Wednesday, February 1, 2012

>POLITICAL CORRIDOR: Bharat Versus India - "Inclusive growth "; exclusive benefits

Bharat vs. India – a gap to be bridged…

Global economies now face a radically altered economic canvas in the ongoing crisis and a “two-speed” world is emerging with a slower rate of growth in developed regions such as Europe and the US and much faster growth in emerging economies. Even within Euro zone states, a two speed world is likely to emerge as stronger states may move towards closer integration while the rest may end up in a loose “confederation”. Ironically, within our country, a two-speed India exists with rural Bharat continuing its long wait for basic social infrastructure while urban India is reaping the benefits of economic growth and still crying out for more.

Taking a leaf out of socialist flavours in the pre-1990s era, India changed its focus big-time to corporate/urban growth. In the last two decades, the stature of corporates and the urban middle class has grown multi-fold. However, with the growing economy, the gap between urban (India) and rural (Bharat) income has increased significantly.

In an ideal economy, capital and labour between rural and urban economy moves freely. However, we have seen that labour from rural India has moved to urban areas for higher income but capital to rural India has not moved to a great extent. Consequently, vast migration resulted in the proportion of the rural population declining to 68% in 2011 from 75% of the population in early 1990.

With the government’s revenue foregone in FY11 at more than | 5 lakh crore, benefits to Corporate India through tax holidays and exemptions have increased extensively. Whether it is state level exemptions or tax holidays for multi years or minimum alternative tax (MAT) credit to certain industries, we have seen that Corporate India has benefited tremendously. This policy of incentivising India Inc. has favoured growth in urban areas at the expense of rural India and somehow ‘inclusive’ growth has ‘exclusively’ been for urban India.

Over the last few years, the government’s focus has also moved towards rural social schemes; be it increasing spend in the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGA) or promoting various rural schemes under ‘Bharat Nirman. Social spend through budget allocations has surpassed | 3 lakh crore in 2012. This is almost double the amount government allocated in 2008 budget.

We believe corporate benefits would continue to be part of the government’s Budget but moving forward, the focus is most certainly more towards social spending and rightly so. Even considering the content of the proposed important bills in Parliament like Food Security Bill, Mineral & Mining Bill and Land Acquisition Bill, most of them mainly focus on the growth of rural people and the socialistic flavour seems to be back on track. Some of the data used for our analysis may be not be an absolute value but is indicative of the scenario. We have analysed various parameters across sectors ranging from banking exposure to rural India or government spending on rural road projects, budget expenditure on rural health and education. Despite this budgetary expenditure increasing at a faster pace, per capita expenditure of the rural population has been very low and needs a leg up.

To read full report: POLITICAL CORRIDOR

>STERLITE INDUSTRIES: BALCO projects delayed by two quarters

■ 3Q results broadly in line: EBITDA of INR23.1bn (up 17,2% y-o-y/ down 7% q-o-q ) broadly in line with our estimate of INR22.8bn. Reported NPAT of INR9.1bn (down 17% y-o-y/ down 8% q-o-q) was impacted by INR4.25bn of forex losses & INR2.6bn in associate losses from Vedanta Aluminium (VAL). Adjusting for these, NPAT at INR14.5bn was up c22% y-o-y (down 5% q-o-q) (See exhibit 1 for details)

■ Projects delayed: Projects at BALCO have been delayed by two quarters. Unit 1 of the 4x300MW captive power plant is now expected to be synchronized in 1QFY13 & first metal tapping at the 325ktpa smelter is now expected during 2QFY13. The 211mt coal block at BALCO has received Expert Appraisal Committee approval and now the stage 2 forest clearance is the next leg of the approval process.

