Thursday, May 31, 2012

>RUPEE DEPRECIATION: Net positive for earnings

The sharp depreciation in INR, on balance, is likely to be positive for earnings due to large positive impact on sectors such as Pharma, IT, and Metals, offset by relatively smaller negative impact on sectors like Capital goods, Energy, Media, Telecom and Utilities. At an aggregate level, assuming INR at ~Rs55/USD, this will translate into a ~5% increase each for FY13 and FY14 for Sensex/Nifty.

 INR has depreciated ~25% since late July 2011
INR depreciation in line with other EMs: Although INR has depreciated sharply in the past few months (~25% since July 2011), the depreciation is broadly in sync with that of other EM currencies that also have a current account deficit, as the chart alongside indicates. Thus, the depreciation largely reflects heightened global risk aversion, which is disproportionately impacting all currencies that have a large external gap.

 INR back in fair-value zone on REER basis: The sharp depreciation in INR is largely justified, given the large current account deficit and inflation differentials. However, as of April, on real effective exchange rate (REER) basis, INR has reverted to the FY06 levels and was just 4-5% higher than the FY09-10 levels. Barring any further sharp increase in global risk aversion, there is limited downside to INR from current levels.

■ Within large caps HCL Tech, Wipro, Tata Steel, Hindalco, Cairn will see >10% upgrade to FY13 EPS while Siemens, ABB, HT Media HPCL, IGL will see >10% downgrade to their FY13 EPS

To read report in detail: RUPEE DEPRECIATION

>BPCL: Better GRMs, full compensation by the government and upstream lead to profits

Government support keeps FY12 PAT in black; E&P remains the trigger

Full compensation for under-recoveries incurred in FY12 by the government (~60%) and the upstream (~40%) aided BPCL’s profitability. Devoid of any absorption on regulated fuels (although it incurred losses on sale of petrol which were absorbed), BPCL reported PAT of Rs13.1bn for FY12. BPCL’s E&P initiative is yielding results with incremental discoveries of hydrocarbon in its Mozambique block. We believe the E&P story is likely to drive stock performance going ahead. We remain positive on regulated fuel price hike and BPCL’s successful E&P initiative and hence maintain Buy on the stock.

 Higher petroleum product prices lead to higher revenues: BPCL‘s revenues climbed up by 42.8% YoY and 9.9% QoQ at Rs646.7bn owing to higher product prices (due to higher crude prices) and slightly higher volumes. Sales of petroleum products jumped by 6.1% YoY and 2.4% QoQ at 8.2mmt. Crude throughput jumped by 7.5% YoY but declined marginally by 2.1% QoQ at 6.0mmt.

 Better GRMs, full compensation by the government and upstream lead to profits in both Q4 and FY12: GRMs improved on a QoQ basis and came in at US$4.2/bbl in Q4 against US$3.5/bbl in Q3 which somewhat supported the performance. Due to higher quantum of under-recoveries during FY12, entire under-recoveries were compensated by the government and the upstream without any absorption left for downstream. Due to this, BPCL was able to show profits for both Q4 and FY12. Although, BPCL did not absorb any loss on regulated fuel, it did absorb losses on petrol (deregulated fuel) which was not compensated. BPCL received Rs129.6bn in subsidies from upstream companies and Rs196.7bn compensation from the government for FY12. Thus the company reported PAT of Rs39.6bn for Q4 and Rs13.1bn for FY12.

 Bina to report double digit GRMs, focus on E&P: BPCL’s Bina refinery operated at about 55-60% utilisation rate during Q4 but is currently operated at about 90% and soon will reach its full capacity (6mmt). With expectation of US$9-11/bbl GRMs, Bina is likely to add to BPCL’s consolidated earnings. BPCL is likely to invest over Rs45-50bn during FY13E of which about Rs15-16bn will be invested in E&P. Reserve estimate for Mozambique block is expected by the end of 2013. We believe higher capacity utilisation of Bina and further positive news flows from E&P are likely to drive BPCL’s stock performance going ahead. We like BPCL due to its exposure in E&P and maintain Buy with a price target of Rs861 (earlier Rs857).


>JET AIRWAYS: Q4FY12 results

PRICE TARGET....................................................................................................Unchanged
EPS (FY13E)............................................................................................................... -| 159
EPS (FY14E)............................................................................................................... -| 125
RATING....................................................................................... Changed from Buy to Hold

Earnings in line but challenges remain…
Jet Airways’ (JAL) Q4FY12 results were better than our expectations at operating levels. Its topline growth remained more or less in line with our estimates. Capacity reduction by other private carriers helped the company to improve load factors and yields especially in the domestic segment despite operating in the lean business season compared to the last quarter (i.e. Q3FY12). As a result, its revenue and market share both increased by 2.4% and 280 bps, sequentially. The company reported an operating revenue of | 4578 crore vs. estimated revenue of | 4680 crore. However, higher domestic fuel prices and weak rupee led to operating loss of | 55.2 crore and | 40 crore for Jet’s domestic segment and JetLite, respectively. On the other hand, the international segment’s performance remained healthy and it reported operating profit of | 182 crore. This, in turn, led to net consolidated operating profit of | 86 crore for the quarter vs. our estimated net operating loss of | 77.1 crore. However, at the PAT level, JAL reported a net loss of | 354 crore vs. | 196.5 crore last year due to higher depreciation & interest costs. Going ahead, we believe, operating environment for the company will continue to remain challenging in the wake of higher fuel prices & depreciating rupee despite growth in revenues. Hence, we downgrade our rating to HOLD from BUY.

 ■  Fuel, weak rupee dent margin despite better topline growth
Fuel prices and rupee depreciation continued to remain a cause for concern during this quarter as ATF prices have increased by 5.7% QoQ and the rupee continued to slide further on a sequential basis. As a result, the company was unable to improve its profitability despite better growth in total revenues.

