Friday, April 16, 2010

>India Fraud Survey Report 2010 (KPMG)

With greed increasingly informing the thought process and the actions of a large number of persons, fraud has a bigger presence in our lives than ever before. Fraud, an intentional deception made for personal gains or to damage another individual, is a significant factor worldwide in today’s competitive world, and in entities irrespective of their size. Fraud is a major source of risk which can have disastrous effects on the finances of a company. It can cause irreversible and often irreparable damage to the image and reputation of a company. In recent times, with increase in awareness, companies have started focusing on pro-active risk management strategies. However, a lot remains to be done, especially having regard to the complexity of instruments and the speed of transactions.

India has had its share of frauds and their incidence has often significantly impacted investor confidence. In an atmosphere of doubt and disbelief financial statements are often viewed with scepticism. This has also led to erosion of confidence and reduced trust among participants in the financial system.

The KPMG India Survey Report 2010 is an effort to provide a clear picture of what really happens in corporates today. The findings are, to put it mildly, disquieting. The mistrust of employees towards their senior management is unmistakable. Despite this, control mechanisms are not in place in most organisations and hence, the need for risk mitigating strategies is unquestionable. It is time that India Inc. sits up and ends its tolerance of unethical behaviour, bribery and corruption. Managements of companies have not only to act ethically but also to intensify their efforts to protect their companies from fraud. They should develop pro-active risk management mechanisms that can anticipate, prevent, understand, detect and respond to fraud.

This report highlights the urgent need for action from managements of companies against fraud. Even a strong regulatory system cannot always prevent fraud. The key lies in management decisions and recommendations to establish formal control systems that can help prevent or at least deal with fraud. I am hopeful that this survey will not only enhance awareness but also persuade corporates to move faster on the road to fraud prevention and risk mitigation.

To read the full report: FRAUD SURVEY 2010

>Q4FY10 RESULTS PREVIEW: Can strong earnings lead to upgrades?

To read the full report: RESULTS PREVIEW

>ABAN OFFSHORE: Asset placement to ease cashflow strain (AMBIT CAPITAL)

■ Two assets placed; day rate disappoints
As expected, Aban announced placement of two of its jackups namely, Deep Driller-1 (DD1) and Aban VII. While DD1 has been placed under contract with a leading domestic E&P operator at a day rate of US$112,000 for a period of one year (plus 2 optional periods of 6 months), Aban VII would work as an accommodation barge at a day rate of US$60,000 for a 6-week duration (~30% lower than our day rate expectation of US$130,000 on a blended basis). However, we also observe that Aban VII would incur marginal opex, implying lower impact (to the extent of ~20%) at the EBITDA level.

■ Two assets remain idle; Abraham deployment key
Aban currently has two idle assets - DD6 and DD8. Our understanding suggests that these assets are likely to be placed by 2QFY11E, against our earlier expectation of 1QFY11E. More importantly, drill ship Aban Abraham (current earnings US$325,000/day) completes its contracted term by end-1QFY11E. We believe that re-deployment of this asset would be critical to the company's earnings for FY11E and thereby to its ability to make good the debt obligation of ~US$375mn for the year.

■ 4Q PAT seen at Rs1.4bn
We expect the company to report PAT of Rs1.4bn (+58% QoQ) in 4QFY10E, implying FY10E earnings at Rs4.1bn (-24% YoY). Earnings for the quarter would be driven by deployment of Aban Pearl and FPU Tahara. We expect the company to report EBITDA of Rs6.1bn (+40% YoY; 17% QoQ), implying margins of 61%. We would like to highlight that our numbers do not factor in write-off of Rs1.95bn for investments made in Petrojack, an entity that has recently filed for bankruptcy. Hence downside risk to our numbers exist in case the write-off materialises.

■ Deleveraging story intact; Maintain BUY
We lower our earnings for FY11E by 13% and for FY12E by 4% driven by: a) lower-than-expected contracted day rates for DD1 and Aban-VII; b) delay in deployment of the two idle rigs; c) re-adjusting our day rate expectation from US$130,000k to US$120,000. Factoring in the above, our target price has been revised downward to Rs1,340 (Rs1,400 earlier). We, however, believe that the de-leveraging theme for Aban remains intact, with the recent deployments reaffirming our view. Hence we maintain our BUY recommendation on the stock.

To read the full report: ABAN OFFSORE


Nestle India Ltd. (Nestle), a 61.8% subsidiary of Nestle S.A. has been able to deliver strong turnover and profitability in CY09 – a period of uncertainties and challenges. During CY09, net sales grew by 18.6% supported by strong 20.4% growth in domestic market backed by increase in volumes as well as better realizations. Exports witnessed a de-growth of 2.9% on account of lower exports to Russia & Bangladesh, which was partially offset by improved realizations due to depreciation of INR in the first nine months of the year. Exports of culinary products continued to grow steadily; sale of sauces & noodles was satisfactory. Poor sale of infant nutrition products to Sri Lanka and Bangladesh impacted export turnover.

