Wednesday, August 29, 2012

>SUPREME INFRASTRUCTURE: Focus on execution & ‘cash contract’ orders to drive growth

We recently met the senior management of Supreme Infrastructure to get an insight on latest developments in various business verticals and overall industry scenario. With strong order inflow in 1QFY13, management is now focused entirely on execution. We retain Buy on the stock.

Order book swelling. Supreme’s order book (incl. L1 projects of `10bn) has grown 29% yoy to`43.8bn (2.7x TTM revenues). This is scheduled for completion in the next 24-30 months and gives good revenue visibility over FY13-14. It bagged orders of `11.5bn during 1QFY13 and
aims at orders of `26bn during FY13. Further, the company plans to bag more EPC orders (especially in the water and power segments) and is also exploring opportunities in foreign markets, mainly Oman & Qatar.

Robust outlook. Management is targeting a 20-25% revenue growth in FY13 and aims to maintain OPM. However, NPM is likely to be under slight pressure due to the rising debt (net debt/equity at 1.7x). Having bagged significant orders in 1QFY13, the company plans to focus on execution to achieve the desired topline growth and lower gearing.

BOT project funding in place. For ten road projects, it has an equity commitment of ~`7.5bn over FY12-15.Of this, `3.1bn will come from 3i India Infra Fund; Supreme already received `2bn in 1QFY13 and is likely to get the remaining in another month (awaiting NHAI approval for
change in holding structure). Of the balance `4.4bn, Supreme has already deployed `3.2bn through investment, advances and debt at the hold-co level; the balance will come over FY13-15.

Valuation. Our sum-of-parts-based price target of `350 (earlier `333) is based on 5x FY13e PE construction business (`313, a 45% discount to midcap target multiples) and 1x P/BV Sep’11 (`44). Risk: rise in interest rates, drop in operating margins.


>ABAN OFFSHORE: Interest charges mar profits

􀂄 Operational performance in line: Aban’s operational performance was in line with expectations, with top-line at Rs8.5bn (16.2% YoY growth and 5.8% QoQ growth). The depreciation in rupee was the major contributor to the top-line growth. Margins stood at 59.5% as against 62% in Q1FY12 and 52.5% in Q4FY12.

􀂄 Interest charges rise sharply with rupee depreciation: On account of ~70% of the loans being foreign currency loans, interest charges have moved up sharply with rupee depreciation, coupled with an increase in interest costs. Interest charges for the quarter stood at Rs3.1bn, 44% up YoY and 9.4% up QoQ. On account of this, increase in the company’s PAT stood at Rs521m, a decline of 41% YoY and 35% QoQ.

􀂄 Vessel status: Of the 18 vessel fleet, 16 are contracted. DD7 started its contract in June 2012 at a day rate of US$147000/day. Contracts for five vessels will expire in September 2012 and hence, their deployment is the key to watch out for. Other than one asset, all the assets coming up for re-deployment are new and hence, we do not foresee too much trouble in deployment of the same. However, since the company has not yet announced any new contracts, we expect a time lag in deployment.

􀂄 Valuations: We are valuing Aban at 6x FY14 which gives us a value of Rs413. We upgrade the stock to ‘Accumulate’.

Thursday, August 23, 2012

>Bharat Petroleum Corporation

Positive GRM due to inventory gain…
Bharat Petroleum Corporation (BPCL) declared its quarterly results with revenues at | 54548.4 crore (our estimate: | 62925.3 crore) and a loss of | 8836.8 crore (our estimated loss: | 1541.9 crore). The reason for such a huge loss was no government compensation towards gross under recovery incurred in Q1FY13. BPCL had a net under-recovery of | 7944 crore during Q1FY13. We expect gross under-recoveries at ~| 1,86,142 crore and ~| 1,98,100 crore in FY13E and FY14E, respectively (our assumption for the exchange rate is | 54/dollar and Brent crude oil is $110/barrel). We expect the net under-recovery of BPCL to be at | 2315.4 crore and | 2383.1 crore in FY13E and FY14E, respectively, while revising our assumption of the share of downstream companies to 5% of gross under-recovery. We recommend a BUY rating on the stock with a price target of | 401.

􀂃 GRM surprise
The company reported a positive GRM of $2.6/barrel in Q1FY13, much better than its OMC peers, HPCL and IOCL, which reported negative GRMs. The positive GRM was mainly on account of inventory gain of | 130 crore. We estimate GRMs at $4.1/barrel for FY13E and FY14E, respectively.

􀂃 E&P story intact
The recent discovery at Atum (10-30 tcf of recoverable gas resources) in Mozambique by the BPCL-Anadarko consortium, in addition to exploration success at Golfinho and Prosperidade Complex, adds great value to the company. The consortium expects gas production in Mozambique to start in 2018. We have valued the Rovuma basin (Mozambique) at | 143.8/share and BM-C-30, Campos Basin (Brazil) at | 22.8/share. We recommend a BUY rating on the stock with a price target of | 401 (valuation based on average of P/BV multiple: | 411 per share and P/E multiple: | 390 per share).


PRICE TARGET........................................................................... Changed from | 44 to | 37
EPS (FY13E)............................................................................. Changed from | 7.2 to | 6.6
EPS (FY14E)............................................................................. Changed from | 8.3 to | 6.7

ILS weakness to continue…
We spoke with the management of NIIT Ltd to understand the industry trends and execution strategy. Earlier, NIIT reported its Q1FY13 numbers, which were below our estimates. Revenues came in at | 228 crore vs. our | 244.1 crore estimate led by a slowdown in the ILS business. Reported EBITDA of | 11.4 crore (5% margin) missed our | 27.3 crore (11.2%) estimate by a wide margin. PAT (including associate profit) of | 11.5 crore (core operations loss of | 2.3 crore) was also lower than our | 20.3 crore (| 9.8 crore) estimate despite the company having a tax provision reversal of | 34.1 crore related to Element K divestiture. The current backdrop of macroeconomic uncertainties and deferred IT-ITeS hiring influences our estimates and our HOLD rating.

ILS segment slowing down
A weakening economy and deferred IT-ITeS hiring led to ILS (66% of the total revenues) declining 11% YoY to | 107.4 crore. IT training enrolments declined 13% YoY. EBITDA declined by | 8.8 crore YoY led by cost overruns (| 6.6 crore), adverse revenue mix (| 1 crore), cost inflation (| 5.1 crore) partly offset by cost optimisation initiatives (| 3.9 crore). For the full year FY13E, the management commentary suggests ILS revenues could decline ~4-8% while EBITDA margins could fall by 500 bps from16.1% in FY12.

CLS & SLS outlook
The management indicated that the CLS business could grow 20% YoY on a continuing basis (excluding Element K contribution) led by ~40% growth in managed training services (MTS, 72% of CLS) while EBITDA margins could come in at around 10%. The SLS business is expected to be flat YoY as the company transitions from government schools to non government schools. Margins are expected to be around 9-10%.

