Wednesday, May 27, 2009



Energy segment boosts revenue growth; margins above estimates
Thermax’s (TMX) Q4FY09 results were significantly above our expectations, both on revenue growth and profitability fronts. For the quarter, standalone revenues grew 2.8% Y-o-Y to INR 9.5 bn, driven by higher-than-expected growth in the energy segment. Sequentially, revenues grew 19.3% in Q4FY09, a positive surprise after a 1.1% Q-o-Q dip in Q3FY09. Consolidated revenues declined marginally, by 0.4% Y-o- Y, to INR 10.1 bn in the quarter. For Q4FY09, standalone EBITDA grew 5% Y-o-Y to INR 1.3 bn. Standalone EBITDA margins were up ~30bps Y-o-Y to 14.1%. In Q4FY09, TMX posted a forex loss (included other operating expenses) of ~INR 259 mn, excluding which, EBITDA margins stand at ~16.8%. For the quarter, standalone PAT grew 17.1% Y-o-Y to ~INR 943 mn. While depreciation expenses increased 64.5% Y-o-Y to INR 100 mn, effective tax rate was lower ~1,000bps Y-o-Y at 30.3%. Standalone net margin for the quarter was up 120bps Y-o-Y to 9.9%. Consolidated PAT in the quarter grew 27.3%.

Strong order book; intake likely to pick up post H2FY10
TMX’s consolidated order book (adjusted for renegotiated orders) at FY09 end was at INR 30.8 bn. Order intake during the quarter was ~INR 5.8 bn. The scope of a few of TMX’s projects was revised, leading to contraction in the company’s order book. Amongst major orders that were revised, Brahmani Steel’s order value now stands at INR 3 bn (~INR 4.5 bn earlier) and that of Essar at INR 3.8 bn (INR 8 bn earlier). Management expects order accretion to pick up H2FY10 onwards.

Outlook and valuations
Improved visibility; maintain ‘ACCUMULATE’ We are revising up our estimates for FY10 and FY11 for the company on the back of increase in order accretion assumptions for FY10. In spite of the upwards revision we are still projecting a 7% Y-o-Y decline in order accretion in FY10. We have increased our execution period assumptions for the energy business by 30% from prior estimates. Our standalone revenues for FY10E and FY11E are now higher by 9.6% and 16%, respectively, from prior estimates. On the margins front, we now expect a ~20bps Y-o-Y decline at the EBITDA level to 12.5%, compared to earlier expected decline of ~70bps Y-o-Y. Hence, our standalone EPS estimates are higher by 20.2% and 23.1% for FY10 and FY11 at INR 24.1 and INR 29.3, respectively. Subsidiaries contributed INR 0.25 to consolidated EPS in FY09. We believe, if TMX bags a few large orders in the utility segment in FY10, its order backlog at FY10 end could be substantially higher than expectations, leading to higher-than-expected growth in FY11. The stock is trading at a P/E of 16.2x and 13.3x for FY10E and FY11E, respectively. Ex-cash, the stock is trading at a P/E of 15.3x and 11.7x FY10E and FY11E, respectively. We maintain our ‘ACCUMULATE’ recommendation on the stock.

Segmental performance
Revenues from the energy business grew 5.5% and those from the environment business declined 7.4%, Y-o-Y during the quarter. However, margins in the environment segment improved significantly by 640bps Y-o-Y. Management stated that the rise was a one off phenomenon and not sustainable. Further, the energy segment’s margins declined 170bps
Y-o-Y to 13.9%.

To see full report: THERMAX



■ Cargo handled at the port grew by 12%yoy to 9.5mt, higher than our expectation of 9.4mt. Bulk cargo volumes increased by 25.5%yoy to 5.5mt, crude cargo volumes increased by 7.9%yoy to 1.8mt (reversing a declining trend of previous two quarters) and container cargo volumes declined by 8.5%yoy to 2.3mt. Cargo volumes continue to remain strong with April-09 volumes at 3.25mt.

■ Revenues fell by 13.4% yoy to Rs2.84bn, lower than our estimate of Rs3.1bn, due to Nil income from land sales. FY09 revenues increased by 38.7% yoy to Rs11.35bn.

■ EBITDA margins for the quarter stood at Rs58.2% (-460bps qoq, 1330bps yoy) impacted mainly by Nil SEZ sales during the quarter. Resultant Q4FY09 EBIDTA declined by 29.5%yoy to Rs1.7bn against our expectation of Rs1.9bn. FY09 EBIDTA grew by 37.7%yoy to Rs7.4bn with EBIDTA margins at 64.9% against 65.4% in FY08.

