>GATI LIMITED

Valuation & Recommendation
We had initiated coverage on the company on 29th May 2012 with a price target of Rs.46 after which the stock touched a high of Rs.45. Post discussion with the management; we have altered interest rate projections in our model for FY13E. Interest burden for FY13E now comes to ~ Rs.44 crore (earlier Rs.25 crore). The company is partly paying the debt and utilizing the rest for working capital needs and up gradation of infrastructure in the express division.

We believe worst is over for the company and we can expect revival in its core business of express distribution. In addition, its loss making shipping business is also expected to get into profits in FY13E. Stock remains subdued due to concerns in the overall economy and Gati’s shipping business which made heavy losses in FY12. We believe any signs of improvement in these two factors should see momentum in the stock price. At CMP, the stock is trading at 10.6x itsFY13E and we remain positive about the prospects of the company.

Company Overview
Gati Ltd is India’s largest express distribution and supply chain (EDSC) company operating through a fleet of more than 4000 vehicles and 64 Distribution Warehouses. Apart from the surface express, the company also operates in the supply chain management, freighter and coast to coast shipping businesses. Recently, Company has formed a Joint venture with a Japanese Company KWE and has transferred its EDSC business and a debt of Rs 330 crs to the JV Company Gati Kinetsu Express Private Limited wherein Gati Ltd. would hold 70% of the holding. KWE would be investing Rs 267 crore in this joint venture.

Gati Ltd enjoys early entrant benefits and is the leader in the express distribution segment which includes movement of goods in the commercial segment catering to the Auto, Consumer Durables, Telecom and Technology sector. Within the EDSC segment, Road transport consists of almost 80% means of business, the rest being equal between Rail and Air. In the rail segment, Gati runs 7 dedicated parcel trains on long term lease from railways.

EDSC is the core business of the company and historically has grown at a CAGR of 20-25% yearly. However, with the slowing economy the growth of this segment was lower at ~ 9% in FY12. However, with synergies with KWE JV unfolding and addition of focus on the SME sector as well, the company expects this division to grow over a CAGR of 15% during FY12-FY15 period. Moreover, the company expects implementation of GST and Postal Bill to boost the logistics industry.

Kausar India (cold chain division which was acquired in 2007) grew by 33% in FY12 to Rs.40 crore. Company has plans to expand the fleet size from the current 162 to 350 by 2015. Cold Chain industry is estimated to be growing at a CAGR of 20-25% and is receiving sector friendly policies from the government.

To read report in detail: GATI LIMITED

>RICOH INDIA LIMITED

Ricoh India Limited is owned by Ricoh company Limited Japan with 73.6% holding in the company. Ricoh Company Japan is a global leader in sophisticated office solutions. The company deals in wide array of products includes copiers, multifunctional and other printers, facsimiles, duplicators and related consumables and services, as well as digital cameras and advanced electronic devices. Ricoh Japan is number one in the global A3 MFP (Multi Function Printers) and operates in around 180 countries. Ricoh Japan has global sales of $24.14 bn and market capitalization of $6.05bn.

The strong parentage of Ricoh Japan is an assurance for the launch of innovative products and with new found focus in Indian operation will drive the top-line growth going forward.
Renewed focus of Ricoh Japan in India

Ricoh Japan is operating since 1993 in India but had remained low profile till recent past. In last year Ricoh has become more aggressive with new product launches, expansion of distribution network and brand building. The impact of same is also visible in FY12 and Q1FY13 financial performance where the revenue has grown by 45% and 56% respectively.

Ricoh Japan has renewed its focus on Indian market and this delisting process could be part of the overall strategy.

To read report in detail: RICOH INDIA
RISH TRADER

>ALLAHBAD BANK

Restructured book to remain a cause of worry

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

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

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

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

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

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

RISH TRADER

>PI INDUSTRIES LTD

Results in-line with expectations
PI Industries reported Revenue of Rs 239.2 cr for the quarter, a growth of 15.8% YoY. Custom Synthesis Manufacturing (CSM) continued to outperform, with 55% YoY volume growth. Agri Inputs witnessed volume de-growth on account of adverse agro-climatic conditions and a high base effect. The volume de-growth was compensated by recently taken price hikes, leading to flattish growth for the Agri business.


Management has maintained its growth outlook of 30% for FY13 on the back of planned new product launches, higher off-take from existing products and scaling up of CSM business & commissioning of Jambusar plant. With monsoon deficit improving and sowing picking up, coupled with new product launched and existing products doing well, Q2 FY13 is expected to perform well.


Key Highlights
 Margins improved on account of improving product mix and higher operating leverage. EBITDA margins were 20.6% in the quarter as compared to 19.8% in Q1FY12 and 15.9% in Q4FY12. Management expects margins to improve by about 100 bps in FY13 over FY12.


 CSM continues to do well, with the CSM order book standing at ~$310 mn i.e. 4.4 times of FY12 CSM revenues, providing revenue visibility for the segment. Further scaling up of exports (CSM) business to happen via (a) higher volumes of newly commercialized products (b) additional facilities via Jambusar SEZ which is expected to be commissioned in Q2 FY13.


 Good traction is expected from planned introduction of new products. The company has launched one new in-licensed product towards the end of the quarter. It has planned three more product launches in FY13. Together these products would drive growth for the company’s domestic business.


 On account of weak monsoon, the company is cautious on pushing of inventory into the channel and is focused on working capital management.


Valuation & Recommendation
We believe that with factors like being a recognized player in the CSM segment, sustained order book with increasing margins and low per-capita pesticides consumption that provides opportunities for growth, PI Industries has a good future. At CMP, the stock trades at attractive valuations of 10.4x FY13E and 7.5x FY14E. Based on FY13E EPS of Rs 46.6, we have a target price of Rs 605, a potential upside of 26% from current levels. We continue to maintain our BUY rating on the stock.