We believe revenue growth would moderate as a rise in fleet supply by other players poses risk, going forward. We expect FY12-14E revenue CAGR of 14% vs. revenue CAGR of 18% during FY10-12. Also, we believe the operating environment will continue to remain challenging in the wake of higher fuel prices and a depreciating rupee in the near term. Hence, we have downgraded our rating from BUY to HOLD and maintain our target price of | 330 (i.e. 0.7x FY14E EV/Sales). A near term upside risk includes positive policy reforms like allowing 49% FDI by foreign carriers. However, that would mainly be sentimental.


>SUN TV: Q4FY12 results

Price Target ........................................................................... Changed from | 348 to | 300
EPS (FY12E)......................................................................... Changed from | 20.5 to | 18.8
EPS (FY13E)..........................................................................................Introduced at | 22.1

Slowing economy darkens Sun…
Sun TV reported its Q4FY12 results, which were in line with our estimates. The topline stood at | 427.0 crore representing de-growth of 7.3% YoY as the topline for Q4FY11 was inflated by a one-time revenue from the movie Endhiran. Ad revenues de grew by 9.5% to | 234.0 crore
owing to the slowdown in the economy and fall in the TRPs of the channels. EBITDA for the quarter stood at | 328.2 crore against our estimate of | 330.7 crore. The EBITDA margin stood at 76.9% contracting by 216 bps YoY due to higher other expenses. The PAT stood at | 159.0
crore against our expectation of | 165.1 crore. In light of a continuous decline in TRPs, which will pressurise ad revenues, going forward, we have cut our revenue/PAT estimates for FY13 by 0.4%/8.4%, respectively. We continue to rate the stock as BUY with a target price of | 300.

Declining TRPs
The quarter was marked by a decline in the TRPs of the channels once again owing to competition from Arasu Cable, which has not carried Sun TV channels as yet and a power crisis in South Indian states. The management has indicated that talks with Arasu Cable have reached a final stage and a deal could be struck anytime soon. This is expected to address the decline in TRPs.

Ad revenue de-grows again
Ad revenues continued to de-grow for the second straight quarter due to a decline in TRPs and a challenging macroeconomic environment. Though a decline in TRPs is expected to be arrested soon, the macroeconomic environment is expected to remain challenging. We have
factored in a 13.3% and 14.8% growth of ad revenue for FY13 and FY14, respectively, in our calculations.

We have valued the stock at 16x FY13E EPS and arrived at a target price of | 300, implying an upside of 20% from the CMP. The political pressure may have an overhang on the stock. We continue to rate Sun TV as BUY.


>STRATEGY: India looks oversold

With sellside economists’ GDP estimates being cut regularly (our estimate remains above 7%), with the INR in a free (our target INR/US$56-58), India's star appears to be fading. However, as shown by a series of long term charts in this note, the Indian market is unquestionably ‘cheap’ now. Whilst given the scale of the European crisis and given India's comatose Government, it is easy to be bearish on India, these charts suggest that now is almost as good a time as any to BUY India. The country will rarely look as attractive on valuations when the world economy perks up and when India's growth hits its cyclical peak (v/s the cyclical trough that it is at now).

India appears oversold on long term metrics
India appears significantly oversold on a comprehensive set of relative valuation metrics based on book value, national income and cyclically adjusted earnings (refer to the right hand margin). In fact, India has appeared cheaper than it is at present only once or twice in the last ten years:

  P/B: The Sensex was significantly cheaper compared to current levels only in the year after 9/11 and in the wake of the Lehman crash (exhibit 1).

  P/GDP: BSE500 was significantly cheaper only until 2005. Since then, with the exception of the post-Lehman period, the market has never been this cheap relative to underlying national income. Even in the depths of the Lehman crisis, the market was only 10% cheaper than it is today (exhibit 2).

  CAPE: On CAPE (i.e. cyclically adjusted real P/E), India has only once traded at lower multiples than the current 15x. This rare outcome materialized in the post-Lehman months when it hit 12x (see exhibit 3).

  Even relative to the nominal CAPE for MSCI EM, India has never looked this cheap v/s its peers post CY05 (with the exception of the post Lehman months) with its premium currently crunched to 38% v/s the long term average of 51%.

Investment Implications: Buy Good & Clean stocks
Given that India appears oversold on long term metrics, unless you believe that there is another Lehman on the way, it makes sense to take a bolder approach to buying high-quality, sensibly-valued companies in India. Fifty such companies were highlighted in our "Good & Clean 4.0: the Great 50" note published on May 03, 2012.

Furthermore, leaving our charts aside, it is worth considering the three upcoming catalysts highlighted in our email last week (India Strategy: Blinkered by all the doom & gloom", May 16, 2012) in case your spirit is willing to buy India but the flesh is weak:

1.Change in FM: With the current FM likely headed for a more prestigious but more titular role, the three candidates who appear to be in the frame for the FM’s role appear to be more progressive candidates than the incumbent.

2.More QE from the West: We have seen the QE playbook being rolled out repeatedly by the ECB and the Fed. Given the potential risks to the European banking system and given a pro-growth (hence anti-austerity) leader heading France, it would be very strange if the ECB did not use the monetary fire hose to calm the markets down eventually.

3. Oil: India's oil import bill amounts to 7% of our GDP. Therefore, a 10% fall in the price of oil (from US$110/Brent barrel to US$100) will reduce our current account deficit by 40bps. We are not oil experts but looking at the weakening Chinese economy and listening to the Saudis talk about how they will work proactively to push Brent to US$100, we cannot but feel optimistic.


>ORBIT CORPORATION: Q4FY2012 revenue boosted by sale proceeds from Ocean Parque

Regulatory environment easing, execution holds the key

  Q4FY2012 revenue boosted by sale proceeds from Ocean Parque: Orbit Corporation (Orbit)’s consolidated revenues in Q4FY2012 came in at Rs123 crore, up 80% year on year (YoY) and 71% quarter on quarter (QoQ) mainly due to booking of Rs65 crore from the Ocean Parque (Napean Sea Road, Mumbai) deal which took place earlier this fiscal. However, there was an impairment of Rs13 crore in the sales value of the World Trade Centre (WTC) project in Bandra Kurla Complex (BKC), Mumbai which impacted the company’s revenue during the quarter. Thus if we adjust these two items, the revenue for the quarter grew by 3.5% YoY and was down 1.5% QoQ. The same was due to poor execution across projects with construction activity having slowed down for want of clearances and approvals.

