>RELIANCE POWER: Projects: Sasan start-up by Dec, Chhatrasal awaits formal FC

1QFY13 normalized EBITDA, PAT a tad below our forecast
At Rs2.27bn, Reliance Power’s (RPWR’s) 1QFY13 normalized net profit was ~3% below our forecast (marginally above consensus); reported PAT was higher at Rs2.4bn on the back of prior period adjustments. RPWR’s top line surprised on the back of third-party power purchases and sale (to meet PPA supply commitment from its Butibori facility), but normalized EBITDA (at Rs3.5bn) was 3% below our/consensus forecast despite sharply lower ‘other opex’. Treasury gains surprised yet again (Rs1.16bn vs our forecast of Rs0.7bn), but were offset by higher-than expected depreciation and interest outgo.

Rosa: RoE remains healthy at 30.7%, albeit down 150bp QoQ
In the first quarter where the entire 1200MW capacity was in commercial operation, the drop in Plant Availability (PAF) from ~92% to 81% led to a 150bp drop in RoE (normalized for prior period revenue) to 30.7%. As per the management, [1] coal mix during the quarter was 51% linkage, 39% imports and 10% domestic market-procured); [2] the receivables cycle remains in check; a combined escrow facility of Rs3.5bn for the entire 1200MW capacity (Phase-I,II) is in the works.

Projects: Sasan start-up by Dec, Chhatrasal awaits formal FC
[1] Coal production from Sasan-linked coal mines is expected to begin shortly; commissioning of Unit-1 (800MW) at Sasan is scheduled in Dec-2012. [2] Formal grant of Forest Clearance (Stage-I) for the Chhatrasal coal block, which would enable RPWR to commence construction of its Chitrangi facility, is awaited. [3] Tato-II (700MW) hydropower project has secured key clearances (TEC, FC) enabling start-up of construction activities. [4] On coal production in Indonesia. RPWR is in the process of awarding contracts for each component of the evacuation chain.

Big-ticket projects still subject to policy diktats; maintain REDUCE
Valuation remains expensive (22.4x FY14F P/E and 1.3x FY14F P/B) and one-half of the FCFE-based fair value remains concentrated in projects (Chitrangi, Sasan-II, Samalkot) wherein operational timelines and profitability remain subject to regulatory diktats and fuel supply risk

To read report in detail: RELIANCE POWER

>APOLLO TYRES: Rubber tailwinds

International rubber prices have declined by over 30% since the beginning of May in rupee terms with futures contracts suggesting that weak prices are likely to sustain. While domestic prices have declined a more modest 9%, historic trends suggest that they will converge in the
coming weeks. This bodes well for Apollo given that a 10% change in natural rubber prices implies a 270+ bps increase in India margins and 30%+ increase to consol EPS. Rubber is a much more critical driver for Apollo than volumes and suggests upside risks to FY13-14 earnings. BUY.

Rubber prices have been under pressure in recent weeks
International natural rubber prices have declined over 30% since early May in rupee terms to sub Rs140/kg while the December-January futures point to prices sustaining around the Rs140 mark. While the correction in domestic prices has been more modest so far (~9%), the historic correlation between the two suggests a pull back in domestic prices ahead. Domestic spot prices have already slipped to Rs178/kg. Given the historic premium of ~8% over international prices, a fall to around the Rs160/kg mark seems likely.

Significant positive for Apollo
Rubber is a key component of raw materials for Apollo (65% of India business RM in FY12). Within this, over 60% is natural rubber as the product mix is geared towards CV tyres. A 5% reduction in natural rubber costs points to a 14% increase in domestic Ebitda, 137bps improvement in margins and 16% increase in consol EPS. Factoring in a natural rubber price of 170/kg would imply a 45%+ increase to our consol EPS estimates.


Sensitivity to rubber higher than to volumes
While the soft domestic economic backdrop has raised worries about volumes, this is less critical for Apollo than rubber. A 5% reduction in our domestic volume estimate implies a 13% reduction in domestic Ebitda and 15% reduction in consol EPS estimates. This is actually less than the sensitivity to a 5% change in rubber despite being much less volatile than rubber prices.

Upside risks to earnings, maintain BUY
Given the tailwinds from rubber and the uptick in Europe margins visible in 1QFY13, we see significant upside risks to our estimates for Apollo Tyres. Even on current estimates, valuations are reasonable at 7.7x FY13 PE/1.3x FY13 PB. We reiterate our BUY recommendation on Apollo with a price target of Rs110, 25% upside. We see the worries around CCI as being overdone.

