Tuesday, January 31, 2012

>POWER SECTOR: Excerpts of Section 62 of Electricity Act, 2003 – Determination of Tariff

Only regulators have the power to cap prices and only for a limited period

  • We see no merit in recent reports claiming there are plans to cap power tariffs for projects with captive mines
  • As per the Electricity Act, only regulators have the power to put a price ceiling in certain circumstances and for short durations to ensure reasonable electricity prices
  • Historically, only once has CERC capped prices and only under short-term trades for 45 days, independent of fuel source

1. The Appropriate Commission shall determine the tariff in accordance with provisions of this Act for

a. supply of electricity by a generating company to a distribution licensee: Provided that the Appropriate Commission may, in case of shortage of supply of electricity, fix the minimum and maximum ceiling of tariff for sale or purchase of electricity in pursuance of an agreement, entered into between a generating company and a licensee or between licensees, for a period not exceeding one year to ensure reasonable prices of electricity;
b. transmission of electricity;
c. wheeling of electricity;
d. retail sale of electricity. Provided that in case of distribution of electricity in the same area by two or more distribution licensees, the Appropriate Commission may, for promoting competition among distribution licensees, fix only maximum ceiling of tariff for retail sale of electricity.

2. The Appropriate Commission may require a licensee or a generating company to furnish separate details, as may be specified in respect of generation, transmission and distribution for determination of tariff.

3. The Appropriate Commission shall not, while determining the tariff under this Act, show undue preference to any consumer of electricity but may differentiate according to the consumer's load factor, power factor, voltage, total consumption of electricity during any specified period or the time at which the supply is required or the geographical position of any area, the nature of supply and the purpose for which the supply is required.

4. No tariff or part of any tariff may ordinarily be amended more frequently than once in any financial year, except in respect of any changes expressly permitted under the terms of any fuel surcharge formula as may be specified.

5. The Commission may require a licensee or a generating company to comply with such procedures as may be specified for calculating the expected revenues from the tariff and charges which he or it is permitted to recover.

6. If any licensee or a generating company recovers a price or charge exceeding the tariff determined under this section, the excess amount shall be recoverable by the person who has paid such price or charge along with interest equivalent to the bank rate without prejudice to any other liability incurred by the licensee.

Excerpts of Section 63 of Electricity Act, 2003 – Determination of tariff by bidding process
Notwithstanding anything contained in section 62, the Appropriate Commission shall adopt the tariff if such tariff has been determined through transparent process of bidding in accordance with the guidelines issued by the Central Government.

To read the full report: POWER SECTOR

>RANBAXY: Resumption of review of ANDAs from Paonta and Dewas is subject to Ranbaxy

■ Consent decree seeks permanent injunction: US has filed consent decree of permanent injunction requesting court to a) permanently restrain and enjoin Ranbaxy under the Act, 21 USC from manufacturing, processing-distribution and related activities at all three sites including Paonta Sahib, Dewas and Gloversville; b) order that FDA be authorized to withhold review of any applications from any of these affected sites c) award damages and other equitable relief as deemed fit. As known, Paonta and Dewas have been under import alert since 2008 and Gloversville liquid formulation facility was closed in Oct-11.

■ Resumption of review of ANDAs from Paonta and Dewas is subject to Ranbaxy a) hiring a third party expert to conduct a internal review and audit applications b) implement procedures and controls sufficient to ensure data integrity and c) withdraw any applications that might contain data irregularities or that may make false claims. Ranbaxy relinquishes 180 day exclusivity for 3 small ANDAs, and could affect bigger exclusivities if certain requirements are not met. In addition, it prevents the company from participating under PEPFAR (for AIDS relief) program and allows FDA to cover additional facilities under decree if there is breach of compliance.

■ Base business recovery to take time, downgrading to UW: While company has set aside USD500mn provision for payment of fines, consultant and other fees, exact amount of fine payment is not discussed in decree. Since the announcement of consent decree stock has rallied c17% with expectation of gradual approval of affected products from the facilities. However, based on our understanding from consent decree we believe product approvals will take at least 1.5-2 years. We haven’t built any material recovery in base US sales, possible risk to exclusivities warrant us to lower our target multiple to 18x (from earlier 20x), 20% discount to other large caps. At 18x Sep-13 EPS of INR20 with reduced para-IV value of INR40 (from INR53, discounting due to higher price erosion in Lipitor) our new TP is INR400 (from earlier INR454). We downgrade to Underweight.

■ Valuation and risk
We change our valuation of the base business from 20x Sep-13 EPS to 18x Sep-13 EPS of INR20.03 (discounting RBXY 20% to other large caps like SUNP, LPC) given slower expectation of recovery in US and further delay in resolution of FDA issues. We additionally reduce para-IV value on back of higher than anticipated price erosion in Lipitor in first six months. We reduce para-IV value from earlier INR53 to INR40. Our new TP is INR400.

We believe with slower recovery in US there could be some pressure on recurring earnings in mid-long term which could result in earnings cut across the street. At current market price stock is trading at rich valuations of c22x CY12e EPS.

To read the full report: RANBAXY

>SIEMENS INDIA: Driven largely by margin erosion in the Energy business (most notably in Power Transmission)

■ Siemens AG’s Q1 results underline the weakening outlook: Siemens AG (parent company of Siemens India) reported a weak set of Q1 results yesterday. Most notable was the decline in order inflows from the Asian regions, particularly from India, where the order intake declined c59% y-o-y (adjusted for currency movement). This came in significantly below our expectation of c5% y-o-y growth for Siemens India orders and was driven largely by the non-repetition of large energy orders. Revenue growth in India stood exactly in line with our expectations at c8% y-o-y (adjusted for currency), supported by execution of prior years’ large orders and continued strength in short-cycle businesses.

■ Group EBIT falls c23%; India margins may disappoint: Siemens reported c23% fall in its sector profits (EBIT), driven largely by margin erosion in the Energy business (most notably in Power Transmission) owing to charges related to project delays. While it is difficult to gauge the impact on the Indian business, it is possible that the weak margins reported last quarter by Siemens India in Power Transmission business may persist in Q1 as well. As such, it seems likely that Siemens may miss our expectation of c400bp q-o-q recovery in margins to c12.1% in Q1.