 Q4FY2012 PAT below expectation; OPM takes a hit: The adjusted net profit fell by 75% YoY to Rs4.8 crore on the back of a sharp contraction in the operating profit margin (OPM) and higher interest cost. The OPM contracted from 77.9% in Q4FY2011 and 54.1% in Q3FY2012 to 35.7% for the quarter under review. The contraction is on account of impairment booked in case of WTC, adjusting for which, the margins would have stood at 51.5%. Further the budgeted cost has been increased during the quarter for three projects under development. During the quarter the company paid further tax of Rs9.7 crore pertaining to the previous
years, which resulted in a net loss of Rs4 crore at the reporting level. Additionally the auditors have qualified the report that Orbit has not provided for income tax demand including interest amounting to Rs157 crore for previous assessment years. However, the management is contesting the same and is confident of much lower tax liability.

 Presales marginally lower sequentially but expect a rebound in H2FY2013 as approvals gain pace: Presales for the quarter stood at 29,654 sq ft (Rs44.4 crore in value terms), ie slightly lower than Q3FY2012 volume of 32,921 sq ft (Rs71.1 crore in value terms) but much better than Q4FY2011 volume of 11,249 sq ft (Rs50 crore in value terms). The fire sale at Orbit Residency (Andheri) and Orbit Terraces (Lower Parel) supported the volume. However in value terms they are much lower since no sales booking took place in any of the Napean Sea Road projects which command high premium. Going ahead, the management is looking at launching a couple of projects in Napean Sea Road and the first phase of Mandwa by Dussera-Diwali time as approvals and clearances have started kicking in for the stalled projects.

Execution set to improve; though downgrading FY2013 and FY2014 estimates: The regulatory environment has started improving where clearances and approvals have started coming in. Orbit has already received clearances for Orbit Terraces, Orbit Enclave and Orbit Haven where the execution can now resume on full swing. It is expecting more clearances which will help it launch more projects in H2FY2013. However, we are reducing our earnings estimate for FY2013 and FY2014 by 27% and 21% respectively on the back of lower revenue recognition. The execution will pick up post monsoon only, which will result in lower revenue recognition. A stake sale in a few projects and improvement in cash collection hold the key for smooth execution going ahead. Debtors collection has been very poor in FY2012 which has
impacted the working capital.

■  Maintain Buy, outlook improves: Poor sales across projects due to regulatory uncertainty and absence of new launches due to pending approvals and clearances had taken a toll on the company and the overall industry. However the regulatory environment has started improving and the clearances have started coming in for the stalled projects. This will result in a pick up in execution and launch of new projects. A stake sale in few projects along with improved cash
collection hold the key. Thus with improved outlook, we maintain our Buy rating on the stock with price target of Rs70. We have rolled forward our net asset value (NAV) to FY2013 and lowered the discount to NAV from 50% to 40%. At the current market price, the stock trades at 7.3x and 4.4x its FY2013E and FY2014 Eearnings respectively.

■ FY2012 net profit down 73% YoY
The net profit for the full year is down 73% YoY on the back of flat revenue, sharp dip in OPM and higher interest outgo. The revenue has been supported by Rs115 crore of sale proceeds from the Ocean Parque deal. The OPM contracted from 52.5% in FY2011 to 39.2%, impacted by impairment of Rs20 crore on account of the WTC project. If we adjust for the same the margin would stand at 47.2%. Looking at partial exit or strategic partner in few projects

■ Orbit is looking to partially exit two of its projects viz Orbit Grandeur, Santacruz (SRA project) and the Kilachand project at Napean Sea Road in this fiscal itself. If it manages to successfully close the deal, this will help the company in execution of the projects without raising further debt on the books.

■ Presales marginally lower sequentially but expect a rebound in H2FY2013 as approvals gain pace Presales for the quarter stood at 29,654 sq ft (Rs44.4 crore in value terms), ie slightly lower than Q3FY2012 volume of 32,921 sq ft (Rs71.1 crore in value terms) but much better than Q4FY2011 volume of 11,249 sq ft (Rs50 crore in value terms). The fire sale at Orbit Residency (Andheri) and Orbit Terraces (Lower Parel) supported the volume.
However in value terms they are much lower since no sales booking took place in any of the Napean Sea Road projects which command high premium.

Going ahead, the management is looking at launching a couple of projects in Napean Sea Road and the first phase of Mandwa by Dussera-Diwali time as approvals and clearances have started kicking in for the stalled projects.

Valuation and view
Poor sales across projects due to regulatory uncertainty and absence of new launches due to pending approvals and clearances had taken a toll of the company and the overall industry. However the regulatory environment has started improving and the clearances have started coming in for the stalled projects. This will result in a pick up in execution and launch of new projects. A stake sale in a few projects along with improved cash collection hold the key going forward. Thus with an improved outlook, we maintain our Buy rating on the stock with a price target of Rs70. We have rolled forward our NAV to FY2013 and lowered the discount to NAV from 50% to 40%. At the current market price, the stock trades at 7.3x and 4.4x its FY2013E and FY2014E earnings respectively.



Realisation driven growth; volume ramp up awaited  

Realisation drives growth; production volume flat: In Q4FY2012, Selan Exploration Technology (Selan)’s net revenues (adjusted for the petroleum profit) grew by 23.2% year on year (YoY), backed by a 28% year-on-year (Y-o-Y) improvement in the realisation. The blended realisation was boosted by a combination of higher crude oil price and depreciation of the rupee. However, the oil production volume remained flat Y-o-Y at 42,484 barrels during the quarter. The operating profit grew at a relatively lower rate of 20% due to margin contraction on the back of higher overhead expenses as a percentage of sales. The reported profit after tax (PAT) grew by 49% YoY but by 9% QoQ, which includes a foreign exchange (forex) gain of Rs1.9 crore in Q4FY2012 and a forex loss of Rs2.4 crore in Q3FY2012.

