Monday, April 30, 2012

TELECOM REGULATORY AUTHORITY OF INDIA: New spectrum pricing to dent business

Telecom Regulatory Authority of India (TRAI) has come up with a recommendation on auction of spectrum and suggests a reserve price of Rs36.2bn for 1800MHz and 4x/2x/2x the price of 1800MHz for 700MHz/800MHz/900MHZ spectrum bands. TRAI also recommends spectrum re-farming which is further going to hurt incumbents. Overall, we believe the regulator’s recommendation, if considered, would not only hurt incumbents by way of higher spectrum
renewal payouts and possibility of losing the high quality 900MHz spectrum, but also make the business case weaker for new operators to re-enter the Indian market based on current tariff plans.

 Spectrum pricing and re-farming to 1800MHz: TRAI has recommended reserve price for different bands in line with international pricing on per MHz per population basis which is 8% higher than 3G spectrum auction price and the new recommendation is Rs36.2bn per MHz for 1800MHz. The pricing for 700MHZ, 800MHz and 900MHz is recommended at Rs144.9bn, Rs72.4bn and Rs72.4bn respectively.

 Auction timelines and payment terms: Spectrum auctioned would be made available for 20 years. TRAI also recommend installment based payment structure wherein 25% of bid amount for 700, 800, 900MHz and and 33% for 1800, 2100, 2300 would be paid initially and balance in 10 equal yearly installments. Spectrum usage charges will be at 1% AGR on the spectrum acquired through auction from hereon as against 3-6% of AGR being charged presently.

 Additional payout to hurt the sector – Bharti relatively better placed: The recommendation looks very aggressive and would face severe opposition from operators. Telecom operators are likely to force a relook at spectrum pricing recommendations especially due to the muted impact of 3G spectrum auction results thus far and the fact that the pricing weakens their business models further and contradicts the affordable service objective of the government. While we believe that Bharti would be better placed to take on the additional burden compared to Idea and RCom due to its balance sheet size and leverage ratio if the recommendation gets accepted. Idea would have to immediately pay out considering that SC has cancelled its 7 licenses. We currently have a Buy rating on Bharti, Hold on Idea and Sell on RCom. We expect the current TRAI recommendation and future risks to put pressure on stock performance. We would be reviewing our price target after further clarity emerges. Other risks on the sector are removal of roaming fees charged, allowing voice over IP in India, stringent security norms
for equipments procurement.

TRAI’s auction of spectrum recommendation

Key highlights
■ All spectrum will be allotted through auction mechanism in future
 700Mhz band auction will be in 2014 as and when eco system for LTE in 700MHz is reasonably developed
 Liberalization of spectrum - removal of technology restrictions will give the licensee an option
to deploy new technologies. Any further spectrum auctioned would be liberalized spectrum.
Liberalized spectrum would be for 20 years.
 Spectrum Re-farming – TRAI recommends 900MHz spectrum auction 18 months before the
expiry of license. Hence, the auction will be carried out in the first half of 2013
 Cap on Spectrum – limit for acquisition of spectrum will be 50% of the spectrum assigned in
each band in the respective service area and 25%of the total spectrum assigned in all bands put together in each service area
 Reserve price recommendations for different bands are in line with international pricing on per MHz per population basis. Pan India pricing now stands 8% higher than the 3G spectrum
auction price and now the recommendation is Rs36.2bn per MHz for 1800MHz
 Payment of spectrum amount on installment basis – Initial payment of 25%/33% of bid amount for 700,800,900MHz/1800,2100,2300 and balance in 10 equal yearly installments.


Re-gas volumes plunge; profitability takes a hit

After about eight quarters of secular profit growth, Petronet LNG’s 17.0% QoQ decline in PAT during Q4FY12 was a negative surprise. The decline was attributed to lower re-gasification volumes (led by lower LNG imports by GAIL and lower long-term volumes from Qatar) despite re-gasification margins going up by 5% from January 2012. Spot LNG earned relatively lower re-gasification margins sequentially thus lowering the average re-gasification charges to Rs36.7/mmbtu in Q4 from Rs38.6/mmbtu in Q3.

  Higher LNG prices lead to higher revenues: Petronet’s revenues surged by 59.9% YoY while being marginally higher QoQ at Rs63.8bn on account of higher LNG prices and higher rupee-dollar exchange rate. As volumes were lower in Q4 compared to Q3, revenues were flattish QoQ despite higher LNG prices.

  Re-gasification volumes decline QoQ due to lower imports by GAIL and lower long term volumes from Qatar: Petronet’s performance was affected in Q4 primarily owing to lower re-gasification volumes. The company processed a total of 134.5TBTUs of LNG of which 93.5TBTUs were long-term volumes, 26.0TBTUs spot volumes and 15.0TBTUs re-gasification services offered to GAIL and GSPC. GAIL imported less LNG due to lower requirement from power players who took shutdowns during the quarter. Q4 capacity utilisation stood at 105%. Blended re-gasification charges were also 5% lower QoQ at Rs6.7/mmbtu owing to lower re-gasification charges for spot LNG.