RISH TRADER

>TVS Motor Company

Volumes to remain under pressure; We Retain Sell


TVS Motor Company reported better-than-expected performance for 1QFY13, as higher- than-expected net sales and lower tax outgo fuelled earnings growth which beat our estimate by 16%. Net sales for the quarter were up by ~ Rs2bn on account of: (1) Revised volumes of 5,47,000 units, which included ~30,000 units despatched to the company’s distribution arm, which were over and above the monthly sales which the company reported, (2) Rise in realisation due to price hikes. On the profitability front, the EBITDA margin for the quarter was down 80bps YoY and 20bps QoQ to 5.9%, largely on account of the rise in input costs and employee costs, which increased 37bps and 21bps QoQ, respectively. However, the EBITDA margin of 5.9% was in line with our estimate of 6.0%. Reported PAT of Rs511mn was more than our estimate of Rs439mn, purely on account of higher net sales and lower tax outgo (22.7% versus our expectation of 25.0%). In the wake of lower exports and domestic sales in 1QFY13, we have revised our assumptions. We have cut our volume/sales/earnings for FY13E by 3.7%/3.5%/5.1% and by 3.2%/2.9%/4.1% for FY14E, respectively. We retain our Sell rating on the stock with a revised target price of Rs36 from Rs38 earlier (8.5x FY14E EPS of Rs4.3, adjusted for losses of Indonesian arm). 


Net sales up due to revised volume: Net sales at Rs18.2bn were 13% ahead of our estimate on account of revised volume and the rise in realisation. For the quarter, the company reported monthly volume of 5.47,000 units which was ~30,000 higher than the numbers reported earlier, with the variance mainly on account of 30,000 units dispatched to the distribution. Apart from this, the company went for a price hike in 1QFY13 , which resulted in higher realisation. The company also went for another price hike in July 2012. The price hikes in 1QFY13 and 2QFY13 combined work out to ~1.2%. 


EBITDA margin in line with estimate: EBITDA margin for the quarter was down 80bps YoY and 20bps QoQ at 5.9%, in line with our estimate of 6.0%. The drop in EBITDA margin was largely on account of the rise in raw material and employee costs, which increased 37bps and 21bps QoQ, respectively. Absolute EBITDA at Rs1,075mn was 11% higher than our estimate due to higher net sales. PAT driven by higher sales and lower tax outgo: The company reported PAT of Rs511mn versus our expectation of Rs439mn, with the variance of 16% largely on account of higher net sales and lower tax outgo. Tax rate at 22.7% was 230bps below our estimate of 25.0%. 


We trim earnings estimates for FY13E/FY14E, retain Sell rating: We have cut our volume/sales/earnings estimates for FY13E by 3.7%/3.5%/5.1% and by 3.2%/2.9%/4.1% for FY14E to factor in slowing domestic two-wheeler demand and exports weakening in 1QFY13. Due to challenging environment and reduced earnings visibility we retain our Sell rating on the stock with a revised target price of Rs36 (8.5x FY14E EPS of Rs4.3, adjusted for losses of Indonesian arm)



We cut our volume, earnings estimates
We have cut our standalone earnings estimates for FY13E/FY14E in the wake of slowing demand for two- wheelers. Further, exports in 1QFY13 de-grew by 15.4% YoY following lower exports to Sri Lanka. We have cut our export estimates for FY13E/FY14E by 15.2%/7.6% to 0.26mn and 0.31mn units, respectively. In the domestic market, competition in the two-wheeler segment intensified further with the launch of new products by competitors; the company has also planned two new launches in FY13 - launch of a new motorcycle in 2QFY13 and a scooter in 2HFY13. Following intense competition, lower exports and slowing domestic demand, we have cut our volume estimates for FY13E/FY14E by 3.7%/3.2%, respectively. Due to the cut in our volume estimates, our revised earnings estimates are lower by 5.1%/4.1% for FY13E/FY14E, respectively. We retain our Sell rating on the stock with a revised target price of Rs36 (8.5x FY14E EPS of Rs 4.3, adjusted for losses of Indonesian arm ) from Rs38 earlier.


Key highlights of our interaction with the company’s management
 Currently, three-wheeler exports to Sri Lanka are less than 200 units per month.
 Company has exported 3,000 two-wheelers to Sri Lanka during 1QFY13.
 It has not gone for any price cuts in Sri Lanka so far.
 Company has hiked product prices in 1QFY13 and also in July 2012, totally amounting to 1.2%.
 It will launch a new motorcycle in 2QFY12 and a scooter in 2HFY13.
 1QFY13 sales numbers reported in the company’s press release included sales of 538,000 two-wheelers and 9,200 three-wheelers.
 The management has given capex guidance of Rs1.25bn-Rs1.5bn for FY13E.
 Losses of the Indonesian arm are coming down.
 Investment in subsidiaries will be minimal in FY13 as the investment cycle is over.
 The management expects exports to revive in 2HFY13.




RISH TRADER

>BATA INDIA

Sales Growth Below Estimate; Downgrade To Hold 


Revenue growth of Bata India (BIL) slowed to 17% in 2QCY12 compared to 30.6%/22.6% in 1QCY12/CY11, respectively, at Rs5,065mn, 4.1% lower than our estimate. It seems BIL was geared up for slower growth, which is visible from the fact that inventory days reduced to 96 in 2QCY12 from 102/108 in 2QCY11/CY11, respectively. Following buoyant performance in CY11/1QCY12, the stock price increased 42.9% over the past six months. Third quarter is generally a weak quarter for BIL due to the monsoon season. In such a scenario further re-rating seems difficult until BIL resumes its earlier growth trajectory. Following limited upside from current levels, we downgrade the stock to Hold from Buy. We maintain our estimates and the TP of Rs1,008 based on 16x CY13 EV/EBITDA. 


Slower pace of growth: BIL opened 108/145/61 stores in CY10/CY11/1QCY12, which drove its revenue up by 22.6%/30.6% in CY11/1QCY12, respectively. Compared to 68/145 new outlets in 1HCY11/CY11, BIL has opened over 100 outlets in 1HCY12. However, with high base and lower demand, tentatively due to the monsoon season as per the management, revenue growth moderated to 17% in 2QCY12. Inventory days increased to 108 in CY11 from 99 in CY10 on account of lower demand and aggressive expansion in 4QCY11. However, BIL appears to be prepared for lower growth which can be seen from the fact that inventory days reduced to 96 in 2QCY12 from 102/108 in 2QCY11/CY11, respectively. We expect the valuation to be capped until BIL resumes its high-growth trajectory. BIL incurred a capex of Rs34mn in 1HCY12, mainly to increase retail outlets. 