Reducing estimates but maintain HOLD
We have adjusted our numbers to account for the weakness in the ILS business. We expect revenues and PAT to decline 13.7% and 10%, respectively, in FY13E and grow 10% and 2.2% in FY14E, respectively. We continue to value NIIT on an SOTP basis with a target EV/EBITDA multiple of 1.8x on our CY13E EBITDA to account for the current ILS slowdown and refilling of Element K revenues that remains crucial.

>Q1FY2013 Pharma earnings review

Weaker rupee and key launches drive growth
  • Pharma universe's performance better than expected: Most of the players in Sharekhan's pharmaceutical (pharma) universe reported better than expected results during Q1FY2013. The universe reported a 39.7% year-on-year (Y-o-Y) rise in its revenues as compared with our estimate of a 34.7% growth. The operating profit margin (OPM) jumped by 412 basis points year on year (YoY) to 27.6%, which is 270 basis points higher than our estimate. However, due to a sharp jump in the fixed costs and marked-to-market (MTM) foreign exchange (forex) losses, the reported profit rose by 9.6% YoY for the pharma universe during the quarter. However, excluding the forex losses or gains and the exceptional items, the adjusted net profit increased by 18.5% YoY, which is better than our estimate of a 7.4% growth for the universe. The profit growth was mainly led by Ipca Laboratories (Ipca; up 93% YoY), Divi's Laboratories (Divi's Labs; up 63% YoY) and Sun Pharmaceuticals (Sun Pharma; 59% YoY). 

  • Higher fixed costs and effective tax rate affects bottom line: Despite the impressive performance at the operating level, the profit of the key players weakened on a sharp rise in the interest and depreciation charges. During the quarter, the interest cost rose by 143% YoY while depreciation jumped by 30% YoY on an aggregated basis. Moreover, the imposition of the alternate minimum tax (AMT) on partnership-based manufacturing units resulted in a sharp rise in the effective tax rate of the pharma universe. The effective tax rate of the universe jumped to 19.8% during the quarter from 11.2% in Q1FY2012. Most affected by the new tax were Sun Pharma (a rise of 1,482 basis points YoY to 17.3%) and Cadila Healthcare (Cadila; a rise of 1,354 basis points YoY to 24.4%) due to the imposition of AMT on their Sikkim-based manufacturing plants.

  • Management of most of key players maintain FY2013 guidance: Most managements maintained their revenue guidance for FY2013 despite an impressive performance in Q1FY2013. We expect the growth to moderate in the subsequent quarter mainly due to a slower growth in the domestic formulation business (from a relatively higher base) and slower depreciation in the rupee against the dollar (up 11% YoY). Nonetheless, strong product pipelines, improved utilisation of the newly commissioned facilities and the contribution from the newly acquired entities would continue to ensure the long-term growth of the pharma universe.

  • Our top pick: We prefer Sun Pharma in the large-cap space due to the strong traction in its US business and its increased focus on the domestic branded formulation business (which has been divested for increased focus). We pick Divi's Labs in the contract research and manufacturing services (CRAMS) space due to the increased traction in the company's CRAMS business and currency benefits. We like Cadila in the mid-cap space for its strong research and development (R&D) for its expected ramp-up in the USA after the US Food and Drug Administration (USFDA) cleared of the company's Moraiya facility and R&D base.

> Q1FY2013 Telecom earnings review

Competition intensifies, regulatory risk persists; cautious view maintained 
  • Weak results fail to meet expectations: The Q1FY2013 results of the telecommunications (telecom) companies tracked by us, ie Bharti Airtel and Idea Cellular, were below expectations on all the fronts, viz revenue, margin and earnings. Bharti Airtel's performance was weak in both South Asia (including India) and Africa. The company's consolidated top line grew at 3.3% on a quarter-on-quarter (Q-o-Q) basis, with the operating profit and the net earnings showing a sequential decline of 6.2% and 24.2% respectively. For Idea Cellular, the top line grew at 2.5% quarter on quarter (QoQ) while the adjusted operating profit and the earnings witnessed a sequential decline of 4.8% and 1.5% respectively. The margin of both the players took a solid hit-Idea Cellular's margin was down 200 basis points QoQ (from 28.1% in Q4FY2012 to 26.1% in Q1FY2013) while Bharti Airtel's consolidated margin contracted by 310 basis points QoQ from 33.3% in Q4FY2012 to 30.2% in the quarter under consideration. 
  • Volumes expand; profit contracts: As expected the traffic momentum remained strong during the quarter, with both Idea Cellular and Bharti Airtel registering a sequential volume expansion of 3.9% and 5% respectively. This good volume growth was achieved on the back of the already solid Q4FY2012 volumes, but at the cost of profitability. Both the players experienced a decline of 2.5% in the average realised rate on a sequential basis which was the prime reason for the fall in the profitability, as visible in the report card.
  • Business competition intensifies, this time the leader leads: The competition in the Indian wireless industry has intensified. The price increases taken by the players earlier have not been sustainable and the price war has started again in the market, this time led by the industry leader itself, ie Bharti Airtel.
  • Bharti Africa-targets realigned with reality: On the African business front as well, Bharti Africa's Q1 performance was dissatisfactory with a flat revenue growth and a 200-basis-point Q-o-Q contraction in the margins. In the conference call of Bharti Airtel, the management confirmed that the business environment in Africa is also facing challenges on multiple counts, ranging from the euro zone crisis and volatile commodity prices to the general political environment in each African country. It echoed our longstanding stance that it would be difficult for the African business to achieve its stated revenue and EBITDA guidance of $5 billion and $2 billion respectively in FY2013 and postponed the guidance.
  • Regulatory environment weighs heavy on fundamentals and stock price movement: The Indian telecom sector is passing through a phase of high policy uncertainty, where various contentious issues that could affect the earnings/cash flow and competitive positioning of the players remain unsettled (read, licencee renewal norms, spectrum refarming process etc). Further, the cabinet's decision of fixing the all-India 2G base price at Rs14,000 crore would hurt the operators, investors and consumers. We believe that the news flow in this sector would be very fluid. Hence, any positive or negative development would swing a stock's performance in the northward or southward direction respectively.
  • Reduced estimates and downgraded rating: Taking cognisance of the changing business environment and the unhealthy regulatory developments, we have reduced our estimates for both Bharti Airtel and Idea Cellular. Bharti Airtel has missed analysts' expectations for around seven to eight quarters in a row for various reasons ranging from a competitive environment to regulatory issues. We expect Bharti Airtel to continue to safeguard its subscriber base and revenue market share at the cost of profitability. This is likely to keep the South Asian business' margin under pressure in FY2013. Further, the African business is also not showing the required elasticity and agility. Thus, we have downgraded our EBITDA and earnings estimates for FY2013 and FY2014. Our new earnings per share (EPS) estimates for FY2013 and FY2014 are Rs11.9 (vs Rs14.3 earlier) and Rs15.7 (vs Rs18.8 earlier) respectively. Based on the new estimates and looking at the tough competitive as well as ambiguous regulatory environment, we reduce our target EV/EBITDA multiple for Bharti Airtel from 7x to 6.5x its one-year forward FY2014E earnings to arrive at a new price target of Rs310 (against Rs362 earlier) and downgrade our rating on the stock from Buy to Hold.