■ Q4FY09 depreciation charges were higher by 34.3%yoy at Rs391m with adverse impact of Rs11.8m due to increase in fixed assets due to capitalization of forex losses of Rs882m for the year. Net interest charges were lower by 21.8%yoy at Rs225m due to higher interest income of Rs255m (Rs158m in Q4FY08) from unutilized proceeds of IPO funds (Rs7.9bn in March-09).

■ Overall, net profit before extra-ordinary items and forex gain/loss grew by 24.5% yoy to Rs1.2bn for the quarter, in line with our estimate of Rs1.2bn. The growth in net profit appears steep in the backdrop of a 39% fall in PBT due to the impact of very high tax provision in Q4FY08.

■ FY09 consolidated total income increased by 42% to Rs12.4bn from Rs8.4bn in FY08. FY09 reported consolidated net profit increased by 105% to Rs4.3bn from reported net profit of Rs2.1bn in FY08.

■ The company declared dividend of 30% for FY09 (including 20% interim dividend) against 15% in FY08.

To see full report: MUNDRA PORT


Crude steel production in all major steel producing countries/continents declined 3% in the month of Apr -09 compared to Mar-09. However, the production was down by ~24% on YoY basis. Asia (mainly China and India) which produced highest steel in the month of Mar-09 since Oct-08 was 3% down in the months of Apr-09. Steel production in all major countries/continents declined by up to 8% on month-on-month (MoM) basis led by EU (-8.1%), China (-3.7%), India (-3.3%), CIS countries (-3.3%).

During Jan-Apr 09 period, the world crude steel production was down 22.7% YoY led by US (-53%), EU (-44%), CIS (-33%) and Japan (-43%). India reported only 1.6% fall in production whereas China produced flat during the same period.

Steel prices in all major markets were on uptrend in last one month except the US. Steel prices in China and India went up by ~16% and ~2% in last one month. On the contrary, steel price in US continued its downtrend and fell ~6%. Indian steel association urged the government to impose a safeguard duty of 25% on imported HR coil and other flat products due to higher imports. The government did not take any such measure due to lack of evidence.

Total steel inventory at Shanghai, China which was falling continuously, started moving up from the beginning of May-09. The rise in inventory level was mainly due to lower consumption of steel due to increase in steel prices in China.

China steel export was also down in the month of Apr-09 compared to Mar-09. According to China Iron and Steel Association (CISA), China steel export may fall by 80% in CY09 to 12 mt (Vs 60 mt in CY08) due to massive fall in steel demand from export markets due to global recession.

To see full report: STEEL SECTOR


Liquidity easing but valuations stretched

Lacklustre results: Q4 revenues plunged 68% YoY to Rs1,545mn and PAT declined 90% to Rs72mn owing to a halt in new transactions and higher tax rate.

Volumes thin due to unaffordability of premium flats: Most of the company's ongoing projects consist of apartments with more than 1,500 sq ft saleable area, targeted at the premium segment. This has resulted in stagnant sales off take due to apartments being priced over Rs5mn.

Estimates lowered: We cut our revenue estimates by 22.1% for FY10 and 20.7% for FY11 due to slower-than-anticipated volume off take in core real estate business. However, PAT estimates have been raised by 17%, assuming that there would be no further correction in prices in FY11 and reduced interest burden.

Possible QIP issue a trigger for the stock: Sobha continues to have a high D/E of 1.7x with ~25% of its Rs18.75bn debt maturing in FY10. However, with liquidity concerns easing in the sector, Sobha may raise upto Rs7.5bn in FY10 through QIP issue.

Spin-off of non-core businesses may provide upside: Sobha’s plans to spin-off its non-core manufacturing and interiors businesses may provide further upside to the stock.

Upgraded to Hold: We have raised our target price to Rs150 from Rs56 due to upgrade in SOTP NAV from Rs140 to Rs200. We have provided 25% discount to NAV vs 60% earlier owing to liquidity concerns easing for the sector. However, Sobha’s minimal presence in affordable housing and questionable accounting practices makes us cautious on the stock and we recommend a Hold on the stock.