Better gross margin drove operating margin: BIL witnessed a drop in gross margin from 3QCY11 to 1QCY12, and even after that it was able to report better operating margin due to lower employee costs. However, with a better product mix, BIL was able to improve its gross margin by 99bps to 51.5% in 2QCY12, which led to a 86bps increase in operating margin. Following aggressive expansion, lease rent as a percentage of sales increased by 213/186bps to 10.6%/9.1% in 1QCY12/1HCY12, respectively. It would be difficult for BIL to improve operating margin from the current levels if the pace of revenue growth moderates in 2HCY12. 


Valuation: We expect the valuation of BIL, which trades at CY13E P/E of 23.5x and EV/EBITDA of 14.3x, to be capped until revenue growth resumes its earlier trajectory.
RISH TRADER

>BHEL

Performance Likely To Moderate 


Bharat Heavy Electricals (BHEL) reported revenue of Rs83.3bn for 1QFY13, up 16.9% YoY and 9.5%/6.4% higher than our/Bloomberg consensus estimates, respectively. However, we believe the pace of order execution may not sustain in the coming quarters with a declining order book, subdued order placement activity and possible delay from the clients’ side owing to structural issues in the power sector. Consequently, we maintain our revenue estimates for FY13E/FY14E. Driven by higher revenue, EBITDA/PAT were higher than our estimates by 7.9%/8.6%, respectively, but margins were largely in line with our estimates. EBITDA grew 17.8% YoY to Rs10.9bn, translating to an operating margin of 13.1%, 20bps lower than our estimate of 13.3%. PAT registered 12.9% YoY growth at Rs9.2bn, resulting in a net profit margin of 11.1%, in line with our estimate. Consequently, we maintain our view of sharp erosion in profitability for BHEL over FY12-14E. We retain our Hold rating on the stock with a target price of Rs221 based on 9xFY14E EPS. 


Order intake to remain weak: Procedural delays on account of land acquisition, fuel linkage and environment/forest clearance continued to hamper order placement activity in the power sector. For the quarter, BHEL reported order inflow of only Rs56bn (weak order intake in four out of the past five quarters) leading to order backlog of Rs1,329bn, 13.3% lower YoY. BHEL is yet to be awarded orders worth Rs93.8bn by NTPC through its bulk tenders. Although the management reiterated its order inflow guidance of Rs600bn for FY13E, we are factoring in order inflow assumption of Rs450bn as we expect the policy paralysis in the power sector to continue. 


Margin compression likely: We expect a sharp erosion in profitability for BHEL over FY12-14E due to pricing pressure in the BTG (boiler, turbine and generator) space owing to dual impact of oversupply and weak demand. The industry segment is also beginning to witness softening margins as it registered a 160bps YoY decline in operating margin to 21% for the quarter. Consequently, we expect BHEL’s operating margin to fall 160bps/150bps YoY in FY13E/FY14E to 17.7%/16.2%, respectively. 


Outlook and Valuation: BHEL is unlikely to sustain its revenue growth traction on such a high base, considering the subdued order placement activity. Also, compression in operating margin is likely to lead to earnings CAGR decline of 7.9% over FY12-14E. However, we believe the recent correction in its stock price factors in these negatives. At Rs212, BHEL trades at 8.0x/8.6x FY13E/FY14E earnings, respectively, compared to average PE of 16x over the past 10 years and least PE of 7.9x/6.5x over the past 6/10 years, respectively. We value the stock at 9xFY14E EPS of Rs24.6 with a target price of Rs221 and retain our Hold rating on it.



RISH TRADER

>STERLITE INDUSTRIES: Expansion update

Sterlite Industries India’s (SIIL) 1QFY13 EBITDA was 5%/7% below our/street estimates, while PAT was 1%/5% above our/street estimates, respectively, due to higher other income and lower tax despite being hit by forex loss. Power segment posted a strong performance, while other segments like aluminium, zinc and copper witnessed minor pressure. SIIL will witness multiple expansion projects getting commissioned in the next one year, which would ensure healthy growth. We retain our Buy rating, earning estimates as well as the TP on SIIL of Rs138. Our TP is based on the combined entity, Sesa-Sterlite’s valuation. 


Power segment gives a positive surprise, aluminium and copper drags: Driven by lower costs due to higher power generation and better coal availability, the power segment was able to post EBITDA margin of 37.6% versus 32.4% in 4QFY12 and 27.0% in 1QFY12. Power realisation per unit increased 1% QoQ, while costs/unit dropped 6% QoQ. Aluminium segment, particularly BALCO, continued to witness high costs to the tune of 17% YoY and 7% QoQ in rupee terms due to tapering of coal linkage and higher costs of alumina due to low grade of bauxite. Copper segment also disappointed due to lower Tc/Rc margin and higher production costs. 


Expansion update: BALCO is likely to start metal tapping operations at its 325,000tn smelter from 3QFY13 onwards, while the first 300MW unit of its 1,200MW power plant is set for synchronisation in 2QFY13 (deferred by a quarter). SEL’s fourth unit is under trial run and the same is likely to start commercial power generation in 2QFY13. After getting environmental clearance, SIIL is looking at obtaining stage-II forest clearance for 211mt BALCO coal block, but we expect a major delay. Talwandi Sabo plant is progressing well and its first unit of 660MW is set to be synchronised at the end of 4QFY13, although we expect a delay of 3-6 months. SIIL has indicated that the new expansion plan for HZL is being prepared and would be presented in due course. 


Other highlights: SIIL started an additional 700MW power transmission capacity in 1QFY13, while, it expects to commission another 1,000MW transmission capacity by 4QFY13, taking the total capacity to 2,850MW. SIIL has responded to Coal India’s offer of supplying pit-stock inventory (logistics arrangements have to be made by the buyer) at the administered price. It expects 2-3mt of additional coal from this route.


To read report in detail: SIIL

>YES BANK

Continues to impress with yet another quarter of strong results
Yes Bank’s reported PAT of Rs.290.1 cr in Q1FY13 resulting in a growth of 34.3% on a YoY basis and 6.7% on QoQ basis.


 Loan book growth moderates
Yes Bank loan book grew at 16.4% YoY and 1.4% on a QoQ basis in Q1FY13. Total Customer Assets (Loans + Credit Substitutes) grew by 32.4% to Rs 49,340 cr in Q1FY13. The bank expects to grow ~30-35% in its total customer assets. We have factored in growth of 34.5% for customer assets in FY13E and 25.7% in FY14E.