>Q1FY2013 Auto earnings review

Drive with caution
  • Auto sector reported flat growth for Q1FY2013; has given lacklustre returns in last six months: In our Thematic Report dated December 27, 2011, we had expressed concerns over the moderation in growth of the automobile (auto) sector with the full impact of the moderation expected in H1FY2013. As against the benchmark index' return of 13% between December 27, 2011 and August 21, 2012, the auto stocks under our coverage too gave an average return of 13%. The best return of 57% came from Apollo Tyres, our top pick for the last six months. The next highest return came from Maruti Suzuki at 22% due to the stock sell-off on account of the Manesar strike. Excluding these two stocks, the rest of the universe gave a negative return of 0.5% between December 27, 2011 and August 21, 2012.

    As we analyse the Q1FY2013 results, our coverage universe saw a profit after tax (PAT) growth of merely 2%. Our auto tracking universe of 15 companies, ex Tata Motors, saw a PAT growth of 2.5% year on year (YoY); that with Tata Motors saw a PAT growth of 11% YoY during the same period. 

  • M&M added to our conviction list on robust Q1FY2013 performance: During the past six months, most of the stocks under our coverage except Apollo Tyres had been kept on Hold recommendation. We recently added Mahindra and Mahindra (M&M) to our Buy list as we see it as a proxy play on food inflation and best positioned to benefit from the reviving rural incomes (refer to our Stock Update report on M&M dated August 21, 2012). 

  • Apollo Tyres, M&M and Tata Motors top revenue earners; Maruti, SKF laggards: Apollo Tyres saw its Q1FY2013 PAT growing the most, by 79% YoY, on a strong operating performance. Tata Motors, M&M and Suprajit Engineering also reported a 20% plus Y-o-Y earnings growth. The disappointment came from Maruti Suzuki and SKF India, both of which reported an earnings decline of over 20% YoY for the quarter. 
  • Outlook and valuation: Going forward in H2FY2013 and FY2014, barring a few companies like Maruti Suzuki, which would grow on a low base, a large part of the earnings growth is expected on an improved operating performance in H2FY2013 and FY2014. The volume growth may remain modest, but the raw material pressure is expected to moderate for most companies in H2FY2013. After keeping most auto companies on Hold for the last six months, we have added M&M to our Buy list along with Apollo Tyres. The outlook on most other companies looks cautious as multiple factors related to competition, inventory build-up, global slowdown and fuel price hike continue to weigh on the auto sector.

Wednesday, August 22, 2012


To read report in detail: INDIA INSURANCE


>STRATEGY: Silver linings aplenty, but cloud lingers on

A small reversion in the P/E and stable earnings growth could lift the Nifty by 20% within four quarters. However, uncertain macroeconomic trends and government policies tend to hold down the valuation. Silver linings are held out by the resilience in FY12 earnings growth and, the yield‐gap to the Libor nearing the low end. Twice within three quarters, FII buying rose when the gap fell near its low. Another protective factor is the cyclical high in interest rates and inflation, and low in industrial growth. In the near term, sectors with strong earnings momentum during FY12 may extend their run. Over the next four quarters, a few more ‘non‐defensive’ sectors could outperform; we advise an overweight position on Construction, Telecom and Utilities, and select segments in Banks, Automobiles and Oil & Gas.

Triple deficits; policy measures hold key to next rebound in P/E
The large potential rebound in the Nifty depends upon the resolution of challenges posed by deficits in the budget, current account and monsoon rains as well as by inflation, interest rates and exchange rates. Earnings growth has lesser influence on the P/E than feared, as indicated by the lower contraction in the P/E, even as forecasts fell in the last six quarters.

Resilience in profits of vulnerable sectors is a positive
Three sectors with a strong link to industry and infrastructure, viz., Automobiles, Cement and Financials drove a late rebound in consensus forecasts for FY12 earnings growth of the Nifty to c9%. The pessimism on 1H2012 earnings growth coincided with the gloom cloaking most aspects of India. However, the diversity of businesses saw the weakness in a group of sectors, viz., Utilities, Telecom and Construction, being more than offset by the strength in the above three. This indicates that businesses and companies represented in the index are capable of protecting earnings during tough times.

Gap with USD Libor has set bottom of range, also precedes FII rebound
Relative to the Libor, the Nifty P/E is much closer to Feb09’s eight‐year low compared to local yields. The yield gap to the one‐year USD Libor indicates that the Nifty is barely 10% above a level that corresponds to this worst case. We also find a surge in the FII purchase of Indian equities soon after the yield gap nears this low. Over the medium term, this metric may point to a likely low point in the valuation as well as a likely revival in FII inflows.

Select ‘non‐defensives’ outperform; may expand over four quarters
Over a four quarter horizon, we advise an overweight position on stocks within Construction, Telecom, Utilities, and select segments within Banks, Automobiles and Oil & Gas. The 2012 year‐to‐date outperformance in Cement, PSU Banks, Construction, among others, indicates that a swing towards ‘nondefensive’ sectors is under way. Our top picks for the near term are ACC, Ambuja, UltraTech Cement, Torrent Pharma, Unichem, NTPC, Tata Power, HDFC Bank, LICHF and RECL. Over the next four quarters, our top picks are SBI, Axis Bank, Maruti, Tata Motors, BPCL, Cadila, L&T, Wipro, Bharti and Tata Steel.

To read report in detail: STRATEGY


>DEN NETWORKS: Q1FY13 results

Den Networks’ (Den) reported Q1FY13 results were in-line with estimates. Below are key takeaways of the results and our interaction with the management.

Revenue isn’t comparable with prior reporting due to accounting policy change: Den’s Q1FY13 total revenue stood at Rs 1.95bn. This isn’t comparable with prior reported revenues, as the company has now started reporting MediaPro revenue on a net basis (Gross revenues less cost of distribution rights paid to broadcasters). Earlier Media-Pro income was reported on a gross basis and content cost was included in operating expenditure. This move will however have no impact on EBITDA and profitability.

Cable income and EBITDA driven by STB sales: Den’s Cable business revenue stood at Rs 1.9bn, up 1% QoQ and 21% YoY. The company seeded 0.29mn Set Top Boxes (STBs), earning Rs 180mn of activation revenue. This led to overall business EBITDA margin improving to 19.8%, from 10.5% in Q4FY12 and 6.8% in Q1FY12.