■ STLT continues to overinvest in VAL – STLT infused INR6.7bn as debt during the quarter taking its total investment in the company to 34% (INR101bn) vs an equity holding of 29.5%. However, Vedanta’s (VED LN, OW (V)) investment in the company’s debt fell by 50% q-o-q. STLT though expects the incremental infusion to be repaid during 4Q through VAL’s undrawn credit lines. While VAL reported a strong q-o-q improvement in operating costs (down cUSD500/t) through higher linkage coal availability and control over operating metrics such as coal consumption and current efficiency, it continued to make losses at the NPAT level (INR8.9bn in 3Q12). Management is confident though of bringing costs down further to INR95k/t (c7% lower than current levels) but coal supply & costs would likely continue to form an overhang.

■ Cutting FY12/13e EBITDA; Reduce TP to INR140 (from INR200) but retain OW rating: We have cut FY12/13 EBITDA by 10%/19% to reflect a) project delays b) revised commodity price forecasts as published in HSBC Metals Quarterly today c) higher input costs. We revised our valuation SoTP valuation methodology and now a) value Sterlite Energy (100% subsidiary) at 1.0x invested book (Jharsuguda project only) given uncertainty in project cash flows due to uncertainty in coal pricing b) value STLT’s current investment in VAL at a 80% discount due to low visibility on profitability of the project. We derive a price target of INR140 (was INR200) earlier & rate STLT OW.

To read full report: STERLITE INDUSTRIES

>YES BANK: Yes has now launched a slew of retail products (vehicle & home loans, loans against property and shares, etc) with more to come

■ 3QFY12 earnings came in 3% above our estimates and the stock ended the day up almost 4% partly led by encouraging results but also given RBI’s CRR cut earlier in the day.

■ Operational review: Loan growth slowed to 15% y/y; however, the Bank grew its overall balance sheet a robust 36% given 71% growth in investments including credit substitutes not in the form of advances (i.e. CPs, CDs, etc). Growth was led both by large corporates and retail & SME loans. YES has now launched a slew of retail products (vehicle & home loans, loans against property and shares, etc) with more to come. However, the stand-out feature was the traction in its CASA deposit mix which grew to 12.6% vs. 11% in Sep11.
Margins however remained flat as the proportion of equity (‘free funds’) reduced. Tier 1 remained healthy at 9.7%. Asset quality too remained stable with both NPLs and credit costs not increasing.

■ Earnings outlook: As the Bank builds out its lower-cost, ‘spoke’ branches and offers its attractive savings deposit product, we build in higher CASA at 14%+ and 16%+ for FY13E and FY14E respectively. However, we trim our balance sheet growth to 22% for each of the next 2 years and hence estimate 24% profit growth for these 2 years. The Bank remains amongst the most profitable private banks enjoying 1.5% ROA and 23% ROE.

■ Valuations and target price: The stock trades 9.3x PE and 2.0x PB on FY13E. We value the stock at 10x PE and 1.8x PB, thereby marginally increasing our 12-month target price to INR 372 (from INR369), implying potential returns (including dividends) of 17.6%. However, with RBI looking to potentially cut rates and YES’ margins likely to benefit, our target multiples have an upward bias. Retain Overweight. Key risks: 1) Longer-than expected build-up of retail liabilities 2) Asset quality risks

To read full report: YES BANK

>ABAN OFFSHORE: Lower operating days for Aban III & V drags Q3FY12 performance

■ Lower operating days for Aban III & V drags Q3FY12 performance
Aban’s Q3FY12 revenues at Rs8.6bn, +13% qoq came in below estimates of Rs9.2bn led by lower revenue days for Aban III & Aban V. Aban III operated for just 30 days while Aban V got operational in October. Consequently EBITDA at Rs5.06bn though + 9% qoq came in below estimates of Rs5.3 bn led by lower revenues. On the cost front other expenses at Rs1.67bn, jumped 16.5% qoq due to higher mobilization expenses for Aban III and Aban V. Interest expenses came in at Rs2.57bn (+10% yoy) significantly higher than estimates of Rs2.4bn due to increase in LIBOR and the sharp INR depreciation against USD this quarter. Interest expenses could go up further up led by recent re-financing leading to higher interest rates (12% vs 9.3%). Lower revenues & higher interest expenses resulted in Q3FY12 net profit of Rs0.73bn (-3% yoy, 7.7% qoq) vs est of Rs1.07 bn. Led by disappointing 3Q earnings & higher interest expenses, we downgrade our EPS estimate for FY12/12 by 9.1 %/ 3.8%. We also lower our target price to Rs465 (Rs485 earlier) to factor in earnings downgrade.