To read report in detail: APOLLO TYRES

>NAVABHARAT VENTURES

Nava Bharat Ventures’ (NBV) Q1FY13 adjusted standalone earnings came in at INR684mn, higher than our estimate of INR511mn. Earnings from the power business were up due to higher merchant realization of ~INR5/kwh (estimated INR4/kwh) while the sustained performance of the ferro alloys division aided profits further. Commissioning of pipeline capacities and a scale up in Zambia mines will boost earnings, going forward. Maintain ‘BUY’ with target price of INR290/share.

Adjusted PAT better than estimates
NBV’s standalone revenue at INR2.7bn was in line with our estimates of INR2.6bn though the adjusted PAT at INR684mn (INR33mn of forex losses) was better than our estimate of INR511mn. Power segment performance was robust on the back of a better‐than‐expected net merchant realisation of ~INR5/kwh during the quarter against our full year average estimate of INR4/unit. While costs for the Ferro alloy division have gone up, realizations have also increased 18% YoY to INR60K/t, improving the performance of the division. The management is guiding for a sale volume of 75KT of silico manganese and a 50KT conversion agreement with Tata steel.

Projects in pipeline on track
The under construction Orissa 64MW unit is expected to be synchronized in Q4FY13 post approval from the Orissa Power Transmission Company. Zambia coal mines have begun sale of high grade coal locally (sold ~6K tonnes, yielding PBT of @USD10/tonne in Q1) and are likely to scale up from 400KT in FY13 to 1MT by the end FY15. The older Orissa 64MW plant, which was under Section 11, has resumed operations and is selling ~20MW to GRIDCO and the balance on merchant (through the exchange).

Outlook and valuations: Near term trigger; maintain ‘BUY’
With the commissioning of Orissa 64MW project as the near term trigger and higher merchant prices tied up in the short term, we expect earnings to be firm. At CMP of INR191/share, the stock is trading at an attractive multiple of 7x and 6x FY13E and FY14E earnings respectively. Maintain ‘BUY’ with SOTP based TP of INR290/share.

To read report in detail: NAVABHARAT VENTURES

RISH TRADER

>JET AIRWAYS (CLSA)

Jet reported better than expected results for 1QFY13 with pre-ex PBT of Rs.456m after five successive quarters of losses. Yield improvements, particularly in the international business, helped drive 30% revenue growth. Costs remained under control and helped drive a 113% YoY increase in Ebitdar. Looking ahead, a strong yield environment, focus on route utilisation and tight cost control should help sustain performance. We now expect profitability to sustain over FY13-14 and significantly upgrade estimates. Upgrade Jet to BUY with a TP of Rs500.

Back in black after five quarters of losses
Jet’s 1QFY13 results reflected rising yields and high cost discipline amidst pressures from fuel, currency and higher airport charges. Ebitdar rose 113% YoY/100% QoQ with a margin recovery in both segments. Pre-exc PBT returned to positive territory after five quarters of losses, coming in at Rs456m against a loss of Rs2.7bn in 1Q12 and Rs3.3bn in 4Q12. At the reported level, FX losses were largely offset by gains on sale and leaseback of two aircrafts and net profit stood at Rs247m – the highest since 3QFY11.

Domestic – yields strong, focus turns to costs and efficiency
Domestic seat factors were at 76.2% (74.6% in 1Q12) while yields were up 10% YoY/9% QoQ amidst strong industry pricing. Fuel costs rose 8% QoQ/27% YoY as rupee depreciation filtered through while other costs grew slower than sales. Ebitdar margins stood at 15.0% (+700bps YoY/1040bps QoQ). Looking ahead, while 2Q will see seasonal weakness, the overall yield and load environment remains strong. Margin performance is being  complemented by tight cost control with Jet controlling staff, selling, maintenance and other costs to target a 5-8% reduction in cost/ASKM.

International – yields and loads strong, route optimisation in focus
The international business saw yields increase 21% YoY/10% QoQ while loads increased 5.8% YoY to 86.3% - an all time high. The improvement is being driven by route rationalisation and an uptick in gulf markets. Fuel costs rose 25% YoY while selling and staff costs declined. Ebitdar margins improved 580bps YoY/440bps QoQ to 17.0%. Looking ahead, the focus on profitable routes and recovery in gulf markets should help sustain margins.

Asset sales easing balance sheet pressure; upgrade to BUY
Jet is focusing on debt reduction with a target of US$400m for the year. The sale and leaseback of two aircrafts and engines in 1Q helped raise Rs720m and an additional 8-9 aircrafts are planned for 2Q. Given the improved performance in international and cost discipline in domestic, we now expect improved profitability over FY13-14, driving significant upgrades. Continuing strength in operating performance and debt reduction leaves room for upside. Upgrade to BUY from SELL earlier (TP Rs500, 6.9x FY14 Adj EV/Ebitdar).

To read report in detail: JET AIRWAYS

RISH TRADER