STB seeding sluggish, but Den believes that phase I deadline will be met: Den has seeded ~70,000 STB’s in July 2012. Management acknowledged a slight dip in rate of seeding since the announced delay, but maintains that digitization will happen on time as the government is serious about digitization and is regularly monitoring stakeholders (demanding status reports during weekly and ad-hoc task force meetings). We highlight that Den has digitized ~0.7mn of its 2mn phase I subscribers, and now needs to seed 0.4mn subscribers/month to meet the deadline.

Digitisation progress on-track, maintain BUY: Considering the pack and STB rate increases by DTH peers, we upgrade our estimates for Den, factoring in ARPU increases and STB subsidy reduction going forward. Our DCF implied target price of Rs 150 implies an upside of 23% over the current price. Maintain BUY.

To read report in detail: DEN NETWORKS


Homegrown smartphone industry on track, Rmb500 smartphone emerging

Made-in-China smartphone shipment on track to reach 170MM in 2012, or 25% of global shipment. Smartphone production volume of Chinese vendors in 1H12 reached 70mn, according to HQ Research. Top 3 vendors (Huawei, ZTE and Lenovo) accounted for 42% of total units in 1H12, vs 60+% in 2011. This is driven by 1) MTK/QRD lowering barriers to entry in R&D; 2) Chinese telcos warming up to low-tier brands and 3) Huawei/ZTE focusing on profitability rather than volume. Vendors gaining market share include China Wireless, Gionee and OPPO. We maintain our smartphone shipment units by Chinese vendors at 170MM in 2012, but we cut shipment units of Huawei/ZTE by 11%/13% to 40MM/28MM (Table 3).

Asian chipset vendors continued to gain market share in June. Total smartphone chipset shipment to Chinese handset makers reached 75-80MM in 1H12. MediaTek’s smartphone chipset shipment in June amounted to 8mn (nearly half are EDGE/TD/EVDO), exceeded Qualcomm’s shipment in China for the first time. Spreadtrum’s smartphone chipset shipment reached 1mn (including TD and EDGE) for the first time in June and is poised to ramp up quickly to 3mn per month by August. Meanwhile, price competition intensified further – ASP of low-to-mid end smartphone chipset is now touching US$6 – putting pressure on margins of chipset makers.

Chinese telcos and open channels ready to push Rmb500 smartphone in 2H12. In the open channel, we found 18 smartphone models with 3+’’ touch screen priced at Rmb500 or below at, a popular website on handsets. Chinese telcos will start to push Rmb500 smartphone in 3Q12. For example, multiple smartphone models including Lenovo A288t, Huawei 8808D and K-touch 800A will be launched for China Mobile in July-August period. China Unicom continues to focus on the Rmb800-1,500 segment but will launch Rmb500 models as well. We summarized China Unicom’s planned smartphone specifications (screen, CPU, RAM, ROM, camera, sensor and others) in 5 price categories in Table 4.

Whitebox tablet – a passing fad or here to stay? Whitebox tablet shipment in 2012 could exceed 40MM, according to EE Times and several industry sources. In 2Q12 whitebox tablet shipment was 9-10MM vs 11-12MM in 1Q12. The 20% drop qoq is mainly due to high inventory level at the end of 1Q12. Major chipset makers for whitebox tablets include Rockchip, Allwinner, VIA, Infotmics and Amlogic. These are mostly 7'' ones with FOB price of US$50. They are mainly replacing multiple devices such as MP4s, PDAs and DVDs in emerging markets. Vendors are aiming to launch 5'', 6'', 8'' and 9'' products entering 2013. We’ll follow the space closely to see whether whitebox tablet will start to impact PC and smartphone market then.

Stock implication: We maintain our positive view on MediaTek and Spreadtrum as they will continue to ride the wave of low-price smartphones.

To read report in detail: CHINA TECHNOLOGY

>CEMENT SECTOR: 3 favorable trends, 3 positive expectations; Upgrading EPS 4-6%; potential for further 10-20% upgrade

Trend #1 Strong realizations across companies, beating estimates by wide margins
Trend #2 In-line costs, with no major surprises; cost push showing signs of moderation
Trend #3 Meaningful upgrades across companies; street yet to catch up

Expectation #1 Stabilizing cost factors should assuage cost inflation
Expectation #2 Strong realizations even in monsoon season to drive further upgrades
Expectation #3 Meaningful upgrades in consensus estimates to drive stock prices

Prefer Ambuja and UltraTech/Grasim among large-caps, and Shree Cement among mid-caps.

1QFY13 numbers decipher more positives, no negatives
The cement majors have reported strong numbers for 1QFY13 (EBITDA 9-18% ahead of estimates), amidst a mixed bag of expectations – improvement in operations coupled with regulatory concerns post the adverse verdict by the Competition Commission of India (CCI). The robust performance is attributable to (1) strong QoQ improvement in realizations (6-8%), and (2) in-line volumes and cost push (which has been showing signs of stabilization). Given our positive outlook, we have upgraded our earnings estimates (4-11% for ACC, Ambuja and UltraTech), backed by 10-12% upward revision in realization assumptions.

To read report in detail: CEMENT SECTOR

>PRIME FOCUS: Q1FY13 Result Update

Operationally a strong quarter
Prime Focus posted Q1FY13 operating results in line with expectation. Apart from the post production business which got impacted in UK, we believe the 2D to 3D conversion business along with PFT would be future growth drivers for the company. Forex gain of Rs125mn boosted PBT while higher tax muted profitability. We maintain our BUY rating.

Q1FY13 results in line with expectations: Prime Focus posted Q1FY13 results inline with expectations. Topline was at Rs1882mn (up 12.4% YoY) 1.4% below our expectations while operating profit was at Rs572mn (up 24.3% YoY) on the back of higher forex gain and margin expansion while PAT was at Rs210mn, down 16.4% (down 26% YoY) from our expectations due to higher than expected tax rate.  Post production business under pressure: Post production business was under pressure and down 41% QoQ following the slowdown in Europe and UK. Olympics further impacted TV advertising and triggered a marked downturn in expected activity levels across the post-production industry in UK. This impacted the profitability of its UK subsidiary which posted losses during the quarter and is expected to be under pressure for the next couple of quarters.

2D to 3D conversion continues to expand: This segment grew by 60% QoQ to 

Rs832mn on the back of a strong pipeline of movies. The company is currently  working on Wizard of Oz and Star Wars 2 & 3. Prime Focus delivered close to 400  shots for the recently released Total Recall, endorsing its ability to cross-sell VFX  services to the 3D conversion client base in Hollywood. We believe VFX would help  the company to gain more business and increase margins going forward.

