>COAL INDIA: Price increases will be hard but still only upside likely

Initiate at 1-OW; a sleeping giant


We view Coal India (CIL) as a core long-term holding in the mining sector given its extremely favourable risk/reward profile. The fact that its adjusted selling price (c45% discount to the seaborne price) looks to have only upside alleviates the coal market concerns around the stock, in our view. We believe investors need confidence about the seven key issues surrounding the stock (highlighted in the report) and that the market is under-appreciating both a potential rebound in volume growth and CIL’s ability to control costs. A hastening of reforms and notified price increases would likely provide significant upside optionality. With a free cash
flow yield of about 7%, valuations look attractive, especially considering the low downside risk to profitability and large cash balance (c26% of market cap). We


■ initiate at 1-OW with a 12-month PT of Rs411.
Higher-than-consensus volume growth feasible: Although the c2% CAGR drop in production over FY10-12E has dented investor confidence, we are optimistic that CIL’s volume growth can rebound to a 5% CAGR over FY12-17E (to 557mt). With only 14% of volume having to come from new mines and tangible measures being taken to address logistics bottlenecks, visibility on a volume rebound has improved dramatically. 


■ Ability to control costs appears underappreciated: Wages are c53% of CIL’s costs and a shift in volume mix towards more efficient subsidiaries (wage/tonne of the most efficient subsidiary is 1/12 that of the most inefficient subsidiary and 1/3 of CIL’s average) and natural attrition of the ageing workforce (expect a c9% drop in employee base over FY11-14E) should offset the impact of rising wage rates, in our view.


■ Price increases will be hard but still only upside likely: We expect price increases for CIL to be less frequent and its sales mix to move away from higher-margin (e-auction and non-power) volumes. Our estimates build in a mere 5% price rise in notified prices in FY14, translating into a 1.5% CAGR in weighted average realisations over FY12-14E. 


■ Near-term issues reflected in price target: Our 12-month price target of Rs411 already factors in a negative Rs41/share for the proposed mining tax. Concerns the government may push CIL to use its cash balance to pay off state electricity board losses are overdone, in our view. Higher dividend payouts would be RoE accretive.


■ Key risks: Key risks to our investment thesis, in our view, include further delays in price
increases, drops in e-auction volumes and adverse regulatory changes.


To read full report: COAL INDIA
RISH TRADER

>JAGRAN PRAKASHAN: Acquires Nai Dunia in an all-cash deal

JAGP, which owns India’s largest read daily Dainik Jagran, has acquired Nai Dunia (ND) – the country’s ninth largest Hindi newspaper. This acquisition gives JAGP a much-awaited entry into the underpenetrated and fast-growing markets of Madhya Pradesh (MP) and Chhattisgarh (CG), and brings consolidation in the print media industry. Financial highlights of the deal: (a) JAGP has valued ND at an enterprise value of Rs 2.25bn (incl. ~Rs 250mn debt), or ~2x EV/sales; (b) JAGP is entitled to tax benefits of ~Rs 800mn owing to ND’s accumulated losses of Rs 2bn-2.5bn. While the valuation is on the higher side given ND’s negative EBITDA, we feel this acquisition is a good strategic fit for JAGP on account of: (a) its geographical expansion in Hindi-speaking states, (b) reduction in gestation period for expansion in new territories and (c) cost and revenue synergies. Maintain BUY with TP of Rs 135.


■  Underpenetrated MP and CG markets offer good growth: Literacy rates of MP and CG are lower than the national average, and so is newspaper penetration, with sole readership at a mere 15%. With rise in disposable incomes owing to increased GDP growth rates (~6.5% for MP, 9.5% for CG), these markets offer good growth potential.


■ JAGP’s ongoing litigation in MP necessitates inorganic route: We note that JAGP has wanted to enter MP and CG since 2005. However, it couldn’t use its flagship brand Dainik Jagran due to family litigation and hence, had to either introduce a new brand or acquire an established player like ND.


■ ND – a good fit: Nai Dunia is published in the Hindi heartland states of MP and CG with a circulation of 0.5mn copies and a readership base of ~2mn, which has more than tripled over the last five years. While ND’s current readership share is 23%, its advertisement market share is ~15%. Its FY11 revenues were at Rs 1bn (FY12E: Rs 1.1bn) with 70‒75% generated from advertising (mostly local). The company incurred an EBITDA loss of Rs 250mn in FY12.


■ Turnaround to be quick, aided by synergies: On the revenue side, JAGP expects to increase the contribution from national advertising to ND’s revenues from <25% now to closer to its own 40% levels. On the cost side, JAGP will benefit from reduced newsprint and manpower costs.


■ Deal financial summary: The deal was closed for an all-cash consideration of ~Rs 2.25bn (including debt). However, JAGP stands to gain tax benefits to the tune of Rs 0.8bn owing to ND’s accumulated losses. Post the deal, JAGP has Rs 1bn of net cash on its books.


