Monday, January 30, 2012

>RAYMOND: Cyclical blip on secular growth story

Growth moderation in FY13 but 

company remains a solid proxy 
for India’s consumption story

■ Action/Valuation: Maintain Buy with Increased TP of INR525
Even after we factor in the impact of a relatively muted 3Q results in our estimates, we raise our TP to INR525 as we roll forward our estimates to FY14. Our TP still values the core business at INR425 based on 6x EV/EBITDA FY14E, which implies 10.1x P/E multiple, and we continue to value land at INR100/share. The current valuation of 10.3x FY13F adj. EPS and 7.3x FY13F EPS adjusted for land value appear quite compelling to us. We view the current price level as an excellent entry point for a long-term secular growth story.

■ Scaled back topline growth estimates for FY12-FY13 after 3Q results
We reduce our FY13 sales growth rate estimate from 11.1% to 7.1% on the back of Q3 results and expected moderation in realization growth. We incorporate a slowdown in the consumer sentiment on account of high inflation in our FY12-FY13 estimates but expect growth to rebound in FY14. While we also reduce our margin assumptions for FY12, we increase our FY13 EBITDA margin estimate by 220 basis points as we factor in the fall in raw material price along with the closure of unprofitable businesses like Manzoni.

■ Catalyst: Short-term headwinds but long-term story remains intact
We think Raymond remains a solid proxy for the Indian consumption story where we expect consumers will upgrade to branded and higher-value products driven by rising income and increased discretionary spending. This trend should improve the current relatively low per capita apparel consumption and low penetration of retail in India. Raymond, with its range of brands, high brand recall and a solid distribution network, should be very well positioned to benefit from rising demand, especially in tier 3/4/5 cities and towns. Reiterate Buy.

■ Q3FY12 – Volume impacted by festival timing and poor consumer sentiment that should only last a short time
Sales growth moderated to 11.7% in Q3 at the consolidated level. Volume growth, which dropped to 3% y-y in the suiting fabric business, was flat in shirt & trouser and negative in other apparel businesses. One reason for the dismal y-y sales growth in Q3 has been the timing of Diwali. Diwali in FY12 was in October vs. in November in FY11. This resulted in September being the strongest sales month in FY12 vs. October in FY11. So comparing (Q2+Q3) performance, Raymond’s sales grew at ~19% in FY12 vs. ~20% in FY11 which is quite healthy, in our view. But as per management, consumer sentiment was depressed in
the past two months of Q3FY12 on account of high inflation.

To read the full report: RAYMOND

>SESA GOA: Western Cluster (Liberia project) on track with encouraging R&R findings. First shipment expected in FY14.

■ Sales volumes higher on stock clearance
While iron ore production for the quarter stood at 3.33 mt (vs 4.70 mt in Q3FY11), sales were at 5.04 mt (vs 4.84 mt in Q3FY11) on account of stock clearance of 0.64 mt from Karnataka through e-auctions and another ~1.1 mt from Goa (the company sold 4.4 mt of iron ore from Goa compared to 3.74 mt in Q3FY11). Goan mines continue to operate at full capacity (14 mtpa). Realization during the quarter improved at US$93/ tonne (US$ 84/tonne in Q2FY12) for iron ore due to improvement in grade by 0.5%. We believe the scope of significant improvement in realizations seems unlikely as further improvement in grade may not be possible and higher global supply should keep iron ore prices under check.

■ EBITDA margins remained under pressure on higher export duty
Effective Q1FY12, the export duty was hiked to 20% on both iron ore fines (from 5%) and lumps (from 15%). Consequently, the EBITDA margin contracted by 1330 bps to ~42% YoY on a comparable basis. Due to seasonality QoQ performance is not comparable. With further hiked in export duty to 30% effective 30th December, we believe pressure on the EBITDA margins to continue going ahead.

■ Strong regulatory headwinds continue to be an overhang
Karnataka continues to be under the mining ban since August 2011. The company has been left with ~0.2 mt of iron ore at the Karnataka. The Supreme Court hearing on the Karnataka mining ban continues to get deferred with no immediate respite. Further, report by the M B Shah Commission investigating illegal mining and export of iron ore (likely in March) can raise concerns even at Goan operations. Also, the implementation of mining bill and revision of royalty rates (due in August 2012) could have an overhang on our FY13 volume estimates of 16.5 mt.

■ Outlook and Valuations
At CMP of Rs 201, the stock is trading at 4.7x its FY13E EPS and 7.1x FY13E EV/ EBITDA. On SOTP basis, we value the iron ore business at 3.5xFY13EV/ EBITDA (giving a discount of ~15% to the global peers). Stake in Cairn India has been valued at 30% discount to current market cap. Thus, we arrive at a target price of Rs 191/ share. Retain Hold.

To read the full report: SESA GOA

>WIPRO: IT budgets are likely to be flattish in FY13

Restructuring initiative started to payoff
Wipro revenue grew 9.9% QoQ to Rs. 99,972mn, which is above our estimate (est. Rs. 98,395mn). In constant currency terms revenue grew 4.5% sequentially, which is ahead of HCL Tech 3.7% growth and inline with Infosys (4.4%) & TCS (4.5%) growth. This indicates that its restructuring initiative has started to pay off.