Annual performance – driven primarily by higher realisation: Even on an annual basis, the growth in net sales of 34% was largely driven by a higher blended realisation as the production volumes declined by 12% to 1,68,041 bbl as compared to FY2011. However, despite lower production volumes, the operating profit margin (OPM) expanded by 270 basis points on the back of a jump in blended realisation (52% growth in realisation), which is a combination of increase in the price of crude (by 41%) and appreciation of the dollar against the rupee (by 10%). Consequently, the operating profit per barrel of production also jumped by 54% YoY to Rs3,568/bbl in FY2012. Hence, its reported PAT grew by 38% YoY to Rs44 crore, translating into an earnings per share (EPS) of Rs25.9 for FY2012.

Healthy balance sheet position: We like the strong balance sheet and impressive cash generating ability of the company. Currently it has net cash of Rs57/ share, that is 21% of the current market price of the share. Further, the company is generating significant cash flow from operations to support its future growth plans. Hence, we believe that the low leverage position is likely to be sustained.

Fine-tune estimates; awaiting regulatory approvals for next round of production ramp up; reiterate Buy: Post the declining production volume trend since FY2009, Selan was expected to begin the next phase of development of its fields and show a ramp-up in production volumes from FY2012. The same has been postponed due to delay in regulatory approvals. However, the management is quite confident of commencing its next phase of growth and has guided for an annual production volume of 5,00,000-7,00,000 bbl in the next two years. Our volume assumption at 4,47,000 bbl for FY2014 is much lower than the management’s guidance. Hence, we remain positive on the stock and continue to rate it as Buy with a target price of Rs500.


>JK CEMENTS: Q4FY12 Result update

Stellar performance, maintain Buy

JK Cement’s Q4FY12 result was better than our expectations with EBITDA at Rs1,992mn vs. est. Rs1,550mn and adjusted PAT at Rs855mn vs. est. Rs672mn primarily driven by better than expected cement realization of Rs3,822/tonne (est. Rs3,757/tonne) and improved profitability of white cement (EBITDA/tonne increased 16% QoQ to Rs5,145/tonne). EBITDA increased  73.1% YoY (and 67.2% QoQ) to Rs1,992mn and EBITDA margin improved  744bps YoY (and 534bps QoQ) to 24.7%. On the back of higher realization and  increase in sales volume, adjusted PAT of the company increased 59.7% YoY  (and 96.6% QoQ) to Rs855mn. Going forward, the management expects the sales volume from South plants to improve and anticipates 10-12% growth in grey cement sales volume in FY13E. It expects volume growth in white cement to be 8-12% and wall putty ~25%. During FY12, the company recorded 187.5% YoY growth in adjusted profit to Rs1,800mn and operating margin improved 730bps YoY to 19.9%. We expect EPS growth of 13.4%/8.6%/23.2%for FY13E/FY14E/FY15E for the company. RoE of the company is expected to improve to 12.5% in FY14E against 4.6% in FY11. We maintain Buy on the stock with price target of Rs204, an upside of 39.7% from the CMP.

 Improvement in grey cement realization and sales volume lead to higher revenues….: Revenue of the company increased 21% YoY to Rs8.1bn led by 7.1% YoY growth in grey cement realization to Rs3,746/tonne and 12.3% YoY growth in cement sales volume (cement and clinker) to 1.71mt. White cement sales volume increased 10.5% YoY to 0.10mt and realization increased 12.3% YoY to Rs16,519/tonne.

 ….. Leading to significant increase in EBITDA and profits: Driven by improvement in realization and sales volume of both grey and white cement, EBITDA of the company increased 73.1% YoY (67.2 QoQ) to Rs1,992mn. EBITDA margin improved 744bps YoY (534bps QoQ) to 24.7%. Adjusted Profit of the company increased 59.7% YoY (96.6% QoQ) to Rs855mn.

 Significant improvement in earnings in FY12: Adjusted profit of the company increased 187.5% YoY to Rs1,800mn in FY12 primarily due to 14% YoY increase in grey cement realization and 7% YoY increase grey cement sales volume. Adjusted EPS of the company for FY12 stands at Rs25.7 against Rs9 in FY11.

 Earnings estimates revised upwards: We revise EBITDA estimates upwards by 16.2%/20.5% to Rs5.5bn/Rs6bn for FY13E/FY14E to factor in higher realization and volume growth. Our EPS estimates stands revised upwards by 17.9%/13.1% to Rs29.2/Rs31.7 for FY13E/FY14E respectively.

 Maintain Buy on attractive valuations: At the CMP, the stock trades at 4.6x FY14E EPS, 2.7x EV/EBITDA and EV/tonne of US$65. We expect improvement in RoE of the company to 12.5% in FY14E against 4.6% in FY12. We maintain Buy on the stock with a price target of Rs204.


>Venky's (India) Ltd.: Q4FY12 RESULTS

First signs of turnaround visible

■ Q4FY12 –Margins witness stark sequential improvement
• Venky’s India Ltd. (Venky’s) saw its net sales rise by 18.9% Y-o-Y to `2.67 bn led by a 31% rise in the poultry segment and 21% rise in the Animal Health Product (AHP) segment.

• The raw material cost which had rose for the seventh consecutive quarter on a Y-o-Y basis to 69% of sales. However, on a sequential basis, the raw material cost declined by 20 bps. The other expenditure declined by 30bps and 380bps on a Y-o-Y and Q-o-Q basis respectively.

• EBITDA was `218 mn for Q4FY12 against `254 mn for Q4FY11. The EBITDA margin declined to 8.3% in Q4FY12 from 11.3% in Q4FY11 but bounced back strongly from the 3.5% margin seen in Q3FY12.

• The other income component stood at `101 mn, above our estimates, resulting in the profit after tax rising by 16.8% Y-o-Y and over 500% Q-o-Q to `181 mn.