 Lower interest cost, higher other income support the bottom-line: As Petronet prepaid debt during Q3, the interest cost was lower at Rs342mn. Higher cash balance led to higher other income which stood at Rs221mn thus benefitting the bottom-line which jumped by 18.8% YoY while declining by 17.0% QoQ to Rs2.5bn

 Kochi to be operational by Q3FY13E and Dahej jetty by Q3FY14E: PLNG’s Kochi terminal is expected to be operational by Q3FY13E while the additional jetty at Dahej is likely to become operational by Q3FY14E. LNG does not form part of the PNGRB regulations as of now and hence PLNG is currently out of the purview of any regulations. According to the management it is very difficult to put forward regulations for re-gasification terminals and hence they do not foresee any threat from such a move by the government. We believe the regulations threat is overblown and hence we continue to maintain our ‘Buy’ rating on the stock. We have changed our estimates taking a conservative 5% decline in re-gasification margins from CY13 and keeping them constant thereon. Hence our DCF based price target stands changed at Rs186 (earlier Rs192) (cost of equity – 11.6%, WACC – 9.6%).


>SESA GOA: Sesa –Sterlite Merger Update

Sesa –Sterlite Merger Update During the quarter, the Company announced the Scheme of Amalgamation and Arrangement amongst Sterlite Industries (India) Limited, The Madras Aluminum Company Limited, Sterlite Energy Limited, Vedanta Aluminium Limited. After merger the company name will be changed from Sesa Goa Limited to Sesa Sterlite Limited.In this regards,the Company received the approval of the stock exchanges where its shares are listed, and the Competition Commission of India. The application of the Company before the Foreign Investment Promotion Board is pending consideration. The Company has also filed the schemes for the approval of the relevant courts and to seek their directions for convening the meetings of its shareholders and creditors, as may be necessary under the applicable laws.

Revenue growth declined, better than our estimate: During the quarter, revenue of the company degrew by 23% Y-o-Y to `27943mn in Q4FY’12 (our estimate `19730mn) compared to `36236mn in Q4FY’12 on the back of lower volume growth due to ban in Karnataka mining and mining lease expiration in Orissa. 

Volume production continued to be hurt on the back of mining activity: During the Q, production of saleable iron ore fell by 11%Y-o-Y to 4.9mn ton compared to 5.5mn ton of corresponding quarter of previous year where full sales contribution came from Goa. However, total saleable iron ore production declined by 4%Y-o-Y to 4.9mn ton in Q4FY12 compared to 5.1mn ton in Q4FY11. Total sales declined by 21%Y-o-Y to 5.2mn ton in Q4FY12 compared to 6.6mn ton in Q4FY11. Out of total sales, volume sales declined by 17%Y-o-Y to 4.9mn ton from Goa, 60%Y-o-Y fell at 0.2mn ton from Karnataka. 

Higher expenditure impacted operational efficiency; EBITDA declined by 26%: Total expenditure of the company grew by 19%Y-o-Y as a percentage of sales to `17974mn (our estimate `9058mn) in Q4FY’12 compared to `15052mn in Q4FY’11 out of which raw material cost, O&M expenses, employee cost and S&D cost increased by 9%, ~25%, ~32 and 61% respectively during the Q4.. Hence EBITDA declined by 52%Y-o-Y to `9969mn (our estimate `10671mn) in Q4FY12 compared to `21183mn in Q4FY’11. PAT also fell more than expected by ~52% Y-o-Y to `6963mn (our expectation `8648mn) compared to `14617mn in Q4FY11. 

Margins too remain subdued: EBITDAM fell by 3897bps to 35.6% (our estimate 54%) in Q4FY’12 compared to 58.4% in Q4FY’11. PBDTM and PBTM fell by 3344bps and 3740bps to 39.7% and 38.6% respectively on the back of higher total cost. PATM too declined to 24.9% (our estimate 42.9%) in Q4FY’12 compared to 40.3% in Q4FY’11. 

Outlook & Valuation: We value the company based on SOTP valuing based on conservative approach) its core operations on a FY13 EV/EBITDA multiple of 3x (earlier 4x) at `127 and b) Cairn Investment based on market cap (discounted at 25%) at `113. At our revised valuation our target price is maintained at `212/share (adjusted Debt), the stock offers a potential upside of around ~15% from the current level; we recommend ‘Buy’ rating on the stock.

To read report in detail: SESA GOA


>SOLAR POWER: Darkest before dawn

To read report in detail: SOLAR POWER


>BHARAT ELECTRONICS LIMITED: Significant order wins in FY2012 (Q4FY2012 Result Update)

Result highlights
Weak operational performance, other income the saviour: Bharat Electronics Ltd (BEL) closed FY2012 with a poor performance on the revenue front which had an impact on the margins and the bottom line. Against a full year sales target of Rs6,200 crore, the company reported sales of Rs5,710 crore. The fourth quarter is the strongest for BEL with more than 40% of the full year’s revenues delivered in the quarter. In FY2012, the fourth quarter contributed 40% of the total revenues of the company. However, in FY2012 there was a revenue lag starting from the middle of the year which could not be recouped. Also, the company faced delays in accepting deliveries from its customers, mainly government and quasi government organisations. For the quarter ended March 2012, BEL reported a 3.3% fall in its revenues to Rs2,232.1 crore. The
EBITDA margin was down 1,140 basis points to 11.5% affected by a higher input cost. However, on the back of a 62.9% jump in the other income to Rs212.3 crore the fall in the net profit was restricted to 25.5% at Rs333.8 crore.
Margins remain under pressure: The margins of the company remained under pressure with the EBITDA margin down 1,140 basis points to 11.5% in Q4FY2012. The gross profit margin (GPM) of the company was down 1,170 basis points to 32% on account of input cost pressure. For FY2012, the EBITDA margin stood at 7.8% against 16.2% in FY2011. One of the reasons for the dip in the margin could be the the depreciation of the rupee as one-third of the company’s expenses is in foreign currency. Another reason would be that the share of the revenues from the defence sector was down to 73% from 80% during the period. Finally, the
delay in accepting deliveries from clients, generally government and quasi government organisations, would have led to pressure on the margins.