PFT continues to gain traction: Company engaged with Sony Music to transition  its video operations to the Cloud on the CLEAR platform and had several client wins in South Africa including becoming the leading TV Spot Distribution supply chain solution in that market. It has also extended its content localization offering- Language Dubbing services, complementing its existing subtitling/captioning service offering. During the quarter PFT business was up 16.8%QoQ and is expected to post revenues of Rs789mn in FY13E.

Maintain BUY: The stock is currently trading at 5.2x and 3.8x FY13E and FY14E EPS 
of Rs8.76 and Rs11.9 respectively. We believe the company is at an advanced stage  to repay the FCCB of USD79mn which we believe is the biggest hangover on the stock. Post this we expect the stock to re-rate given its strong business model and global dominance in 2D to 3D conversion. Hence we maintain BUY rating on the stock.



We hosted HCL Tech on an NDR in Asia last week. The management team was represented by Mr Anant Gupta (President & COO), Mr Anil Chanana (CFO) and Mr Sanjay Mendiratta (Head of IR). The key takeaways from the NDR were: 1) significant market-share shift opportunity over the next 2.5 years, when ~USD140bn worth of deals come up for renegotiation, 2) overall spending remains soft, however, market-share gains are possible from vendor churn (which has increased from ~15% to ~35% over the past 3-5 years towards newer players), 3) expects significant deals to be decided in 2Q/3QFY13F and 4) confidence in maintaining EBIT margins at FY12 levels of ~16%. HCLT remains our top pick in IT, we maintain BUY. Continued outperformance on revenue growth and margin stability, in our view, can lead to a further re-rating.

Big window of opportunity over next 2.5 years from vendor churn
The company sees ~USD140bn worth of deals coming up for renegotiation in the total outsourcing space (source TPI) over the next 2.5 years. This is coupled with vendor churn increasing from 15% to 35% over the last 3-5 years. This, in our view, lends a USD40bn+ opportunity for HCLT to target. The company has seen successes in the past in winning large deals (USD2.5bn+ over last 3 quarters) with Astra Zeneca, Statoil, UPM, Blue Cross and Blue Shield Association etc. The company, in conjunction with participating in churn, is also focussing on cross selling and tracks the service adoption at its clients very closely.

Vendor churn in BFSI an opportunity
While overall spending in BFSI remains constrained, the company sees vendor churn opportunities over the next 6 quarters (HCLT signed USD1b+ of deals in BFSI over last 3 quarters). This is an opportunity for the company to get into blue chip clients, which it was shut out from due to limited participation in the Y2K boom and strong deal ramp-ups in the 2003-05 period.

Reasons for churn and key success factors
The company sees vendor churn because of: 1) dissatisfaction with existing vendors on rigidity in cost structures and limited flexibility, 2) availability of more innovative cost structures, 3) the need to delink technology and services, and 4) greater stability of technology over time reducing input costs and change in importance of systems as business requirements change. The key success factors according to the company are: 1) an ability to showcase a business case with savings of at least 10-15% being imperative for a client to look for churn, 2) zero defect transitions (as extensions are costly and there is a set timeline to
shift from one vendor to another), 3) reference-ability and 4) the availability of alternatives like HCLT to take up large total outsourcing deals, which wasn’t available previously when these deals were signed.

Discretionary demand soft; growth through shift from RTB to CTB
The company sees discretionary demand to be soft and growth largely being driven by need to cut costs (e.g ERP consolidation), shorter-term ROI projects and mandatory spending (e.g risk & compliance). Investments to discretionary projects are largely through reallocation of cost saves in RTB to CTB (e.g in Europe a trend seen of EAS projects being bundled with ITO deals).

Segmental outlook: Positive on Europe, Telecom remains sluggish
The company remains confident on the growth outlook in Europe (increased cost push at clients) and expects broad-based growth across verticals with strength in manufacturing, retail, energy & utilities and healthcare (except telecom – 8% of revenue). Telecom continues to be sluggish and the company has not seen any material trends to suggest a reversal. Within Europe, the company sees Nordics to be an area of

Confident on EBIT margin stability at FY12 levels of ~16%
The company was not defensive on their lower margin profile versus tier 1 IT peers and believes that this is conscious choice, which has been made given the profile of business (total outsourcing deals) that the company chases. It remains confident on holding EBIT margins at FY12 levels of ~16% if USD-INR rates are sustained closer to 55 levels. The company ended 4QFY12 at 19% EBIT, it would face pressures on wage hikes (8% offshore and 2% onsite) and possible increases in sales expenses as big deal flow comes up for decision making by 2Q/3Q. The company sees pricing to be stable. Within BPO, the company sees it
operating closer to breakeven for a year.

Cash usage, dividends and visas
The company indicated that it has converted ~100% or higher of its net income to operating cash flow over the last 3 years and has distributed ~60% of the FCF generated to dividends. The company does not have any acquisitions or abnormal capex in the pipeline over the near term. The company does not see visas to be a material issue and remains committed to creating 10,000 incremental local jobs in US/Europe by FY15.


>OPTO CIRCUITS: 1QFY13 Result Update

PRICE TARGET………………………………………………………………Unchanged
EPS (FY12E)……………………………………………...Changed from | 22.9 to | 24.2
EPS (FY13E)…………………………………………………………………Unchanged

Performance intact amid rating concerns.…
Opto Circuits’ Q1FY13 results were above our expectations. Revenues grew 36% YoY to | 715 crore, higher than our estimates of | 643 crore on the back of 1) 38.3% growth in the medical equipment & consumables segment, 2) 34% growth in the interventional devices segment and 3) favourable currency. After a sharp decline in Q4FY12, EBITDA margins normalised during the quarter. On a YoY basis, however, EBITDA margins declined 30 bps to 27.9%, higher than our estimates of 26.5%. The effective tax rate increased by 440 bps to 9.1%, which restricted net profit growth to 26.3% at | 147.0 crore. We are maintaining our BUY rating on the stock, although we will keep a watch on Crisil’s credit rating due in September amid the Icra rating downgrade confusion.

Non-invasive segment grows 18% on constant currency basis
Revenues from the non-invasive segment grew 38% to | 583.5 crore on the back of new tenders, resumption of distribution of Powerheart AEDs in Japan and favourable currency. The invasive segment also registered healthy growth of 34% YoY to | 126 crore on the back of improved presence in geographies like China & Indonesia and favourable currency.

My Sense Heart device launch to be in current fiscal
The company is planning to launch a wearable Holter cardiac monitor MySense Heart device in the US market by the end of Q3FY13, for which it had received USFDA approval. It is also in discussions with some retail chains to market this product in the US. It is planning to set up a back end office, which is used for analysing the data from those machines.