■ Downgrade to UW (from N); maintain TP of INR765: As we highlighted in recent notes, we believe Siemens’ earnings growth will moderate significantly over the next couple of years, driven by weakening sales growth and likely margin erosion. If the company reports weak Q1 results, which now appears likely, the stock may witness significant de-rating and warrant consensus downgrades. We note that, at c27.3x FY12e PE, Siemens remains expensive compared with peers such as Areva T&D (and Crompton), which we believe offers a much better earnings growth profile. Hence, we downgrade our rating to UW (from N) and advocate switching to Areva T&D (ATD IN, INR178.4, OW, TP INR205) going into the results.

We highlight the key risks related to our investment case for SIEM:
Upside risks

  • Significant order wins
  • Better-than-expected improvement in margins
  • Continued strength in short-cycle orders
To read the full report: SIEMENS INDIA

>Q3FY12: Pfizer has established a 100% subsidiary to hive off its animal healthcare (AHC); Merger with Wyeth; Successfully launched insulin brands in domestic market

Lower sales growth, better margins
Pfizer’s Q3FY12 numbers were below our expectations due to 4%YoY sales growth. The company’s EBIDTA margin improved by 70bps and net profit grew by 11%YoY. Pfizer has realigned its marketing team with the addition of 200 MRs from Wyeth and created a new marketing team for the diabetes segment. The recently introduced insulin brands are doing well in the domestic market. Pfizer has established a 100% subsidiary to hive off its animal healthcare (AHC) business in line with the global re-structuring of AHC business. We reiterate
Buy with a target price of Rs1483 (based on 19x FY13 EPS).

 Lower sales growth of pharma division: During the quarter, Pfizer reported 4%YoY growth in total revenues from Rs2.61bn to Rs2.71bn due to lower sales from the pharm division. The results are strictly not comparable as the previous quarter ended Nov’10. Pharma sales (81% of revenues) grew by 6%YoY from Rs2.06bn to Rs2.18bn. AHC sales (12% of revenues) grew by 13%YoY from Rs302mn to Rs340mn. However, clinical services (7% of revenues) revenues declined by 27%YoY from Rs249mn to Rs183mn.

 Margin improves by 70bps: Pfizer reported 70 bps YoY improvements in EBIDTA margin from 18.5% to 19.2% mainly due to the decline in material cost and other expenses. Its material cost declined by 240bps YoY from 32.8% to 30.4% of total revenues due to the change in product mix. Its personnel cost increased by 270bps YoY from 15.1% to 17.8% of total revenues due to the addition of field force and transfer of 200 MRs from Wyeth. Pfizer’s other expenses declined by 100bps YoY from 33.6% to 32.6% due to improvement in productivity of field force. The company’s net profit grew by 11%YoY from Rs436mn to Rs483mn due to margin improvement & rise in other.

■ Good upside from insulin products: Pfizer has successfully launched two insulin brands in the domestic market. The company sources these products from Biocon. Pfizer has created a dedicated field force for the anti-diabetic segment and has plans to launch more products in this segment. It is also giving a thrust to its hospital business and rural marketing.

 Growing in line with the market: As per IMS MAT-November’11, Pfizer grew by 14% in line with the market growth of 14%. Eight of the company’s products appear in the list of top 300 brands in the domestic market. Pfizer’s Lyrica and Claribid grew by 28% and 37% respectively in the domestic market.

 Hives off AHC business: In line with the international re-structuring to focus on pharma business, Pfizer has created a 100% subsidiary to hive off its AHC business. The AHC business contributes around 12% to the consolidated revenues.

 Merger with Wyeth: In line with the international merger, Wyeth would merge with Pfizer in India. The merged company would rank 9th in the domestic market and 4th among MNC pharma companies in India. The merged company would have 13 products in the top 300 products (8 from Pfizer and 5 from Wyeth).

 Reiterate Buy: We have maintained our EPS estimates for FY12 and for FY13. We expect the company to benefit from good growth of its brands, launch of new products in the domestic market and expected merger of Wyeth. At the CMP of Rs1224, the stock trades at 18.8x FY12E EPS of Rs65.2and 15.7x FY13E EPS of Rs78.0. We reiterate Buy with a target price of Rs1483 (based on 19x FY13E EPS).

To read the full report: PFIZER

Monday, January 30, 2012

>RAYMOND: Cyclical blip on secular growth story

Growth moderation in FY13 but 

company remains a solid proxy 
for India’s consumption story

■ Action/Valuation: Maintain Buy with Increased TP of INR525
Even after we factor in the impact of a relatively muted 3Q results in our estimates, we raise our TP to INR525 as we roll forward our estimates to FY14. Our TP still values the core business at INR425 based on 6x EV/EBITDA FY14E, which implies 10.1x P/E multiple, and we continue to value land at INR100/share. The current valuation of 10.3x FY13F adj. EPS and 7.3x FY13F EPS adjusted for land value appear quite compelling to us. We view the current price level as an excellent entry point for a long-term secular growth story.

■ Scaled back topline growth estimates for FY12-FY13 after 3Q results
We reduce our FY13 sales growth rate estimate from 11.1% to 7.1% on the back of Q3 results and expected moderation in realization growth. We incorporate a slowdown in the consumer sentiment on account of high inflation in our FY12-FY13 estimates but expect growth to rebound in FY14. While we also reduce our margin assumptions for FY12, we increase our FY13 EBITDA margin estimate by 220 basis points as we factor in the fall in raw material price along with the closure of unprofitable businesses like Manzoni.

■ Catalyst: Short-term headwinds but long-term story remains intact
We think Raymond remains a solid proxy for the Indian consumption story where we expect consumers will upgrade to branded and higher-value products driven by rising income and increased discretionary spending. This trend should improve the current relatively low per capita apparel consumption and low penetration of retail in India. Raymond, with its range of brands, high brand recall and a solid distribution network, should be very well positioned to benefit from rising demand, especially in tier 3/4/5 cities and towns. Reiterate Buy.