FY2013 revenue target at Rs6,300 crore: For FY2012, BEL reported net sales of Rs5,645.3 crore, up 3.2% with the EBITDA margin down to 7.8% from 16.2% in FY2011 and the net profit down 12.2% at Rs756.3 crore. For FY2013 the management has set a revenue target of Rs6,300 crore, implying a growth of 10.3% over FY2012. In FY2013, the company would be working on many strategically important projects in the areas of weapon systems, electronic warfare systems, shipborne systems, coastal surveillance system, network centric systems, night vision devices, Satcom and communications.

Valuation and view: BEL has reported a poor show for FY2012 on account of the execution of the low-margin non-defence business as well as a delay in decision making by its customers. BEL remains one of the best plays in the defence capital expenditure space. With the increase in the defence budget and the focus on modernisation of the defence technology, BEL is best
placed to take a sizeable pie of the defence spend. The order book at 4.5x FY2012 sales gives BEL strong revenue visibility for at least the next two to three years. The huge cash reserve gives the stock further support. The key risks, however, remain the timely delivery of orders and the margin performance, which has deteriorated through FY2012. We have introduced our FY2014 estimates and rolled over our PE multiple in this note. We maintain our Buy rating on the stock with a revised price target of Rs1,805 (Rs1,893 earlier) in view of the
strong long-term growth outlook for the company.

Healthy order book at 4.5x FY2012 revenues: BEL closed the year with a healthy order book of Rs25,748 crore, up from Rs23,600 crore at the end of FY2011. The order book is executable over the next five to six years. It includes export orders worth $59.17 million. The order book has seen a steady growth after the big jump seen in FY2011. Though the order book remains strong, the key risk remains its execution; a delay in the release of the orders could lead to slower execution.

Valuation and view: BEL has reported a poor show for FY2012 on account of the execution of the low-margin non-defence business as well as a delay in decision making by its customers, mainly government and quasi government organisations. BEL remains one of the best plays in the defence capital expenditure space. With the increase in the defence budget and the focus on modernisation of the defence technology, BEL is best placed to take a sizeable pie of the defence spend. The order book at 4.5x FY2012 sales gives BEL strong revenue visibility for at least the next two to three years. The huge cash reserve gives the stock further support. The key risks, however, remain the timely delivery of orders and the margin performance, which has deteriorated through FY2012. We have introduced our FY2014 estimates and rolled over our PE multiple in this note. We maintain our Buy rating on the stock with a revised price target of Rs1,805 (Rs1,893 earlier) in view of the strong long-term growth outlook for the company.


>RAYMOND: Relocation of Thane capacity to Jalgaon completed (Q4FY2012 Result)

Liquidation drive to clear inventory results in poor earnings

Q4FY2012 - good revenue growth; dismal earnings result of increased discounting: Raymond’s consolidated Q4FY2012 revenues grew by a strong 13.1% year on year (YoY) to Rs949 crore, led by growth in textiles, garmenting and the denim businesses, each of which grew at a Y-o-Y pace of 24.4%, 40.5% and 14% respectively for the quarter. Despite a robust show on the revenue front, the earnings plunged 89% YoY to Rs3.2 crore due to margin compression (as a result of heavy discounting done for inventory liquidation) coupled with an increase in the interest charge. For the quarter, the company added 46 stores, while same store sales showed a healthy 15% growth.

Denim showed improved performance while worsted & branded apparels witnessed margin pressure: Across the board for the quarter, the revenue momentum was robust for the core business segments (viz- textiles, garments, denim, branded apparels) with the only exception being the shirting business, that saw a decline in revenue by 9.7% YoY. On the profitability front, the denim business saw an improved performance on a Y-o-Y as well as sequential basis with its EBITDA growing by approximately 91% YoY and 17% sequentially. The same has come on the back of increased volume offtake (+5% YoY) and stable realisation.

The worsted / suiting segment that sells fabric under its flagship brand Raymond, along with the branded apparel business (that includes readymade apparels for formal wear sold under Raymond and Park Avenue brands and casual wear sold under Parx and Colorplus brands) saw pressure in its gross margins due to an extended sale season for inventory liquidation. The worsted EBIT margins tumbled down 310 basis points YoY (-440 basis points quarter on quarter [QoQ]), while the branded apparel business posted an EBITDA loss of Rs15 crore for the quarter (as against a profit of Rs6 crore in Q4FY2011 and Rs29 crore in Q3FY2012).

Earnings revision: The management in its commentary sounded committed to its core strategy of focusing on its four power brands and enhancing its already strong network with new stores in the hinterlands (smaller towns and cities). But for the short term ie H1FY2013, it sounded cautiously optimistic. Building the same momentum in our estimates we have revised our
earnings for FY2013, with new EPS at Rs Rs32.8 and have also introduced our FY2014 estimates where we expect Raymond to report an earning per share (EPS) of Rs39.7 for the year.

