Sunday, January 29, 2012

>OBEROI REALTY: An investment profile

 Revenue declined by 53%YoY to IN1.9b (v/s. est. of INR2.2b) due to lower than expected recognition.

 EBITDA down by 54%YoY to INR1.1b (est. of INR1.2b), while margin improves to 60.5% (v/s. 52% in 2QFY12) due to a) Price escalation across all ongoing projects and b) effect of one-time cost escalation adopted in 2QFY12 in Exquite and Grande on account of change in specification. Also with completion of the Splendor (the highest margin project), 100% revenue recognition from all incremental sales from this project has also boosted EBITDA margin in 3QFY12.

 PAT increased by 17%YoY to INR1b (v/s. est. of INR1.1b).

 QoQ sales volume declined sharply to 0.12msf: During 3QFY12 OBER witnessed sharp a decline in QoQ sales volume to ~0.12msf (INR1.8b) as against 0.19msf (INR2.2b) in 2QFY12 and ~0.15msf (INR3.2b) in 3QFY11. Esquire and Grande continue to remain key sales driver with 55% and 22% contribution respectively. While challenging macro remains the major attributable factor, the company has raised prices across all its ongoing projects by ~10%, which could be the other factor for sales decline. 9MFY12 residential sales stood at 0.52msf/INR6.5b (up from 0.4msf in 9MFY11) as against our est. of 0.7msf/INR10.6b in FY12E.

 Lower incremental sales continues in revenue contributing projects: During 3QFY12, OBER's revenue stood at INR1.9b, comprising a) INR575m of annuity income (v/s. INR510m in 2QFY12) and b) INR1.2b from (v/s. INR1.6b in 2QFY12) recognition of sales from residential projects. The key revenue contributing residential projects are:

1. Exquisite (INR0.3b v/s. INR0.6b in 2QFY12) - sales of 0.01msf (8units)
2. Splendor (INR0.5b v/s. INR0.7b in 2QFY12) - sales of 0.01msf (14 units)
3. Grande (INR0.3b v/s. INR0.3b in 2QFY12) - sales of 0.03msf (15 units)

 Contribution from Esquire to be delayed to FY13: OBER's FY12 sales have been largely driven by Esquire, which contributed for ~69%/64% of sales volume/value during 9MFY12. However, the project is unlikely to cross the recognition threshold of 20% in 4QFY12 and is expected to be delayed till 1QFY13. Esquire has achieved sales of ~INR7.5b till 3QFY12, which offers a strong revenue visibility in 1QFY13. Nonetheless, we are downgrading our FY12 revenue estimate by ~24%, due to shifting of revenue recognition of Esquire by a quarter.

 Annuity income improves QoQ: During 3QFY12, OBER's annuity income stood at INR555m v/s INR497m in 2QFY12 and INR518m in 3QFY11. While uptick in contribution is largely attributable to higher ARR (~14% up QoQ) and occupancy at Westin. However the occupancy of 64% is far below the management's expected steady state level of ~70% - which kept the EBITDA margin for Westin subdued at ~24%.

To read the full report: OBEROI REALTY


>SOUTH INDIAN BANK: Q3FY12 Earnings Review

Background: South Indian Bank (SIB), among the midsized banks in the private sector space, operates a network of about 674branches and about 614 ATMs. With about half of its branches located in Kerala the bank’s business is largely skewed towards the Southern state.
SIB has established a strong brand recall among the Keralite-NRI diaspora. The bank plans to foray into newer geographies by expanding its footprint in the Northern and North - Eastern regions. With no identifiable promoters SIB is run by a team of professionals. A slew of FII’s hold a 42% stake in the bank.

■ Net interest income leads growth
South Indian Bank's (SIB's) topline and operating profit were along expected lines. PAT was up 35.7%YoY at Rs 1.02bn the highest in the bank’s history. Credit growth continued to drive topline. Net interest income continued to drive operating profits; non-interest income also chipped in with a 20%YoY growth. Asset quality continued to be resilient despite the aggressive credit growth in the recent quarters.

■ Valuation
At current levels the stock trades at 1.2X times its FY13E book value and 5.4X times its FY13E EPS. We reiterate our MARKETPERFOMER rating on the stock with a target price of Rs 26.3. Key risks include a surge in delinquencies. South Indian Bank is among the inexpensive stocks in the private banking space with a commendable return on assets and return on equity.

■ Business growth outpaces that of system
South Indian Bank continued to maintain momentum on the balance sheet front. The bank outperformed the industry by reporting a 30.8% YoY growth in the loan book vis-à-vis the system growth of 15.9%. Loan book was reported at Rs 250.50bn. Deposit growth also was strong at 25.3%YoY as against the industry growth of 16.9%. Deposits were reported at Rs 338.34bn. Credit appears to have grown at the cost of the investment book. The credit-deposit ratio was reported at 74%, amongst the highest in recent quarters. CASA ratios continued to remain under strain; a slowdown in growth of demand deposits was noted. Term deposits were
up 26.8% at Rs 265.54bn. Balance sheet continued to grow at a healthy pace of ~25%YoY.