To see full report: SOBHA DEVELOPERS


Impressive Performance – HDFCs operating numbers and net profit numbers in Q4FY09 were impressive. Net Interest Income handily beat expectations coming in at Rs 870.9 crores during Q4FY09 on back of higher interest income from disbursements and better spreads. Unlike other private sector financial institutions, HDFC increased its disbursements in tough economic times. Loan approvals grew disbursement growth was reported at 16% yo- y and 3% q-o-q. Inspite of having no access to low cost deposits, HDFC interest expense growth in Q4FY09 was muted at 1% q-o-q. Non Interest Income growth was impressive at 125.7% q-o-q largely on account of dividends and fees from HDFC AMC.

Incremental Margins Improvement – Net Interest Margins improved incrementally to 2.21% for FY09 from 2.19% for 9MFY09 on back of lower funding costs. CP rates, a proxy for wholesale funding costs in India, have been trending down on account of comfortable liquidity environment and decreasing risk aversion. HDFC has been incrementally shifting its borrowings to the wholesale markets from deposits to benefit from the declining rates. HDFC strategy continues to be to hold onto margins as it has not followed SBI’s aggressive pricing strategy in home loans.

Asset Quality – Management focus on prudent underwriting standards during the upswing has helped withstand the pressures on asset quality. Gross NPLs amounted to Rs. 701.55 crores (0.81% of portfolio) as at March 31, 2009 down 3 bps from 0.84% as at March 31, 2008. Provisions for contingencies stood at Rs. 621.53 crores (0.72% of portfolio) as at March 31, 2009. Coverage ratio was high at ~89%, providing a buffer to future earnings.

Our View – At current price of Rs 2093 the stock is trading at ~3.86x FY10E P/BV. We maintain a buy on HDFC with a target price of Rs 2,475, giving an upside potential of 18% from the current levels, on account of:: 1) housing demand will improve in H209 due to better affordability, leading to a 18 – 20% y-o-y pickup in disbursements (high loan approvals and disbursements in Q4FY09 demonstrates HDFCs ability to withstand stiff competitions from public sector banks); 2) Net Interest Margins will improve as borrowing rates, especially in the wholesale markets, will remain low on account of benign liquidity conditions; 3) income from real estate fund management fees and asset management (HDFC MF) will remain an earnings driver in FY10; 4) strong asset quality will reduce earnings pressure; 5) RoE growth (~18% in FY09) on account of redeploying cash to support balance sheet growth will drive multiple expansion; 6) potential value unlocking in life insurance subsidiary.

To see full report: HDFC


Deepak Fertilisers & Petrochemicals Corporation Ltd. (DFPCL) posted a 1.2%YoY de-growth in sales to Rs3.3bn in Q4FY09 against our estimate of Rs3.2bn. OPM expanded by 152bps to 20.4% driven by fall in operating expenses. With higher other income (+155%) and lower effective tax rate, net profit grew by 26.5% to Rs396mn against our estimate of Rs258mn.

■ OPM expands on lower trading volume
Declined in traded goods by ~25% YoY to Rs0.9bn and decrease in cost of other expenses to net sales by 167bps led OPM to increase by 152bps to 20.4%.

■ Ishanya getting firm
Ishanya mall is making its mark in the interiors and exteriors in western Maharashtra. It registered over 1.3mn footfalls with conversion rate of ~35%.

■ Availability of gas to boost performance
DFPCL has begun purchase of consignments of LNG through GAIL pipeline (Dahej-Uran). Once regular gas supply starts from KG basin, company will be able to increase its capacity utilisation and eventualy profitability will improve.

■ Projects / New initiatives
DFPCL augmented its technical Ammonium Nitrate capacity to 132k MT from 90k MT p.a. in FY09. It further plans to raise its capacity of Ammonium Nitrate by 300k MT Taloja plant with a capex of Rs6bn, which is expected by Oct’10. Commissioning of Bentonite Sulfur plant (25k MT p.a.) at Taloja and Ammonia tank (15k MT) at JNPT is over and now company should be able to limit its exposure to highly volatile ammonia prices. Nitric acid facility with 450 MT p.d. should be commissioned by H1FY10 which will make DFPCL among the largest producer of Nitric acid in Asia.

At the CMP of Rs86, DFPCL is trading at a P/E of 6.2x and EV/ EBITDA of 3.5x FY10E. Favourable fertiliser policy & expected increase in availability of gas post RIL KG basin development, augurs well for DFPCL. We maintain our ‘BUY’ recommendation with a target price of Rs98, which implies a P/E of 7x FY10 earnings that is less than 5years historical median P/E of 7.4x.



