>Indian Oil Corporation Limited: The entry tax jolt

IOCL lost UP entry tax case in Allahabad High court, liability of INR84bn: Allahabad High Court has dismissed IOCL's petition and upheld the UP Entry Tax Act 2007, whereby UP govt is entitled to levy an entry tax/octroi on crude oil at 5% (USD5.5/bbl at current oil prices) for its Mathura refinery. IOCL
will have net liability of INR84bn (refer table on page 2) including last ten-year demand with interest. Hon'ble Supreme Court while accepting the review petition has asked IOCL to deposit 50% of the accrued tax liability (INR42bn) and furnish bank guarantee for the balance within next few months. Hon'ble Supreme Court has also asked IOCL to pay the tax at the prevailing rates for the future period till the review petition is decided.


■ Entry tax - an irrecoverable item for refiners, to make Mathura refinery unviable: Entry tax has been an irrecoverable item for refiners and not included as part of the refinery transfer price (RTP) as it is based on import parity price and does not include local taxes. Entry tax burden of USD5.5/bbl is huge with respect to average USD6.1/bbl GRMs made by Mathura refinery (8mmtpa) during FY09-11 and an average net margin of USD3.9/bbl.


■ Full price hike in marketing looks difficult, we expect 2.5% underrealisation: IOCL will require MoP&NG approval (largely political clearance) for raising prices on regulated products in UP to cover this additional tax. On nonregulated products, IOCL will face the problem of substitution, as products imported from nearby states will attract entry tax in UP, which can be fully set-off against VAT. We believe that when Central Govt. itself is looking to raise prices of regulated products, it would be very difficult for IOCL to separately raise price in UP to pass through the entire entry tax leading to irrecoverable expense of ~2.5%.


■ Impact on earnings: IOCL has to provide for this entire liability of INR84bn in one go, wiping off FY12e earnings. Also payment of INR42bn in next few months will increase interest liability by INR3.4bn in FY13e. Assuming 2.5% less pass through, IOCL recurring EBITDA would be impacted by INR7.4bn annually (INR2.1/sh post tax) on IOCL's recurring earnings.


Valuation and outlook
■ Downgrade to HOLD: Considering Hon'ble SC doesn't reverse High Court order, we have reduced our earnings for FY12-14e. We have revised our valuation methodology and now value IOCL at an average of: i) FY12e 0.8x BV at INR174/ share; and ii) FY13e 10x EPS at INR200/share (FY13e revised EPS of INR20). We value listed investments at INR80/share. We downgrade the stock to HOLD in light of the above changes with a revised target price of INR267/share (earlier INR314/share).


To read the full report: Indian Oil Corporation Limited
RISH TRADER

>IDBI BANK: has strategic stakes in NSE, CARE and several other unlisted entities in the financial services space

Margins under pressure
IDBI Bank’s revenues and operating profit were lower than expected. Slow credit growth and rise in cost of fund contributed to the decline in profits. Chunky slippages also saw a decline in asset quality.


Quarterly Highlights
• Top-line lower than expected
• PAT down 9.7% YoY at Rs 4.1bn
• Credit growth at 16.2%YoY
• Deposit growth healthy at 17.9%YoY
• CASA improves to 19.2% up 414bps
• Asset quality healthy deteriorates, net NPLs at 2%
• Chunk of slippage from a single account
• Spreads under pressure
• Net interest down 12%YoY
• Operating profits down 27.3%YoY


Valuation
At current levels the stock trades at 0.8X FY13E adjusted book value and 6.95X FY13E EPS. We rate the stock an OUTPERFORMER with a target price of Rs 151. The bank has strategic stakes in NSE, CARE and several other unlisted entities in the financial services space. These investments are expected to provide down-side cushion. Key risks include a lower than expected CASA composition and greater than expected slippages.


Balance sheet consolidation
In line with its objective of capital conservation IDBI Bank reported muted balance sheet growth. Loan book was reported at Rs 1,562.17bn up 0.2%QoQ. Moderation in growth was witnessed with a 16.2%YoY growth as against 19.7% in the September 2011 quarter. Deposit growth was reported at Rs 1,771.23bn up 17.9%YoY and 1.5%QoQ. The credit-deposit ratio was reported at 88.2%. IDBI Bank improved its deposit franchisee, despite intense competition from new age private sector banks. CASA deposits were up 54.1% YoY and 4.1% QoQ; CASA composition improved to 19.2% vs. 15.1% in December 2010. Investment book growth was muted at 2.1%YoY and 7.9%YoY. IDBI Bank reported a balance sheet size of Rs 2,558.89bn a 2.2%QoQ growth.


Spreads under pressure as yields lag cost of funds
Sharp rise in cost of funds by ~150bps (YoY) to 8.6% hampered spreads as yields failed to keep pace. Yields inched up ~70bps (YoY) to 10.1%. Spreads dropped about ~80bps (YoY) to 1.7%, amongst the lowest in a series of several quarters. Tight liquidity conditions since May 2011 has seen the banks spreads decline, as the bank relies on bulk deposits. With the bank absorbed a portion of the rise in cost of funds net interest margins were down ~60bps (YoY) at 2.4%. Net interest income was down 12%YoY at Rs 10.6bn.