Strong brand play - we maintain Buy: Raymond’s Q4FY2012 performance has been resilient in the light of challenging macroeconomics (demand slowdown, high input cost pressure) . We believe that Raymond, with its continuous focus towards its power brands and strong distribution franchise, is all set to encash on the strong secular consumer wave waiting ahead.
Hence we continue with our bullish view on the company. Further, any development with regard to the Thane land in the form of either joint development or disposal would lead to value unlocking and provide significant cash for the company. We continue to maintain our Buy rating on the stock and our revised sum of the part (SOTP) based target price of Rs500 (valuing the core business at 10x FY2014E earnings plus 50% value for the Thane land bank parcel).

What happened in the quarter gone by?
Q4FY2012 reported robust revenue growth; like to like sales grew 15%: Raymond’s consolidated Q4FY2012 revenue grew at a strong 13.1% YoY to Rs949 crore, led by a growth in textiles, garmenting and denim businesses, each of which grew at a Y-o-Y pace of 24.4%, 40.5% and 14% respectively for the quarter. Volumes in the denim business showed an increase of 5% on a Y-o-Y basis.
Increased discounting to liquidate inventory casted pressure on gross margin and thus operating performance: Increased discounting in the branded garment segment as a result of the management’s strategy of liquidating inventory due to weak macro sentiments and prolonged discounting season dented the company’s gross margins (down 2000 basis points
from approximately 64% to 43%). Hence the profitability for the quarter (operating profit margin
[OPM]) was down by approximately 400 basis points.

 Earnings down 89% YoY, led by poor operating performance coupled with increased interest
charge: Along with a de-growth in the operating profit, an increased interest expense (+26% YoY) and depreciation (+7.6% YoY) dented the earnings down by 89% YoY for the quarter.

Denim showed improved performance while worsted & branded apparels witnessed margin pressure: Across the board for the quarter, the revenue momentum was robust for the core business segments (viz textiles, garments, denim, branded apparels) with the only exception being the shirting business, that saw a decline in revenue (-9.7% YoY). On the profitability front, denims saw an improved performance on a Y-o-Y as well as sequential basis; its EBITDA grew by approximately 91% YoY and 17% sequentially with increased volume offtake (+5% YoY) and stable realisation.

The worsted / suiting segment that sells fabric under its flagship brand Raymond, along with the branded apparel business (that includes readymade apparels for formal wear sold under Raymond and Park Avenue brands and casual wear sold under Parx and Colorplus brands) saw pressure in its gross margins due to an extended sale season for inventory liquidation. The worsted EBIT margins tumbled down 310 basis points YoY (-440 basis points quarter on quarter [QoQ]), while the branded apparel business posted an EBITDA loss of Rs15 crore for the quarter (as against a profit of Rs6 crore in Q4FY2011 and Rs29 crore in Q3FY2012).

What were the management’s comments?
Q4FY2012 results included certain one-offs: Raymond’s Q4FY2012 results included certain one-off expenses / costs in the form of inventory write-off (approximately Rs4 crore) and costs related to the Thane plant’s relocation to Jalgaon (Rs9 crore booked in the manufacturing cost). Concentrated efforts towards clearing and liquidating old inventory from the system
impacted the gross margin (around 32% sales from the branded garment segment amounting to approximately Rs53 crore came from the deep discount sales).
Satisfied with Raymond’s achievements: Despite a challenging macroeconomic environment in H2FY2012, the management sounded quite satisfied with its performance and mentioned that its worsted segment’s volume growth at 9% was ahead of the industry growth rate. In the branded fabric business it has increased its market share in the multi brand outlet (MBO) segment which grew by 34% for the year. The extension of brand Raymond from a fabric to apparel has been successful (in two years’ time frame) with its apparel range clocking a turnover of Rs85 crore for FY2012.

Expects recovery from H2FY2013 onwards: The management in its commentary sounded cautiously optimistic about the near term macro environment and expects a strong recovery from H2FY2013 onwards. Likewise it is gearing itself towards the same with it introducing a new avatar for its ColorPlus range and is planning to make Makers a national brand from a
regional one currently.

Relocation of Thane capacity to Jalgaon completed: The relocation of the 7 million meters Thane capacity to Jalgaon has been completed and the same has enhanced the company’s worsted capacity from 31 million meters to 38 million meters with a total cost of Rs65 crore.

 Focus on power brand continues to be strong: The company continues to focus all its energy on growing its four power brands - Raymond, Park Avenue, Parx and ColorPlus. It has strategised on continuous investment in the brands through advertisement and enhanced retail expansion (the management has guided towards opening 100 The Raymond stores in
FY2013) covering more hinterlands ie class-3, class-4 and class-5 towns and cities.

What have we done to our estimates?
The management in its commentary sounded committed to its core strategy of focusing on its four power brands and enhancing its already strong network with new stores in the hinterlands (smaller towns and cities). But for the short term ie H1FY2013, it sounded cautiously optimistic.
Building the same momentum in our estimates we have revised our earnings for FY2013 to Rs32.8 and have also introduced our FY2014 estimates where we expect Raymond to report an EPS of Rs40 for the year.

Strong brand play - we maintain Buy: Raymond’s Q4FY2012 performance has been resilient in terms of macroeconomics (demand challenges) although it faced input pressure. We believe that Raymond, with its continuous focus towards its power brands and strong distribution franchise, is all set to encash on the strong secular consumer wave waiting ahead. Hence we continue with our bullish view on the company. Further, any development with regard to the Thane land in the form of either joint development or disposal would lead to value unlocking and provide significant cash for the company. We continue to maintain our Buy rating on the stock and our revised SOTP based target price of Rs500 (valuing the core business at 10x FY2014E earnings plus 50% value for the Thane land bank parcel).