Concerns regarding WC, ratings likely to wane, remain lightweight
We expect sales, EBITDA and PAT to grow at a CAGR of 22%, 20% and 18% (adjusted net profit base for FY12), respectively, in FY12-14E. Improvement in working capital management, which was visible in Q4, was reflected in Q1 as well, vindicating the progress on that front. New
product launches in various geographies are expected to keep the growth momentum going. The shift of production to Vishakhapatnam and Malaysia is expected to compensate the pressure on margins on account of R&D charges to P&L henceforth. We have ascribed a value of | 256, based on 9x FY14E EPS of | 28.5. We maintain our BUY recommendation with a lightweight bias.


>KPIT Cummins: 1QFY13 Results Update

Good quarter, rich valuations; Maintain HOLD

KPIT reported good 1QFY13 with an ahead-of-industry 5% Q/Q US$ revenue growth, limited margin decline despite taking wage hikes ahead of peers and healthy metrics all-across. Further, management expects growth momentum to continue driven by healthy deal pipeline. We believe that KPIT would continue to grow ahead of industry and build revenue/EPS CAGR of 27%/21% over FY12-14E. While we fundamentally like the company, valuations at P/E of 12x FY13E, are at the upper end of mid-cap trading range. Maintain HOLD with a revised Mar’13 target price of Rs130/share.

 Healthy top-line growth: KPIT’s 1Q reported USD revenue came in at USD 98.05mn up 2.8% and broadly in-line with expectations. Adjusted for the SSG divestiture, continuing business grew by a healthy 5% QoQ. SYSTIME’s revenue grew by 11.6% QoQ to USD 14.7 million. We continue to expect a healthy 3-4% CQGR throughout the year which should help deliver a 22% organic growth over full year FY13.

 Manufacturing steady; US, Europe healthy: From a vertical perspective, Energy & Utilities grew by ~22% QoQ on a low base while manufacturing was steady with 3.4% QoQ growth. Among geographies, US and Europe saw healthy growth of 6.9% and 4.2% respectively. Enterprise solutions (Oracle) mix increased to 44.4% (42.6% in Q4), while SAP mix declined to 31.9% (32.4% in Q4).

 EBITDA Margins in-line, PAT beat driven by FX gain: EBITDA margins came in at 15% down 75bps QoQ, slightly ahead of expectations. The company has given a full quarter of wage hikes of 10% offshore and 4% onsite. Margin movement breakup: growth +30bps, forex +230bps, Wage hikes -300bps and Visa costs -35bps.

 Metrics: KPIT added 3 new clients in the quarter and 1mn+ customers increased by 6 to 65. Overall head count increased by 154 in the quarter while development headcount increased by 141. Offshore utilization stayed flat at 74.1%. Debtor days were at 75. Hedges outstanding at the end of 1Q were $120mn.


>PFIZER: Q1FY13 Result Update/

Slower sales growth affects results

Pfizer results for Q1FY13 were lower than our expectations. The company reported 7%YoY decline in revenues, 270bps decline in EBIDTA margin and 41%YoY decline in net profit due to lower growth of pharma business and the divestment of animal healthcare (AHC) business. The sales growth of the pharma segment was 4%YoY due to slower growth of three key brands. The introduction of new products in the domestic market is likely to drive growth. Pfizer is a debt free company with cash per share of Rs300. We have revised the rating from Buy to Neutral with a target price of Rs1,325 (based on 17x FY14E EPS of Rs77.9) with an upside of 4.9%.

Slow domestic growth: Pfizer reported 7%YoY decline in total revenues from Rs2.61bn to Rs2.43bn due to the slower growth of pharma business and divestment of AHC business to a 100% subsidiary. The pharma business (90% of revenues) grew by 4%YoY from Rs2.10bn to Rs2.18bn. AHC revenues were ‘nil’ against Rs315mn.

Margin under pressure: Pfizer’s EBIDTA margin declined by 270bpsYoY from 16.0% to 13.3% due to the rise in personnel cost and other expenses. Material cost declined by 280bps from 32.6% to 29.8% of revenues due to the change in product mix and the absence of AHC products. Personnel cost increased by 100bps YoY from 22.3% to 23.3% due to lower sales growth. Other expenses were up by 450bps from 29.1% to 33.6% due to the additional expenses of Rs15mn related to the contract field force and brokerage of Rs20mn related to the new office.

Sale of AHC business: Pfizer sold its AHC business to a 100% subsidiary Pfizer Animal Pharma Pvt. Ltd for Rs4.24mn. The company reported a gain of Rs3.83bn from the sales. After providing for capital gains tax of 20%, the balance amount of Rs3.06bn appears as EO item. The sales proceeds are likely to generate more interest than the EBIDTA generated by AHC business.

Leading brands have slower growth: As per IMS MAT-June’12, three major brands have lower growth rates. These are: Becosules (2.2)%, Gelusil-MPS 5.6% and Magnex (2.8)%. The slowdown in Becosules is attributed to the trade scheme in Q4FY12 and that for Gelusil due to slowdown of the category.
Valuations: We expect Pfizer to benefit from good growth in the domestic market and from the introduction of new products. We have lowered our EPS estimates by 4% for FY13 and 3% for FY14. At the CMP of Rs1,263, the stock trades at 18.6x FY13E EPS of Rs68.1 and 16.2x FY14E EPS of Rs77.9. We have revised the rating from Buy to Neutral with a target price of Rs1,325 (based on 17x FY14E EPS of Rs77.9) with an upside of 4.9%


Tuesday, August 21, 2012

>MARUTI SUZUKI LIMITED: Manesar plant to resume production from August 21 under heavy security cover

Manesar plant to resume production from August 21 under heavy security cover
In a press conference today, Maruti announced that it will resume production at its Manesar plant from August 21 under heavy security cover. With this resumption, the shutdown will have lasted for around 1 month – broadly in-line with what we were building into our numbers. As per an investigation conducted by the company, they will fire 500 regular workers who were involved in the misconduct on 18 July. Further, the company will no longer employ contract workers on the production line; however, MSIL will keep 20% of the total workforce on short-term agreements. According to today’s announcement, current contract workers (1,869 employees) will be given an opportunity to join the company as regular (ie, permanent/non-contract) workers provided they meet the company requirements.

Production will get ramped up gradually
As per the company, about 300 workers will resume production from August 21; the company will aim to manufacture 150 cars daily initially as compared to full capacity of around 1,600 cars daily. Production will increase gradually as the company hires more workers, in our view. If everything goes smoothly, we believe the company may take another month to achieve full production. In our view, the company may be able to largely make up for lower production later on during the year. Hence, our estimates are unchanged at this stage.

Do not expect significant stock reaction; maintain Neutral
We believe expectations around the resumption of production have been built in to the share price from last week. Therefore, we do not expect any significant stock reaction on this announcement. Maintain Neutral.

To read report in detail: MARUTI SUZUKI


In line performance, JLR reported 110 bps YoY expansion in EBIDTA margin
As per our expectation TML reported healthy operating performance in Q1FY13 led by stellar performance in JLR business (110 bps YoY expansion in EBIDTA margin to 14.5%). However its standalone business showed muted performance (170 bps YoY contraction in EBIDTA margin to 6.6%).

