Sunday, July 25, 2010

>The rise of the aspirational Indian

In our 1st July note we highlighted that ‘aspirationals’ stocks have outperformed ‘essentials’ on both fundamental and stock price performance over the past decade. Today we highlight that in a high inflation environment in particular, ‘aspirationals’ deliver higher top and bottom line growth than ‘essentials’.

Aspirationals outperform essentials in all ‘GDP growth – inflation’ combinations barring ‘low GDP growth, low inflation’

An 11 year time-series analysis of the ‘aspirational’ vs ‘essential’ product companies’ financials yields the following results (see Table 1 below for a summary):

• In terms of EBIDTA growth, aspirationals outperform essentials under all four macro settings (see Fig 1 and 2 on the right side). In fact aspirational product companies’ EBIDTA expanded at a greater pace (YoY) than that of essentials in 31 of 43 quarters under study (see Fig 3 below).

• In terms of net sales expansion, aspirationals outperform essentials under all but one (low growth, low inflation) setting.

• In a high inflation environment in particular, ‘aspirationals’ deliver higher top and bottom-line growth than ‘essentials’ irrespective of the GDP growth environment.

To read the full report: MACRO OUTLOOK

>LARSEN & TOUBRO: The leader takes it all

LT- MHI, Joint ventures start production
L&T and MHI has started the production at its facility in it newly set facility at Hazira. The JV’s (50% each) will have installed capacity to produce 4,000 MW of Boilers and Turbines annually.

Apart from these two factories, the company is also setting up dedicated factories for axial fans, air-preheaters, electrostatic precipitators, high pressure piping and a forge plant. We believe these units will increase the indigenization of the manufacturing of the overall BTG
units for L&T and would result in higher margins.

LT emerges as lower bidder for Hyderabad Metro Project
L&T has emerged as the lowest bidder for the Hyderabad Metro Project. The company has put in INR14.6bn as the Viability Gap Funding (VGF) which is the lowest. The project has a 5 year construction and 30 years concession period which can be extended by another 25 years.

Transtroy BEML constortium (VGF- INR22bn) and Reliance Infrastructure (VGF – INR29.9bn) were second and third in terms of lowest VGF.

The project will provide ~INR90bn of EPC opportunity for the company which will be executed over the next 5 years.

Order inflows to meet guidance – 25% growth for 1QFY11
Based on the announced orders we believe the company is well positioned to have a 25% order inflow growth – as per guidance.

We estimate that the total order inflow for the quarter would range from INR106bn to INR129bn implying a 11.2-35% growth in order
Our base case for order inflow stands at INR118bn translating into 24% order inflow growth.

Target upgraded to INR2,097
The strong order inflow for the last 4 quarters and strong execution in 4QFY10 would take the company to a high growth trajectory.

We have revised our target price from INR1,781 to INR2,097 on 1 year rolling basis and INR2,186 on FY12 basis.

To read the full report: L&T


Bullish on Sterlite’s exposure to zinc
Sterlite has augmented its zinc capacity though organic and inorganic routes. Dariba smelter added 210ktpa, Anglo’s assets would add c.400ktpa taking the total zinc-lead capacity to 1,462ktpa; in all c.11% of the world’s total zinc-lead capacity. We are bullish due to two emerging themes for the zinc market - China’s robust concentrate imports, coupled with struggling global mine supply.

Downward revision to our short term metal estimates
The UBS global commodity team has decreased its 2010 estimates for zinc from 105c/lb to 93c/lb (-12%) and aluminium from 103c/lb to 94c/lb (-9%). This is due to aggressive sell-downs in inventory on concerns over policy tightening in China, slower loan growth and industrial activity and the ‘post-stimulus’ slowdown. We incorporate lower metal prices into our estimates.

Expect to catch up underperformance to metals index
We have revised our earnings estimates by -9.2%/ -7.3% for FY11/12 following the revision to our metal price estimates. Sterlite has underperformed the BSE Metals index by c.8% YTD; we believe it should catch up on the underperformance with the bullish outlook on zinc

Valuation: Reiterate Buy; lower price target to Rs225
We reiterate our Buy rating with a lower price target of Rs225. We base our price target on a sum-of-the-parts valuation of individual businesses. The value of businesses is derived from an NPV valuation method using explicit mine life forecasts. We assume a WACC of 13.2% for the copper and zinc business and 12.1% for BALCO.

To read the full report: STERLITE INDUSTRIES


Strong bounce back in order inflows; current valuations stretched
Armed with a robust order book, Thermax started FY11 with a sharp bounce back in growth during 1QFY11. Revenues grew by 45%, while PAT grew by 42% during the quarter. More pertinently, the standalone order backlog increased to Rs63bn (96% growth YoY), with an across-the-board improvement in order inflows.

An improvement in the macro environment and a pick-up in the capex cycle enhances the visibility in order flows for the company’s base boiler and captive power divisions. This apart, the new technological tie-ups in the power and environment space is expected to result in strong order accretion in FY11. Despite the increased visibility for growth, valuation has got stretched on account of the sharp run-up in the stock’s price. Thermax currently trades at 22x, a premium to the large cap companies in the capital goods space. Hence, we downgrade the stock from Buy to Hold.

