Saturday, January 28, 2012

>TCS: Tailwind pushed revenue growth higher

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

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

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

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

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

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

To read the full report: TCS

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

Positive for financials

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

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


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

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

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

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

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

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

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

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

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

To read the full report: SMART INVESTOR

>PETRONET LNG: Interest expense falls due to debt prepayment

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

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

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

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

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

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

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

To read the full report: PETRONET LNG

>TATA GLOBAL BEVERAGES: Impressive performance by domestic tea business

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Other highlights of the analyst meet

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

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



  • Bank of India’s results were ahead of our as well as the Street’s estimates. Its net profit grew 9.5% year on year (YoY) (45.7% quarter on quarter [QoQ]) to Rs715 crore. The net profit growth was driven by a better growth in the net interest income (NII) and a sequential decline in the provision expenses.
  • The net interest income increased by 4% YoY (8.6% QoQ) to Rs2,061 crore. The growth in the NII was driven by a sequential expansion in margins (3.55% compared to 3.44% in Q2FY2012) and a stronger growth in advances (7.5% QoQ).
  • The non interest income expanded by a healthy rate of 31% YoY mainly driven by better treasury gains and higher recovery from written off accounts. The fee income grew at a modest rate of 12.9% YoY.
  • The asset quality improved on a sequential basis as gross and net non performing assets (NPAs) declined to 2.74% and 1.78% respectively (compared to 3.02% and 1.98% in Q2FY2012). However the restructured advances increased to 5.9% from 5.2% in Q2FY2012.

Bank of India posted relatively better numbers for Q2FY2012, led by an increase in margins and decline in provision expenses. Though the slippages have declined in the quarter gone by, the higher proportion of stressed assets (8.64% of advances) and a higher rate of slippages (23.3%) from restructured accounts coupled with lower provision coverage ratio are a cause of concern. Further, the growth in business is likely to slow down (estimated at 16% compounded annual growth rate [CAGR] over FY2011-13) which would impact the growth in NII and earnings. We revise our price target to Rs335 (0.9x FY2013 book value [BV]). We maintain our Reduce rating on the stock.