>ICICI BANK: Q4FY12 Results update

Above estimates on strong core performance

ICICI Bank’s Q4FY12 core performance came in stronger than expected (Rs19bn, up 31% YoY) led by positive NIM surprise and lower provisions. Asset quality remains comfortable with 1) GNPA stable QoQ 2) slippages under control (~1%) 3) Credit costs under control at 75 bps and PCR healthy at ~80%. While the restructured portfolio has increased sharply by ~39% QoQ (with negligible pipeline), it still remains comfortable at 1.7% of advances. We maintain our fair value estimate and recommend Buy and believe that ICICI Bank is one of the safest bets in the current asset quality cycle that also offers decent upside.

 NIM expands 30bps QoQ, Loan growth @ 17%: NII grew by a strong 23.7% yoy to Rs31.1bn led by a credit growth (17.3% yoy) and 30 bps QoQ expansion in reported NIM. The NIM expansion is can be traced to 1) higher loan yields due to late upwards re-pricing of loans 2) lower securitisation losses and 3) favourable loan mix. While the management guided for a 10-15 bps expansion in NIM for FY2013, we believe that NIM could surprise on the upside based on 1) lower share of low-yielding international book 2) benefit of lower losses on security receipts and 3) higher share of retail loans.

 Asset quality stable, restructuring on rise but comfortable: Asset quality matrices continue to remain healthy with 1) GNPA improving by ~20 bps QoQ 2) PCR expanding to 80.4% 3) Slippage rate contained at ~1.0% and 4) credit costs contained at 75 bps. Meanwhile, the restructured portfolio has increased sharply by ~39% QoQ (with negligible pipeline), though still remains comfortable at 1.7% of advances.

 Loan growth healthy but challenges remain: Overseas loan growth seems to have benefitted from rupee depreciation (up 26% YoY), which along with strong growth in SME and domestic corporate book drove the 17.3% advances growth. Meanwhile, retail book growth remained lacklustre (8% YoY). Given the anticipated weakness in overall domestic loan demand coupled with significant run-offs in overseas book, maintaining loan growth is likely to be a challenge for the bank during FY13.

 Weak core fee income performance: Non-interest income grew by strong 36% YoY during the quarter led by sharp jump in treasury gains while fee income witnessed a contraction of ~3.5% YoY (on continued weakness in third party distribution and corporate fee income). For FY13, management guided for higher growth in core fee income.

 Maintain Buy: Not withstanding the challenges on loan growth, we draw significant comfort on asset quality front led by a limited restructured portfolio, strong PCR and relatively conservative loan book build up in the past 2 years. Potential upside surprise on NIMs and contained credit costs should help the bank deliver RoA of ~1.5% for FY13 & FY14. At the current price, the stock trades at 11x FY14 EPS and 1.5x FY14 ABVS. We maintain Buy and retain the target price.


>INDIA UTILITIES: Coal India (CIL) is close to signing fuel supply agreements (FSAs)

Synopsis of draft modified FSAs
• Statutory charges pass through: The wording of the draft modified FSAs stipulates that royalties, cesses, duties, taxes, levies etc if any payable under relevant statue but not included in the base price shall be paid by purchaser. Hence, it appears that the liabilities arising out of the MMDR bill will interpreted as statutory charges and will be pass through in nature. Major positive for CIL

• Introduction of force majeure: CIL’s responsibility stands waived in case of laundry list of events such as flood, adverse geo mining condition, explosions, civil disturbance, strike, legal issues, global issues with respect to coal availability, breakdown et al (it includes almost everything that can possibly impact CIL’s production). Change in statutory laws is included in the clause. Positive for CIL

• Purchaser’s condition precedent to put onus of timely execution on power company: Power companies will have to complete activities within 24 months from the date of signing FSAs as a condition precedent for the formulation of FSAs. This will lead to exclusion of delayed power projects from the list of projects eligible for coal. Moderately positive for CIL

• Import in the event of low domestic availability: CIL shall inform buyer three months in advance in case coal import is required, and the transportation charges from port shall be borne by the purchaser. There is no clarity on pooling of coal costs, however, this will be a pass through for CIL. CIL will announce price of
imported coal from time to time. Positive for CIL

• Negligible incentive for over delivery: Matching the penalty level, incentives are set at 0.01% for delivery in excess of 90% of ACQ. Negative for CIL • Negligible penalty for not meeting FSA: Penalty has been set at 0.01% of FSA value for delivery in case of undersupply. However, we believe that CIL is unlikely to pay any penalty, as it has the option to import coal to meet the domestic shortfall and in case the quantity offered for imported coal is not accepted by the purchaser, there will be no penalty for the shortfall.

• Quality assessment at loading end daily: There will be joint sampling, either manually or mechanically, for moisture, ash, and GCV of coal on a daily basis. The quality assessment will also help in implementing GCV based pricing system. Assessment at loading level is positive for CIL, as transportation related issues are beyond its control. Weighment of coal will be done at loading end. Positive for CIL

• Older FSAs to have priority: Commitments made under prior FSAs and commitments existing under "Coal Distribution System" shall take precedence over commitments made under the current FSAs. Positive for NTPC

• Lack of wagon availability to reduce availability; not to be included for calculation of penalty.

• FSAs fully reviewable by CIL: As per the terms, the FSA can be reviewed by either party after five years. And, nine months after the review, if either of them find the terms unsuitable, they have the right to end the agreement.