Key highlights
Across-the-board improvement in order accretion: Order inflows during the quarter improved significantly with a 70% growth to Rs17bn. All the divisions of the company witnessed a growth in order flows. In the captive power segment, Thermax won large orders of Rs5.8bn for a 72 MW combined cycle gas based power plant. Even after excluding this large ticket order, the order flows remained strong. The closing order backlog at a standalone level stood at Rs63bn, a growth of 96% YoY. The key industries contributing to the order backlog include power, refineries, ferrous metals, paper, cement and mining.

Update on JVs: Thermax has started negotiations with state governments for acquiring land for the boiler plant under the JV with B&W. The company expects the process to be completed well in time to bid for the NTPC tender for 800 MW supercritical sets. The manufacturing plant is expected to commence operation by Feb-Mar11. The team under the JV with SPX has been formed and has already generated order enquiries worth Rs5bn. The order accretion in this venture is expected to commence in 3QFY11.

To read the full report: THERMAX LIMITED

>UNITED SPIRITS: Less Bulk, More Brands (CITI)

W&M: Brand focused — Mgmt noted that W&M will focus on emerging markets and branded scotch, moving away from its current bulk business. We believe this is a long-term positive. The new business model is in keeping with W&M’s status as a leading global scotch manufacturer. Execution will remain a key imponderable In the near term; earnings will be affected – mgmt has guided to EBITDA of £33m (-40%) in FY11 on a revenue base of £110m (3.5-4m cases). Mgmt expects EBITDA growth of ~15% CAGR over the next 2 years. W&M's scotch inventory of 103m litres is valued at £430m as of June 2010.

Domestic business: Directionally positive — Wet goods costs have softened to Rs143/case in 1QFY11, down from ~Rs151-152/case in 1QFY10 and Rs148/case in 4QFY10. Mgmt expects input costs to remain at current levels during 2Q before softening in 2HFY11. However, mgmt noted that glass prices (~20% of COGS) are expected to harden in August by ~7%. Lower input costs coupled with better fixed cost mgmt and controlled BTL spends should ensure EBITDA margins remain ~20%. Volume growth is expected to continue at a healthy pace of 12-15% Y/Y.

Capital structure: Remains challenged — Overall, gross debt is Rs56.8bn end June, up ~Rs2bn Q/Q, driven by higher requirements of working capital (~Rs1.8bn), and investments in 3 tie-up units (~Rs1.6bn). We don’t expect debt levels to meaningfully reduce, despite strong profit growth, in the backdrop of: a) elevated capex spends over the next 3 years (Rs11bn – firmed up from ~Rs7-8bnearlier), and b) uncertainty on working capital/NCA. From a cash flow/debt servicing perspective, UNSP is comfortably poised. The option of selling treasury shares (8.4m shares, value of Rs11.6bn) and reducing debt is a tangible positive.

Maintain Buy — Given the recent run-up in the stock, we might not see meaningful stock price appreciation in the near term, especially in the context of W&M’s revised forecasts. We note W&M’s EBITDA cut of ~40% could adversely impact our consolidated PAT estimates by ~13-18% over FY11-12E.

To read the full report: UNITED SPIRITS

>NHPC LIMITED: Established track record in implementing hydroelectric projects (ICRA)

Company Overview: Incorporated in 1975, NHPC Limited, formerly known as National Hydroelectric Power Corporation Ltd, is the largest hydro power company in India. It has developed and constructed 14 power stations and its current total installed capacity is 5,295 MW with a major presence in the Northern and Eastern parts of the country. Its 51 per cent subsidiary, NHDC, has 1,520 MW under operation and is also considering development of a 1,320 MW thermal power project in Madhya Pradesh. The company has 4.6 GW capacity under construction, while 6.7 GW is under different stages of planning and awaiting clearances.

Key Business Highlights
Established track record in implementing hydroelectric projects
NHPC has vast experience in the development and execution of hydroelectric projects. The company has managed the development and implementation of 12 hydroelectric projects, and two thermal power projects through its subsidiary, NHDC. The two hydro power projects ‐ Chamera‐II and Dhauliganga‐I were completed ahead of schedule.

New tariff order for FY10‐14
New tariff norms will provide incentives for early commissioning of projects, while the ROE has also improved to 15.5 per cent from 14 per cent. NHPC is entitled to receive incentives for achieving a plant availability factor greater than the Normative Annual Plant Availability Factor (NAPAF) as well as for generating energy in excess of the design energy level of the plant.

Long term PPA (power purchase agreements) with the customers
At the time of making investment decisions on new capacity or expansion of existing capacity, NHPC typically has commitments for the purchase of the output. In FY09, NHPC derived 84.81 per cent of its consolidated total income from the sale of energy to State Electricity Boards (SEB) and their successor entities, pursuant to long term power purchase agreements. These billings to
state entities are currently secured through letters of credit generally entered into through tripartite agreements among the GoI, the RBI and respective state governments.

Capacity expansion by 80 per cent by 2013
NHPC is set to increase capacity by 80 per cent from 5.1 GW in FY09 to 9.4 GW by FY13. The company has 4.6 GW capacity under construction, while 6.7 GW is under different stages of planning and awaiting clearances from CCEA. Further 7.6 GW is under survey and investigation.
Key Risks

• Hydro‐power projects typically require a long gestation period thus posing a risk of delay in execution.

• Border dispute with China over Arunachal Pradesh can hamper the future prospects of projects planned in that region by NHPC.

The stock is currently trading at a P/E multiple of 17.1x on its FY10 EPS of Rs. 1.8 and 11.9x EV/EBITDA multiple based on FY10 EBITDA of Rs. 4,129 crores.

To read the full report: NHPC LIMITED