 CASA momentum continues
CASA deposits increased by 71.5% YoY and 10.5% QoQ to Rs 8,170 cr taking the CASA ratio to 16.3% in Q1FY13 up from 10.9% in Q1FY12. The Bank continues to witness increased traction in CASA on the back of enhanced Savings Rate offering and improvements in productivity. We expect CASA ratio to be at 17.5% and 18.4% in FY13E and FY14E.


 Cost to income ratio remains elevated
The bank added 25 new branches and added approximately 540 employees in Q1FY12 which resulted in higher operating expenses. The cost to income ratio stood fairly stable at 39.5% in Q1FY13 as compared to 39.8% in Q4FY12 and broadly within the Management’s targeted levels. We expect cost to income ratio to be at 39.3% and 39.2% for FY13E and FY14E.


 Non- interest income continues to impress
Non Interest Income grew a whopping 74.3% YoY and 8.2% QoQ to Rs 288.1 cr in Q1FY13. Financial Markets increased almost 2.5x to Rs 95 crs which has been the highest level since Q1FY10 primarily due to Rs 30 cr of treasury gain. Management does not expect these levels of growth to be sustainable going forward. We expect non-interest income to grow 29.7% and 27.3% for FY13E and FY14E.


 Asset quality remains stable
Gross NPA increased 30.6% QoQ to Rs.109.5 Cr in the quarter ended June 2012. Gross NPAs and Net NPAs stood at 0.28% & 0.06%, respectively as on June 2012. The bank’s restructured assets stood at 0.51% of gross advances at Rs 196.5 cr in Q1FY13. Provisioning coverage ratio of the bank (including technical write off) stood at 78.3% in Q1FY13. We expect Gross NPAs to be at 0.39% and 0.42% for FY13E and FY14E and Net NPAs to be at 0.07% and 0.08% for FY13E and FY14E.


To read report in detail: YES BANK


RISH TRADER

>JSW STEEL: Resolution of iron ore crisis on the horizon

Resolution of iron ore crisis on the horizon: JSW Steel has indicated that a sizeable number of mines had their reclamation and rehabilitation (R&R) plans approved and these mines should start production in the next one-two months. Though we believe it may take three-four months to start production, JSW Steel has built in sufficient amount of inventory to take care of its needs in the interim period. 


Operational performance remains strong: JSW Steel achieved 27% YoY and 4% QoQ jump in steel production due to higher utilisation. The company posted a 4% QoQ surge in realisation, which helped it to achieve a 17% QoQ jump in EBITDA/tn. Overall, the company was able to achieve 33% YoY and 1% QoQ (4QFY12 had an exceptional gain of US$36mn made by the US subsidiary) jump in consolidated EBITDA. 


Performance update of subsidiary and associate companies: US operations reported EBITDA of US$6.4mn in 1QFY13 compared to US$3.6mn in 1QFY12. The Chilean subsidiary reported EBITDA of US$8.5mn compared to US$12.7mn in 1QFY12 and US$0.9mn in 4QFY12. JSW Ispat reported EBITDA of Rs4,490mn compared to Rs2,907mn in 4QFY12. In calculating the profit of associate companies, JSW Steel has not considered deferred tax credit and therefore it reported a loss of Rs1,496mn despite JSW Ispat reporting a profit of Rs4,782mn during the quarter.


To read report in detail: JSW STEEL

>HINDALCO INDUSTRIES

The Devil Is In The Details, We retain Sell 


Hindalco’s FY12 consolidated EBITDA was 4.6% above our expectation at Rs81,894mn, while PAT was 23.8% above our estimate largely due to lower tax rate and higher EBITDA. PBT was 12% higher than our estimate, while the effective tax rate for the year stood at 18.1% as compared to our estimate of 20.8% and last year’s tax rate of 25.1%. Besides this, there was a substantial increase in the leverage, with consolidated net debt/equity jumping from 0.73x to 1.02x due to increased capex as well as rupee transactions of foreign subsidiaries in a falling currency environment. A detailed analysis reveals that FY12 PAT and EBITDA has been overstated by Rs12,775mn and Rs15,512mn with the company routing certain expenses through reserves and surplus and booking some prior period income during the year. We continue to retain our Sell rating with a target price of Rs107 on Hindalco. 


Routing costs through business reconstruction reserve: Hindalco had created business reconstruction reserve (BRR) in FY09 for adjustment of certain specified expenses. During FY12, it booked Rs5,363mn of other expenses from this reserve. Consequently, tax expense was higher by Rs359mn and PAT was up by Rs5,005mn. 


Actuarial gains/losses accounted for in balance sheet rather than P&L account: With effect from FY12, the company changed its accounting policy in respect of gains/losses arising out of actuarial valuation of long-term employee benefits and post-employment benefits relating to one of its overseas subsidiaries (Novelis). Until FY11, the actuarial gains/losses were accounted for in the P&L account, but following the change in the accounting policy these gains/losses along with related deferred tax were adjusted against reserves and surplus. As a result, employee expenses were lower by Rs10,149mn, tax expenses higher by Rs2,999mn, net profit higher by Rs7,150mn and reserves and surplus higher by Rs444mn. 


Prior period income: Following exceptional circumstances, the accounts of Idea Cellular, an associate company of Hindalco, were not available for FY11. The consolidated accounts for FY12 include Rs620mn as Hindalco’s share of profits made by Idea Cellular in FY11, thereby leading to FY12 PAT being higher by the said amount. 


Balance sheet update: Consolidated net debt in FY12 increased from Rs213bn to Rs327bn, while standalone net debt rose from Rs36bn to Rs93bn. Standalone net fixed assets increased from Rs136bn to Rs234bn, largely driven by the capex on Utkal refinery and Mahan/Aditya aluminium units in FY12, while consolidated net fixed assets jumped from Rs327bn to Rs470bn primarily due to higher standalone capex, increased capex at Novelis and translation of foreign assets in a falling rupee environment. Goodwill on consolidation rose from Rs89bn to Rs111bn.