To read the full report: IDBI BANK
RISH TRADER

>VATECH WABAG LIMITED: a leading technology focused Indian Multinational in the water treatment industry

VATECH WABAG Limited, a leading technology focused Indian Multinational in the water treatment industry, with market presence spanning across three Continents, offers complete life cycle solutions for sewage treatment, process and drinking water treatment, effluent treatment, sludge treatment, desalination and reuse for Industries and Municipal Corporations.


Investment Rationale
■ Water & Waste water Treatment - A Paradigm shift to preserve Natural resources
Investment in water supply and sanitation is expected to double to Rs.1222bn during 2010-11 to 2014-15 from Rs.548bn in 2005-06 to 2009-10 .The water supply segment forms 67% of investments followed by the waste water which accounts for 28%.


■ Strong Order book rendering revenue visibility of more than 2 yrs
The current Order backlog as of Q2FY12 stands at 33bn with contribution from the domestic & international segment in the ratio of ~70:30. We expect the order backlog for FY12 to be ~Rs.34bn rendering a revenue visibility of ~30mths.


■ An Asset-lite model with Core focus on Technology, Collaborations & R&D
A technological focussed patented approach, VA Tech has established R&D centres in Chennai-India, Vienna-Austria and Winterthur-Switzerland. It has a research collaboration programme in India with the Centre for Environmental Studies, Anna University. It has also technical tie-ups with Sumitomo Corporation, Japan & Zawawi group in Oman.


■ Initiatives aimed to improve operating margins
Strategic initiatives like Centralizing engineering assistance from India, implementing low cost sourcing model via global procurement policy, emphasis on higher margin O&M Segment, adopting decentralized approach & Multi-Domestic Unit concept to increase local presence are being implemented to focus on improving margins.


■ Venturing across geographies
Apart from focusing on existing international countries, it is also looking at emerging opportunities in Saudi, Tunisia, Algeria, Turkey, China, Philippines, Srilanka & Maldives. A cash rich model, notably worth Rs.3.2bn in its balance sheet, it is scouting for acquisitions to grow inorganically.


■ Valuation
At the CMP of Rs.358, the stock quotes a PE of 10x FY13E EPS of Rs.35 per share respectively. We initiate a coverage with a Accumulate Rating on the stock, with a price target of Rs.424 per share based on its PE of 12x FY13E EPS of Rs.35 per share.


To read full report: VATECH WABAG
RISH TRADER

>TVS Motors: refreshes of Apache and Scooty coupled with 2 new model launches in the motorcycle segment & a new scooter (in FY13, timing not known)

Operating results better than estimates; Maintain Buy


TVS Motors’ (TVSL) 3QFY12 operating results were better than our expectations with EBITDA margin at 6.5% vs our estimate of 6.1%. Revenues at Rs17.6bn were higher than our estimate of Rs17.5bn, largely driven by higher-than-expected realizations (up 0.4% QoQ despite unfavourable product mix vs estimated drop of 0.2% QoQ). Though the other expenditure stood higher than our expectations, lower than expected pressure on input costs coupled with improved realizations helped the company report better than expected operating performance. As a result, PAT stood at Rs566mn, higher than our estimate of Rs513mn. Going
forward, we believe that refreshes of Apache and Scooty coupled with 2 new model launches in the motorcycle segment (one to be launched in May/June 2012 and the other in 2HFY13 in the executive segment) and a new scooter (in FY13, timing not known) will help the company in arresting market share loss and maintain decent volume growth. Post the recent correction in the stock price, we believe the downside is limited. We continue to maintain BUY rating with a revised target price of Rs70 (earlier Rs75, price cut in line with earnings cut).


■ Operating results better than estimates; PAT beats expectation: TVS reported overall sales of Rs17.6bn (est.: Rs17.5bn), up 7% YoY led by volume growth of 1.5% and realization growth of 5.5%. On a sequential basis, sales declined by 12%, largely driven by a drop in volumes by 11.9% as realization improved marginally by 0.4%. EBITDA margins for 3QFY12 stood at 6.5% compared to our estimate of 6.1%. This was largely on account of better-than-expected revenues and mild savings in RMC, as it helped the company negate higher than expected increase in other expenditure. As a result, PAT for the quarter stood at Rs566mn (up 1% YoY but down 26%QoQ) vs. our estimate of Rs513mn.


■ Other highlights: 1. Company raised prices by 1-3% in the domestic market during 3Q and 3.5% in the exports market; 2. During the quarter company invested Rs.258mn in PT Indonesia and did volumes of 4033 units (YTDFY12 investments in PT Indonesia stands at Rs.622mn and volumes are at 18,905 units); 3. It also made investments of Rs.150mn YTDFY12 in TVS Energy (60MW capacity is expected to be
commissioned by March 2012).


■ Valuations and Recommendations: At the CMP of Rs53, the stock is trading at 9.5x FY12E EPS of Rs5.1 and 7.9x FY13E EPS of Rs6.1. We continue to maintain our BUY rating with a revised target price of Rs70 (earlier Rs75, price cut in line with earnings cut). We are factoring in negative value of Rs.3 for PT Indonesia.


RISH TRADER