• Capacities – Total FSA for 25GW with 104mnte of LoAs (Letter of Assurance). 13.5GW of capacities have linkages with LOAs of 56mnte, which were commissioned in FY12. For FY11, 5.8GW of capacities have LoAs of 23.2 mnte. For FY10, 5.3GW of capacities have LoAs of 24mnte.

To read report in detail: INDIA UTILITIES

>ECONOMY: S&P raises red flag

S&P has maintained India’s sovereign rating at BBB‐ but the outlook has been revised downward to ‘negative’. This action is based on factors that are already widely known. Importantly, at this stage it is just an outlook change and not a ratings downgrade. To that
extent, it is more of a warning of increasing vulnerabilities of the country. Nonetheless, the action can impact INR in the near term, which is already under pressure and perhaps raise external borrowing costs for some of the corporate. However, the silver lining could be that this action could exert pressure on the government to act on fiscal front (possibly by raising the diesel prices etc) as well as on policy front.

S&P Action: Ratings reaffirmed; outlook downgraded
S&P has revised its outlook on India from ‘stable’ to ‘negative’ while re‐affirming the
rating of BBB‐, (just one notch above speculative grade). The ‘negative’ outlook reflects 1/3rd chance of ratings downgrade over next 24 months.

The key reason for the action is the worsening macro situation, particularly the widening CAD, investment slowdown and high fiscal deficit.

What can trigger ratings downgrade?
• External situation worsens
• Growth prospects diminish
• Progress on fiscal remains slow

On the other hand, the ratings can improve if government implements initiatives to reduce structural fiscal deficits such as fuel price hikes, early implementation of the goods and service tax etc.

Our view: A timely warning
Overall, the outlook downgrade is based on the factors that are already widely known. Importantly, at this stage it is just an outlook change and not a ratings downgrade. To that extent, it is more of a warning of increasing vulnerabilities of the country. Nonetheless, the S&P action would add to the overhangs on the Indian economy. At the margin, the S&P action can have an impact on INR in the near‐term, which is already under pressure and perhaps raise external borrowing costs for some of the corporates. The silver lining could be that it will exert added pressure on the government to act on fiscal front (possibly by raising the diesel prices etc) as well as on policy front.


>BIOCON: Supply of Fidaxomicin to Optimer Pharma continues (Q4FY12 Result update)

Strong Growth Momentum

Biocon has reported excellent sales growth of 30%YoY for Q4FY12 due to good growth across its segments. However, EBIDTA margin declined by 250bps YoY from 27.8% to 25.3% due to sharp increase in other expenses.

The company’s other income fell sharply by 92%YoY from Rs169mn to Rs13mn. Net profit before EO items grew by 4%YoY. After the termination of the agreement with Pfizer for insulin and its analogues, the company is scouting for a new partner. For FY12, Biocon reported 16%YOY growth in sales and flat net profit despite net licensing income. Biocon’s subsidiaries
Syngene and Clinigene have reported 29%YoY growth in revenues. We have retained Buy rating for the scrip with a target price of Rs345 (based on 16x FY14E EPS of Rs21.5).

■ Strong revenue growth: During the quarter, the biopharmaceutical business (70% of revenues) reported 28%YoY growth, branded formulations (11% of revenues) grew by 34% and contract research (19% revenues) grew by 33% indicating strong growth across all segments.

 Margin under pressure: Biocon reported 250bps drop in EBIDTA margin from 27.8% to 25.3% due to sharp increase in other expenses. The PBIT margin of pharma business dropped by 920bps YoY from 41.3% to 32.1%. However, the PBIT margin of CRAMS business grew by 90bps from 30.2% to 31.1%. Biocon’s EBIDTA margin has shown improvement on QoQ basis after consecutive decline in four previous quarters.

 Decline in licensing income: During the quarter, Biocon’s licensing income fell by 40%YoY from Rs768mn to Rs463mn due to the termination of the agreement with Pfizer. For FY12, licensing income dropped by 17% YoY from Rs1.53bn to Rs1.27bn. We expect licensing income to fall further due to the termination of the agreement with Pfizer.

 Other developments: Supply of Fidaxomicin to Optimer Pharma continues. Trastuzumab (Mylan alliance) has entered phase III clinical trials in India. Itolizumab (psoriasis molecule) has completed Phase III studies in India. 􀂁 Cheap valuations, Reiterate Buy: We expect Biocon to become leading global player in insulin, immunosuppresants, statins and branded formulations. We have revised the EPS estimates downwards by 13% for FY13 and 2% for FY14. At the CMP of Rs239, the stock trades at 13.9x FY13E EPS of Rs17.2 and 11.1x FY14E EPS of Rs21.5. We retain Buy rating for the scrip with a target price of Rs345 (based on 16x FY14 earnings).


>HDFC BANK: Q4FY12 Results

Asset quality continued to remain healthy, Retain Buy

HDFC Bank announced its results for Q4FY12. The bank reported higher than expected bottom line driven by robust NII and other income growth coupled with lower provisioning during the quarter.

Key Highlights
■ Net Profit after tax for the current quarter increased 30.4% YoY (1.6% QoQ) to Rs 14530.8 mn from Rs 11147.1 mn for Q4 FY11. The growth in PAT on YoY basis, despite higher operating expenses (driven by aggressive branch addition), was mainly driven by 19.3% YoY (32.0% QoQ) increase in the NII at Rs 33883.1 mn (led by robust growth in advances 22.2% YoY and 0.6% QoQ) and 18.8% YoY (5.1% QoQ) increase in other income. The main contributor to other income for the quarter was fees & commissions of Rs 12373 mn, which was up by 23.7% YoY. Besides this lower provisioning (decline of 30.8% YoY and 9.4% QoQ) during the quarter led by lower slippage further aided growth in net profit. Cost / Income ratio during the quarter increased by 175 bps YoY (298 bps QoQ) to 50.6% driven by aggressive branch and ATM expansions during the quarter.