To read report in detail: HINDALCO INDUSTRIES

RISH TRADER

>DLF: Deleveraging hinges on launch of high-value residential projects

Non-core Asset Sales Right Move, But Not Enough 
DLF has sought its shareholders’ approval for divestment of its wind power business. As per media reports, the deal is likely to be closed in the next four-six weeks and might fetch Rs10bn. Further, DLF last week reported it has divested its entire stake in Adone Hotels and Hospitality for Rs5.7bn. Such non-core asset sales are in line with our expectation, helping its overall debt reduction strategy to some extent. We have factored in Rs35bn of non-core asset sales and expect the gearing level to decline marginally to 0.76x in FY13E from 0.83x in FY12. For any meaningful debt reduction, it has to be supported by strong pre-sales or higher non-core asset sales than expected. We remain sceptical on the pace of DLF’s non-core asset sales in the current environment and the deleveraging hinges on improvement in the launch of high-value residential apartments. Any delay in the launch of such high-value residential apartments would lead to equity dilution. We retain our Sell rating on DLF. 


Negative cash flow remains a concern: At the post 4QFY12 results conference call, DLF’s management had given a target of Rs30-40bn of non-core asset sales by the end of 1HFY13, which includes likely disinvestment of Aman Resorts, NTC mill land (Lower Parel, Mumbai) and wind power business. It also increased the overall target for asset divestment from Rs45bn to Rs100bn. Despite non-core asset sales of Rs30.5bn over FY10-12, cash flow after accounting for interest costs and capex remained negative at Rs16bn, indicating worsening cash flow situation from core operations. This was on account of cost escalation and shift in the product mix towards low-value plot sales, thereby impacting margins and pre-sales in FY12. 


Deleveraging hinges on launch of high-value residential projects: FY12 pre-sales were skewed towards low-value plot sales, resulting in an 18% YoY fall in pre-sales, despite a 32% YoY volume growth. We expect a similar trend to continue as the company intends to defer project execution risk apart from the risk of delay in approvals in the current environment. However, the management has given guidance regarding the launch of 2mn sq ft of high-end residential flats in Gurgaon Phase V (Magnolias) project in 2HFY13. We are factoring 30% of Magnolias launch in our pre-sales estimates in FY13E as absorption of such high end residential under current environment will be challenging in our view. 


Valuation: At the current market price, DLF trades at a 9% discount to our one-year forward NAV (Rs 204/share). We retain our Sell rating on the stock with a target price of Rs174 (15% discount to our NAV).
RISH TRADER

>MINDTREE

Bearing Fruit


Even as Mindtree’s strong EPS growth and out-performance versus consensus expectations (25% EPS beat in 4QFY12) has been a primary stock driver over the past year, a valuation re-rating is yet to fully materialise. The stock trades at 7.7x FY14E EPS, leaving room for further upside, given good revenue growth, improving client metrics, a 23.5% EPS CAGR over FY12-14E, support from a weak rupee and most importantly, low consensus estimates. Our FY13E revenue/margin/EPS estimates are 10.4%/81bps/22.7% above consensus estimates while for FY14E they are 10.1%/75bps/25.3% higher, respectively. We assign a Buy rating to Mindtree with a TP of Rs820, implying a PE multiple of 10x FY14E EPS.


Still room for upside; multiple-based upside yet to materialise: Despite Mindtree’s outperformance vs the BSE Midcap Index over the past year, we believe there is room for upside. While strong EPS out-performance versus consensus has driven the stock price, a valuation re-rating is yet to fully materialise. Mindtree trades at 7.7x FY14E EPS, leaving room for upside in light of good revenue growth, improving client metrics, a 23.5% EPS CAGR over FY12-14E, support from a weak rupee and most importantly, still low consensus EPS expectations (FY13 consensus EPS Rs58.7 versus our estimate of Rs72). Improving client metrics drive confidence on the revenue front while a weak rupee is likely to support earnings and also provide headroom for re-investment in the business. Going forward, we expect stock upside to be driven by a multiple upgrade.


Our FY13/FY14 EPS estimates are 22.2%/25.3%, respectively above consensus: In our view, consensus estimates for Mindtree are conservative and do not factor in potentially higher margins on operational efficiency and a weak rupee. Consensus FY13E


EPS estimates are Rs58.7, implying growth of just 8.3% YoY. Our FY13E/FY14 EPS estimates are above consensus estimates by 22.7%/25.3%, respectively. While we expect good revenue growth, we also expect a weak rupee to support earnings, given Mindtree’s greater sensitivity to this factor (over 65% offshore revenue in 4QFY12). Our FY13E/FY14 rupee revenue estimates are 10.4%/10.1% above consensus estimates and margins are 81bps/75bps higher, respectively, driving our well-above consensus EPS forecasts. Going forward, we expect consensus forecasts to inch up, supporting the stock.


Mining focus boosts client metrics, drives confidence on revenue growth: Mindtree’s strategy of focussing on select verticals and leveraging domain expertise to gain client wallet share has paid dividends, and led to annualised revenue/client rising to US$1.7mn in 4QFY12 (US$1.2mn in 4QFY10). This reflects in rise in revenue share from top-10 clients (45.6% in 4QFY12 vs 40% in 4QFY10, 6.1% CQGR). Clients in different revenue buckets have also risen steadily, with US$1mn revenue clients at 77 in 4QFY12 (60 in 4QFY10).


Valuation: Mindtree’s stock trades at 7.7x FY14E EPS. We initiate coverage on the stock with a Buy rating and a TP of Rs820, implying a PE of 10x FY14E EPS.


To read report in detail: MINDTREE
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>ZYDUS WELLNESS LIMITED

■  Strong presence in niche segment: The Company has created niche segment by introducing Sugar free sweetener for diabetes, Nutralite butter for health conscious, EverYuth skin care and also created one more brand named Actilife which is an adult’s drink. The company being a niche player enjoys commendable market share and presence in the respective category. We expect gross revenue register a growth of 17% and 20% in FY13E and FY14E respectively.


■  Launch of value added products to widen consumer offering: Zydus Wellness has launched extensions, variants, SKUs’ under the already existing brands so as to fill the product gap, to enhance the wider offering; thus, expanding the present loyal customer base to other product categories. We believe that the company enjoys the premium position in the niche segment and enjoys the first mover advantage in all the categories. We also believe rising health awareness and the growing number of people with diseases such as diabetes and blood pressure will result in wider acceptance of such products thus; boosting revenues.