■ Net interest margin stays put at 3% 
Yields and costs were higher, while margins improved to 3.05%. A 5 bps rise in margins along with a ~25%YoY balance sheet growth contributed to a 33.5%YoY growth in net interest income. The bank appears to have passed on much of the higher cost of funds contributing to healthy spreads. Yield on the loan book was reported at 12.3% vs 10.7% in the December 2010 quarter, while cost of deposits was reported at 7.8% vs 6.4%.

To read the full report: SIB

>RELIANCE COMMUNICATIONS: FCCB refinancing removes near-term concerns

FCCB refinancing should alleviate near-term liquidity concerns, but longer-term questions remain?

■ RCOM today announced that it has tied up with a group of banks to refinance its FCCBs of US$1.18bn. We believe this move should alleviate near-term liquidity concerns – given its stretched balance sheet with net-debt to EBITDA of 4.9x (as of 2Q12), there was little comfort that FCCB redemption could be met with internal cash accruals. This should also see some positive momentum in the stock, although we believe longer-term balance sheet concerns remain.

 RCOM has secured this loan from a group of banks including Industrial and Commercial Bank of China Ltd (ICBC), China Development Bank Corporation (CDB) and Export Import Bank of China (EXIM) and others. The refinanced loan has a maturity of 7 years and not much colour on the principal repayment schedule is available at the moment. In FY11, RCOM had an underlying net interest expense (not including forex gains or losses) of INR10bn, implying an interest rate of around 4%, we estimate (adjusting for 3G
loans for which interest was capitalised). The FCCBs are now being refinanced at 5%.

 Operationally, some turnaround/stability in the wireless segment has been evident in the last couple of quarters – it has held wireless pricing steady, there is recovery in revenue growth, and revenue share appears to be stable vs declining previously. However, this hasn’t been significant enough to translate into a share price driver.

 Notwithstanding this refinancing deal, RCOM’s stretched balance sheet will be a longer-term concern. It could also curtail investment needed for the business. The company has been vocal about divesting a stake in one of its businesses, to de-lever its balance sheet. However, with little success so far. (Source: Blackstone, “Carlyle set to buy Anil Ambani's RCOM towers”, The Economic Times, 11 November). In the absence of a material operational turnaround, any finalisation of a cash-injection deal could be a significant re-rating catalyst for the stock, we believe. Maintain Neutral

To read the full report: RELIANCE COMMUNICATIONS

>IDEA CELLULAR LIMITED: Strong Q3, but environment challenging

Idea Cellular (Idea) reported strong performance during Q3FY12. While topline was a tad better than our estimates, the EBITDA margin was lower than expected at 26.6% (we were slightly bullish on margin expansion for Q3 on RPM increase). We revise our target price lower to Rs82 based on the revision in EBITDA margin estimates. We expect lower margin expansion as growth in data services and revenue per minute may happen at a lower rate that we expected due to circle level competition and uncertainty over equipment clearance due to security norms. We retain our Hold rating on the stock with a cautious stance as continuing regulatory risk can dent profitability and increase pressure on return on equity.

 Topline in line; EBITDA margin below estimates: Idea reported 9% QoQ growth in topline to Rs50.2bn against our estimate of Rs48.47bn. Minutes of usage bounced back and registered 7.3% QoQ on the back of strong 6.2mn net addition in subscribers. Revenue per minute (RPM) grew by 1.4% QoQ to 43.3p/min driven by revenue from value added services but voice RPM remained flat. EBITDA margin expanded by 108bp QoQ to 26.6% (we expected tariff increase to expand margin) driven by savings from network cost.

■ Operational matrix saw mixed performance during Q3: MoU/sub increased to 369 in Q3 from 364 in Q2FY12 despite strong addition in net subscribers compared to last quarter. This indicates improvement in usage on Idea network, but this could not translate into higher voice RPM despite significant subscribers migrating to newer tariff. Both established and newer circles showed strong growth and improvement in operating margin. 3G coverage expanded to 2,300 cities and registered 2.25mn subscribers, giving incremental ARPU of Rs79.

 Concall highlights: Capex guidance was maintained at Rs40bn for FY12 despite spending Rs33.7bn for 9MFY12. The management indicated competition at circle level and did not see any significant tariff hike in near term. The management indicated that business environment remained uncertain at this point of time.

■ Environment uncertain; Reiterate Hold with a cautious stance: We revise our estimate marginally to factor in lower than expected margin on account of higher data related revenue. Hence, we reduce our target price to Rs82 to factor in earnings revision and risk associated with the sector which can dent earnings in FY13E. Downside risks are 1) removal of roaming revenue which can impact profitability; 2) pending recommendation of one-time spectrum

charges, 3G inter circle roaming would put pressure on balance sheet; 3) spectrum pricing and risk of spectrum availability through auction can jack up spectrum pricing, hurting return ratios again; 4) Slow pace of equipment clearance due to security norms. Hence, we are cautious on the sector as we enter a phase where the growth rate of 2G services would come down and
regulatory risk can dent the balance sheet further leading to pressure on return ratios which are already low.

To read the full report: IDEA CELLULAR LIMITED