VOLTAS: EMP division was strong adjusting for the onetime loss

■ What's changed
Voltas reported a Q3FY12 loss of Rs. 2.0bn after taking one-time impact of Rs. 2.8bn in the loss making Qatar contracts. As a result, 3Q EBITDA margins of 7.5% (350-400 bps above GS and Bloomberg consensus estimates) were more normalized. Revenue for the quarter at Rs 11.6bn also came in above our and consensus expectation, due to better than expected execution on the EMP orders. Order inflow at Rs 9.6bn was slightly above our expectation, with the order book growing 8% yoy partly due to order inflow and partly on account of restatement of the book on yrend foreign exchange rates.


■ Implications
Though the performance of EMP division was strong adjusting for the onetime loss, giving further visibility on normalized margins, we believe that margins are unlikely to go back to historical levels of 8-9% because recent
projects have been bid at lower margins: we expect FY13E EBIT margin of 6.5% for this segment. In addition, the EPS segment is also facing headwinds on the back of a change in the ownership of principal which may result in loss of some domestic contracts for Voltas: we expect revenue growth of 8% in FY13E. Increasing competition and a prolonged winter also leave little to expect from the UCP segment. These headwinds across all segments are the key reason for our Neutral rating.


■ Valuation
We incorporate the one-off in FY12E EPS, but increase EPS for FY13E-14E by 12-16% based on higher inflows, as a result increasing our PE-based 12-m fwd TP to Rs 113 (from Rs 97). The stock trades at 12-m fwd P/B of 2.3X, which in our view is justified given the muted growth: we expect FY11-13E revenue CAGR of 8% and ROEs of 21% vs. 39% over FY05-10.


■ Key risks
Downside risks: lower volumes in the UCP segment. Upside risks: pick-up in order inflows in the Middle East.


To read full report: VOLTAS
RISH TRADER

>Crude Oil: Geopolitical tensions around Iran driving prices higher •

Oil prices have risen amidst increasing geopolitical tensions around Iran
Oil markets have increasingly focused on the escalating geopolitical tensions over the Middle East in general and Iran in particular. Iran is the second largest oil producer in OPEC, with an output of around 3.5 million barrels per day (mbpd), accounting for almost 4% of global oil production. In response to rising geopolitical concerns, the front-month Brent oil price has risen by around 12% in the month of February and hit a 9-month high of USD 125.55/bbl, while long speculative positions on oil have also increased. We had earlier highlighted the upside risks posed by geopolitical tensions to oil prices in our December report1.



The US, the European Union (EU) and Israel have been engaged in efforts to diplomatically isolate Iran over its alleged nuclear weapons program. The US recently imposed additional unilateral sanctions on Iran and froze Iranian Central Bank’s assets in the US. Earlier, US had classified the Central Bank of Iran (CBI) as a centre for money laundering, and also passed a law that would punish any foreign financial institution that did  business with the CBI. [For further details on Iran related sanctions, please refer to Appendix] Efforts have been stepped up to discourage countries from importing oil from Iran. Meanwhile, risks of a military conflict remain high-ranking US and Israeli officials repeatedly stressing that “all options remain on table”, an apparent allusion to military strike, in order to deal with Iran’s alleged nuclear weapons program. We attempt to briefly evaluate the risks to oil supply and energy security emanating from the current crisis over Iran.


Diplomatic efforts have increased to embargo Iranian oil out of world market
The EU on January 23rd agreed to halt oil imports from Iran from July onwards. Such an oil embargo will force EU to seek other sources of oil supply, and is likely to push up oil prices. The EU decision comes amidst increasing diplomatic pressure on Iran’s major trading partners – China, India, Japan and South Korea – to halt oil imports from the country and aid in its diplomatic isolation.


To read the full report: CRUDE OIL

>SHIPPING CORPORATION OF INDIA: Disappointment continues, downgrade to Sell

Shipping Corporation of India’s (SCI) Q3FY12 results continued to remain weak and was below expectations. Apart from the container liner segment which continues to report losses, the bulk division (adjusted for profit from sale of ships) also remained in red. The company reported losses of Rs390mn at the EBIT level (adjusted for profit from sale of ships). We believe SCI would remain impacted by lower freight rates and higher operating costs, which would result in operational losses for FY12 and FY13. We have lowered our estimates and downgrade the stock to Sell. We believe that the recent run-up in the stock is not sustainable; especially given that the global supply glut and slower demand growth is likely to mar the shipping industry until the end of 2013.