■ Aban redeems bonds worth $160 mn – coupon rate jumps steeply to 12%
Aban recently redeemed bonds aggregating to USD USD 160 mn. The redemption is financed through mix internal accruals (USD 40 mn) & debt refinancing (USD 120mn). The refinance of USD 120 mn is done through a fresh bond issue with coupon rate of 12% & repayable over 4 years. The coupon rate at 12% (v/s 9.3% for the redeemed bonds) is negative for Aban’s already stretched balance sheet. The management highlighted that the sharp jump in the refinance rate is on account of unwillingness European to extend fresh credit in current uncertain global environment. Next re-finance of USD157 mn could also be on similar lines-Interest cost pressure to intensify- Downgrade to HOLD

■ Apart from the higher refinance rate of the new bond issue at 12% we believe that
Aban’s next repayment obligation (due Mar-12) worth ~USD157 mn could also see increase in its coupon rate which in turn will further intensify interest cost pressure witnessed in 3QFY12. Though Aban boasts of revenue backlog of ~$1.9 bn over FY12- 15E, revenue visibility stands at 65% for FY13 as 6 rigs are due for contract renewal in H2FY13. Lower FY13 visibility & intensifying interest cost pressure leaves little upside for stock out performance after a recent 30% appreciation-Downgrade to HOLD.

To read full report: ABAN OFFSHORE

>UNITED PHOSPHORUS LIMITED: Revenue contribution from the acquisitions of RiceCo and DVA Agro in 3QFY12

United Phosphorus reported robust 3QFY12 earnings, with net sales up ~58% y-y, beating our and consensus estimates by a wide margin. On PAT level, results were largely in line on the back of a higher tax rate (due to a one-off impact) and higher minority interest/lower associate
income. Better realisation (+8% y-y), supported by new acquisitions and INR depreciation helped company report strong numbers. Overall, these are a good set of numbers and we remain positive on the stock. We reiterate our Buy as the stock is currently trading at 7.7x our FY13F earnings estimate.

Key highlights

Strong top-line growth above expectations
Revenues at INR19.3bn (+58% y-y and 9% q-q) was ~15-16% higher than our as well as consensus estimates of ~INR16.8-16.6bn. Better realisation (+8% y-y) plus depreciation of INR helped United Phosphorus achieve strong revenue growth. The company’s business in Europe also showed resilience with 31% y-y revenue growth after it had been weak over the last two years, a positive for the stock.

 For 9MFY12, the company recorded top-line growth of 40% y-y; to achieve our target of 31.5% for FY12F, United Phosphorus only has to grow 11% y-y in 4QFY12. We believe the company will be able to achieve growth that will surpass our expectations of 31.5% y-y
revenue increase.

 Revenue contribution from the acquisitions of RiceCo and DVA Agro in 3QFY12 has been ~INR3.0 bn, and hence, organic growth for the company in 3QFY12 works out to 31%, which is much higher than in the past and should be a positive for the stock.

Operating performance beats our estimates by 18%
 On the cost front, higher-than-expected raw material cost and employee cost was more than offset by the decline in other manufacturing expense. This led to EBITDA margin of 18.1% higher than our expectation of 17.6%. The slight slippage in the EBITDA margin on a sequential basis (18.1% vs. 18.3% in 2QFY12) was on account of higher employee cost. Depreciation in INR against various currencies was the primary reason for this increase.

 Higher revenue coupled with slightly better-than-expected margin resulted in EBITDA at INR3.5bn (+57% y-y and 7% q-q), which beat our as well as consensus expectations by 18% and 9%, respectively.