■ Bajaj Auto 4QFY09 results are above estimates, but for forex loss of Rs218m on hedging instruments. EBITDA margins were at 15.2% and adjusted PAT of Rs1.87b.

■ Volumes declined 20% in 4QFY09 (two-wheeler sales declined 22% YoY where as 3Ws de-grew 7%). However, realizations in 4Q improved by 14% YoY (flat QoQ) due to improvement in product mix.

■ Revenue at Rs18.8b de-grew by 9%, due to 20% decline in volumes. However, improvement in business mix and RM cost savings led to 70bp QoQ (~260bp YoY) improvement in EBITDA margins to 15.2%, translating into EBITDA of Rs2.86b. During the quarter, Bajaj accounted for forex loss of Rs218m on hedging instruments. Adjusted PAT at Rs1.87b was higher by 22% YoY.

■ Higher INR/USD realization in FY10 would drive export realizations and EBITDA: Bajaj would benefit from higher INR/USD for its exports. For FY10, it has entered into collar option for US$535m (70-75% of expected export revenues). The collar option provides bottom side protection at Rs47 and caps upside at Rs55. At floor rate of Rs47, its export realizations would be higher by 14% over FY09 average rate of Rs41.2.

Upgrading estimates: We are upgrading our earnings estimates for FY10 by 13.9% to Rs72.4 and FY11 by 15.5% to Rs78, to factor in for a) Higher export realizations and b) RM cost savings of 370bp in FY10 over FY09. The stock trades at 12.9x FY10E EPS and 7.6x FY10E EV/EBITDA. Maintain Buy.

To see full report: BAJAJ AUTO


Steadying ship in turbulent seas

Impressive Outperformance – Kotak Mahindra Bank beat estimates with Net Profits increasing 40.7% q-o-q to Rs 171 crores on back of continued robustness in the core business. Profits growth from banking activity was even more impressive growing ~44% to Rs 102.6 crores in Q4FY09 from Rs 71.1 crore while profits from lending business (Kotak Mahindra Prime) grew 41% to Rs 47 crores. Capital Markets related businesses underperformed in Q4 with advisory business loosing Rs 3.8 crores on account of slowdown in corporate activity. Brokerage net revenues also degrew ~80% y-o-y as stock market volumes declined. The quality of earnings improved in FY09 as the share of profits from volatile capital markets business declined to 18% and the share of profits from banking and financing business grew to 67%. Management’s ability to manage balance sheet continues to be impressive as the bank was a net lender on most days during the liquidity crisis of
October 2008.

Net Interest Margins – The banks NIMs are easily the best in the industry. NIMs grew 40 bps y-o-y to 6% for FY09 from 5.6% in FY08. Wholesale funding was available at ~6% as the rates on the short end of the curve have been driven down by surplus liquidity while retail deposits, which compete with administered rates, were 150 – 175 bps more expensive at 7.5 to 7.75%. Management believed that it was prudent to boost margins by incrementally shifting funding sources to wholesale deposits from retail deposits.

Asset Quality – Management continued to be cautious during the turbulent times changing asset mix and slowing advances growth. Total retail advances were flat in FY09 at ~Rs 19600 crores. The compositions of retail advances shifted to lower risk secured assets, such as housing loans (which increased 300 bps y-o-y) and away from higher risk assets, such as unsecured personal and business loans (which decreased 400 bps y-o-y) and commercial vehicles (which decreased 200 bps). Gross NPA increased from 2.56% in FY08 to 3.64% in FY09 while Net NPA increased to 2.02% in FY09 from 1.65% in FY08. Coverage ratio declined 4% q-o-q on account of higher slippages.

Our View – At current price of Rs 619 the stock is trading at ~2.72 x FY10E P/BV. We maintain a hold on Kotak Mahindra Bank with a target price of Rs 695, giving an upside potential of 12% from the current levels, on account of: 1) balance sheet well positioned to grow advances by 10 – 15% without pressuring RoE or raising additional capital; 2) incremental shift in asset mix in favor of corporate advances will reduce risk; 3) potential multiple expansion of insurance subsidiary on account of policy changes; 4) rationalizing of bank branches will reduce operating expenses. 5) cost control measures (consolidating back office to lower rental premises and moving front office function to BKC) will improve operating efficiencies; 6) capital markets business well positioned fore recovery. Downside risks to out price target include: 1) volatility in the wholesale funding markets driving up funding costs and pressure margins; 2) slower than expected credit growth; 3) prolonged slowdown in capital markets and corporate activity driving down subsidiary profits

To see full report: KOTAK MAHINDRA BANK


Thesis reiterated post mgmt call

• Impressive 20%, 17% growth in replacement, industrial volume in 4QFY09; demand remains unscathed by slowdown.

