Tuesday, January 17, 2012

>Tough Times = 12 Tough Tasks to Sustain Growth in 2012

Presentation Path

GDP – 12 Tough Tasks To Sustain Growth at ~7%
■ FX Vulnerabilities Increase

► External Debt – Short-term Debt Worries; Redemption Pressures Key to Monitor
► BOP – Flows Lower, But Sufficient to Finance the Deficit

 Fiscal – Fiscal Consolidation on the Backburner: Assessing Debt Concerns
 WPI Inflation – Determined by Interplay Between Currencies and Commodities
 Rates – Easing cycle likely to be advanced to 1Q 2012
 Politics – Will the Policy Gridlock Ease

To see full presentation: INDIA MACRO OUTLOOK

>EDUCATION SECTOR: Price performance of Career point, Everonn Education, Educomp & NIIT

Growth momentum intact

We expect the companies to register strong growth during Q3FY12 on the back of seasonality . We believe the growth in topline would be largely driven by multimedia solutions to private schools, vocational courses and IT training segments. We expect Educomp Solutions to register strong growth in sales in Q3 driven by the school segment. NIIT is expected to report a decline in topline as it sold the Element K business. Within the space, we like NIIT considering attarctive valuation and better prospects of improving its margin profile in FY13E.

■ Topline growth to continue: We expect the growth momentum to continue for companies given the opportunity in the space and also because Q3 is seasonally a better quarter. Segments including multimedia solutions to private schools and vocational business would be key drivers.

 Operating margin to improve: Better topline would result in improvement in margin during Q3. NIIT would witness better margin on a like to like basis, though the individual learning segment is in the process of integration. We believe that NIIT would see margin expansion in FY13E on the back of better sales mix in favour of individual learning solutions and school
learning solutions.

 Prefer NIIT in the space: We prefer NIIT in the space considering attractive valuations and prospects of margin expansion in FY13E. Our belief is that NIIT rerating is contingent upon FY12E financial performance i.e growth with margin expansion. Hence, NIIT becomes a long-term bet. Also, we believe that stock price of Educomp factors in all the concerns including FCCB payout, high capex in formal education and free cash flow generation. Some of the triggers for the stock would be: 1) monetization of subsidiary(s) and 2) further announcement of securitization deal with 20% recourse.

Career Point (Rating – Under Review)
  • We expect Career Point to post Rs189mn in revenue in Q3FY12 on the back of an increase in realisation per student. We expect student enrollment to be flat or marginally decline this year.
  • We expect the operating margin to be 30% in the quarter on higher salary expense.
  • We expect net profit at Rs61mn on the back of higher other income. As the company has IPO proceeds in its books which are unutilized, it has invested surplus funds in tax saving schemes which reduces effective tax rate.

Educomp Solutions (Rating – Hold; Target Price – Rs220)

  • We expect Educomp to register 20% YoY revenue growth in Q3FY12 on the back of strong growth in School Learning and Higher Learning segments.
  • We expect the company to report an operating margin of 43.7% at the consolidated level driven by better sales mix.
  • We expect net profit to decline by 11.4% to Rs856mn. We assumed full tax rate as against effective tax rate of 20% in Q3FY11.

NIIT (Rating – Buy; Target Price – Rs81)

  • We expect NIIT to register 17.7% YoY revenue decline mainly due to sale of Element K business. We expect the company to post 14.8% growth (ex-corporate learning solution).
  • Operating margin is expected to expand marginally by ~30bp mainly due to better sales mix which results from the sale of Element K business. The margin profile is not going to change in FY12E and margin expansion would be more visible in FY13E.
  • We expect net profit to grow by 26.6% YoY on the back of savings from interest expenses and higher other income from the sale of Element K business.


>Pharma Q3FY12 Preview: Large caps Ranbaxy, Dr Reddy’s, Sun Pharma, Cipla, Lupin and Cadila expected to outperform


Large Caps to post robust growth: Large caps (Ranbaxy, Dr Reddy’s, Sun Pharma, Cipla, Lupin and Cadila) under our coverage are expected to cumulatively post a topline growth of 19.3% & Ebitda growth of 44.5% driven by strong domestic market, currency depreciation & launch of blockbuster drugs by Ranbaxy and Dr Reddy’s. We expect Dr Reddy’s to post strong earnings growth led by launch of key products like Zyprexa & Fondaparinux. Ranbaxy’s performance will be driven by launch of one time exclusivities like Lipitor & Caduet contributing to higher margins and growth respectively. Excluding Dr Reddy’s and Ranbaxy EBITDA will grow by 38.4%. We are expecting the base business by both the companies to improve in this quarter.

Lupin’s performance will be driven by strong growth in branded generics & better traction in US generics business led by launch of key products like Ultram, Lo Seasonique. Sun Pharma & Cipla will show a strong growth due to favourable currency movement. Both the companies have not taken any forward covers which we believe will have positive impact on EBITDA margins. We expect Cipla to show strong domestic performance as it has higher exposure to acute segment which is growing around 20%. Cadila will show a modest growth due to slowdown in its consumer business & Europe formulation segment. Traction in US business will be driven by Nesher acquisition & its domestic business will perform on account of Biochem acquisition that has huge exposure to anti infective segment which has shown growth above 15% in this quarter.