 On sequential basis, interest and financial costs was down 57% to INR826mn because the company has recognized a MTM loss of INR1.1bn on account of foreign currency debt in the last quarter. Although some of these losses were reversed as the company realised gains on hedging derivates it has used on foreign debt but these gains were more or less offset by forex loss on account of rupee depreciation in the reported quarter.

 At the operating level, the company’s performance exceeded our as well as the Street’s expectations. However, on the bottom line, adjusted PAT (forex loss and tax benefit from the forex loss) at INR1.1bn was largely in line with our expectations due to the higher tax rate and higher minority interest / lower associate income. The effective tax rate at ~32% was a result of amalgamation of 100% United Phosphorus’ Mauritius subsidiary into a stand-alone India
entity. The company has guided for an effective tax rate in the range of 23-25%.

Takeaways from management’s call
 Management remained confident that the company would be able to achieve a revenue growth of 30-35% for FY12F, which should be driven by a Brazilian acquisition in 4QFY12 due to the seasonally strong quarter in Latin America. The weaker 15% y-y growth in 3QFY12 for India business was on the back of challenging weather conditions in Southern India, particularly Andhra Pardesh. In the short term, management sees some headwinds due to continuing
challenging conditions in AP.

 The company continues to expect to generate a PBDIT margin to the tune of 19-20% in FY12F. Any volatility in raw material prices can lead to slippage in margins as cost increases can only be passed on to its customers with a lag.

 New acquisitions have resulted in margins turning out to be lower than earlier, and management believes that it will take another 3-4 quarters to bring them back to earlier levels. Specifically, DVA Agro, which was acquired by the company in July 2011 has a gross margin ranging between ~28-30%, ie, lower than the company’s overall gross margin of around ~46%. Sipcam UPL Brasil, in which the company picked 50% stake in April 11 recorded a loss of INR 110mn (propionate share) in 2QFY12. Management expects a total loss of ~INR300mn on
full year basis from Sipacam UPL Brasil.

 The performance of European business has showed resilience after UNTP’s post-harvest treatment product, Decco, was restricted in EU after May 2010. Management indicated that the increase in its average realisation from the European market has been higher than its overall
8% y-y increase.

 On the working capital front, the increase in the no. of inventory days to 99 days from 86 days in the last quarter was partly attributable to inventory restocking due to upcoming crop season (Feb-July) in North America and European markets.

 On the balance sheet side, the company’s average cost of debt continues to be in the range of 7-8% on a consolidated basis and the company an outstanding net debt of around INR 25bn (as of Dec-11).

 South America has experienced a weather disturbance known as La NiƱa but as of now the impact from this seen is seen to be minimal.

>JYOTI STRUCTURES LIMITED: Revenue growth guidance would depend upon the clearances and payments made by the clients.

Jyoti Structures Ltd (JSL) Q3FY12 results were below our expectation on execution getting impacted due to delay in clearances and payments by clients. During the quarter, the company reported 6.5% yoy growth in net revenue at Rs 6 bn and PAT declined by 44% yoy to Rs 138 mn. The decline in PAT was on account of 127 bps decline in EBITDA margins and 63.7% yoy rise in interest expenses. The company added Rs 5.1 bn of new orders resulting in an order backlog of Rs 42.9 bn at the end of the quarter. The achievement of 20% revenue growth guidance would depend upon the clearances and payments made by the clients.

Key Highlights
Q3FY12 revenue grew in single digit at 6.5% yoy: The net revenue of JSL witnessed single digit growth of 6.5% on yoy in Q3FY12 and was below our expectations. The delay in clearances from various government departments and payment related issues from certain clients resulted into slower execution of orders. Currently 15-20% of the projects are slow moving and these are from state utilities from UP, Tamil Nadu, DVC, etc. The achievement of the guidance of 20% revenue growth would depend upon the clearances and payments made by the clients.