■ Q3FY12 – Volume impacted by festival timing and poor consumer sentiment that should only last a short time
Sales growth moderated to 11.7% in Q3 at the consolidated level. Volume growth, which dropped to 3% y-y in the suiting fabric business, was flat in shirt & trouser and negative in other apparel businesses. One reason for the dismal y-y sales growth in Q3 has been the timing of Diwali. Diwali in FY12 was in October vs. in November in FY11. This resulted in September being the strongest sales month in FY12 vs. October in FY11. So comparing (Q2+Q3) performance, Raymond’s sales grew at ~19% in FY12 vs. ~20% in FY11 which is quite healthy, in our view. But as per management, consumer sentiment was depressed in
the past two months of Q3FY12 on account of high inflation.

To read the full report: RAYMOND

>SESA GOA: Western Cluster (Liberia project) on track with encouraging R&R findings. First shipment expected in FY14.

■ Sales volumes higher on stock clearance
While iron ore production for the quarter stood at 3.33 mt (vs 4.70 mt in Q3FY11), sales were at 5.04 mt (vs 4.84 mt in Q3FY11) on account of stock clearance of 0.64 mt from Karnataka through e-auctions and another ~1.1 mt from Goa (the company sold 4.4 mt of iron ore from Goa compared to 3.74 mt in Q3FY11). Goan mines continue to operate at full capacity (14 mtpa). Realization during the quarter improved at US$93/ tonne (US$ 84/tonne in Q2FY12) for iron ore due to improvement in grade by 0.5%. We believe the scope of significant improvement in realizations seems unlikely as further improvement in grade may not be possible and higher global supply should keep iron ore prices under check.

■ EBITDA margins remained under pressure on higher export duty
Effective Q1FY12, the export duty was hiked to 20% on both iron ore fines (from 5%) and lumps (from 15%). Consequently, the EBITDA margin contracted by 1330 bps to ~42% YoY on a comparable basis. Due to seasonality QoQ performance is not comparable. With further hiked in export duty to 30% effective 30th December, we believe pressure on the EBITDA margins to continue going ahead.

■ Strong regulatory headwinds continue to be an overhang
Karnataka continues to be under the mining ban since August 2011. The company has been left with ~0.2 mt of iron ore at the Karnataka. The Supreme Court hearing on the Karnataka mining ban continues to get deferred with no immediate respite. Further, report by the M B Shah Commission investigating illegal mining and export of iron ore (likely in March) can raise concerns even at Goan operations. Also, the implementation of mining bill and revision of royalty rates (due in August 2012) could have an overhang on our FY13 volume estimates of 16.5 mt.

■ Outlook and Valuations
At CMP of Rs 201, the stock is trading at 4.7x its FY13E EPS and 7.1x FY13E EV/ EBITDA. On SOTP basis, we value the iron ore business at 3.5xFY13EV/ EBITDA (giving a discount of ~15% to the global peers). Stake in Cairn India has been valued at 30% discount to current market cap. Thus, we arrive at a target price of Rs 191/ share. Retain Hold.

To read the full report: SESA GOA

>WIPRO: IT budgets are likely to be flattish in FY13

Restructuring initiative started to payoff
Wipro revenue grew 9.9% QoQ to Rs. 99,972mn, which is above our estimate (est. Rs. 98,395mn). In constant currency terms revenue grew 4.5% sequentially, which is ahead of HCL Tech 3.7% growth and inline with Infosys (4.4%) & TCS (4.5%) growth. This indicates that its restructuring initiative has started to pay off.

Revenue from IT services grew 11.4% QoQ to Rs. 76,076mn, IT Product revenue de grew by 10% and Consumer care and Lighting grew 9.8% QoQ. Currency and realization had a positive impact on margins, during the quarter, EBIT margin expanded by 80 bps to 17.2%; which can be explained as follows; Currency (+70bps), Realization (+170 bps), SG&A (-80 bps) and others (-80bps). Wipro has declared an interim dividend of Rs. 2 per share

IT budgets are likely to be flattish in FY13
IT budgets are likely to be finalized in February 2012; initial indications show that the budgets are likely to be flattish. IT spending curb has been witnessed in Investment banking, retail and consulting space in energy space; however, upstream energy business will help kick in growth. Realignment of budget has been happening in retail banking with significant spend happening in analytics, regulatory and mobility space.

Outlook & Valuation:
At the CMP Rs. 417.85, the stock trades at 18.1X and 15.8X to FY12E and FY13E of Rs. 23.1 and Rs. 26.5 respectively. We value Wipro at 15X to FY13E earnings (~15% discount to Infosys forward earnings multiple) to arrive at a 12-month target price of Rs.398.

Top client grew faster than company
Wipro’s top client during the quarter grew 7.8% sequentially to US$59mn. Up-selling and cross-selling initiatives were witnessed across client verticals. US$100mn clients have improved from 1 in Q3FY11 to 6 in Q3FY12 and similar pattern were witnessed across the clients pyramid.

To read the full report: WIPRO

>GAIL: Investment View & Q3FY12 Result update

■ Volume growth a challenge. We believe that volume growth would be under pressure as the gas production from the KG-D6 field of RIL continues to decline and other domestic gas field developments on the eastern coast are delayed. Import capacity is running at almost peak capacity with limited scope for higher throughput near term. Overall, we anticipate a largely flat transmission volume during FY12 and FY13. The company is also struggling to evacuate its petrochemical production due to heightened competition following the commissioning of a naphtha cracker at Panipat in North India by the Indian Oil Corporation.

■ Uncertainty on under-recovery remains a risk: We believe that the current calculation of GAIL's share of subsidy is based on total losses incurred by the oil marketing companies on LPG alone as has been requested by GAIL. While, there is no certainty that this formula would continue in future, as the government would struggle to close the ballooning subsidy gap (cINR1,300bn in FY12e), we have assumed that GAIL would continue to pay subsidies such that it maintains only a normative profit for the LPG segment. Our underrecovery assumption has increased for FY12 and FY13 due to higher crude oil assumption at USD112/bbl and
USD105/bbl, respectively based on the current forward curve. We expect the subsidy burden to ease in FY14 as we expect crude oil prices fall to USD92/bbl, in line with our house view.

