown and general elections led to muted order inflows in H2FY09 and H1FY10. Order inflows, however, have picked-up since H2FY10 (up 74% YoY). Due to the back-ended nature of revenues, we expect our coverage universe (SINF, NJCC, IVRCL and HCC) to report a 16% YoY growth in revenues for FY11 (8% YoY growth in Q1FY11) and 23% YoY growth for FY12.

■ Risk-reward ratio favourable; SINF and NJCC our top-picks
After outperforming the broader markets during the pre-crisis period, construction stocks have been a consistent underperformer since May 2008. Against a 2% return generated by Sensex between May 2008 and August 2010, our coverage universe has delivered a negative 25% return.

With earnings momentum expected to pick-up in the coming quarters, select construction stocks are trading at attractive valuations (available at 9-12x our FY12 EPS). Within the construction space, we prefer SINF and NJCC due to their (1) diversified order book (2) better working capital position (3) conservative approach to BOT projects and (4) attractive valuations. We have valued construction companies based on SOTP methodology. For the core construction business, we have assigned earnings multiple in the range of 10-15x, based on certain quantitative and qualitative factors. The listed (unlisted) subsidiaries of construction companies are valued at 30% discount to CMP (1x book value). We initiate coverage on SINF, NJCC and IVRCL with a BUY rating and maintain our HOLD rating on HCC.

To read the full report: INDIA CONSTRUCTION SECTOR

>SANGHVI MOVERS LIMITED (IDBI CAPITAL)

SUMMARY

Sanghvi Movers Ltd. (SML), the fastest growing equipment company in the country has been adversely impacted by the economic slowdown. The negative global sentiment has led to core sectors going slow on fresh capital investments. Most companies have either delayed their projects or have cancelled them. However, we believe that the factors favoring SML far outweigh the concerns we have regarding the market.

We have revised our revenue and earning estimates to factor in lower rental yields due to the slowdown in demand, reduction in capacity additions, and contractions in margins from lower utilization.

We continue to maintain the rating as Outperformer as we believe that the factors favoring SML far outweigh the concerns we have regarding the market. At the reigning market price of Rs.178, the stock is trading at 10.3x its FY10E EPS of Rs.17.3 and 9.4x its FY11E EPS of Rs.19.0. We recommend 'Accumulate' with a target price of Rs.197.

INVESTMENT HIGHLIGHTS

■ Capex pruned due to slowdown in core sector activities
SML's fortunes are directly related to the infrastructure and industrial growth. It provides infrastructure support services to the core sectors, which include power, refining and petrochemicals, windmills, cement, steel, metro rail and many more.

The current global financial crisis has resulted in companies going slow on fresh capital investments. Many projects in the core sectors have either been delayed or have been cancelled. This has translated into lower utilization rates of cranes for SML. The company has accordingly curtailed its Capex plan from Rs.1,340m to Rs.600m in FY10.

■ Impressive clientele
SML’s services find applications in core and Infrastructure sector projects like Windmills, Refineries, Cement, Steel and Power sectors. Its top five customers list includes Suzlon, Reliance, Enercon, BHEL and Aditya Birla Group.

Currently Suzlon and BHEL source 70% of their total requirement from SML. The company has also remained a key partner of Enercon for the last 5 years.

Going forward, we believe that Capex planed by these organizations shall translate into strong demand for cranes.

To see full report: SANGHVI MOVERS LIMITED

>BGR ENERGY SYSTEMS LTD. (IDBI CAPITAL)

LEVERAGING GROWTH

Summary
BGR Energy Systems Ltd. (BGR) is all set to outperform in the medium term due to huge opportunities in the Power Sector for Balance of Plant Equipments (BOP), robust order book, diversified business model, technological collaborations, likely entry into boiler and turbine manufacturing space and strong balance sheet.

Going forward, BGR plans to cater to variety of clients by expanding existing facilities in India. We believe that the robust order book, diversified business model and technical collaborations with strong management team would help it maintain its revenue growth in the medium term. BGR raised a sum of Rs.3.37bn from equity issuances from private Equity and IPO last year to withstand large capital expansion and working capital needs for the ongoing projects.

At current market price the stock is quoting at 12.2x the FY10E EPS of Rs.25.3 and 9.4x FY11E EPS of Rs.33.0. We recommend ‘Accumulate’ with a target price of Rs.321.

Investment Highlights

■ Huge opportunity for BOP and EPC contracts in the 11th and 12th Plan
Government of India planned capacity additions of 78,577MW for 11th 5-year plan. Till today, around 91% of the projects are under construction. Despite continuous slippages in the last two 5-year plans, we believe that 45-50GW capacity additions look realistic in the 11th 5-year plan. In addition, the GoI would continue its thrust in the power sector and planned to add 82,200 MW in the 12th Plan.

■ Robust order book to lead a steep rise in revenue & profit growth
BGR has a robust order book of Rs.95bn with a majority of projects from the Power Projects division. The company has recently won large BOP and EPC orders of Rs 49bn from RRVUNL and Rs. 31bn from TNEB with an expected execution period of 3-4 years. As a result, the company's revenues and profits are also expected to pick up strongly in the next few years.

■ Diversified business model to enable BGR to de-risk business in the long term.
Though BGR's large order book consists of Central and State Utility orders, it diversified into Air fin Cooler and Oil and Gas Equipment businesses, which can become a major growth drivers in the next couple of years. The company also manufacturers related equipments and products through its divisions and associates. BGR is executing an EPC contract for 1200 MW for RRVUNL which was awarded on international competitive bidding.

■ Technical Collaborations & Strong management to grab large & complex projects
BGR has technological tie-ups with world leading Power Equipment companies for various products. The company is poised to execute power plants of sizes upto 1,000 MW using the latest technologies. The company has a strong management team with an average experience of more than 25 years. The company has also worked with reputed clients such APGENCO and RRVUNL & other SEBs.

To see full report: BGR ENERGY