 PAT declined on lower margin and higher interest expenses: In the quarter, the EBITDA margin declined by 127 bps yoy to 10.1% on higher erection & subcontracting expenses and other expenses which included MTM forex losses. The EBITDA for the quarter declined by 5.3% yoy to Rs 595.5 mn. The interest cost grew by 63.7% yoy to Rs 310 mn on account of increase in working capital loan. The delay in payment from some of the SEBs resulted into this. In addition the average cost of debt also remained high at 12-12.5%. As a result, the PAT for the quarter declined by 44.2% yoy to Rs 138 mn.

Rs 5.1 bn of order added in Q3FY12: During the quarter, JSL added Rs 5.1 bn of new orders. The current order backlog stands at Rs 42.9 bn. 62% of orders are from transmission line, 19% from rural electrification and rest 19% are from substation. The current order book comprises 42% of PGCIL orders, 8% of private sector orders and 19% from Maharashtra T&D companies, 9% from MP and balance from other state SEBs like Chattisgarh, Tamil Nadu, UP, West Bengal, J&K, Assam, etc.

 Over Rs 100-110 bn of opportunity in the next few months: The management expects over Rs 11 bn of new opportunity in T&D EPC from various states utilities of MP & Rajasthan. It expects Rs 40 bn of new opportunity from PGCIL which includes Rs 36 bn of bid yet to open and Rs 4 bn of new tenders. Besides this, JSL expects Rs 60 bn of EPC opportunity from BOOT projects from states such as UP, Rajasthan, etc and private players. Besides this, it is looking at Rs 6 bn opportunity from Maharashtra and Bangladesh.

 Outlook & Valuation
We have downgraded our revenue estimates for FY12E & FY13E with the assumption of delay in execution of 15-20% of its orders and have also reduced our margin estimates. We have downgraded our EPS estimates for FY12E and FY13E by over 20% to Rs 9.7 and Rs 10 respectively. Currently, the stock trades at FY12E & FY13E P/E of 4.7x and 4.6x respectively. We maintain BUY on the stock with the revised target price of Rs 60. At our target price the stock trades at FY12E and FY13E P/E of 6.2x and 6 x respectively.


>HAVELLS INDIA LIMITED: Q3FY12- No sign of fatigue here! ; Sylvania sees margin improvement

■ Domestic revenues maintain strong momentum
Havells India Limited’s (HIL) 3QFY12 standalone and consolidated revenues at INR9bn
and INR16.6bn were in line with our estimates. In India, growth was impressive across
all verticals viz. cables & wires (C&W), lighting & fixtures (L&F) and consumer durables, while the switchgears division delivered the second quarter of superlative growth (30% YoY) after two quarters of sluggish growth in 4QFY11 and 1QFY12. Sylvania’s revenues fell 4% YoY to Euro114m, but improved product mix and timely price increases across several key product lines coupled with tight cost control resulted in EBIDTA rising 30% YoY to Euro7.8m in the quarter.

■ Sylvania sees margin improvement, Indian OPM slightly better
HIL delivered margin improvement of 290bps (consolidated) on the back of a superior product mix and savings resulting from the management's efforts at rationalisation of manufacturing and selling costs in Sylvania. This reflected HIL's continued preference on operational profitability as opposed to improving revenues at the cost of margins and cash flows. In India, HIL registered an OPM of 12.7% (+10bps YoY). Its consolidated EBIDTA jumped 52% to INR1.8bn in the quarter. The company also registered a forex loss of INR194m on account of M-to-M provisioning on its forex loans in India as well as its Brazilian operations. PAT stood at INR889m (+40%).

■ Valuation and outlook
HIL’s 3QY12 operating performance and profitability, at the domestic and international levels, were in line with our estimates. Going forward, we believe that HIL’s domestic turnover and margins would play a key role in shaping the operational cash flows of the company. We expect HIL to focus on higher channel sweating in domestic and international markets, which in turn, should bolster profitability and cash flows. This would be the key to fortifying its balance sheet metrics and return ratios. We reiterate a BUY recommendation on the stock, with a marginally higher target price of INR535, which represents an upside of 12% from current levels.