■ Marketing margin issue pending with PNGRB: The government has entrusted the task of determining the gas marketing margin to the Petroleum & Natural Gas Regulatory Board (PNGRB). We believe this would remain an overhang on the stock until the regulator decides on a fair marketing margin for India where demand for natural gas far outstrips supply.

GAIL reported Q3FY12 net profit of INR10.9bn in line with our and consensus
estimates. However, the subsidy to oil marketing companies (OMCs) was provisional and
could change after the government announces the allocation over the next few weeks. While
GAIL has maintained its transmission volume despite lower domestic gas thanks to imported
LNG, we anticipate flat transmission volume over FY13. The blended tariff for the quarter was
INR993/’000scm, which we expect to increase by 3% in FY13.

■ Transmission volume to remain flat. We expect GAIL to get c4mmscmd lower gas from KG-D6 field of RIL during FY13e, which would be partly substituted by c2 mmscmd from the western coast; new volume is expected to earn the higher tariff of the new pipeline while the KG-D6 volume was flowing through the old HVJ pipeline that has the lower tariff. Overall, we anticipate GAIL to transmit 118.8mmscmd gas during FY13e as against 117.8mmscmd in FY12e.

■ Uncertainty on subsidy and marketing margin to be an overhang. We expect the subsidy to OMCs to be capped at earnings from its LPG business as has been the trend in the past, but the actual amount could vary depending upon final allocation by the government. Additionally, the government has recently asked regulator to determine the marketing margin on gas sold by marketing entities. This could impact the marketing margin of GAIL. The marketing margin of cUSD0.24/mmbtu contributed c20% to its net income in Q3FY12. We lower our earning estimates. We lower our FY13e EPS estimate by c15% to account for 3-4% lower transmission volume, and 92% higher subsidy assumption for FY13.

■ Valuation and risks. We value GAIL on the PE of its core business and 10% holding
discount market value of investments. We reduce our target price from INR500 to INR405 but
retain Neutral rating in view of recent correction in stock. We value the core business at 11.6x
FY13e core EPS to reflect 11.5% cost of capital, 6% growth and 16% ROE, which is also in
line with the last six months’ multiple. We believe investment risks include any downward
revision in GAIL’s tariff, a higher-than-expected share in under-recovery, or different
marketing margins. Potential catalysts include new gas supply visibility, or discovery in its
exploration blocks.

To read the full report: GAIL 

Sunday, January 29, 2012

>OBEROI REALTY: An investment profile

 Revenue declined by 53%YoY to IN1.9b (v/s. est. of INR2.2b) due to lower than expected recognition.

 EBITDA down by 54%YoY to INR1.1b (est. of INR1.2b), while margin improves to 60.5% (v/s. 52% in 2QFY12) due to a) Price escalation across all ongoing projects and b) effect of one-time cost escalation adopted in 2QFY12 in Exquite and Grande on account of change in specification. Also with completion of the Splendor (the highest margin project), 100% revenue recognition from all incremental sales from this project has also boosted EBITDA margin in 3QFY12.

 PAT increased by 17%YoY to INR1b (v/s. est. of INR1.1b).

 QoQ sales volume declined sharply to 0.12msf: During 3QFY12 OBER witnessed sharp a decline in QoQ sales volume to ~0.12msf (INR1.8b) as against 0.19msf (INR2.2b) in 2QFY12 and ~0.15msf (INR3.2b) in 3QFY11. Esquire and Grande continue to remain key sales driver with 55% and 22% contribution respectively. While challenging macro remains the major attributable factor, the company has raised prices across all its ongoing projects by ~10%, which could be the other factor for sales decline. 9MFY12 residential sales stood at 0.52msf/INR6.5b (up from 0.4msf in 9MFY11) as against our est. of 0.7msf/INR10.6b in FY12E.

 Lower incremental sales continues in revenue contributing projects: During 3QFY12, OBER's revenue stood at INR1.9b, comprising a) INR575m of annuity income (v/s. INR510m in 2QFY12) and b) INR1.2b from (v/s. INR1.6b in 2QFY12) recognition of sales from residential projects. The key revenue contributing residential projects are:

1. Exquisite (INR0.3b v/s. INR0.6b in 2QFY12) - sales of 0.01msf (8units)
2. Splendor (INR0.5b v/s. INR0.7b in 2QFY12) - sales of 0.01msf (14 units)
3. Grande (INR0.3b v/s. INR0.3b in 2QFY12) - sales of 0.03msf (15 units)

 Contribution from Esquire to be delayed to FY13: OBER's FY12 sales have been largely driven by Esquire, which contributed for ~69%/64% of sales volume/value during 9MFY12. However, the project is unlikely to cross the recognition threshold of 20% in 4QFY12 and is expected to be delayed till 1QFY13. Esquire has achieved sales of ~INR7.5b till 3QFY12, which offers a strong revenue visibility in 1QFY13. Nonetheless, we are downgrading our FY12 revenue estimate by ~24%, due to shifting of revenue recognition of Esquire by a quarter.

 Annuity income improves QoQ: During 3QFY12, OBER's annuity income stood at INR555m v/s INR497m in 2QFY12 and INR518m in 3QFY11. While uptick in contribution is largely attributable to higher ARR (~14% up QoQ) and occupancy at Westin. However the occupancy of 64% is far below the management's expected steady state level of ~70% - which kept the EBITDA margin for Westin subdued at ~24%.

To read the full report: OBEROI REALTY


>SOUTH INDIAN BANK: Q3FY12 Earnings Review

Background: South Indian Bank (SIB), among the midsized banks in the private sector space, operates a network of about 674branches and about 614 ATMs. With about half of its branches located in Kerala the bank’s business is largely skewed towards the Southern state.
SIB has established a strong brand recall among the Keralite-NRI diaspora. The bank plans to foray into newer geographies by expanding its footprint in the Northern and North - Eastern regions. With no identifiable promoters SIB is run by a team of professionals. A slew of FII’s hold a 42% stake in the bank.