Revenue from IT services grew 11.4% QoQ to Rs. 76,076mn, IT Product revenue de grew by 10% and Consumer care and Lighting grew 9.8% QoQ. Currency and realization had a positive impact on margins, during the quarter, EBIT margin expanded by 80 bps to 17.2%; which can be explained as follows; Currency (+70bps), Realization (+170 bps), SG&A (-80 bps) and others (-80bps). Wipro has declared an interim dividend of Rs. 2 per share

IT budgets are likely to be flattish in FY13
IT budgets are likely to be finalized in February 2012; initial indications show that the budgets are likely to be flattish. IT spending curb has been witnessed in Investment banking, retail and consulting space in energy space; however, upstream energy business will help kick in growth. Realignment of budget has been happening in retail banking with significant spend happening in analytics, regulatory and mobility space.

Outlook & Valuation:
At the CMP Rs. 417.85, the stock trades at 18.1X and 15.8X to FY12E and FY13E of Rs. 23.1 and Rs. 26.5 respectively. We value Wipro at 15X to FY13E earnings (~15% discount to Infosys forward earnings multiple) to arrive at a 12-month target price of Rs.398.

Top client grew faster than company
Wipro’s top client during the quarter grew 7.8% sequentially to US$59mn. Up-selling and cross-selling initiatives were witnessed across client verticals. US$100mn clients have improved from 1 in Q3FY11 to 6 in Q3FY12 and similar pattern were witnessed across the clients pyramid.

To read the full report: WIPRO

>GAIL: Investment View & Q3FY12 Result update

■ Volume growth a challenge. We believe that volume growth would be under pressure as the gas production from the KG-D6 field of RIL continues to decline and other domestic gas field developments on the eastern coast are delayed. Import capacity is running at almost peak capacity with limited scope for higher throughput near term. Overall, we anticipate a largely flat transmission volume during FY12 and FY13. The company is also struggling to evacuate its petrochemical production due to heightened competition following the commissioning of a naphtha cracker at Panipat in North India by the Indian Oil Corporation.

■ Uncertainty on under-recovery remains a risk: We believe that the current calculation of GAIL's share of subsidy is based on total losses incurred by the oil marketing companies on LPG alone as has been requested by GAIL. While, there is no certainty that this formula would continue in future, as the government would struggle to close the ballooning subsidy gap (cINR1,300bn in FY12e), we have assumed that GAIL would continue to pay subsidies such that it maintains only a normative profit for the LPG segment. Our underrecovery assumption has increased for FY12 and FY13 due to higher crude oil assumption at USD112/bbl and
USD105/bbl, respectively based on the current forward curve. We expect the subsidy burden to ease in FY14 as we expect crude oil prices fall to USD92/bbl, in line with our house view.

■ Marketing margin issue pending with PNGRB: The government has entrusted the task of determining the gas marketing margin to the Petroleum & Natural Gas Regulatory Board (PNGRB). We believe this would remain an overhang on the stock until the regulator decides on a fair marketing margin for India where demand for natural gas far outstrips supply.

GAIL reported Q3FY12 net profit of INR10.9bn in line with our and consensus
estimates. However, the subsidy to oil marketing companies (OMCs) was provisional and
could change after the government announces the allocation over the next few weeks. While
GAIL has maintained its transmission volume despite lower domestic gas thanks to imported
LNG, we anticipate flat transmission volume over FY13. The blended tariff for the quarter was
INR993/’000scm, which we expect to increase by 3% in FY13.

■ Transmission volume to remain flat. We expect GAIL to get c4mmscmd lower gas from KG-D6 field of RIL during FY13e, which would be partly substituted by c2 mmscmd from the western coast; new volume is expected to earn the higher tariff of the new pipeline while the KG-D6 volume was flowing through the old HVJ pipeline that has the lower tariff. Overall, we anticipate GAIL to transmit 118.8mmscmd gas during FY13e as against 117.8mmscmd in FY12e.

■ Uncertainty on subsidy and marketing margin to be an overhang. We expect the subsidy to OMCs to be capped at earnings from its LPG business as has been the trend in the past, but the actual amount could vary depending upon final allocation by the government. Additionally, the government has recently asked regulator to determine the marketing margin on gas sold by marketing entities. This could impact the marketing margin of GAIL. The marketing margin of cUSD0.24/mmbtu contributed c20% to its net income in Q3FY12. We lower our earning estimates. We lower our FY13e EPS estimate by c15% to account for 3-4% lower transmission volume, and 92% higher subsidy assumption for FY13.

■ Valuation and risks. We value GAIL on the PE of its core business and 10% holding
discount market value of investments. We reduce our target price from INR500 to INR405 but
retain Neutral rating in view of recent correction in stock. We value the core business at 11.6x
FY13e core EPS to reflect 11.5% cost of capital, 6% growth and 16% ROE, which is also in
line with the last six months’ multiple. We believe investment risks include any downward
revision in GAIL’s tariff, a higher-than-expected share in under-recovery, or different
marketing margins. Potential catalysts include new gas supply visibility, or discovery in its
exploration blocks.

To read the full report: GAIL