• Company confident of improving margin given lower lead price, smelting capacity expansion and minimal price cuts.

• TP of INR70 (based on 13x FY10E EPS and INR10 for ING Vysya Life stake). Reiterate BUY.

Improved confidence in sustainable earnings growth
Our recent call with Exide’s management gave us confidence in our expectation of a greater than 25% EPS growth in FY10, on strong volume growth led by the replacement segment of automotive batteries and margin expansion led by lower lead price. The replacement segment, which accounts for more than half of Exide’s operating profits, rose 18-20% in 4QFY09. The segment will continue to impress in FY10 due to battery replacements driven by a higher vehicle base post the auto boom in FY03-07. The management was also confident about continued growth in the industrial segment, which was up more than 15% in FY09.

Pick-up in auto OEM demand a long-term positive
Exide is seeing improvement in demand from auto OEMs, coming out of the trough in the December 2008 quarter. Sales to auto OEMs, being low-margin, may only be marginally beneficial for the bottom-line in the near-term. However, it is a key long-term positive since higher OEM sales will eventually translate to higher replacement sales, due to increase in the vehicle base, and also because customers tend to largely replace worn-out batteries with the same brand which is pre-fitted in the vehicle.

Expect strong margin expansion in FY10
We expect a 250bp EBITDA margin expansion in FY10, driven by lower lead price (lead cost accounts for more than 50% of revenue) as well as greater reliance on cheaper recycled lead. FY10 will not be affected by the problem of ‘high-cost inventory in a falling lead price environment’ which affected 2HFY09, since about 55% of Exide’s revenue is governed by pass-through agreements. Since lead prices have stabilized in the USD1,200-1,400 range, the full margin potential should be visible starting 1QFY10.

Stock attractively valued
Our TP of INR70 is based on INR60 for the core business based on 13x FY10E EPS and INR10 for Exide’s 50% stake in ING Vysya life insurance. Even if we assign a zero value to the stake in the insurance business, Exide is currently trading at 10.7x FY10 EPS.

To see full report: EXIDE INDUSTRIES


Industry slowdown hurts performance

Sharp decline in topline: Bharat Forge (BFL) reported a sharp 49.7% YoY degrowth in topline to Rs2.9bn, on account of a 48.3% YoY decline in the domestic revenues at Rs1.7bn. The company also witnessed a slowdown in their exports; exports declined by a whopping 51.6% YoY at Rs1.2bn. The general economic slowdown across the globe as well as production cuts, especially in the commercial vehicle (CV) segment, led to a severe decline in the revenues on a standalone basis. Operating profits declined by 70% YoY at Rs427m, whereas operating margins declined by 10% YoY to stand at 14.6%. The company reported a forex gain of Rs987m on account of adoption of the revised AS 11 accounting norms. As a result, the decline in PAT was restricted at 26.2% YoY (Rs611m). However, excluding the forex gain, BFL reported a loss of Rs377m.

Consolidated performance: On a consolidated basis, BFL reported a decline of 46.8% YoY in net sales at Rs6.1bn, while reported PAT was down 68% at Rs203m. EBITDA for the quarter stood at Rs176m, a decline of 90.5% YoY. 􀂄 Increasing focus on the non–auto business: The facilities at the Baramati plant and the open die forge facility in Pune have commenced operations. These plants have an annual forging capacity of 125,000 tpa and are expected to generate a revenue of Rs10bn-11bn at their full capacity utilization. However, in the medium term, the utilization of the new capacity might be impacted due to a slowdown in the user industries (construction, mining and marine).

Outlook & Valuation: With the auto industry in US and India facing tough times, we expect the non–auto business to be the key growth driver for BFL in the long term. However, we believe that the non-auto business will start contributing significantly to the revenues post FY10E. The stock is currently trading at 19.0x and 12.4x our FY10E and FY11E earnings. Given the uncertain economic environment in the US as well as European markets (which account for ~65% of BFL’s consolidated sales) for atleast the next two quarters, we rate the stock as ‘Reduce’.

To see full report: BHARAT FORGE