■ Net interest income leads growth
South Indian Bank's (SIB's) topline and operating profit were along expected lines. PAT was up 35.7%YoY at Rs 1.02bn the highest in the bank’s history. Credit growth continued to drive topline. Net interest income continued to drive operating profits; non-interest income also chipped in with a 20%YoY growth. Asset quality continued to be resilient despite the aggressive credit growth in the recent quarters.

■ Valuation
At current levels the stock trades at 1.2X times its FY13E book value and 5.4X times its FY13E EPS. We reiterate our MARKETPERFOMER rating on the stock with a target price of Rs 26.3. Key risks include a surge in delinquencies. South Indian Bank is among the inexpensive stocks in the private banking space with a commendable return on assets and return on equity.

■ Business growth outpaces that of system
South Indian Bank continued to maintain momentum on the balance sheet front. The bank outperformed the industry by reporting a 30.8% YoY growth in the loan book vis-à-vis the system growth of 15.9%. Loan book was reported at Rs 250.50bn. Deposit growth also was strong at 25.3%YoY as against the industry growth of 16.9%. Deposits were reported at Rs 338.34bn. Credit appears to have grown at the cost of the investment book. The credit-deposit ratio was reported at 74%, amongst the highest in recent quarters. CASA ratios continued to remain under strain; a slowdown in growth of demand deposits was noted. Term deposits were
up 26.8% at Rs 265.54bn. Balance sheet continued to grow at a healthy pace of ~25%YoY.

■ Net interest margin stays put at 3% 
Yields and costs were higher, while margins improved to 3.05%. A 5 bps rise in margins along with a ~25%YoY balance sheet growth contributed to a 33.5%YoY growth in net interest income. The bank appears to have passed on much of the higher cost of funds contributing to healthy spreads. Yield on the loan book was reported at 12.3% vs 10.7% in the December 2010 quarter, while cost of deposits was reported at 7.8% vs 6.4%.

To read the full report: SIB

>RELIANCE COMMUNICATIONS: FCCB refinancing removes near-term concerns

FCCB refinancing should alleviate near-term liquidity concerns, but longer-term questions remain?

■ RCOM today announced that it has tied up with a group of banks to refinance its FCCBs of US$1.18bn. We believe this move should alleviate near-term liquidity concerns – given its stretched balance sheet with net-debt to EBITDA of 4.9x (as of 2Q12), there was little comfort that FCCB redemption could be met with internal cash accruals. This should also see some positive momentum in the stock, although we believe longer-term balance sheet concerns remain.

 RCOM has secured this loan from a group of banks including Industrial and Commercial Bank of China Ltd (ICBC), China Development Bank Corporation (CDB) and Export Import Bank of China (EXIM) and others. The refinanced loan has a maturity of 7 years and not much colour on the principal repayment schedule is available at the moment. In FY11, RCOM had an underlying net interest expense (not including forex gains or losses) of INR10bn, implying an interest rate of around 4%, we estimate (adjusting for 3G
loans for which interest was capitalised). The FCCBs are now being refinanced at 5%.

 Operationally, some turnaround/stability in the wireless segment has been evident in the last couple of quarters – it has held wireless pricing steady, there is recovery in revenue growth, and revenue share appears to be stable vs declining previously. However, this hasn’t been significant enough to translate into a share price driver.

 Notwithstanding this refinancing deal, RCOM’s stretched balance sheet will be a longer-term concern. It could also curtail investment needed for the business. The company has been vocal about divesting a stake in one of its businesses, to de-lever its balance sheet. However, with little success so far. (Source: Blackstone, “Carlyle set to buy Anil Ambani's RCOM towers”, The Economic Times, 11 November). In the absence of a material operational turnaround, any finalisation of a cash-injection deal could be a significant re-rating catalyst for the stock, we believe. Maintain Neutral

To read the full report: RELIANCE COMMUNICATIONS

>IDEA CELLULAR LIMITED: Strong Q3, but environment challenging

Idea Cellular (Idea) reported strong performance during Q3FY12. While topline was a tad better than our estimates, the EBITDA margin was lower than expected at 26.6% (we were slightly bullish on margin expansion for Q3 on RPM increase). We revise our target price lower to Rs82 based on the revision in EBITDA margin estimates. We expect lower margin expansion as growth in data services and revenue per minute may happen at a lower rate that we expected due to circle level competition and uncertainty over equipment clearance due to security norms. We retain our Hold rating on the stock with a cautious stance as continuing regulatory risk can dent profitability and increase pressure on return on equity.

 Topline in line; EBITDA margin below estimates: Idea reported 9% QoQ growth in topline to Rs50.2bn against our estimate of Rs48.47bn. Minutes of usage bounced back and registered 7.3% QoQ on the back of strong 6.2mn net addition in subscribers. Revenue per minute (RPM) grew by 1.4% QoQ to 43.3p/min driven by revenue from value added services but voice RPM remained flat. EBITDA margin expanded by 108bp QoQ to 26.6% (we expected tariff increase to expand margin) driven by savings from network cost.

■ Operational matrix saw mixed performance during Q3: MoU/sub increased to 369 in Q3 from 364 in Q2FY12 despite strong addition in net subscribers compared to last quarter. This indicates improvement in usage on Idea network, but this could not translate into higher voice RPM despite significant subscribers migrating to newer tariff. Both established and newer circles showed strong growth and improvement in operating margin. 3G coverage expanded to 2,300 cities and registered 2.25mn subscribers, giving incremental ARPU of Rs79.

 Concall highlights: Capex guidance was maintained at Rs40bn for FY12 despite spending Rs33.7bn for 9MFY12. The management indicated competition at circle level and did not see any significant tariff hike in near term. The management indicated that business environment remained uncertain at this point of time.