Result Highlights
■ Segmental revenues in-line with our estimates
The poultry and poultry related segment grew by 31.4% Y-o-Y to `1.99 bn and contributed 69% to total revenues as compared to 62.7% in Q4FY11. Similarly the AHP division witnessed a 21.1% Y-o-Y growth in revenues to `244 mn and contributed 8.5% to the revenues in Q4FY12 as compared to 8.3% in Q4FY11. The oil seed division on the other hand de-grew by 8% Y-o-Y to `644 mn and contributed 22.4% to the total revenues.

■ Segmental margins decline annually but bounce back strongly on Q-o-Q basis
The higher raw material cost pressures have been visible across segments over the last four quarters. The EBIT margin of the poultry and poultry related segment was 10.4% in Q4FY12 much lower than 13.6% in Q4FY11 but significantly higher from the 4.8% margin reported in Q3FY12. Similarly, the oilseed segment also clocked EBIT margins 10.2% in Q4FY12 from 6.1% in Q3FY12. The strong bounce back in the EBIT margin re-iterrates the turnaround for the company.

■ Valuation & viewpoint
Given the turnaround in realisations after the last few slack quarters and the strong macro conditions; we expect the company to report a 21.6% CAGR in revenues over FY12-FY14E. We expect the lower raw material cost to help margins to expand and reflect in the PAT with a CAGR of 57.3% over FY12-FY14E in PAT.

Venky’s is currently trading at 5.4x FY13E EPS and 3.6x FY14E EPS, a significant discount to its historical one-year forward P/E band. We have valued the company based on the average historical P/E band (5.6x) over the last four years to capture the cyclicality of the industry and its profits. With an assumption of the worst behind the company as far as the raw material prices are concerned, we value the company based on its next two years average EPS of `90 per share. Consequently, we reiterate our BUY rating on the stock with a target price of `515 per share.


Wednesday, May 30, 2012


FIIs invested in HDFC, ITC and Tata Motors.

FIIs divested in Bharti Airtel, Patni Computer and United Spirits.

To read report in detail: STRATEGY

>VOLTAS: Update on Sidra Project

  Margin improvement drive earnings surprise: Voltas reported numbers which was ahead of our and street estimate by reporting better-than-expected margin for the quarter. It reported EBIT margin of 8.3% in the MEP segment (100bps improvement QoQ). The improved margins were primarily driven by improved follow-up, leading to recovery of variation claims in few old projects. Sales reported de-growth of 5.8% YoY at Rs15.7bn lower than our expectation of Rs17.1bn. PAT was up 7% YoY to Rs1.04bn.

  Update on Sidra Project: Sidra Medical and Research Centre Hospital project in Qatar is ~67% complete. Voltas has taken a hit of Rs3.2bn in FY12 on this project. The company believes that the execution of the Sidra project will get extended beyond FY13 as client continues to make changes in the project design. Voltas will conduct a techno commercial study in July-August (similar to one done in Q3FY12) to assess if any further provisions are required in the project.

  Outlook on ordering: Voltas ended the year with an order book of Rs42.3bn, down 12% YoY. It bagged orders worth ~Rs23bn in FY12 and Rs4.5bn in Q4FY12. In the international markets, the company has started seeing some signs of revival, especially in the Dubai markets and expects to see more traction over the next six months. In Abu Dhabi, the airport order has been awarded to the main contractor. We expect the sub contractor to get finalised by October (Voltas along with JV partner bid for the same). The Joint Venture established in the new geography of KSA has begun to make progress and expects traction in Qatar and the KSA markets (already bagged orders worth Rs3.6bn in Qatar though a private JV). In domestic markets, the commercial real estate and IT/ITES continues to be slow. However, hospital and hotels have seen some
traction. Entry into in new segment in industrial space like Power, water and MEP project for automotive industry will help widen the scope of business and support growth in orders.

To read the full report in detail: VOLTAS

>AXIS BANK: Robust in FY13 with slippages/restructuring remaining inline with FY12

Axis bank’s top management ressured that they expect asset quality to remain robust in FY13 with slippages/restructuring remaining inline with FY12 levels and limited risk from growing Infra book in the near term. Retail focus will help mitigate some growth pressures but fee income will moderate. We continue to believe that market is dis‐regarding recent corporate asset quality performance and stable asset quality trends will surprise in the near term. Valuations at 1.6x FY13 book is undemanding; Axis/ICICI continue to remain top picks.

􀂄 Key Takeaways from the Management roundtable:
(1) Retail credit – Key focus: Axis re-emphasised their thrust on increasing share of retail to 30% from 22% currently. Liability customers constitute ~45-50% of incremental sourcing which we believe is a credit positive.
Management is seeing significant pricing competition in mortgages but believes competitive landscape is relatively better in auto lending.

(2) Corporate asset quality/Infra portfolio relatively comfortable:
Delinquency/restructuring in expected to remain in line with FY12 levels v/s consensus expectations of a pick up in slippages/credit costs. Axis does not expect any material near term pressure on Infra portfolio with very limited exposure to imported coal and gas projects. Power portfolio remains unseasoned (at currently 25% project commissioned) but management expects ~45% of their portfolio to be commissioned by FY14.

􀂄 Key Annual report takeaways: (1) Growth in stress sectors exposures (ex Infra) moderated to 14% y/y with contraction in non fund exposure. Infra exposure expanded by +33% y/y with power portfolio expanding by ~60% y/y largely driven by increase in non-fund exposure (2) Accretion to RIDF book of Rs10bn continue to remain low with total RIDF book equivalent of ~3% of loan book

(3) In line with industry trends, retail NPAs showed significant improvement from 1.4% to 0.8% in FY12 . Large and SME NPAs have also contracted except for services which has seen an increase in NPA levels.

To read report in detail: AXIS BANK


Quick Comment: Reliance Infrastructure reported

F4Q12 standalone revenue of Rs57.3bn (up 142% YoY), 
EBITDA of Rs6.2bn (up 136% YoY), PBT of Rs5.3 bn 
(up 30% YoY) and PAT of Rs6.6bn (up 84% YoY). 
Revenue was 30% higher than our estimate, but 
EBITDA was 9% below and PBT 11% below. The strong 
revenue growth, fueled primarily by EPC revenue of 
Rs43.8bn vs. our forecast of Rs28bn, was muted by the 
150 bps QoQ fall in EPC EBIT margins. While negative 
tax in F4Q (deferred tax assets created and previous 
year taxes included) pushed up PAT, full-year PBT of Rs 
23.3 bn was 3% below our estimate.