Reported EBIDTA at `57.5 bn close to our estimates of `55.7bn
We believe that healthy volume growth in JLR business (34.4% YoY), favourable currency movement (average GBP/Re at 85.8 in Q1FY13 against 72.9 in Q1FY12) and increase in volumes in China (China contributed 21.5% to the total volumes in Q1FY13 against 15.7% in Q1FY12), helped TML to report healthy performance in Q1FY13. Revenue increased by 30.1% YoY to `433.2 bn (against estimates of `430.3bn).EBIDTA increased by 35.9% YoY to `57.5 bn (against estimates of `55.75 bn). EBIDTA margin expanded by 60 bps YoY to 13.3% (against our expectation of 13%).APAT increased by 30.6% YoY to `26.8bn (against our estimates of `27.2bn). It is to be highlighted that JLR board has proposed a dividend of GBP 150 mn to Tata Motors (parent company), which will likely to be paid off in August 2012.

Not offering discounts in JLR but indicated a caution on EBIDTA margin front
The management has indicated that currently they are not offering any kind of discounts (according to media reports, its competitors are offering) to its customers (including China market). However the management has not ruled out the possibility of increase in marketing cost in coming future due to increase in competitive pressure. Further management has shared a cautious optimistic outlook on EBIDTA margin front. Hence in anticipation of pressure on margin, we have tweaked our JLR’s EBIDTA margin expectation to 14.5% for FY13E.

Maintain outperform rating with target price of `297 
In Q1FY13 TML’s operating performance was in line with our expectation. Post Q1FY13 result, we maintain our FY13E volume estimates for JLR at 364k units and standalone business at 967k. However, we tweaked conso EBIDTA margin expectation to 12.6% (from 13%) for FY13E on lowering JLR’s EBIDTA margin expectation to 14.5% from 15.2% (in line with its current EBIDTA margin).With this we maintain our Outperform rating on the stock with target price of `297 (earlier `307). At our target price stock would trade at 5.0xFY13E conso EV/EBIDTA and 4.5xFY14E conso EV/EBIDTA.


>BHARTI AIRTEL: FY12 Annual Report

Key Highlights:
 While Africa business proforma revenue growth at aggregate level remained strong at ~25% in INR terms (~19% in USD terms) in FY12, there was significant divergence in the performance at the individual country-level. As per our proforma estimates, Bharti Africa witnessed ~35%+ USD revenue growth in Sierra Leone, Ghana, Uganda, and DRC (together contribute 18% of Africa revenue). However, proforma revenue growth is estimated to be single-digit/negative for Chad, Niger, Seychelles, Madagascar, Kenya, Malawi and Congo B (together constitute 21% of Africa revenue).

 Gross debt remains largely USD denominated (70%) followed by INR (19%) and other currencies (11%). Debt schedule indicates relatively high re-payment in FY13 with 28% of overall gross debt (INR193b) having maturity period of less than one year. However leverage remains relatively comfortable with FY12 net debt/EBITDA at 2.75x.

 Only ~9% of the overall borrowings for Bharti are at a fixed rate implying that interest rates remain key earnings variable. Every 1% increase in USD (INR) interest rate would have impacted Bharti's FY12 PBT by INR4.8b (INR1b).

 Earnings sensitivity to exchange rate remains high as well with adverse impact of INR4.6b on FY12 PBT (7%) for a 5% appreciation in USD assuming all other variables remained constant.

 Contingent liabilities have increased significantly during FY12 largely due to increased tax-related disputes. Contingencies increased 81% YoY to INR55.5b in FY12.

 We expect 14% EBITDA CAGR for Bharti over FY12-14E. The stock trades at EV/EBITDA of 6.5x FY13E and 5.3x FY14E.

 Maintain Buy with a target price of INR370 based on 7.5x FY14 EV/EBITDA for India & SA business, 5x EV/EBITDA for Africa business and INR142b impact for potential regulatory outlay.

To read report in detail: BHARTI AIRTEL

>STRATEGY- Stratoscope: Show Me the Money

In the midst of the dividend payout season for Indian equities, we analyzed the payout policies of Corporate India and its relationship with stock price performances. We highlight key observations and stock ideas in the report.

 The median dividend payout ratio for the BSE 100 has remained stable over the last decade at about 20%. The flat trend is not satisfying from a minority shareholder perspective. But could be attributed to: a) the corporate sector in India being in a capital-intensive growth phase (both organic and inorganic), b) funding constraints post the global financial crises, c) increased competitive intensity has also resulted in a more cautious stance on sustainability of payouts.

 The cautious stance is reflected even in the payout policies of defensive sectors – Consumer Staples, Consumer Discretionary and Healthcare, wherein payout policies have remained stable or reduced. The payout of the IT services sector has almost doubled over the last decade. But it still remains around the broad market average. Payout of the Financials sector has also been limited to around the market average. The State-owned Banks have, however, seen a reduction in recent times due to capital constraints.

 It is also worth highlighting that only a few managements have a clearly articulated dividend payout policy. The state-owned companies typically try to adhere to Government guidelines which stipulate a payout of about 20-30% depending on the sector. Given the Government’s
fiscal constraints, we expect cash-rich, state-owned companies to continue to have a high payout policy.

 That said, managements wanting to enhance shareholder value would do well to have a consistent payout policy – with stable to rising dividends. Our analysis shows that companies with such a policy have consistently outperformed the benchmark over the last decade.

To read report in detail: STRATEGY

>AARTI INDUSTRIES LIMITED: Core strengths & Key developments(Q1 FY13)

  • Presence in high margin specialty chemicals with diverse applications 
  • Global Scale Units Manufacturing more than 125 products 
  • Ability to Supply Basket of products to Global Customers & MNCs 
  • Tagged as “Strategic Supplier” by various Global MNCs 
  • Backward Integration 
  • Latest Manufacturing Technology & World Class R&D 
  • Superior Cost Management Skills & Economies of Scale 
  • Capability to convert by-products into commercially viable product 
  • IPRs for Developing Customized Products & Products under Secrecy Agreements 
  • Captive Power Plants
To read report in detail: AIL


Short term blip in long term growth story
Raymond Ltd Q1 FY13 results were below street estimates, both on the topline and bottom-line front. In Q1 FY13, company's net sales increased 9.5% Y-o-Y however declined 12.5% sequentially to Rs. 8377.1 mn while the EBIDTA margin declined ~565 bps Y-o-Y and ~ 464 bps sequentially to 3.7%, primarily on account of lower margins in the Textile and Branded apparel business.