■ Environment uncertain; Reiterate Hold with a cautious stance: We revise our estimate marginally to factor in lower than expected margin on account of higher data related revenue. Hence, we reduce our target price to Rs82 to factor in earnings revision and risk associated with the sector which can dent earnings in FY13E. Downside risks are 1) removal of roaming revenue which can impact profitability; 2) pending recommendation of one-time spectrum

charges, 3G inter circle roaming would put pressure on balance sheet; 3) spectrum pricing and risk of spectrum availability through auction can jack up spectrum pricing, hurting return ratios again; 4) Slow pace of equipment clearance due to security norms. Hence, we are cautious on the sector as we enter a phase where the growth rate of 2G services would come down and
regulatory risk can dent the balance sheet further leading to pressure on return ratios which are already low.

To read the full report: IDEA CELLULAR LIMITED

Saturday, January 28, 2012

>TCS: Tailwind pushed revenue growth higher

Exchange tailwind pushed the revenue growth higher…
Revenues during the quarter was tad above our expectation, reported at Rs. 132,040mn (CSEC est. of Rs. 131,110mn) a sequential growth of 13.5%. Volume grew 3.2% sequentially, coupled with exchange and realization aiding 8.95% and 2% respectively, which pushed the rupee revenue run rate. However the effort mix dragged to the tune of 64bps.

Margin Expansion: Currency offsetting the Rate & Productivity slump
TCS posted an EBIT of Rs. 38,618mn a sequential growth of 22.4% and the margins expanded by 213 bps on a sequential basis to 29.24% v/s 27.11% in the previous quarter. Margin expansion was largely attributed by the currency which had a positive impact of 282 bps on margin and other factors contributing positively to the tune of 45 bps; these factors largely mitigated the negative impact caused by rate & productivity mix which had a negative impact to the tune of 94 bps and offshore shift and SG&A optimization & Provision for bad debts negatively impacting 10 bps each

Effective tax rate for the quarter stood at 22.6% verses 24.3% in the previous quarter and for
the full year it is estimated to be around 23.4%. PAT grew 18.4% sequentially to Rs. 28,866mn
with a margin of 21.9% compared to 21% in the previous quarter.

Revenue by Geographies:
Barring Middle East & UK all other geographies delivered good sequential growth. In dollar terms revenues from Continental Europe grew 6.5%, Latin America grew 5.8%, Asia Pacific and Indian operation grew 3.8% and 3.6% QoQ basis respectively.

Revenue by Vertical:
Revenue growth was broad based; all verticals grew well expect telecom and energy utilities.
Retail & distribution grew by 4.1%, manufacturing, travel & hospitality and life science & healthcare grew by 2.4% on a sequential basis.

Revenue by Services:
In dollar revenue terms, infrastructure services and global consulting services grew by 13% and
10% on a sequential basis respectively. Pressure was witnessed in business intelligence and
asset leverage solutions space which de-grew 4.1% and 2.7% respectively on a QoQ basis

To read the full report: TCS

>RBI credit policy – Positive for financials; Impact of 50bps change in rates on bank earnings

Positive for financials

  • The RBI cut CRR by 50bps, which is positive for banks and finance companies.
  • The CRR cut will lower cost of incremental wholesale borrowings, which will help banks wit low CASA and finance companies. The main beneficiaries are Yes Bank and IDFC.
  • In addition, lower bond yields will also help banks with MTM writebanks and higher trading gains. Banks with high duration will benefit – SBI, Axis, OBC.
  • The direct impact of a CRR cut on bank earnings is immaterial but the indirect impact in terms of lower incremental cost of wholesale funds and lower bond yields are material. The direct impact of a CRR cut will be that banks’ earnings will increase by 1-3% for FY13E as the CRR funds, which currently earn zero interest, will be redeployed in bonds or loans yielding 8-11%.
  • We maintain ICICI Bank, Yes Bank, Bank of Baroda and M&M Finance as our key picks.

Sector view: The CRR cut will help marginal loan growth and marginal spreads. It is also a lead indicator for the RBI’s rate cut cycle expected to commence in March. We expect the rally in bank stocks to continue after the RBI’s move. Large and mid cap state banks (SBI. OBC, PNB), ICICI Bank, Axis Bank, Yes Bank and IDFC will likely outperform other financials. We expect the Bankex to rally till more newsflow on weak asset quality emerges. We believe newsflow on asset quality deterioration will now emerge in May/June when more details on restructuring pipelines will be available post the 4Q earnings of banks. We maintain that stressed assets in this cycle are policy driven not rate driven. However, rate cuts will help improve loan growth and will also help banks book trading gains, which can be utilised towards higher loan loss provisions.


>Peaking of interest rates turns focus on banks, capital goods, real estate and consumer durables where demand is closely linked to borrowing rates.

Predictably, rate-sensitive indices led the way for arise in the broader indices as the Reserve Bank of India(RBI) again emphasised a peaking of the interest rate cycle inits reviewof theMonetary Policy today. The RBI Governor reinforced the guidance that further policy actions would most likely reverse the cycle by lowering policy rates. The central bank cut Cash Reserve Ratio (CRR) maintained by banks by 50 basis points (bps) to 5.5 per cent of their net demand and time liabilities (NDTL) effective from January 28, 2012 that would release about Rs 32,000 crore into the banking system. 

The move would reduce liquidity pressure which, the Governor stated, has been tight and beyond the RBI’s comfort zone of 1% of NDTL with a net liquidity injection of over Rs 70,000 crore by the RBI through open market purchase of government securities.

The policy stance was influenced by this significant increase in the structural deficit in the system which, according to the RBI, could hurt the credit flow to productive sectors of the economy. This, therefore, necessitated a permanent primary liquidity injection into the system especially ahead of further stresses expected from upcoming advance tax outflows.

While keeping the key policy repo and reverse repo rates unchanged at 8.5 and 7.5%, the RBI noted that growth is decelerating and inflation is moderating and therefore the next policy action would most likely cut rates.

The slowing growth reflects the combined impact an uncertain global environment, the net impact of past monetary policy tightening and domestic policy uncertainties. With credit offtake below projected trajectory, the central bank lowered its gross domestic growth projection for FY12 to 7% from 7.6% and stated that risks to growth have increased.