Consolidated revenue for the quarter was Rs71.4bn (up 
81% YoY), EBITDA was Rs5bn (up 48% YoY), and PAT 
was Rs4.1bn (up 28% YoY). Interest expense for the 
quarter was high; the infrastructure segment continued 
to contribute negative EBIT to the consolidated results. 
Consolidated book value was Rs918/sh at end F2012.

Key highlights:
• EPC: F2012 EPC revenue was Rs117bn (up 245%  
YoY). We believe significant progress made in 
Reliance Power’s Sasan and Samalkot projects was 
the key reason for the ramp-up in EPC revenue. The 
company expects similar revenue in F2013. The 
EPC order book currently stands at Rs173bn.

• Infrastructure: Infrastructure revenue for the quarter was Rs925mn (up 85% YoY). However, the

segment remained loss-aking with a negative EBIT  
margin of about 29% in the quarter. The company 
has invested Rs43.6 bn in the infra SPVs 

0.5x trailing consolidated P/B is undemanding, but  
lack of earnings triggers keeps us Equal-weight: 
Execution on Reliance Power and infrastructure projects 
will be critical for stock performance along with an 
improvement in the macro environment.


>PAGE INDUSTRIES: Tie-up with Speedo

Page Industries Ltd (Page), promoted by the Genomal Brothers in 1995, is the exclusive
licensee of Jockey International Inc (US) for manufacture and distribution of the Jockey brand
innerwear/leisure wear for men and women in India, Sri Lanka, Bangladesh, Nepal and UAE. The
agreement is in place till 2030. The company paid a royalty of 4.9% of sales. Page has also been
appointed the India franchisee for Speedo, a swimwear brand.

Leading Global branded Innerwear Company: - Jockey is an established & well know inner
ware brand. Page is the sole licensee of the Jockey brand in India and is the leader in the
India innerwear (undergarments) market. We expect the branded innerwear market to
continue to grow at CAGR of 15-20% over the medium term, driven by increasing consumer
aspirations and the shift from the unorganized segment to branded goods.

Shift from unorganized to organized segment to aid overall growth: - Indian apparel
market has been witnessing a shift to organized segment over the past couple of years. The
share of the organized segment in the overall pie has increased from 13% in 2005 to 16% in
2010 and the same is expected to go up to 40% in 2020E. It is expected to grow more rapidly
at a CAGR of ~22% during 2010-2020E as compared to the apparel industry which is
expected to grow as 10.6%. This is an advantage for organized players.

Tie-up with Speedo to boost up the top line going ahead: - Page has tied up with
swimwear brand Speedo International to manufacture market and distribute the brand in
India. Under the exclusive licensing agreement, effective from July 2011, the company will
make swimwear, water shorts, apparel, equipment and footwear in India. Page will be able to
leverage the strong distribution network created for the innerwear products to market this
range of swimwear products also.

To read report in detail: PAGE INDUSTRIES


Incorporated in 2003, Talwalkars Better Value Fitness Ltd (TBVFL) is the largest fitness chains in India offering a diverse suite of services including gyms, spas, aerobics and health counseling under the brand “Talwalkars”. It has pioneered the concept of gyms in India and today is a recognized name in the health and fitness industry. The company has grown rapidly since its inception and as on date operates 128 health clubs in 68 cities belonging to 18 states of the country serving over 1,25,000 members.

Pan India presence: Holds highest market share in the Organised health club market
TBVFL has pan India presence and holds highest market share in the organised health club market in India (~ 10%). In a fragmented health and fitness industry, where the demand for quality services is high while the supply is largely unorganized (primarily from singly city operators) and non-standardized, TBVFL has an edge over its peers.

Zero Capex model of “HI FI” gyms: results in accelerated expansion
The newly launched “HIFI” format has accelerated TBVFL’ penetration into the smaller markets. With a small sized format, “HI FI” health club can be rolled out in 8-10 weeks against 14-16 weeks for a typical “Talwalkars” health club. For FY13E, management has guided for ~25-30 additional gym roll out (including owned gyms/subsidiaries, franchises and JVs) taking the total number of gyms to ~160.

Focus on Franchisee/subsidiary model to improve return ratios
TBFVL is now focusing on adding more franchisees and also adopting a JVs/subsidiary model which we believe will result in lower capex (due to 51% holdings in subsidiary health club) and improve return ratios (as TBVFL receives a royalty of 6% of revenues for 1st 3 yrs which is 8% thereafter).

Broaden its scope from being a gym player to a fitness player: “Nu Form” Gym Studios
TBVFL has broadened its scope from being a gym player to a fitness player by introducing ‘Nu Form’ Gym studios (high product EBITDA) with a focus on weight loss using the EMS (Electric Muscle Stimulation) method. “Nu Form” is priced at a significantly higher premium for people who are more conscious of weight loss than only of health and fitness in gyming. Currently 6 ‘Nu Form’ Studios are operational in Mumbai. “Nu Form” studios opened in April 2012 received a great response with ~140 members in less than one month of its inauguration.

Consistent financial performance

  •  Number of Health Clubs has increased at a CAGR of 28% over FY07-FY13E.
  • Number of Members has increased at a CAGR of 29% over FY07-FY13E.
  • Achieved 4 year CAGR (FY’08-12) of 30% in Revenues, 35% in EBITDA & 44% in PAT.
  • The company continues to maintain debt equity of ~ 1:1. The company has properties which has current market values considerably higher than the book value.

At the CMP of `159.50, the stock is trading at 10.9x its FY14E EPS of `14.68. We recommend BUY on the stock with a 12-18 months target price of `220, providing an upside of 38% from the current levels.