■  Expansion in distribution network to boost revenue: The success in the consumer business is broadly dependent on the strong distribution network. The company understands the necessity of strong distribution network and on the same context is planning to increase its current 0.5mn outlets to 1.5mn. The company is expected to use the distribution network of its parent company (Cadila) to utilize the prescription route to promote its products. We believe this will boost the revenues going forward.


■  Increase in Advertisement expenditure to improve volume growth: Zydus has cut back its advertisement expenditure in FY12 as the rival companies like HUL, J&J, etc had increased their advertisement expenses. This had led Zydus to cut back their advertisement expenses which resulted into the subdued performance in EverYuth. Management expects to revive the falling volumes and register double digit growth as company resumes its brand campaign n Q1FY13.


■  Debt free company: Zydus is a zero debt company and has cash reserve of Rs. 132 crores on its books. The company is also open for inorganic growth and is scouting for some viable options. We feel that with the zero debt and sufficient cash on its books, the company can leverage the situation without stretching its balance sheet.


■  Lower Effective Tax rate and Excise Duty: The company earlier used to go for third party manufacturing. But recently the company has set-up a facility in Sikkim in Q2FY12. As the company is expected to pay excise duty in Sikkim, but collect the refund from the government in the next year, the excise duty is likely to drop in the 2HFY13E.


■  Valuation & Recommendation
We initiate coverage on Zydus Wellness with a “BUY” rating with a price target of Rs. 477 per share (25x FY13E), an upside of 28.6%.

RISH TRADER

>PETROL PRICE HIKE: Heralding Stagflation? (May 24, 2012)

State-owned oil companies increased petrol prices by Rs7.50/litre with effect from Wednesday midnight. They hiked petrol prices by Rs6.28/litre excluding local sales tax or VAT. The price hike came just a day after Prime Minister Mr. Manmohan Singh called for implementation of strict measures to help the economy. The government had decontrolled petrol prices in June 2010 and since then they were hiked just once in November 2011. While the hike was on the cards and expected, the quantum of the hike has surprised all. While the move may bring some short-term reprieve for oil marketing companies (OMCs) grappling with higher under-recoveries, it would lead to inflationary pressure as other administered prices would also increase even as Wholesale Price Index (WPI) in April 2012 stood at 7.2% YoY and food inflation at 10.5%. We have factored in such price hikes for our FY13 WPI inflation estimate of
8.5%. The immediate inflationary impact may be limited on account of petrol having a lower weight in WPI.


The hike in petrol prices by state-owned oil companies should not merely be viewed in isolation but as part of a broader strategy of increasing administered prices and reducing subsidies. The petrol hike will have no impact on fiscal deficit and hence we can expect diesel, public distribution scheme kerosene, domestic liquefied petroleum gas (LPG), urea, and electricity prices also to be hiked in future as the government wants to align domestic prices with global prices. Such a strategy, policy makers believe, will result in short-term spike in inflation but will thereafter result in higher GDP growth. We believe the rise in administered prices will result in higher inflation, higher interest rates, and decelerating demand with no assurance of laying a foundation for future economic growth. Indeed, stagflation may be the likely fallout of such a policy. We reiterate our negative stance on the banking sector and view this development as a major setback for sustained efforts by the Reserve Bank of India (RBI), which has been struggling to contain inflationary pressures.


Oil & Gas: The steep petrol price hike could bring some respite to the financials of OMCs, but what is important is the intention behind the price hike – is it meant to ease the financial stress on OMCs or is an indicator of forthcoming bold decisions for other regulated petroleum products. India is currently facing a double whammy of elevated crude oil prices and a sliding rupee and in such a state, without a hike in the prices of regulated petroleum products, the overall under-recoveries may touch Rs2,000bn(US$36.36bn) in FY13E compared to Rs1,385bn(US$28.76bn) in FY12. The government, in the 2012-13 budget, mandated only Rs430bn of oil subsidy for FY13E and showed its intention to rein in subsidy to 2% of GDP and so keeping in mind the strain on government finances, we believe the hike in the prices of regulated petroleum products is imminent. We have already factored in Rs5/litre hike in the price of diesel, Rs50 hike per LPG cylinder and Rs3/litre hike in kerosene in our FY13E under-recoveries estimate. We believe the petrol price hike and restricting upstream companies’ subsidy burden at ~40% in FY12 could bring some semblance of positive undertone for companies in our coverage universe, but we will review our ratings and target prices only after the likely revision in the prices of regulated petroleum products.


To read report in detail: PETROL PRICE HIKE

>Non-ferrous Metals Sector: Soft landing for Chinese economy is also bad for the sector

The Long & Short of it


We remain cautious on global demand recovery and expect the slowdown to prolong in developed countries. We refrain from taking a call on Euroquake/sovereign debt crisis in Europe as it has become more of a political issue than plain economics. However, even if the politicians are able to save the euro currency (which entails major austerity measures for most of the Eurozone members), the case for demand contraction is quite strong in that situation too. The Chinese economy’s hard as well as soft landing would be painful for the entire metals sector barring zinc (which is relatively better placed among other metals), while monetary easing in China is unlikely to result in a pick-up in investment cycle as the investment to GDP (gross domestic product) ratio is already at an alarming level of over 65% and any further rise from here on would certainly lead to a hard landing in China. Our London Metal Exchange (LME) metal price assumptions are around 10-15% lower compared to consensus estimates, but our rupee assumption is 7-9% weaker because of extensive slowdown likely in the Indian economy, leading to 2-6% weaker metal prices in rupee terms compared to street estimates. We are positive on Hindustan Zinc (HZL) due to its attractive valuation, balance sheet strength and steady growth.


■ Soft landing for Chinese economy is also bad for the sector: The Chinese government’s plan to engineer a soft landing for its economy would also lead to investment slowdown in all industries. Construction, real estate, commercial vehicle and capital investments are showing a declining trend, which is likely to continue in the coming quarters. This would result in huge demand slump in all metal categories (China accounts for 35-40% consumption of all metals). 


■ US economy appears to be improving, but still far from its peak: Headline US economic numbers are showing a rising trend, driven largely by the base effect. Economic indicators like automobile sales, housing sales, housing prices and joblessness are still way off from their highs witnessed before 2007 as US new home sales are still at a four-decade low.


