>STRATEGY- Stratoscope: Show Me the Money

In the midst of the dividend payout season for Indian equities, we analyzed the payout policies of Corporate India and its relationship with stock price performances. We highlight key observations and stock ideas in the report.

 The median dividend payout ratio for the BSE 100 has remained stable over the last decade at about 20%. The flat trend is not satisfying from a minority shareholder perspective. But could be attributed to: a) the corporate sector in India being in a capital-intensive growth phase (both organic and inorganic), b) funding constraints post the global financial crises, c) increased competitive intensity has also resulted in a more cautious stance on sustainability of payouts.

 The cautious stance is reflected even in the payout policies of defensive sectors – Consumer Staples, Consumer Discretionary and Healthcare, wherein payout policies have remained stable or reduced. The payout of the IT services sector has almost doubled over the last decade. But it still remains around the broad market average. Payout of the Financials sector has also been limited to around the market average. The State-owned Banks have, however, seen a reduction in recent times due to capital constraints.

 It is also worth highlighting that only a few managements have a clearly articulated dividend payout policy. The state-owned companies typically try to adhere to Government guidelines which stipulate a payout of about 20-30% depending on the sector. Given the Government’s
fiscal constraints, we expect cash-rich, state-owned companies to continue to have a high payout policy.

 That said, managements wanting to enhance shareholder value would do well to have a consistent payout policy – with stable to rising dividends. Our analysis shows that companies with such a policy have consistently outperformed the benchmark over the last decade.

To read report in detail: STRATEGY

>AARTI INDUSTRIES LIMITED: Core strengths & Key developments(Q1 FY13)

• Presence in high margin specialty chemicals with diverse applications 
• Global Scale Units Manufacturing more than 125 products 
• Ability to Supply Basket of products to Global Customers & MNCs 
• Tagged as “Strategic Supplier” by various Global MNCs 
• Backward Integration 
• Latest Manufacturing Technology & World Class R&D 
• Superior Cost Management Skills & Economies of Scale 
• Capability to convert by-products into commercially viable product 
• IPRs for Developing Customized Products & Products under Secrecy Agreements 
• Captive Power Plants

To read report in detail: AIL

>RAYMOND INDUSTRIES

Short term blip in long term growth story
Raymond Ltd Q1 FY13 results were below street estimates, both on the topline and bottom-line front. In Q1 FY13, company's net sales increased 9.5% Y-o-Y however declined 12.5% sequentially to Rs. 8377.1 mn while the EBIDTA margin declined ~565 bps Y-o-Y and ~ 464 bps sequentially to 3.7%, primarily on account of lower margins in the Textile and Branded apparel business.

Textile and Branded apparel segment impacted due to poor consumer sentiments, higher input costs, inventory liquidation, lower contribution from high margin products … In the quarter, the textile division sales increased 6% Y-o-Y to Rs. 3.66 bn while that of the branded apparel segment declined 3% Y-o-Y to Rs. 1.71 bn, on account of a weaker demand profile due to poor consumer sentiment and a subdued wedding season. The EBIDTA margins of textile and branded apparel division declined ~ 1000 bps Y-o-Y and ~ 700 bps Y-o-Y to 5% and 6% respectively. The management expects the demand to recover in H2 FY13 on account of a strong wedding and festive season.

…However, Other segments showed robust performance
In Q1FY13, Raymond Zambaiti - JV net sales increased 29% Y-o-Y to Rs. 0.68 bn while the EBIDTA margin of the business increased ~ 400 bps Y-o-Y to 14%. The capacity utilization of the 21.6 mnpa plant improved to 76% and likely to be fully utilized by FY13.

In the quarter, Indian denim business net sales increased 3% Y-o-Y to Rs. 1.98 bn while the EBIDTA margin which increased ~ 200 bps Y-o-Y to 13%. The plant operated at 100% capacity utilization. The segment is likely to continue its robust performance on account of a good order book.

In the quarter, the Tools and Hardware sales increased 30% Y-o-Y to Rs.0.91 bn while the margin expanded 200 bps Y-o-Y to 13%. The auto component sales increased 20% Y-o-Y to Rs. 0.39 bn while the EBIDTA margin ~ 200 bps Y-o-Y to 17%.

Emphasis on core brands, cost rationalization and retail network expansion continues…
In the quarter, the company added 28 stores taking the total count of stores to 867. In Q1 FY13, the company added 21 EBO while the retail space increased 11% Y-o-Y to 1,681 thousand square feet. For FY13, the company is likely to add 80-100 stores. In the quarter, company reported exceptional expense of Rs. 129.2 mn on VRS payments for 140 employees. The company is likely to carry out further employee rationalization which may put pressure on the bottom-line in the short term but is positive in the long term.