To read report in detail: TBVFL
To read full report: TBVFL

Tuesday, May 29, 2012

>THE FLAWS OF FINANCE: Bad Models, or, Why We Need a Hippocratic Oath in Finance

As a child, watching my parents write postcards whilst we were all on holiday was an instructive experience. My mother would meticulously write out the card, scattering a few interesting holiday tidbits within the text. My father, whose sum total of postcards sent was invariably just one (to his office), opted for a considerably more efficient approach. His method is shown at the left in Exhibit 1.

I think we can construct a similar diagram to explain the Global Financial Crisis (GFC), represented at the right in  Exhibit 1. In essence, the GFC seems to have sprung from the interaction of the following four “bads”: bad models, bad behaviour, bad policies (which is really just bad behaviour on the part of central banks and regulators), and bad incentives. 

In an effort to rethink finance, I want to examine each of these factors in turn, beginning with bad models.

Bad Models, or, Why We Need a Hippocratic Oath in Finance
The National Rifle Association is well-known for its slogan “Guns don’t kill people; people kill people.” This sentiment has a long history and echoes the words of Seneca the Younger that “A sword never kills anybody; it is a tool in the killer's hand".

 I have often heard fans of financial modelling use a similar line of defence. However, one of my favourite comedians, Eddie Izzard, has a rebuttal that I find most compelling.  He points out that "Guns don’t kill people; people kill people, but so do monkeys if you give them guns.” This is akin to my view of  financial models. Give a monkey a value at risk (VaR) model or the capital asset pricing model (CAPM) and you’ve got a potential financial disaster on your hands.

The intelligent supporters of models are always quick to point out that financial models are, of course, an abstraction from reality. Just as physicists can study worlds without frictions, financial modelers should not be attacked for trying to reduce the complexity of the “real world” into tractable forms. Finance is often said to suffer from Physics Envy. This is generally held to mean that we in finance would love to write out complex equations and models as do those working in the field of Physics. There are certainly a large number of  market participants who would love this outcome.

To read paper in detail: THE FLAWS OF FINANCE

>STRATEGY: The flipside of policy inertia – rising FCF yields

  Sensex PER valuations belie the bottom-up pain. Though Sensex PER (12.5-13.0x) seemingly has more downside given (1) FY12-14E earnings CAGR of only 12%, (2) the still negative spread of earnings yield vs. risk free rate and (3) avg. Sensex PER of 11.5x during the GFC, we expect the rising FCF yields (focus of this report) to begin supporting valuations. The top-down market PER, however, has been supported by the increased weights in FMCG, IT and Pharma and the sustained premiums thereof, thus understating the severe de-rating in other sectors. It is also interesting to note that the India weight in benchmarked funds relative to MSCI EM has remained stable at an Overweight of ~1% during the past two years. Even the absolute India weight has declined only 190bps from the peak of 9.5% two years ago, suggesting significant sector rotation even as relative Over/Underweight has been stable.

  FCF yield at 2SD to provide downside support, identify stocks. Meanwhile, the flip-side of the collapse in the capex cycle is the rising FCF yields; the Sensex fwd FCF yield is now at 4.5%, higher than 2008-09 levels and almost at 2SD. We believe this could provide material downside support to market valuations notwithstanding the regulatory/policy overhangs. Continuing with our thesis, we map stocks based on the (1) FCF yield (FY13/14E avg.) and (2) the delta in FY13/14E yield vis-à-vis FY12. Stocks that stand out on both parameters are Apollo, Cairn, HZL, Crompton, M&M and TAMO. Stocks with high FCF yields but low deltas are HCLT, Ambuja, ACC, Infy, Bajaj Auto and BHEL. In the model portfolio, we reduce Staples to UW from EW and increase weight on Industrials (OW vs. EW), Financials (EW vs. UW, mainly through PSU banks) and Energy (Reliance). We also reduce weights in Pharma/Healthcare and Materials.

  FY12-14E earnings CAGR of 12% below nominal GDP growth now: Meanwhile, earnings have continued to slide – Sensex FY13/14E EPS stands at Rs1,216/1,338 (Rs1,247/1,372 in end-Feb). We don’t see too much further downside as margin expectations are low and gains from a weak rupee will start flowing through FY13 earnings. The Earnings Revision Index (ERI) for India has also declined from -0.5 in Sep-11 to -0.1 and has been stable in the past 3 months.

  Top picks: ACC, HCL Tech, DLF, ICICI Bank, Dr. Reddy’s. We replace Cipla with Dr. Reddy’s and drop HUVR, Tata Motors and Bharti from the top picks. Top Midcap Picks: Apollo, PLNG, Adani Ports, Sobha, YES Bank.

To read report in detail: INDIA STRATEGY

>Companies doing Buy-Back – Offers value to investors

Corporate that generates profit usually deploy it in two forms one in the form of dividends to reward the shareholders, the remainder portion is redeployed in the business for future growth. Theory suggests that if the management is able to generate higher returns by deploying the profits so generated in business, then they should conserve cash for investing. However if the business is not able to generate better returns, the profit generated should be paid out to the investors as dividend.

Another form of rewarding the shareholder is through share BuyBack as an alternative to the dividend payout which is more efficient and better alternaive to dividends.The advantage is that buy-backs give a boost to share price and give shareholders capital gains rather than income. The management of the company may also resort to share Buyback when they feel that the stock is under valued and the surplus cash can be utilised to enhance the shareholder value for the existing shareholders, as sharebuy back is also one way of improving earnings per share. It is an indirect way of increasing the promoter holding in the company and reducing the floating stock.

To read report in detail: BUY BACK OFFERS

>LARSEN & TOUBRO: Larsen & Toubro Electrical & Automation acquires UK-Based Thalest Group".

Investment Highlights
Q4 FY12 Results Update L&T Ltd. has reported net profit of Rs 19204.00 million for the quarter ended on March 31, 2012 as against Rs 15862.10 million in the same quarter last year, an increase of 13.89%. It has reported net sales of Rs 184609.00 million for the quarter ended on March 31, 2012 as against Rs 153842.10 million in the same quarter last year, a rise of 20.00%. Total income grew by 19.18% to Rs 187751.00 million from Rs. 157540.30 million in the same quarter last year. During the quarter, it reported earnings of Rs 31.36 a share.

