Friday, May 14, 2010

>Avoiding the sovereign avalanche (CITI)

The view from the valley

Avalanche warning

Surviving the fallout

To read the full report and charts: SOVEREIGN AVALANCHE

>ICSA: Stress due to revenue mix to continue (MACQUARIE RESEARCH)

Event: ICSA reported FY10 results that were in line with expectations. We are reducing our estimates on margins, as the projects business continues to dominate order book. In addition, we reduced our target price to Rs197 from Rs205.

■ Results in line with expectations: ICSA reported FY10 revenue growth of 11%, which was in line with our expectation. However, margin at 20.4% was slightly lower than our estimate, due to continued domination of infra projects in revenues. FY10 PAT stood at Rs1.3bn (vs our estimate of Rs1.34bn). We are maintaining our revenue estimates, which call for growth of 23% in FY11 and 20% in FY12.

Change in mix continues to affect margins, as expected: The shift towards the lower-margin infra projects segment continues. The high-margin software product business accounted for only 32% in 4Q FY10 and 34% for the full year.

We build in margins risk, due to higher mix of projects in overall revenues: We have reduced our FY11 and FY12 estimates to build in a margin decline to 20.3%, as we expect the current revenue mix to continue in FY11 (36% coming from software division and 64% coming from the projects business).Our previous margin estimate was 21.4%.

Order book is healthy at Rs18.4bn: Although the order book stands flat YoY, the composition has changed significantly. The projects business constitutes at 81% of order book in FY10 vs 66% in FY09.

Earnings and target price revision
We have reduced our EPS estimates for FY11 and FY12 by 9% each, building in lower margin due to the projects business. In addition, we have reduced our target price to Rs197 from Rs205.

Price catalyst
12-month price target: Rs197.00 based on a DCF methodology.
Catalyst: Higher revenues and margins from next quarter.

Action and recommendation
Stock attractive at 4.9x FY11 earnings: On our current FY11 EPS estimate of Rs31.5, the stock is trading at 4.9x. Our target price of Rs197 builds in margin risk due to low-margin infrastructure projects. We expect the revenue mix and margins in FY11 to be the same as in FY10.

To read the full report: ICSA


Cipla's 4QFY10 performance was disappointing. Key highlights are:
■ Net sales grew 3.3% YoY to Rs13.7b (v/s our estimate of Rs14.6b), EBITDA declined 6% YoY to Rs2.8b (v/s our estimate of Rs4.1b) and PAT declined 18% YoY to Rs2.1b (v/s our estimate of Rs3b). Revenue growth was lower than we had estimated due to lower than expected growth for domestic formulations, INR appreciation against the US$ and the management's conscious decision of not participating in some of the non-remunerative ARV tenders.

■ EBITDA margin declined 200bp to 20.4% as against our estimate of 28% mainly due to lower than expected topline growth, significant drop in OOI (which directly adds to EBITDA) and higher than expected staff and other expenses.

■ Reported PAT grew 6% YoY to Rs2.8b despite weak operational performance due to one-time income of Rs950m from sale of the I-Pill brand to Piramal Healthcare. Adjusted PAT, however, declined 18% YoY to Rs2.1b.

We believe that Cipla has one of the strongest generics pipelines among Indian companies. After a long delay, we believe Cipla's CFC-free inhaler pipeline is likely to gradually get commercialized in Europe and upsides from high-margin opportunities like Seretide could come through over the next two years (our estimates do not include these upsides). Its large manufacturing infrastructure, strong chemistry skills and huge inhaler capacity make it a partner of choice for global MNCs that are ramping up their generics and emerging market presence. This coupled with its low-risk strategy and one of the strongest capex in the company's history should ensure good long-term potential. Temporary slow-down in overall growth, US FDA compliance and increasing working capital requirements remain our key concerns for the company. We expect Cipla to record EPS of Rs14.6 for FY11 and Rs17.4 for FY12, translating into 17% CAGR for FY10- 12. The stock quotes at 22x FY11E and 18.3x FY12E earnings. We have lowered our target price to Rs350 (20x FY12E EPS). We maintain Buy.