Textile and Branded apparel segment impacted due to poor consumer sentiments, higher input costs, inventory liquidation, lower contribution from high margin products … In the quarter, the textile division sales increased 6% Y-o-Y to Rs. 3.66 bn while that of the branded apparel segment declined 3% Y-o-Y to Rs. 1.71 bn, on account of a weaker demand profile due to poor consumer sentiment and a subdued wedding season. The EBIDTA margins of textile and branded apparel division declined ~ 1000 bps Y-o-Y and ~ 700 bps Y-o-Y to 5% and 6% respectively. The management expects the demand to recover in H2 FY13 on account of a strong wedding and festive season.

…However, Other segments showed robust performance
In Q1FY13, Raymond Zambaiti - JV net sales increased 29% Y-o-Y to Rs. 0.68 bn while the EBIDTA margin of the business increased ~ 400 bps Y-o-Y to 14%. The capacity utilization of the 21.6 mnpa plant improved to 76% and likely to be fully utilized by FY13.

In the quarter, Indian denim business net sales increased 3% Y-o-Y to Rs. 1.98 bn while the EBIDTA margin which increased ~ 200 bps Y-o-Y to 13%. The plant operated at 100% capacity utilization. The segment is likely to continue its robust performance on account of a good order book.

In the quarter, the Tools and Hardware sales increased 30% Y-o-Y to Rs.0.91 bn while the margin expanded 200 bps Y-o-Y to 13%. The auto component sales increased 20% Y-o-Y to Rs. 0.39 bn while the EBIDTA margin ~ 200 bps Y-o-Y to 17%.

Emphasis on core brands, cost rationalization and retail network expansion continues…
In the quarter, the company added 28 stores taking the total count of stores to 867. In Q1 FY13, the company added 21 EBO while the retail space increased 11% Y-o-Y to 1,681 thousand square feet. For FY13, the company is likely to add 80-100 stores. In the quarter, company reported exceptional expense of Rs. 129.2 mn on VRS payments for 140 employees. The company is likely to carry out further employee rationalization which may put pressure on the bottom-line in the short term but is positive in the long term.

Valuations and outlook
We cut the EBIDTA estimates of FY13 by 7.8% to factor in the subdued Q1 FY13 results. At the
CMP, Raymond is trading at an Adjusted P/E of 13.0x FY13E and 9.6x FY14E EPS of Rs. 27.4 and Rs. 37.1 respectively. Over FY12-14E, we expect the company's sales and EBIDTA to grow at CAGR of 12% and 13% to Rs. 45.45 bn and 5.9 bn respectively. Raymond is trading at an EV/EBIDTA of 6.5x FY13E. We value the company at an EV/ EBIDTA multiple of 8.0x FY13E, a ~25% discount to its historical average; we arrive at a revised target price of Rs. 480 per share. The company's ~ 125 acres Thane land could fetch Rs. 15.0 -18.75 bn (implying valuation of Rs. 244- 305 per share) at conservative land valuation of Rs 120-150 mn per acre. However we do not factor the land valuation in arriving at our target price. We believe any sale of land would substantially reduce the debt and strengthen the balance sheet and would drive further re-rating in the stock. We have not factored in valuation of land in arriving at our target price. Any form of real estate value unlocking would be value accretive.



Kalpataru Power’s (KPP) Q1FY13 numbers were above our estimates adjusting for INR130mn of forex (mark to market) loss. While revenue grew 20% YoY, margin declined 60bps YoY to 10.8% (adjusting for forex loss) primarily due to higher input cost. Order inflow dipped 33% YoY to INR6bn in the absence of any big-ticket order during the quarter. The company has lowered its FY13 EBITDA margin guidance for JMC from 7-8% to 6-7% on back of increased volatility in commodity prices. Maintain ‘HOLD’ with revised target price of INR 78 (earlier 84).

Margin pressure sustains; execution remains steady
KPP’s revenue grew a healthy 20% YoY, better than estimate. Margin (adjusted for forex loss) fell 60bps YoY to 10.8%, owing to higher input costs. Adjusted PAT increased 20% YoY to INR404mn. At JMC, revenue surged 51% YoY to INR5.7bn. However, margin plunged 290bps YoY to 5% due to high volatility in commodity prices primarily in cement and steel. For JMC, management has trimmed its FY13 margin guidance to 6-7% from 7- 8% earlier. KPP’s capital employed increased 16% YoY as the infra division’s capital employed doubled on increased debtor balance.

New orders down 33 % YoY; order book flat at INR 60.5 bn YoY
The company’s order inflow declined 33% YoY to INR6bn, owing to weak project awards. KPP stated that the order pipeline is healthy and it anticipates orders from MEENA region and CIS countries apart from PGCIL. The company’s standalone and consolidated order backlog stands at INR60.5bn (flat YoY) and INR116bn (up 10% YoY), respectively.

Outlook and valuations: Cautious; maintain ‘HOLD’
While we do not expect any upside in KPP’s operating profitability in the near to medium term, rising input cost in key subsidiary (JMC Projects) remains a concern, with limited pricing power. We maintain our ‘HOLD/SP’ recommendation with a Target price of INR 78(earlier 84) as we remain cautious on the company’s incremental order intake and margin profile given rising competition and higher working capital issues. The stock, on consolidated basis, is currently trading at P/E of 5.1x and 4.3x on FY13E and FY14E, respectively.

Key conference call highlights
• Forex loss: KPP stated that there was a forex loss (mark to market) of INR130mn on account of USD denominated loan and commodities, of which INR50mn has been charged to other operating expenses and INR80mn to interest cost.

• FY13E guidance: Management has reduced JMC margin guidance of 7-8% to 6-7% for FY13E on back of increased volatility in commodity prices with revenue guidance of 35-
50%. The company maintains its capex guidance for FY13E at around INR2bn (INR1bn
for KPP, INR 0.4-0.5 bn for JMC and INR400-500mn for Shri Subham Logistics etc).

• Infra projects update: The company has achieved financial closure of all 4 road BOOT projects viz., Rohtak Bowel (COD expected by Q4FY13), Agra–Aligarh (COD expected by Q2FY14), Bagpur Waiganga (COD expected by Q2FY15) and Rewa MP project (COD
expected by Q4FY15).

• Update on Subham Logistics- Subham Logistics posted revenue growth of 15% in Q1FY13 with EBIDTA margin of 14% and PBT of INR0.7mn. FY13E management guidance stands at 35 % revenue growth with EBIDTA levels at 15-16 %.

• Capex at INR 2 bn for FY13E- The company’s new tower manufacturing plant at Raipur is on track and is expected to start by September 2012 with INR 1 bn as capex. Also, JMC & Subham logistics will have capex equally at INR 500 mn.

• KPP stated that while ~60% of its order book is covered by price variation clause, ~40% is fixed price book.

• The company targets to maintain its debt (consol) at INR13-14bn by end FY13E, which currently stood at INR 15 bn and is likely to come down by FY13E end.

• 0% tax rate in JMC in Q1FY13 due to exemption in case of certain infra projects.