With changing lifestyle, Nestle continues to focus on understanding the evolving needs of the consumers through:
Constant innovation & renovation to develop products that are convenient
Enhance taste
Improve nutrition and wellness and

The benefits of this are clearly reflected is its increasing growth across the segments.
Significant Event
Acquisition of Healthcare Nutrition business: Nestle acquired the Healthcare

Nutrition business from Speciality Foods India Pvt. Ltd. w.e.f. Jan 01’ 2010 for ~Rs. 6.7 crore. The product portfolio is meant to satisfy the needs of consumers with special malnutrition requirements. In India the products are sold under the brands like RESOURCE, OPTIFAST and SPERT.

Brand Focus
RESOURCE Management of malnutrition and diabetic people OPTIFAST Nutrition supplement for overweight people SPERT Protein supplement

We believe the new products will further strengthen Nestle’s leadership position in providing nutrition & Health and Wellness.

Financial Scan
During CY09 Nestle’s top line grew by 18.6% to Rs. 5,129.4 crore, EBITDA grew by 19.8% to Rs. 1,034.5 crore and net profit grew by 22.6% to Rs. 655.0 crore.
Domestic sales constituted 94% of total sales and balance was exports.
Excise duty as % to sales declined significantly to 1.8% in CY09 as against 3.3% in CY08. With government increasing excise duty rate by 200bps in Budget 2010, we expect excise duty for Nestle would be higher going ahead.
Despite challenging times, Nestle was able to maintain operating margins, in fact OPM marginally improved by 20bps to 20.2%. Decline in RM consumed and purchase of goods as % to sales (from 49.5% in CY08 to 47.9% in CY09) lead to improvement in margins. As a consequence, NPM improved from 12.4% in CY08 to 12.8% in CY09 on the back of better operating leverage, decline in effective tax rate. The effective tax rate declined to 28.6% in CY09 compared to 30.9% in CY08.
ASP expenses increased as % to sales from 4.5% in CY08 to 5.2% in CY09 as competitive landscape became more sensitive.
All the segments showed good growth except for beverages. Milk products & Nutrition grew by 19.2%, prepared dishes & cooking aids grew by 26.9%, Chocolates & confectionery grew by 13.5%. Beverages grew marginally by 0.4% on the back of realization (volume declined by 3%).
Nestle paid a total dividend of Rs. 48.5 per share during CY09. At CMP of Rs. 2,715 it gives a dividend yield of 1.8%.

To read the full report: NESTLE INDIA


Greenply Industries Limited or “Greenply” is the largest Interior infrastructure company in India, engaged in the business of Manufacturing and Marketing Plywood and allied products,
Laminates, Decorative Veneers and Particle boards. It operates through 28 branches across India and has a strong Dealer/Distributor/Sub-dealer/Retailer network of over 9600 and a
presence in over 300 cities. The company manufactures its products through its ultra modern production units in six states located in Nagaland, West Bengal, Uttarakhand, Rajasthan, Himachal Pradesh and Gujarat. 'Greenlam'; its flagship Decorative Laminate brand is exported to more than 50 countries including Thailand, Indonesia, Taiwan, Canada, Bahrain, Hong Kong, Malaysia, Singapore, Kenya, Dubai, Russia, Syria, USA, Australia, Mexico, Saudi Arabia, China and Israel.

Currently it works through two key segments, Plywood & Allied Products, and Laminates & Allied Products. Note that, Greenply accounts for more than 25% of the organized Plywood and 20% of the organized laminate market in India.

Plywood and Allied Products
Greenply's plywood range comes from the finest A+ grade timber and goes through a stringent 5-step process making it termite and borer resistant. Besides the cold and hot press process and the post resin treatment, Greenply's tenderizing is an in-house patented process. The company derives a substantial chunk of its revenues and profits from this division and though the overall % contribution from the division is expected to go down from 50% plus levels, historically; it will still be a steady and firm performer in the years to come. Greenply’s Plywood quality can be judged from the fact that, it was the first company to introduce a lifetime guarantee on its premier brand, Green Club Premium Plywood.

The company is expected to work at 100% capacity utilization for the next few years while the realizations are seen improving steadily, leading to increase in Revenue. The other smaller segment Particle Boards is also expected to witness rising realizations and sales in the

To read the full report: GREENPLY INDUSTRIES