■ Maintain BUY with a TP of Rs 135: We believe that this acquisition is another step in the direction of consolidation in the print media space, wherein smaller regional players will be acquired by larger national players like JAGP, owing to both revenue and cost synergies. We continue to like the print media space because of: (a) healthy ROEs (25% +), (b) good dividend payouts (45‒50%) and (c) attractive valuations (currently 12.7x FY14E). Maintain BUY with a TP of Rs 135 (17x FY14E).


To read full report: JAGRAN PRAKASHAN
RISH TRADER

>BEML: Will supply intermediate metro coaches to Delhi Metro Rail Corporation

■  Metro orders
BEML has recently bagged orders worth Rs 318 crs for supplying 40 metro cars (10 trains of 4 cars each) to Jaipur Metro Project. The Company expects to receive some more orders totaling Rs 60 crs from this project in future. It is also designing and developing metro cars for upcoming metro projects in Tier II cities.


BEML will supply intermediate metro coaches to Delhi Metro Rail Corporation. It is also targeting orders from Bangalore, Hyderabad and Kolkata rail projects, besides participating in international projects in Dubai, Abu Dhabi, Qatar, Colombo, Malaysia and Dhaka.


■  Railway business hive-off
BEML is planning to hive off its railway business into a separate Company to tap the growing demand for rolling stock over the next decade. It has emerged as the only Indian Company to manufacture metro rail cars, which has helped in bagging orders from Delhi, Bangalore and Jaipur metro projects. The company is also exploring opportunities in aluminium rail wagons manufacturing and has taken trial project for Nalco. Demand for mining equipments from Indonesia continue to soar which made BEML to rework its growth strategy. It plans to open an after - sales service centre cum depot at the coal mining belt of Kalimantan in
Indonesia this fiscal. A new assembling unit or an acquisition of existing unit in Indonesia by next fiscal is also on the anvil.


■  Flurry of earthmoving equipment orders
BEML expects order intake of earthmoving equipments to improve this year, led by new product introductions, recovery in domestic mining sector and strong overseas demand. It launched mining equipments in Thailand and other neighbouring countries like Myanmar, Laos,
Cambodia etc through marketing tie up with Paragon Company Ltd, a Thailand based entity. Similarly, it unveiled high - end products such as dozers, dumpers, motor grader etc in China this year.


We estimate the earthmoving equipment division to grow by 12% this year, thus reversing the declines of last two years. The next year is projected to be tad better as plans to enter new markets in South East Asia, Africa and South America for supplying earthmoving equipments for mining sector fructifies. Margin which saw an erosion of 450 bps in FY11 is estimated to rise by 180 bps to 14.5% in current year.


To read full report: BEML
RISH TRADER

>HDFC LIMITED: Major structural drivers of housing finance industry in India remain intact...

The major drivers of the housing finance industry in India as stated below remain intact:-


• Large population with a favourable demographic profile wherein 65% of the population is below 35 years
• Rising and high disposable income with high propensity to spend on assets like real estate for shelter as well as for investments
• Increasing urbanisation — currently only 31% of the population resides in urban areas
• Nuclearisation of families leading to higher demand for houses
• Due to demand-supply mismatch, the total housing shortage is ~88 million as on FY11, of which urban housing shortage is 28.9 million (as per Crisil Research)
• Tax incentives available in the form of deduction of interest and principal repayments, which results into lower effective interest rates borne by the borrower
• Improved affordability




■ Opportunity for mortgage finance industry remains huge….
There continues to remain huge potential for growth of the Indian housing finance industry. This is evident from the fact that mortgage as a percentage of India’s GDP at 9% remains one of the lowest in the world. The corresponding figure for developed countries like the US and UK stands at 81% and 88%, respectively, while for China it is at 20%.




■ India’s under-penetrated market to offer long-term growth visibility
Mortgages as a percentage of GDP in India are just 9% compared to developed countries where it is above 80% and China where it is 20%, providing long-term visibility for growth. We expect HDFC’s loan book to witness a healthy CAGR of 20% over FY12-14E to | 1995 billion.


■ Volatility in spreads contained
HDFC has been able to minimise deviation in reported spreads by maintaining it in the range of 2.15% to 2.35% in the past five years despite volatile interest rates owing to its flexible borrowing profile and stable asset-liability management. We expect FY13E calculated adjusted spreads to be stable at 2.9% as compared to 2.83% in FY11.


■ Seasoned loan portfolio, nil NNPA
HDFC’s assets are seasoned and have witnessed various cycles still maintaining resilience with nil NNPA and 0.8% GNPA as on FY11. Going forward, we expect the asset quality to remain strong with GNPA of 0.9% and nil NNPA for FY13E owing to its strong in-house recovery team.


To read full report: HDFC LIMITED
RISH TRADER