■ Whether the euro is alive or dead, metal demand contraction to be evident: LME prices are witnessing sharp volatility on news flow from Europe; but in the case of a deal or no deal to save weaker countries from sovereign debt crisis, demand contraction would be apparent in both the situations. Governments would be forced to go for severe austerity measures, leading to a cut in household and corporate demand.


■ Economic conditions not as bad as 2008, but the ability to fight the crisis is limited:
Although we believe the economic situation is not as dire as the 2008 crisis, the ability to fight the crisis is also limited. Most of the countries have fiscal deficits close to high single-digit with
debt/GDP of over 100%, implying lower ability to further boost their economies.


Metal prices trade below marginal costs for a long period of time: We do not accept the
argument that metal prices are below marginal costs and are thus expected to recover from these levels. Until some capacities go offline on a permanent basis, the threat of supply hitting back the market will keep the prices subdued for a long period of time.


Valuation: We have a Buy rating on HZL as the stock will become more like a bond because of strong cash generation. We also remain relatively positive on zinc prices due to strong demand environment in China and supply concerns. We assign a target price of Rs153 (5.0x FY14E EV/EBITDA) for HZL, which is 25% higher than the CMP. For Hindalco, we assign a Sell rating as new expansion is likely to be value dilutive at current aluminium prices. NALCO has been given a Sell rating due to subdued earnings growth and cash utilisation concerns.


RISH TRADER

>ARVIND MILLS: Multiple drivers

Back in Vogue


With a strong portfolio of 21 brands and aggressive 23.9% CAGR in retail expansion at 1.58mn sq ft, we expect Arvind’s brands and retail business to show 25.6% CAGR over FY11-14E at Rs19.1bn and increase its share from 22% to 32.7% over the same period. Positive result of major capex of Rs4.3bn over FY11-12 would be visible in FY13-14. Its stock is currently trading at 6.5x/4.9x FY13/14E P/E and 5.2/4.2x EV/EBITDA, below the mean of 8.1x and 6.5x, respectively. Strong 12.4% revenue CAGR aided by 104bps higher operating margin, working capital efficiency and debt reduction by 26.5% should drive profitability CAGR by 45.6% over FY11-14E, generate free cash flow of Rs5.2bn over FY13-14E, improve adjusted RoCE by 303bps over FY11-14E and calls for expansion of PE multiple. We assign a Buy rating to Arvind with a SOTP-based TP of Rs117, valuing it at 9.1x/6.4x/1.2x PE, EV/EBITDA, P/B for FY13E.


■ Lower debt, interest rates to drive profitability: Bumper cotton production led to softening of prices, which would reduce Arvind’s ex-cash working capital requirement to 26.8% of sales in FY14E from 28.3% in FY11. Free cash flow of Rs5.2bn over FY12-14E would reduce its debt by 26.5% to Rs16.2bn and its adjusted D/E ratio from 1.6x to 0.6x over FY11-14E. Lower debt, falling interest rates and improved credit rating would prune interest costs from 6.4% to 3.3% of sales over FY11-14E and drive net profit CAGR by 45.6% over the same period. Monetisation of real estate assets, as and when it happens, would sweeten its cash flow and debt reduction programme.


■ Fast paced growth of B&R business: From a denim producer for corporate clients, Arvind is turning into a brand power house catering to consumers directly. Aggressive retail expansion, growth through multiple drivers like distribution expansion, new brands launch and category expansion would drive the brands and retail (B&R) division’s revenue CAGR by 25.6% to Rs19.1bn and increase its revenue share to 32.7% from 22% over FY11-14E. We expect its operating margin to rise by 140bps to 9.5%, which would increase segmental RoCE by ~109bps to 14.0% over FY11-14E. 


■ Strong free cash flow and return ratios: With the decline in cotton prices and hence working capital needs, a 104bps improvement in operating margin over FY11-14E and lower capex, Arvind should generate positive free cash flow of Rs5.2bn over FY13- 14E. Following weak demand, we expect the performance of its textile and retail divisions to remain muted in 1HFY13, thereby pruning consolidated margin by 20bps to 14.2% and RoCE by 96bps in FY13E. However, with the revival in demand and soft cotton prices, its revenue should grow 14.3%, operating margin should improve by 40bps and RoCE by 123bps in FY14E. Adjusted RoCE/RoE should improve from 11.7%/11.0% in FY11 to 14.8%/18.3%, respectively, in FY14E. Positive free cash flow from FY13 onwards and improving return ratios should drive up the valuation multiple.


To read report in detail: ARVIND MILLS
RISH TRADER

>INDIA GAS: Growth will hinge upon the pricing of regasified liquified natural gas (RLNG)

Shifting focus from availability to affordability

We believe India’s gas sector growth will hinge upon the pricing of regasified liquefied natural gas (RLNG) rather than being a function of the widely accepted notion of supply constraint. The sector, which set a new paradigm in the energy space on the back of domestic gas in 2010, will now be driven by RLNG until domestic supply perks up. We believe that despite the euphoria over surging domestic gas supply fading, the earnings of players in this sector are fairly intact. We assign Buy rating to Gujarat State Petronet, Petronet LNG and GAIL (India) who are direct beneficiaries of the RLNG play in India, while we have Sell rating on city gas distribution (CGD) companies such as Indraprastha Gas and Gujarat Gas Company as they
seem to be entering a phase of margin contraction.


Gradual soft pricing of LNG in the offing: We have assumed average LNG free-onboard (FOB) spot price of US$15/mmBtu for FY13E as well as FY14E compared to an average of US$16.18/mmBtu in the first nine months of FY12, implying the cost economics of natural gas will continue to be favoured by the non-core sectors. We believe the current trend of softening spot LNG prices will continue on account of companies preferring to rely more on spot/medium term cargo rather than on long term contracts due to price distortion caused by the advent of shale gas. Our interaction with industry stalwarts indicated that ~35mtpa of RLNG capacity is being withheld by suppliers as they feel current spot prices are depressed and ~8.2mtpa of
contracts will be available for renewal from 2014.


Pricing to drive medium-term consumption growth: In the wake of dwindling production of domestic gas, consumption growth will hinge upon the ability of midstream companies to source LNG at US$15/mmBtu FOB in the medium term. Our analysis reveals that gas consumption can post a 9% CAGR over FY11-16E if noncore sectors remain dependent on RLNG with the core sector continuing to rely on domestic gas. Average LNG cost of US$15/mmBtu is vital for consumption growth as historical evidence shows that this level acts as a threshold limit for oil refineries, petrochemicals and CGD companies to determine their propensity to consume natural gas or switch to other liquid fuels.