Recommends Dividend: Larsen & Toubro Ltd has recommended a Dividend of Rs. 16.50/- per share (previous year Rs. 14.50/- per share)

Allotment of Shares: Larsen & Toubro Ltd has allotted 3,80,562 (Three Lakh Eighty Thousand Five Hundred Sixty Two) shares on May 14, 2012 to those grantees who had exercised their options under the Company’s Employee Stock Ownership / Option Schemes.

L&T bags Rs 1937 crore order from GVK for Construction of Road Infrastructure IC of L&T Construction has bagged a major order worth Rs 1937 crore from the GVK group for Design, Engineering, Procurement and Construction for 4 Laning of a major portion of Shivpuri - Dewas section of NH -3 in Madhya Pradesh totaling 235 Km. The project has to be completed in 27 months.

 L&T construction has bagged new orders valued over Rs 1880 crore
L&T Construction has bagged new orders valued over Rs 1880 crore across various business segments during the fourth quarter of FY2012.

The Infrastructure IC has secured new orders aggregating to Rs 1048 crore from The Government of West Bengal.

In the Water and Effluent Treatment business unit, L&T Construction has secured orders worth Rs 348 crore from Gujarat Water Infrastructure Limited for providing, supplying, lowering, jointing & commissioning of bulk water transmission by M.S.Pipeline at Surendranagar and Junagadh Districts in Gujarat.

In the Power Transmission & Distribution IC, new orders valued at Rs 263 crore have been bagged from esteemed clients. The orders include construction of e-BOP system for 2x600 MW Coal fired thermal power plant at Singhitarai in Chhattisgarh from a private developer and another order from DMRC for supply.

L&T Construction has also received additional orders worth Rs 221 crore from various ongoing projects.

To read report in detail: LARSEN & TOUBRO

>RELIANCE CAPITAL LIMITED: CCI clearance for sale of 26% stake in MF arm to Nippon Life and reversal of interest rate cycle positive

Impressive Q4FY2012 results & sale of stake in MF and Life Insurance arms are major triggers for RCap

 CCI clearance for sale of 26% stake in MF arm to Nippon Life and reversal of interest rate cycle positive for RCap: Recently, Competition Commission of India (CCI) approved the proposal of Japanese major Nippon Life to acquire 26% stake in Reliance Capital's (RCap) mutual fund arm Reliance Capital Asset Management (RCAML). CCI is of the opinion that the proposed combination is not likely to have any appreciable adverse effect on competition in India. The deal, (which took place on January 19, 2012) valued at an aggregate amount of Rs.1,450 crore, is the largest FDI deal in any Indian asset management company till date. The transaction pegs the valuation of RCAML at around Rs.5,600 crore ($1.1 billion) or about 7% of its overall assets under management (AUM) at the time of the transaction. This deal has been done at valuations which are better than some of the deals done in the recent past, at valuations of 1.5 - 3.5% of assets. Also, on April 17, 2012, RBI cut the Repo rate, after a period of 3 years, by 50 bps, signaling a reversal in the interest rate cycle, which will be positive for RCap.

■ Sale of 26% stake in Reliance Life Insurance another booster: Nippon Life has already invested $680 million in October 2011 for a 26% stake in Reliance Life Insurance Company (RLIC) pegging the total valuation of Reliance Life Insurance at more than to Rs.11,500 crore (at the then prevailing INR/USD rate). The deal value for a 26% stake in RCAML and RLIC amounts to Rs.4512 crore (according to the USD/INR exchange rate prevailing at the time of the deals), valuing these two businesses alone at Rs.17,100 crore. The market cap of the listed entity Reliance Capital is Rs.7,809 crore only. The proceeds from the stake sales have helped the company reduce its consolidated debt burden which has come down from Rs.20,000 crore in September 2011 to Rs.11,000 crore as on March 31, 2012. Another way to look at it is that based on the valuations of these two deals, the valuation of RCAML and RLIC alone comes to Rs.696/share whereas the stock of RCap, which has a range of other businesses in the financial services sector like broking, wealth management, private equity, etc, is trading at Rs.318/share only, which is a 54% discount to this valuation.

 Impressive Q4FY2012 results indicate the worst is over for RCap: We believe that the worst is over for RCap. On the back of adverse corporate newsflows, the company’s stock price has been punished very severely, more than it deserves. Also, the company has posted impressive Q4FY2012 results. While total income has increased by 26% YoY to Rs.1995 crore, the company has posted a net profit of Rs.329.3 crore against a net loss of Rs.6.5 crore in the corresponding period of the previous year, mainly due to significant improvement in operating margins contributed by less net claims incurred during Q4FY2012. For FY2012, net profit increased 57% YoY to Rs. 457.8 crore while total income increased 22% YoY to Rs.6,577 crore. For FY2012, the life insurance business posted PBT of Rs.372.6 crore against loss before tax of Rs.129.3 crore in FY2011.

■ Other businesses provide further comfort: The other businesses of the company provide further value to the company. Reliance Securities had 6.85 lakh broking accounts as on March 31, 2012. The distribution business, Reliance Money, has a pan-India distribution network of 6,000 outlets. Reliance General Insurance (RGI) is amongst the leading private sector general insurance companies in India with a private sector market share of 8%. Reliance Commercial Finance had a loan book size of Rs.13,260 crore (USD 2.6 billion), as on March 31, 2012.

■ Risk to View: Any further steep slowdown in the industrial economy could impact its profitability adversely.

■ Valuations: We believe that the stock price of the company has seen significant correction, more than it deserves, of 48% from its 52-week high of Rs.612/, on the back of adverse corporate news flows. We believe that the worst is over for the company and its Q4FY2012 results have been impressive. At the current market price of Rs.318/, the stock is trading at 11.9x its FY2014E EPS of Rs.26.8 / and 0.62x its FY2014E BV of Rs. 512/. We continue to recommend BUY on this stock with a fair value of Rs.440 which is 16.5x FY2014E EPS and 0.86x FY2014E BV.

To read report in detail: RELIANCE CAPITAL