 Net Interest Margins during the quarter registered an increase of 10 bps sequentially to 4.2% on the back of higher average CASA balance during the quarter (the bank was the collecting banker for issuance of tax-free bonds for some of the issuers in Q4 FY12). Added to this the bank’s continued focus on retail lending due to attractive yields and run down of low yielding corporate loans has further aided in margin expansion.

 Total business of the bank registered a robust growth of ~20.0% YoY (3.6% QoQ) as at Q4FY12. Deposits grew by 18.3% YoY (6.1% QoQ), whereas Net Advances grew by 22.2% YoY (0.6% QoQ). The advance book grew on the back of healthy 34% YoY (7% QoQ) growth in the retail book, while corporate advances book grew 11% YoY (decline of 6% QoQ). The share of retail book in the total advances improved to 54.8% against 50.1% YoY. Going forward, management expects corporate loan book to pick up pace and has guided for a credit growth of 19-22% for FY13.

 Asset quality continued to remain stable with gross NPA at 1.01% (1.05% YoY, 1.03% QoQ) and net NPA at 0.18% (0.19% YoY, 0.20% QoQ). The bank’s slippage ratio for FY2012 was low at 0.98% (1.13% in FY11 and 2.66% in FY10). Restructured assets were also stable at 0.4% of gross advances in Q4FY12. Provision coverage based on specific provisions was at 82.4% higher by 207 bps sequentially despite lower provisioning during the quarter mainly led by lower slippages. Going forward, the management expects credit costs to rise from the current levels.

 The bank had opened 343 new branches in this quarter taking the total number of branches to 2544. The bank plans to add ~250 branches each year going forward.

Outlook and Valuations
The banks consistent strong performance despite challenging times reflects its strong and dynamic business model. We estimate HDFC Bank to report an EPS CAGR of 28.5% over FY11-FY14E. ABV is estimated to grow at 19.3% CAGR during the same period. The bank’s strong asset quality, superior return ratios, strong asset growth and adequate capitalization bodes well for its future growth. HDFC Bank has always commanded a premium valuations visà- vis its peers due to its track record of consistent growth in earnings and assets. The stock currently trades at 3.7x FY13E ABV and 3.0x FY14E ABV. Over the last five years, the bank has traded at a mean multiple of 3.5x its one year forward ABV. We believe the bank to continue to command premium valuations going forward. We retain our BUY rating with a March 13 target price of Rs 635.9 implying an upside of 15.4% from current levels.


Thursday, April 26, 2012

>GEOMETRIC: One‐off marred, otherwise a decent quarter

Geometric posted a steady revenue growth in line with expectations, however EBITDA margin deteriorated by 544bps QoQ to 12.5% due to extra ordinary items of expenditure & currency fluctuation. In our upgrade note in the previous quarter, we indicated presence in growth market, with focus on margins yielding stronger performance. But this quarter performance marred our expectation due to volatility. We retain ‘Accumulate’, with a TP of Rs80.

 Steady performance accompanied by lower than expected margins : Geometric reported in-line revenue growth of 2.7% QoQ to Rs2.25bn (PLe: Rs2.21bn, Cons:Rs2.20bn) and 5.4% QoQ in USD terms to $44.92m (PLe: $43.91m). EBITDA margin dipped by 544bps to 12.5% (PLe: 17.4%, Cons: 16.5%), due to rupee depreciation, higher utilization & extra ordinary items of expenditure. EPS degrew by 39.9% QoQ to Rs2.04 (PLe: Rs3.23, Cons: Rs3.15).

 Two‐fold performance – Revenue growth and margin expansion: We believe that the company’s strength in PLM and PES space is playing out well. The company’s ability to cross-sell strength of different geographies has started paying-off. We expect steady margin performance as these extra-ordinary is not going to be part in FY13. The management didn’t give detail for extra-ordinary.

■ Conference call highlight 1) Volume growth at ~5.1%, no change in pricing 2) New contracts amounting to $11.71mn awarded during the quarter (Q3FY12 : $3.55mn) 3) Total headcount is 4567 (Q3FY12: 4447) 4) Growth from emerging verticals like ship building, Oil & Gas & Energy 5) Effective tax rate to be ~28% for FY13 6) Fresher Hiring for FY13 to be ~200+ 7) DSO stood at 65.28 for Q4FY12 (Q3FY12: 71.36)

■ Valuation & Recommendation: We believe that Geometric’s operational performance is expected to strengthen from here. We expect a steady revenue performance for the company in FY13 with improved margins. We reiterate our ‘Accumulate’ rating, with a TP of Rs80, 6x FY13E earnings estimate.


INSURANCE: Business traction improves in last month of FY2012.

Business traction improves in last month of FY2012. Private insurance companies reported 6% growth in APE collections for March 2012 on the back of subdued performance for the past several months. Most large insurance companies (except Birla SL and Reliance Life) reported positive yoy APE trend. Bajaj Allianz (up 26% yoy) was the major surprise. We believe that private players will need to sustain APE growth trends order to maintain/improve expense ratio.