It noted that although headline WPI inflation is moderating, this largely reflects a sharp softening in prices of seasonal food items. In contrast, inflation of other key components, particularly protein-based food items and non-food manufactured products continued to be high. The upside risks to inflation were due to global crude oil prices, impact of rupee depreciation and fiscal deficit slippages.

While this shift in the GDP growth and inflation balance has led to a predictably dovish tone to the monetary policy guidance, the central bank has cautioned that future rate actions depend on policy and administrative actions towards fiscal consolidation.

Dr. Arun Singh, Senior Economist, Dun & Bradstreet believes that any policy rate cuts will only come after April 2012 when the inflation scenario becomes clear. A number close to 6 per cent will provide comfort for the Reserve Bank of India to proceed with rate cuts in its April 2012 monetary policy review, he says.

To read the full report: SMART INVESTOR

>PETRONET LNG: Interest expense falls due to debt prepayment

Petronet LNG’s Q3 FY12 results beat our expectations due to all-time high capacity utilization of 114% (our estimate: 105%) and was reinforced by marketing margin (implied) of ~Rs 58/mmBtu (our estimate: Rs 28/mmBtu).

Capacity utilization at 114%, 8% above estimate
The company continues to utilize its Dahej terminal to the maximum with sales of 144.9 tbtu, 8.3% ahead of our expectation of 133.9 tbtu. Thus, capacity utilization stood at 114% during Q3 FY12, as against 106% in Q2 FY12. We raise our FY12 capacity utilization estimate to 109% driven by the persistent demand-supply gap of natural gas in India.

Implied Q3 FY12 marketing margin at Rs 58/mmBtu
Strong demand for natural gas has enabled Petronet to earn marketing margin of Rs 58.2/mmBtu on spot cargoes, which was much above our expectation of Rs 27.8/mmBtu. Notably, such a high margin was earned on spot LNG which was priced around $ 14-16/mmBtu during Q3 FY12. We expect the company to continue to earn healthy marketing margins in the near term.

Revenue at Rs 63,303 mn, up 75% y-o-y
Total revenue came in at Rs 63,302.6 mn, 17% ahead of our estimates led by higher capacity utilization and high marketing margins. Sales increased 74.5% yo-y on account of sales volumes increasing by 21.1% & blended regas margins higher by 39%. The q-o-q jump of 18% in revenue reflects higher marketing margin of Rs 58.2/mmBtu earned during Q3 FY12, compared to Rs 37.1/mmBtu in Q2 FY12.

EBITDA at Rs 5,572 mn, up 61.2% y-o-y
Q3 FY12 EBITDA stood at Rs 5,572.5 mn, 24.5% ahead of our expectation, driven by higher than expected marketing margin. OPM stood at 8.8%, higher than our estimate of 8.3%, but lower than Q2 FY12 OPM of 9.3%.

Interest expense falls due to debt prepayment
While depreciation was flat y-o-y & q-o-q at Rs 462.9 mn, interest expense was Rs 344.7 mn which was 24.8% lower q-o-q due to prepayment of debt of Rs 5,000 mn. The steep depreciation of the rupee has necessitated (as per accounting rules) entry of a notional forex loss of Rs 540 mn on the books.

PAT of Rs 2,954 mn, 17% ahead of estimates
Consequently, Q3 FY12 PAT stood at Rs 2,953.9 mn, up 72.9% y-o-y & 13.5% q-oq. EPS for the quarter was Rs 3.9 compared to Rs 3.5 in Q2 FY12.

To read the full report: PETRONET LNG

>TATA GLOBAL BEVERAGES: Impressive performance by domestic tea business

Result highlights
OPM broadly in line: Tata Global Beverages Ltd (TGBL)’s Q3FY2012 consolidated results are lower than our expectation largely on account of a lower than expected top line growth. The consolidated gross profit margin (GPM) improved sequentially by 278 basis points year on year (YoY) to 58.0% and the operating profit margin (OPM) improved by around 170 basis points sequentially to 10.0% (which is broadly in line with our estimate of 10.3%) during the quarter. Some of the positives for the quarters include a strong year-on-year (Y-o-Y) improvement in the domestic operating performance, a rise in the sales of Tetley and an improvement in the profitability of the Mount Everest business.
Synopsis of consolidated results: The consolidated net sales of TGBL grew by 12.0% YoY to Rs1,801.8 crore (which is lower than our expectation of Rs1,864.3 crore). The growth was driven by a mix of (lower) single-digit volume growth, price hikes and favourable benefits from the rupee’s depreciation (5%+). Though the domestic raw tea prices were down on a Y-o-Y basis, but the higher green coffee prices affected the GPM at the consolidated level. The GPM was down by 105 basis points YoY to 58.0%. Also the company spent heavily on brand building and promotional activities during the quarter. The advertisement expenditures as a percentage of sales went up by 158 basis points YoY to 18.9% during the quarter. Hence, the OPM was down by 141 basis points to 10.0% and the operating profit was lower by 1.7% YoY to Rs180.9 crore. However, a lower interest cost on a Y-o-Y basis (due to debt restructuring) resulted in a 15.2% Y-o-Y growth in the adjusted profit after tax (PAT; before minority interest and share from associates) to Rs92.2 crore during the quarter (lower than our expectation of Rs112.6 crore).

Domestic tea business—stellar performance: The domestic business’ performance was the highlight of the quarter with a 594-basis-point Y-o-Y improvement in the GPM in Q3FY2012. This was mainly on account of the softening of raw material prices and the price increases undertaken by the company to mitigate the raw material cost pressure.

Most of the international markets performed well: Most of the international markets performed well during the quarter. The UK business witnessed a reversal in trend recording a growth in the top line during the quarter. Canada continues to be the leader (in volume and value terms) in the black and speciality tea market. TGBL’s new products found good acceptance in Australia. The quarter’s strong performance in various geographies could be attributed to the higher spend towards advertisements and promotional activities.

