>MARUTI SUZUKI: Impact of Manesar issue

Manesar issue to impact FY13 earnings; Maintain Buy


Maruti Suzuki’s (MSIL) 1QFY13 operating results were marginally below our expectations. Despite EBITDA margins standing lower at 7.3% (our est. 7.7%), absolute EBITDA was higher by 1% due to better than expected realization led revenue growth. Adjusted PAT stood at Rs.4.2bn compared to our estimate of Rs.5.1bn due to lower than expected other income. On a conservative side, we are factoring in production loss of 2months (i.e 50,000 units) from its Manesar plant for FY13E. We are lowering our EPS estimates for FY13E by 26% to factor in expected production loss at Manesar, lower operating performance in 2QFY13 due to lower than expected contribution from Diesel models and higher royalty outgo. However, if the production loss is higher than our estimate, we will re-visit our estimates and rating on the stock. We continue to remain positive on the stock and maintain our Buy rating with a revised target price of Rs.1,345.


Realization led revenue growth: Revenues stood at Rs.108bn compared to our estimate of Rs.102bn. The increase in NSR was higher than our expectations (up 11.6% QoQ and 20.4% YoY) resulting in better than expected revenue growth by 6%. Higher realization was expected due to higher contribution from the Diesel portfolio for its existing product line and from Ertiga (Ertiga accounted for 7% of domestic sales in 1QFY13). Also, as we have been highlighting, discounts stood at Rs.11,500 compared to Rs.13,500 in
4QFY12, lower by 15%.


Management interaction: Key highlights: 1) Diesel penetration to overall domestic sales stood at 38% compared to 27-28% in 4QFY12, thanks to higher contribution from Ertiga. For the overall passenger car industry, diesel penetration stood higher at 55% for 1QFY13. 2.) Discount for the quarter, as indicated stood lower by 15% QoQ to Rs.11,500 in 1QFY13 compared to Rs.13,500 for 4QFY12. 3.) Export revenues stood at Rs.11bn (10% of revenues) and export realization for the quarter moved up by 5.4% 4.) Domestic realization increased by 12.4% due to lower discount and more favorable product mix 5.) Overall market share in the domestic passenger car industry for MSIL in 1QFY13 stood at 44.6% compared to 44.2% in 4QFY12, helped by strong sales of Ertiga. Ertiga diesel continued to have a waiting period of
6 -7 months.


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>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

>PUNJAB NATIONAL BANK: Q1FY13 Result Update

Healthy core performance, asset quality slips


PNB reported healthy core earnings performance in Q1FY13 with PPP coming in 4% above our estimates, though asset quality disappointed forcing PAT marginally below our expectations. Slippages were high at 3.8% and restructured loans inched up to 8.7% of loans – which collectively kept the provisioning cost high at ~1.4%. While the troubled SEB and aviation exposures have been restructured, we still see asset quality concerns persisting due to the challenging macro. We suggest accumulate stance on the stock led by cheap valuations.


Asset quality deterioration...: Asset quality matrices for PNB continued to deteriorate further during the quarter with 1) higher delinquency rate of 3.8% on annualised basis 2) inching up of %GNPA by ~35bps to 3.3% 3) further increase in restructured assets to 8.7% of advances. Given the large outstanding restructured book and exposure to agri and SME, we have factored in stiff credit cost assumptions at 1.3% for FY13 vs 1% for FY12.


…mars an otherwise healthy core performance: Despite the marginally lower bottomline, the core performance of the bank during Q1FY13 was healthy with a 10 bps QoQ expansion in NIM and higher than estimated other income. The NIM expansion can be traced to higher lending and investment yields during the quarter. This, along with a healthy 21.2% YoY credit growth, led to a respectable 18.6% YoY growth in NII.



Loan growth healthy: Loan portfolio expanded 21.2% YoY with clear preference towards agriculture (30.6% YoY) and retail (21.2% YoY) segments. From an industry perspective, incremental disbursement remained skewed towards the infra sector as past sanctions come up for disbursals. Meanwhile, on the deposit front, CASA share eroded by 80 bps QoQ to 34.6%. While an above industry credit growth is encouraging, it is a risky strategy to aggressively build up the loan book in adverse economic scenario and hence we remain cautious on asset quality.


Non-interest income surprises positively: Non-interest income surprised positively during the quarter led by strong treasury gains (YoY). However, the core fee income growth was weak at 2% YoY. The TPD revenue stream is likely to gain more traction as PNB has begun selling insurance products of Metlife Insurance (PNB now holds 30% in the company).


Accumulate on cheap valuations: PNB continues to report a weakening asset quality matrix with pressures likely to continue for a few more quarters led by incremental restructuring and high slippage rate. However, our stiff assumptions (credit cost and slippage rate) and lowered valuation multiple (1x FY14E) amply factors in asset quality challenges and resulting pressure on return ratios. Current valuation seems reasonable at 0.9x FY14E PABV considering RoE of ~18% for FY13E and FY14E. Hence we recommend investors to accumulate the stock from a 12-15 month perspective given that asset quality concerns should lead to underperform in near term. Failure of monsoon in northern India and resulting risks to agri loan book is key risk to our stance.

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>ONGC: Government likely to take up policy measures to tackle subsidies

• ONGC’s consolidated production to fare better as its IOR/EOR initiatives and marginal fields development bear fruit. Expect 6% CAGR over FY12-15E to 73mtoe
• Declining crude oil price scenario augurs well for ONGC as it has a positive impact on its oil net realization. Expect ONGC’s net realizations to improve to US$55.7/bbl in FY13 and US$58.5/bbl in FY14
• Current government finances point towards fuel price hikes as the only solution. Declining oil prices to further aid policy reforms to tackle the subsidy issue
• Given its improving production profile, lower oil prices and possibility of price hikes, we recommend Accumulate rating for ONGC with a PT of Rs327

Consolidated production to improve at 6% CAGR over FY12-15E
ONGC is expected to have a consolidated production growth of 6% CAGR over FY12-15E in oil and gas over 2012-15 to 73mtoe on the back of new field development efforts, IOR/EOR efforts on existing domestic fields and increase in oil production from Rajasthan JV field. This is in contrast to its flat production at 61mtoe during FY07-12.


ONGC to realize higher oil prices from decline in crude oil
The current decline in crude oil prices is beneficial for ONGC as its realization on crude oil goes up. We have factored net realization of US$56/58.5bbl in FY13/14 as against US$54.7/bbl for FY12. At 40% share of upstream share in subsidies, ONGC’s net realization on crude oil ranges between US$64/bbl-US$53/bbl for a crude oil price range of US$80/bbl-US$120/bbl


Government likely to take up policy measures to tackle subsidies
Given the precarious financial status of the government, it has no choice but to take up policy measures to tackle subsidy issue. The recent decline in crude oil prices provides government an opportunity to bring in favorable policy measures to tackle subsidies. We expect oil prices to remain subdued ahead on the back of weak oil demand fundamentals globally. Any price hike will have a substantial impact on ONGC and provide valuation upsides.


Valuations
We initiate coverage on ONGC with Accumulate rating given its production growth ahead and likely government action on the fuel subsidy front. Our target price for ONGC works out to Rs327/share, with the standalone business contributing Rs224/share at 4xEV/EBIDTA and OVL, Rs68/share at 5xEV/EBIDTA on FY14 estimates. The balance contribution comes from MRPL (Rs9/share) and cash and investments of Rs26/share. ONGC also offers an attractive dividend yield of ~3.5%.


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