Higher APE growth last month
Private insurance companies reported 6% growth in APE collections for March 2012 after subdued performance for the past several months. LIC’s APE for the past two months of FY2011 was distorted and hence we don’t read much in its 16% yoy growth for March 2012.

Most companies fared well
Most large insurance companies (except Birla SL and Reliance Life) reported yoy growth in APE. Bajaj Allianz (up 26% yoy), Max NY (up 20% yoy) and HDFC SL (up 16% yoy) were the key fastgrowing players. ICICI Pru Life reported marginal yoy growth but 50% mom growth; Birla SL also reported almost 170% mom growth.
FY2012E APE significantly weaker than expected

APE for FY2012E was down 22% for private players; Bajaj Allianz, Birla SL, ICICI Pru Life, Reliance Life and SBI Life reported over 20% decline. LIC reported 12% positive growth. Base effect of the new IRDA regime pulled down APE by 44% for private players in 1HFY12. In 2HFY12, HDFC SL was the only large player to report yoy growth (up 8% yoy); other companies reported yoy decline in 2HFY12: Bajaj Allianz (down 10%), Reliance Life (down 21%), Birla SL (down 9%), SBI Life (down 8% yoy), Max (down 6% yoy).


>Ambuja Cements

Realizations decline in peak construction season. Ambuja Cements saw its net
realizations decline by Rs90/ton in 1QCY12 despite a Rs10/bag increase in its key
markets, as the benefits of price increase were likely passed on to dealers in the form of
higher trade discounts. Inability to effect an improvement in realizations in the peak
construction season does not augur well for full-year earnings that will likely be
susceptible to higher input costs. Maintain SELL rating and target price of Rs150/share.

Sequential decline in realizations despite price hikes
ACEM reported revenues of Rs26.3 bn (19% yoy, 13% qoq), operating profit of Rs7.4 bn (22%
yoy, 77% qoq) and adjusted net income of Rs5.1 bn (25% yoy, 96% qoq) against our estimate of Rs28.3 bn, Rs7.3 bn and Rs4.6 bn respectively. Despite cement prices increasing by Rs10-12/bag over the past quarter, ACEM’s average realizations declined by Rs90/ton likely on account of higher dealer margins eating into the pricing benefits. Sharp sequential jump in profitability (53%) was largely aided by (1) decline in raw material cost and (2) leverage benefits of higher volumes. We note that reported net income of Rs3.1 bn includes prior-period depreciation of Rs2.8 bn as the company retrospectively changed its depreciation policy for captive power plants from SLM to WDV. We discuss key details of the result in a subsequent section.

Pricing discipline continues to remain precariously positioned
We further note that the under-utilization of capacities is likely to continue even in CY2012E
despite factoring 8% consumption growth. In our view, pricing discipline continues to remain
precariously positioned in the wake of (1) a weak demand environment coupled with a continued capacity overhang and (2) potential action by the Competition Commission of India (CCI) apart from the hefty penalty that could be levied in case of an unfavorable ruling.

Valuation indicating an optimistic scenario, ignoring potential regulatory risks; SELL
We maintain SELL on ACEM with a target price of Rs150. ACEM is currently trading at 9X
CY2012E EBITDA and EV/ton of US$186/ton on CY2012E production as against a replacement cost of US$110-120/ton. We note that the current market price implies 25% yoy growth in profitability in CY2012E on a multiple of 8.5X CY2012E EBITDA (see Exhibit 3), which in our view does not take cognizance of risk to earnings given (1) the continued demand-supply overhang and (2) threat of an unfavorable regulatory action. We note that our estimates factor sustenance of pricing discipline as well as demand revival (to an extent) as we build 6% and 13% growth in volumes and realizations and a corresponding 20% improvement in profitability in CY2012E.


>STRATEGY: No escaping GAAR.

No escaping GAAR. The Government issued certain clarifications on GAAR and clarified that GAAR would apply on all impermissible arrangements from April 1, 2012. However, GAAR provisions will not apply with retrospective effect. The Government’s clarifications effectively extinguish hopes of postponement of GAAR provisions or implementation of a ‘sunset’ process to allow sufficient time for affected entities to deploy alternatives.

GAAR will apply to all impermissible structures
The Revenue Secretary categorically stated that GAAR would apply to all ‘impermissible arrangements’. As part of the clarification on ‘impermissible arrangements’ in the context of foreign institutional investors (FIIs), he stated that an arrangement would be deemed impermissible if it did not have a reasonable operation in a country (and where it does not have to pay tax) and the actual operations, such as fund management and trading, are done from some other country.

GAAR will apply from April 1, 2012; no retrospective application
The Government clarified that the provisions of GAAR would apply from April 1, 2012. However, it would not apply with retrospective effect. Besides, GAAR would not be invoked if the entities pay short-term capital gains tax or income tax, as the case may be, in India. The Government will put in place sufficient safeguards to ensure that GAAR provisions are not applied haphazardly. In terms of procedural issues for taxing an entity under GAAR, the IT department will have to prove that (1) an arrangement is impermissible for it to invoke GAAR provisions and (2) the arrangement has been made for the sole purpose of avoiding taxes.

GAAR would apply to P-Note providing FIIs if the structure is deemed impermissible
On the specific issue of P-Note providing FIIs, the Revenue Secretary clarified that GAAR applied to investors investing in India and an FII would be liable for tax under GAAR if the arrangement were not permissible. The Government clarified that GAAR would apply to all investors (foreign or resident) and it is not directed at any country or investor.