Slim chances of across-the-board limit on marketing margin: The oil ministry has asked the regulator, PNGRB (Petroleum & Natural Gas Regulatory Board) to set the quantum of marketing margin that can be charged by a gas marketer. Our interaction with PNGRB officials indicated that as per the PNGRB Act, the regulator has no legal standing to limit marketing margin unless under Section 11(a) it finds concrete evidence of profiteering, or unless natural gas gets a notified status. Upcoming gas infrastructure to allay fears of tight gas supply: Indian companies will be investing US$28-37bn in gas infrastructure over the next four-five years. With the infrastructure in place, gas supply potential over this period is expected to increase to 336mmscmd from 185mmscmd currently by FY16, of which ~40% will be accounted for by RLNG terminals.


To read full report: INDIA GAS SECTOR
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>SOBHA DEVELOPERS LIMITED (SDL): Has not launched any new project in 3QFY12 and has given muted new project launch

Strong 3QFY12 pre-sales, but no new project launch a concern
Sobha Developers (SDL) reported strong pre-sales of Rs4.4bn (up 47% YoY) in 3QFY12, thanks to sales from Gurgaon project, but they were down 7.8% QoQ on lack of new project launch. Although reported pre-sales of Rs12.3bn and 2.4mn sq ft in 9MFY12 were ahead of our expectations, we believe higher net debt (net D/E ratio of 0.71x in 2QFY12) will remain an overhang on the stock. Further, SDL has not launched any new project in 3QFY12 and has given muted new project launch guidance of 1.6mn sq ft for 4QFY12, which will make sustainability of 3QFY12 pre-sales challenging. We maintain our Hold rating on SDL.


Strong pre-sales; likely to surpass its FY12 guidance: Volumes stood at 818,935 sq ft, up 16.2% YoY, but down 12.5% QoQ. Average realisation was Rs 5,475/sq ft, up 5.4% QoQ, aided by better product mix. The management has indicated that the company will surpass its pre-sales guidance of Rs15bn and volume guidance of 3mn sq ft for FY12, which, we believe, is achievable. However going forward, sustainability of strong pre-sales will be challenging, given the lack of new project launch in Bangalore.


No new project launched in 3QFY12: SDL had done 3.1mn sq ft of new project launch in 1HFY12 (across Bangalore, Gurgaon and Mysore) and had given muted guidance of only 1.6mn sq ft for 2HFY12 because of lack of new projects in Bangalore. Further, the ongoing delay in getting government approvals in Chennai resulted in no new project launch in 3QFY12. The management has given guidance of launching Sobha Serene (0.2mn sq ft) and Sobha Meritta (0.7mn sq ft) projects in Chennai and Hopefarm project (0.6mn sq ft) in Bangalore in 4QFY12.


Higher debt remains an overhang: SDL had reported positive operating cash flow of Rs891mn in 1HFY12, but adjusted for capex (Rs558mn) and interest payment (Rs1,230mn), debt reduction seems to be unlikely. Further 50% of its debt is front-ended, which makes it vulnerable in a scenario of high interest rates. Going forward, we expect muted debt reduction visibility (the management gave guidance of Rs3bn debt reduction in FY12) because of no land sales, stake purchase from PAN Atlantic for Rs600mn and high pre-launch expenses in markets other than Bangalore.


Outlook: At the current market price, SDL is trading at 0.9x P/BV and 8.8x P/E on FY13E earnings and at 36% discount to our one-year forward NAV. Muted visibility on debt reduction and higher new project launch in new cities offsets 30% discount to NAV. We maintain our Hold rating on SDL with a TP of Rs227, which is at a 30% discount to our one-year forward NAV.
RISH TRADER

>GMR INFRA: A consultation paper on the framework for determining the tariff for DIAL (Delhi International Airport) released by the Airports Economic Regulatory Authority (AERA).

AERA proposes tariff hike for DIAL in two phases
A consultation paper on the framework for determining the tariff for DIAL (Delhi International Airport) released by the Airports Economic Regulatory Authority (AERA) has proposed the shared-till method for revenue calculation, weighted average cost of capital (WACC) of 10.33%, cost of equity of 16%, project cost of Rs12.5bn and disallowance of refundable interest-free security deposit (RSD) as equity. The airports regulator has also recommended tariff hike by 148% in FY13 and FY14 each at DIAL, effective from 1 April 2012 to 31 March 2014. We believe this is a positive development that will eliminate the overhang on DIAL’s valuation and therefore retain our Buy rating on GMR Infrastructure with a target price of Rs39.


Key highlights:

• AERA has proposed that the first regulatory period may be taken as 1 April 2009 to 31 March 2014 and recovery of the revised tariff may be contemplated during 1 April 2012 to 31 March 2014.

• The regulator has proposed WACC of 10.33% as compared to bid WACC of 11.6% for the purpose of calculation of the returns on regulatory asset base (RAB). The reduction in WACC is primarily because of lower CoE of 16% against the projected CoE of 22%.

• AERA has proposed that the targeted revenue be calculated on the basis of the shared-till method, which includes reduction of 30% of non-aeronautical revenue. The regulator has proposed allowable project cost of Rs125bn, which is as per its order in respect of the development fee.

• Proposed average RAB for the first regulatory period would be lower by Rs12.7bn than what was submitted by DIAL because of lower hypothetical asset base and disallowance of future capex.

• AERA has proposed that refundable interest-free security deposit (RSD) of Rs 14.5bn, which was used for financing of the project, should not be considered as equity.

• AERA has not clarified on the issue of monetisation of remaining land bank at DIAL and usage of the funds generated. We believe this uncertainty would keep the hangover on valuation of DIAL’s land parcel.

Valuation: We have not revised our earnings estimates for DIAL based on the consultation paper and prefer to wait for the final order which is due in 4QFY12. However, we believe that based on the revised tariff the DIAL project is likely to report net profit of Rs0.6bn in FY13 and Rs7bn in FY13. Clarity on land monetisation and usage of the funds raised from it would be the next trigger for the GMR Infrastructure stock. We maintain our Buy rating on it with a SOTP-based target price of Rs39.


To read the full report: GMR INFRA
RISH TRADER