Outlook and valuation: We have trimmed our estimates for FY2012 by 3% to factor in the lower than estimated top line and bottom line growth in Q3FY2012. However, we have broadly maintained our earnings estimate for FY2013. The management of TGBL has hinted at a likely improvement in the margins of Eight O’clock Coffee business and the domestic business with the raw material prices having corrected from their highs and showing some stability in the past few months. Also the UK business has shown signs of improvement with revenue recording a growth during the quarter. The new launches have gained good acceptance in various international markets. This gives us visibility of the improved performance in the coming quarters. Having said that, the performance of the Eight O’clock Coffee business and any movement in the raw material prices have to be keenly monitored for the next one to two quarters. In view of the limited upside from the current level we maintain our Hold recommendation on the stock with the price target of Rs109. At the current market price the stock trades at 18.5x its FY2012E earnings per share (EPS) of Rs5.2 and 14.3x its FY2013E EPS of Rs6.8.

TGBL stand-alone: stellar operating performance: 
TGBL’s stand-alone performance was the highlight of the quarter with a strong improvement in the profitability during the quarter. The net sales of the business grew by 11.6% YoY to Rs530.5 crore and it was largely a volume-led growth. The management has hinted that adequate advertisement support helped the company to achieve a good revenue growth.

The consumption pattern for black tea in the domestic market is improving with an increase in the consumption of tea and the upgradation of consumers from loose tea to branded tea.

The company was able to maintain its leadership position in the domestic market with volume and value market share of 21.3% and 19.5% respectively during the quarter.

Raw tea prices declined by 5% on a Y-o-Y basis in Q3FY2012. This along with the price hikes undertaken by the company helped the company to achieve almost a 600-basis-point Y-o-Y improvement in the GPM during the quarter. Hence the OPM improved by 402 basis points YoY to 20.5% during the quarter.

As a result, the operating profit grew by 39% YoY to Rs108.5 crore and the adjusted PAT grew by 33.3% YoY to Rs63.1 crore during the quarter.

Tata Coffee’s consolidated results—profitability affected by higher coffee prices
It was yet another quarter of a disappointing performance by Tata Coffee (consolidated) at the
operating level with the OPM contracting to 13.1% in Q3FY2012 (from 24.4% in Q3FY2011). The margin contracted because of high green coffee prices during the quarter.
The net sales grew by 18.7% YoY to Rs415.9 crore in Q3FY2012. This was driven by a 23.2% Y-o-Y growth in the stand-alone business and around a 17% Y-o-Y growth in the Eight O’clock Coffee business during the quarter.

The revenues of the Eight O’clock Coffee business (which contributes about 70% to the total revenues) grew by just 3.3% on a constant-currency basis. Eight O’clock Coffee maintained its volume market share during the quarter.

A higher realisation in coffee plantations and extraction helped the stand-alone business to post a strong 691- basis-point Y-o-Y improvement in the OPM. The Eight O’clock Coffee business’ PAT was down by about 85.0% YoY (on a constant currency basis) during the quarter.

At the consolidated level, Tata Coffee’s adjusted PAT declined by about 35.0% YoY to Rs22.7 crore during the quarter.

The green coffee prices have corrected from their highs and are showing a declining trend in past few months. If the prices remain stable or correct from the current level, we would see a sequential improvement in the margins of Tata Coffee (consolidated). The key focus area for the company would be improving the sales volume of the Eight O’clock Coffee business. Regional performance In the US business the revenue growth was driven by the price increases implemented at the Eight O’clock Coffee level. However, the profitability was affected by higher commodity and merchandise costs during the quarter.

Tetley continues to be the volume and value leader for black and speciality teas in Canada on the back of aggressive innovations. It has a 50% brand share in the black tea market in Canada. New products including Dark Chocolate Vanilla Bean Perk and Green Pomegranate 80s are gaining distribution.

The UK business showed a strong revival in Q3FY2012. The company recorded a sales growth for the first time after several quarters of low single-digit sales. The speciality category performed well during the investor’s eye stock update quarter. Tetley’s green tea saw an improvement in brand share while Teapigs brand of super premium teas continues to grow with distribution gains. Sensing the strong performance of Teapigs in the UK, the company is planning to launch the brand in Australia and Canada too. The profitability of the UK business was affected by higher spends on brand building and promotional activities.

The other geographies such as South Africa, Australia and Russia have shown a strong improvement in their performance.

Other highlights of the analyst meet

  • Mount Everest mineral water has posted a profit at the operating level for the first time in several quarters. Himalayan mineral water is reaping the benefits of strong distribution synergies of JV with PepsiCo. We expect the company to post an improved performance in the coming quarters as well.
  • The management has indicated that it would increase the penetration of branded tea in the rural markets in India. We believe this is a positive step towards improving the growth prospects of the stand-alone business.
  • Intense promotional activities in the developed economies helped the company to achieve incremental revenues of around Rs20.0 crore during the quarter.  The profit before exceptional items and tax would have been more than Rs200 crore had the Eight O’Clock Coffee business’ profits remained flat.
  • The management has hinted at launching new products under NourishCo (a 50:50 joint venture between TGBL and PepsiCo) in the coming quarters.

Outlook and valuation: We have trimmed our estimates for FY2012 by 3% to factor in the lower than estimated top line and bottom line growth in Q3FY2012. However, we have broadly maintained our earnings estimate for FY2013. The management of TGBL has hinted at a likely improvement in the margins of Eight O’clock Coffee business and the domestic business with the raw material prices having corrected from their highs and showing some stability in the past few months. Also the UK business has shown signs of improvement with revenue recording a growth during the quarter. The new launches have gained good acceptance in various international markets. This gives us visibility of the improved performance in the
coming quarters. Having said that, the performance of the Eight O’clock Coffee business and any movement in the raw material prices have to be keenly monitored for the next one to two quarters. In view of the limited upside from the current level we maintain our Hold recommendation on the stock with the price target of Rs109. At the current market price the stock trades at 18.5x its FY2012E earnings per share (EPS) of Rs5.2 and 14.3x its FY2013E EPS of Rs6.8.