Valuations and outlook
We cut the EBIDTA estimates of FY13 by 7.8% to factor in the subdued Q1 FY13 results. At the
CMP, Raymond is trading at an Adjusted P/E of 13.0x FY13E and 9.6x FY14E EPS of Rs. 27.4 and Rs. 37.1 respectively. Over FY12-14E, we expect the company's sales and EBIDTA to grow at CAGR of 12% and 13% to Rs. 45.45 bn and 5.9 bn respectively. Raymond is trading at an EV/EBIDTA of 6.5x FY13E. We value the company at an EV/ EBIDTA multiple of 8.0x FY13E, a ~25% discount to its historical average; we arrive at a revised target price of Rs. 480 per share. The company's ~ 125 acres Thane land could fetch Rs. 15.0 -18.75 bn (implying valuation of Rs. 244- 305 per share) at conservative land valuation of Rs 120-150 mn per acre. However we do not factor the land valuation in arriving at our target price. We believe any sale of land would substantially reduce the debt and strengthen the balance sheet and would drive further re-rating in the stock. We have not factored in valuation of land in arriving at our target price. Any form of real estate value unlocking would be value accretive.

RISH TRADER

>KALPATARU POWER

Kalpataru Power’s (KPP) Q1FY13 numbers were above our estimates adjusting for INR130mn of forex (mark to market) loss. While revenue grew 20% YoY, margin declined 60bps YoY to 10.8% (adjusting for forex loss) primarily due to higher input cost. Order inflow dipped 33% YoY to INR6bn in the absence of any big-ticket order during the quarter. The company has lowered its FY13 EBITDA margin guidance for JMC from 7-8% to 6-7% on back of increased volatility in commodity prices. Maintain ‘HOLD’ with revised target price of INR 78 (earlier 84).

Margin pressure sustains; execution remains steady
KPP’s revenue grew a healthy 20% YoY, better than estimate. Margin (adjusted for forex loss) fell 60bps YoY to 10.8%, owing to higher input costs. Adjusted PAT increased 20% YoY to INR404mn. At JMC, revenue surged 51% YoY to INR5.7bn. However, margin plunged 290bps YoY to 5% due to high volatility in commodity prices primarily in cement and steel. For JMC, management has trimmed its FY13 margin guidance to 6-7% from 7- 8% earlier. KPP’s capital employed increased 16% YoY as the infra division’s capital employed doubled on increased debtor balance.

New orders down 33 % YoY; order book flat at INR 60.5 bn YoY
The company’s order inflow declined 33% YoY to INR6bn, owing to weak project awards. KPP stated that the order pipeline is healthy and it anticipates orders from MEENA region and CIS countries apart from PGCIL. The company’s standalone and consolidated order backlog stands at INR60.5bn (flat YoY) and INR116bn (up 10% YoY), respectively.

Outlook and valuations: Cautious; maintain ‘HOLD’
While we do not expect any upside in KPP’s operating profitability in the near to medium term, rising input cost in key subsidiary (JMC Projects) remains a concern, with limited pricing power. We maintain our ‘HOLD/SP’ recommendation with a Target price of INR 78(earlier 84) as we remain cautious on the company’s incremental order intake and margin profile given rising competition and higher working capital issues. The stock, on consolidated basis, is currently trading at P/E of 5.1x and 4.3x on FY13E and FY14E, respectively.


Key conference call highlights
• Forex loss: KPP stated that there was a forex loss (mark to market) of INR130mn on account of USD denominated loan and commodities, of which INR50mn has been charged to other operating expenses and INR80mn to interest cost.

• FY13E guidance: Management has reduced JMC margin guidance of 7-8% to 6-7% for FY13E on back of increased volatility in commodity prices with revenue guidance of 35-
50%. The company maintains its capex guidance for FY13E at around INR2bn (INR1bn
for KPP, INR 0.4-0.5 bn for JMC and INR400-500mn for Shri Subham Logistics etc).

• Infra projects update: The company has achieved financial closure of all 4 road BOOT projects viz., Rohtak Bowel (COD expected by Q4FY13), Agra–Aligarh (COD expected by Q2FY14), Bagpur Waiganga (COD expected by Q2FY15) and Rewa MP project (COD
expected by Q4FY15).

• Update on Subham Logistics- Subham Logistics posted revenue growth of 15% in Q1FY13 with EBIDTA margin of 14% and PBT of INR0.7mn. FY13E management guidance stands at 35 % revenue growth with EBIDTA levels at 15-16 %.

• Capex at INR 2 bn for FY13E- The company’s new tower manufacturing plant at Raipur is on track and is expected to start by September 2012 with INR 1 bn as capex. Also, JMC & Subham logistics will have capex equally at INR 500 mn.

• KPP stated that while ~60% of its order book is covered by price variation clause, ~40% is fixed price book.

• The company targets to maintain its debt (consol) at INR13-14bn by end FY13E, which currently stood at INR 15 bn and is likely to come down by FY13E end.

• 0% tax rate in JMC in Q1FY13 due to exemption in case of certain infra projects.

RISH TRADER