Mid caps to report subdued growth: Mid caps under our coverage (Strides, Biocon, and Unichem) will post cumulative topline growth of 4.2% y-o-y. Biocon’s topline growth will be affected due to selling off of Axicorp in Q4FY11. Unichem will show strong performance in export segment on account of commencement of contract manufacturing business from Ghaziabad facility. Domestic formulation business will continue to show degrowth due to ongoing restructuring exercise by the company to improve working capital cycle. Strides will perform in Q3FY12 on account of traction in specialty segment and significant product launches.

Top Picks: Lupin & Sun Pharma are our preferred picks in the large cap space. We believe Lupin has an excellent oral contraceptive (OC) pipeline which will drive the performance as it will be able to garner strong market share. The overall market size of OCs in USA is around 5bn$. Sun Pharma will benefit from key product launches in international markets & huge exposure to chronic segment in domestic market.

In the mid cap space we like Strides Arcolab as its presence in niche sterile space provides long-term growth visibility.

To read the full report: PHARMACEUTICAL

>GMR INFRA: A consultation paper on the framework for determining the tariff for DIAL (Delhi International Airport) released by the Airports Economic Regulatory Authority (AERA).

AERA proposes tariff hike for DIAL in two phases
A consultation paper on the framework for determining the tariff for DIAL (Delhi International Airport) released by the Airports Economic Regulatory Authority (AERA) has proposed the shared-till method for revenue calculation, weighted average cost of capital (WACC) of 10.33%, cost of equity of 16%, project cost of Rs12.5bn and disallowance of refundable interest-free security deposit (RSD) as equity. The airports regulator has also recommended tariff hike by 148% in FY13 and FY14 each at DIAL, effective from 1 April 2012 to 31 March 2014. We believe this is a positive development that will eliminate the overhang on DIAL’s valuation and therefore retain our Buy rating on GMR Infrastructure with a target price of Rs39.

Key highlights:

  • AERA has proposed that the first regulatory period may be taken as 1 April 2009 to 31 March 2014 and recovery of the revised tariff may be contemplated during 1 April 2012 to 31 March 2014.
  • The regulator has proposed WACC of 10.33% as compared to bid WACC of 11.6% for the purpose of calculation of the returns on regulatory asset base (RAB). The reduction in WACC is primarily because of lower CoE of 16% against the projected CoE of 22%.
  • AERA has proposed that the targeted revenue be calculated on the basis of the shared-till method, which includes reduction of 30% of non-aeronautical revenue. The regulator has proposed allowable project cost of Rs125bn, which is as per its order in respect of the development fee.
  • Proposed average RAB for the first regulatory period would be lower by Rs12.7bn than what was submitted by DIAL because of lower hypothetical asset base and disallowance of future capex.
  • AERA has proposed that refundable interest-free security deposit (RSD) of Rs 14.5bn, which was used for financing of the project, should not be considered as equity.
  • AERA has not clarified on the issue of monetisation of remaining land bank at DIAL and usage of the funds generated. We believe this uncertainty would keep the hangover on valuation of DIAL’s land parcel.

Valuation: We have not revised our earnings estimates for DIAL based on the consultation paper and prefer to wait for the final order which is due in 4QFY12. However, we believe that based on the revised tariff the DIAL project is likely to report net profit of Rs0.6bn in FY13 and Rs7bn in FY13. Clarity on land monetisation and usage of the funds raised from it would be the next trigger for the GMR Infrastructure stock. We maintain our Buy rating on it with a SOTP-based target price of Rs39.

To read the full report: GMR INFRA

>GREED & FEAR: Reformulated Outlook (CLSA)


Stock markets opened the New Year on a strong note despite the seemingly concerning news from the Strait of Hormuz. Still GREED & fear remains fundamentally cautious. This is also the view propagated in the new reformulated Asia Maxima quarterly which now includes Australia (see Asia Maxima – Pain suspended and extended, 1Q12). The past year ended to GREED &; fear in a kind of truce in the sense that investors were relieved to see the European Central Bank (ECB) make increasing efforts to ease the liquidity situation of European banks, which remain the epicentre of systemic risk globally. Yet, markets had not yet been given what they really wanted in order to celebrate the hoped-for end of the European crisis. That was,
unsterilised monetisation by the ECB and fiscal union.

The result for GREED & fear is that the fault line which has been the cause of the European crisis, itself a nasty mixture of both sovereign debt crisis and banking crisis, still festers. That is, of course, the unsustainable combination of monetary union without fiscal union. So long as this is the case, there remains the likelihood of more euro-tremors and potentially a “euroquake”, to which risk assets globally will continue to be correlated. As a result, this crisis continues to exacerbate the debt deflationary dynamic which has been in play in the Western world since the so-called “global financial crisis” hit in 2008. In truth, of course, the crisis has never really ended with the symptom of that continuing deflationary dynamic the continuing Japanese style correlation of American or German bank stocks with long-term government bond yields (see Figure 1). Thus, the correlation between the German banks index and the 10- year bund yield is 0.96 since the start of 2011.

Still if this is the “big picture”, the New Year begins again with the focus very much on Europe. The issue facing investors is that markets have become used in the last 20 years to celebrating moral hazard-intensifying bailout trades, with most of these policies hailing from Washington. On this occasion, investors have had to contend with German psychology. This provided an abrupt wake-up call for markets in 2011. The first point is that the German political establishment does not like to make policy in response to immediate market pressures. The
second point is that the Germans do not easily accept that a debt problem can be solved by
simply adding more debt, most particularly if it involves the central bank “printing money”.

To read the full report: GREED & FEAR