■ Q3 results below expectations: Revenue grew 29.1% YoY to Rs11,475mn, 13.5% above our estimate mainly on the back of foreign exchange gain of Rs1,686mn included in other operating income. EBITDA plunged 26.8% YoY to Rs1,180mn while margins declined 785pp YoY to 10.3%. Operating expenses (including bunker costs) at 69.2% of revenue increased 14.5pp YoY and 265bp higher than anticipated. Bunker cost at 42.2% of revenue increased 18.5pp YoY and 145bp QoQ to Rs4,082mn.


 ■ Operational losses across segments: Though SCI reported EBIT profits in its bulk division at Rs1,377mn in Q3 these were not the operating profits at it included Rs1,751mn profit from the sale of eight old vessels. The container liner segment continued its losses at Rs241mn. This led to overall operational (EBIT) loss of Rs390mn vs. a profit of Rs600mn last year.

■ Forex movement further dents profitability resulting in losses at net level: SCI managed to report profits at net level only from profits from the sale of ships and foreign exchange gain booked under other operating income. Adjusted for the forex gain of Rs1,686mn and Rs784mn MTM loss on forex borrowings charged to interest cost in accordance with AS-16, adjusted PAT came at a loss of Rs161mn vs. our estimate of a loss of Rs149mn. If we adjust for the profit form sale of ships, the loss further increases to Rs1,919mn.


■ Estimates lowered, downgrade to Sell: We have revised our estimates to factor in losses in bulk and liner segments. We have also factored in the impact of changes in foreign exchange in interest cost. We expect SCI to report a net loss of Rs1.2bn in FY12 and a marginal loss of Rs147mn in FY13. We continue to value the company at 0.4x P/B (which factors in the company’s dismal performance) but roll-forward it to FY13. Hence, we downgrade the stock to Sell with a target price of Rs60.

RISH TRADER

>RANBAXY LABORATORIES: Exceptionals wipe off operating gains

Ranbaxy’s 4QCY11 numbers were a mixed bag. The company capitalized on its launch of generic Lipitor and AG version of Caduet to clock net sales slightly ahead of our estimates at Rs37.3bn (up 79.2% YoY). While operating EBITDA was up 273.6% YoY at Rs8.6bn, the pre-exceptional PAT of Rs5.0bn was more than offset by extraordinary items – the DoJ settlement provision of Rs26.4bn and loss on derivative positions of Rs8.3bn - resulting in a net reported loss of Rs29.8bn.


We raise CY12 EPS estimates to Rs36.6 due to higher market share garnered in generic Lipitor (currently at ~42%) and introduce our CY13 EPS estimate at Rs29.9. This assumes Ranbaxy will be able to launch generic Provigil and Diovan during CY12. We upgrade the stock from a Sell to a Hold with a target price of
Rs419, valuing the company at 14x CY13.


Key highlights
■ Ranbaxy wrote off inventory amounting to Rs621mn during the quarter. Other expenses increased significantly by ~123% YoY to Rs14.3bn, as a result of payments made to Teva in connection with generic Lipitor sales (details not disclosed). However, the impact on EBITDA was mitigated by higher margin sales from FTF opportunities. The company recorded an impairment charge on a fermentation facility of Rs820mn, which resulted in depreciation spiking up by 63.2% YoY to Rs1.6bn.


■ Sales in the domestic market were up 16% YoY to Rs3.9bn i.e. marginally above market growth. The OTC business, which is 16% of total domestic sales, grew at a brisk 20% YoY during CY11; however, Ranbaxy saw lower than anticipated growth in its anti-infectives portfolio.


■ The North America region sales grew at a staggering 201.5% YoY to US$407, on the back of generic Lipitor and Caduet sales. Management stated that price erosion in Lipitor was ~65% and the company had a market share of ~42% at end-CY11.


■ Pursuant to its consent decree with US FDA/ Department of Justice (DoJ), Ranbaxy made a provision of Rs26.4bn and agreed to forfeit three FTF opportunities. However, management claimed that the loss of these opportunities would not impact sales growth significantly.


RISH TRADER