To read the full report: CIPLA

>SYNDICATE BANK: Margin expansion continues (EDELWEISS)

Syndicate Bank (SNDB) reported a PAT of INR 1,682 mn against our estimate of INR 2,226 mn on account of higher provisioning and tax rate. However, NII grew ahead of our estimate at 53% Y-o-Y and 20% Q-o-Q to INR 8,597 mn. While gross NPAs remained flat Q-o-Q, provision coverage dropped with slippages running high. Business growth picked up with advances growing 10% Q-o-Q to INR 914 bn. NIMs (cal) improved during the quarter by 33bps to 2.62%, in line with most PSU banks.

Business growth picks up; NIMs expand
After a muted growth over 9mFY10, growth eventually picked up for SNDB as its advances grew 10% Q-o-Q and 11% Y-o-Y to INR 914 bn; CD ratio improved 160bps sequentially to 78%. We expect the bank to grow its loan book at 20% over FY11-12E. Margin expansion continued for second consecutive quarter as the bank recorded 33bps improvement in NIM (cal) (against 37bps in Q3FY10) primarily benefiting from decline in cost of deposits (53bps), offsetting the
decline in yield on advances (21bps). We expect margins to expand further over FY11 benefitting from improvement in yield on advances as credit growth picks up. We build in 2.3% NIMs over FY11-12E.

Asset quality deteriorates marginally; provision coverage drops (ex tech write offs) to 51%
SNDB’s gross NPA remained flat Q-o-Q at INR 20 bn (2.2% of loans). However, net NPAs grew 17% to INR 9.7 bn (1.1% of loans) resulting in 730bps decline in provision coverage (ex tech write offs) to 51%. The bank restructured its loan book further, with restructured assets growing 7.7% sequentially to INR 45 bn (4.92% of loans). Slippages in restructured books touched 13.3% in Q4FY10 against 6% in Q3FY10.

Outlook and valuations: Core performance improves; maintain ‘BUY’
Margin expansion playing well in line with declining cost of funds is a trend witnessed across all PSU peers. Reliance on treasury income has receded and core earnings are supporting earnings. However, asset quality woes continue. We have broadly maintained our numbers for FY10-11, factoring in credit growth performance and higher non-loan related provisions. On revised numbers, the stock is trading at 0.8x FY11E adjusted book and 4.6x FY11E earnings, delivering RoEs of around 18%. The risk-reward continues to remain favorable at current valuations. We maintain ‘BUY’ on the stock and rate it ‘Sector Performer’ on relative return basis.

To read the full report: SYNDICATE BANK

>RELIANCE INFRASTRUCTURE: SC order prima facie negative: Fine print awaited (EDELWEISS)

SC squashes family MoU; no gas for Reliance Power’s Dadri plant
• The Supreme Court (SC) bench gave a 2:1 verdict in favour of Reliance Industries (RIL) by dismissing the validity of the family MoU that had entitled Reliance Natural Resources (RNRL) to source 28 mmscmd of gas (from RIL) at USD 2.34. The ruling implies that there would be no gas for the Dadri plant that was expected to generate ~7.5 GW of power, of which, 50% was to be on merchant basis.

Written order is expected this evening
• Assuming the decision is final and Dadri power plant is not expected to come up, the valuation of Reliance Power (R Power) would be lower by ~INR 40/share. This translates into an impact of ~INR 170/share for SOTP of Reliance Infrastructure (RELI). In addition, since RELI was also likely to get EPC orders to the extent of ~INR 250 bn, there would be a further ~INR 40/ share impact. Hence, our current RELI SOTP value of INR 1,451 would stand reduced at INR 1,241.

Possible recourse for RNRL
• Can approach GoI to get RIL’s gas at USD 4.2/mmbtu for its power plant
• This would negate the above mentioned adverse impact

Our view: ‘BUY’
RELI’s SOTP based on this decision would be lower by ~INR 210/share, at INR 1,241. Considering the stock has already corrected by ~8%, to ~INR 970/share, we recommend investors to use this as a buying opportunity.

To read the full report: RELIANCE INFRASTRUCTURE


■ Q4 revenues rise 22% yoy on the back of an estimated 12-14% growth in volumes.

■ Lower RM, staff and SG&A expenses support margin expansion of over 11ppts.

■ Co posts a profit on a pre-exceptional basis vs loss of Rs169mn a year ago.

■ QIP proceeds of rs 3.4bn to be utilized to repay debt; we factor in a 27% reduction in interest cost in FY11 but retain MP with a revised TP of Rs 138.

To read the full report: RADICO KHAITAN