>PUNJAB NATIONAL BANK: Q3FY12 RESULTS REVIEW- Operating performance inline, asset quality disappoints

Punjab National Bank (PNB) reported earnings with net profits at INR11.5bn (+6% YoY) in 3Q, below our estimates of INR12.54bn (consensus estimates at INR12.58bn), on higher than expected loan loss provisioning. However, core earnings progression positively surprised on better than expected NII traction and stronger recoveries in written-off accounts. Higher slippages and deterioration in asset quality ratios were the key negative that emerged from the result.

■ Moderation in b/s growth in line with industry; margins compress on expected lines
Loan growth moderated to 19% YoY, pretty much in line with the industry, driven by infrastructure, retail and MSME loans. Margins for the bank came compressed by 7bps sequentially to 3.88% on the back of rise in cost of funds. Given the high interest rate environment, the bank has witnessed signs of cannibalisation of low cost deposits to retail term deports leading to erosion in CASA by 100bps with CASA ratio share declining to 36.1%. While the momentum in savings and current deposits accretion slowed down, retail term deposits continued to be robust at 31% YoY. Going forward, management is guiding sedate NIMs at 3.5% levels for full year FY12e and moderate b/s growth.

■ Asset quality deteriorates
Asset quality for the bank substantially deteriorated with GNPA accretion at 25%QoQ. Slippages came in at INR16.83bn (delinquency ratio at 2.6% vs. 1.6% in 2QFY12) as the bank recognized its exposure to Kingfisher as NPL (INR7.5bn). Overall, provisioning came in higher at INR9.46bn on the back of NPV provisioning of INR1.2-1.3bn linked to GTL exposure under CDR. However, lower recoveries and upgrades were key disappointment during the quarter. Restructured book increased by INR18.9bn (one
large chunky account related to telecom of INR9.9bn) to INR168.8bn at 6.4% of advances. While the bank is likely to witness SEB restructuring (related to Rajasthan & Haryana) during 4Q, the management is confident of containing GNPA ratio at <2%.

■ Valuation and outlook
While slippages and credit costs continue to remain high for the bank, risk adjusted margins (margins - credit costs) continue to remain amongst the highest within PSU banks. PNB continues to remain one of the best deposit franchises with best in class margins and returns profiles and has adequate earnings power to absorb any negative surprises on asset quality. Hence, we reiterate a BUY with a target price of INR1,340.

>ICICI BANK LIMITED: 3QFY12 RESULTS REVIEW- Impressive core; guidance even better

ICICI Bank reported operational 3Q earnings at INR17.3bn, above our as well as consensus estimates, on the back of better than expected core earnings progression driven by margin improvement of 10bps (2.6% to 2.7%) and dividend income of INR1.5bn from ICICI PruLife. Credit costs during the quarter were at 56bps while asset quality continued to remain stable. Bank management's positive guidance on asset quality and margins for FY13e were the key positives that emerged from the result.

■ Corporate, overseas advances drive loan growth; CASA on average balances improves
Loan growth for the bank was above systemic credit growth at 19% YoY (5% QoQ) driven by higher disbursements to large corporate (23% YoY) and overseas advances (38% YoY) while retail unsecured continued to show decline. Retail segment grew 1% QoQ due to higher disbursements in the Auto and CV segment. Margins improved 10bps QoQ to 2.7% as international NIMs improved by 31bps QoQ to 1.4% while domestic NIMs improved 6bps to 2.98%. Currently, the bank is not facing any funding issues overseas given that asset prepayments are likely to offset liabilities maturing in FY12. CASA based on average balances improved by 70bps to 39% as absolute CASA improved 10% QoQ. Management is guiding margins to improve to 2.8% in FY13e driven by domestic book and loan growth at 18% driven by retail and working capital loans.

■ Asset quality stable; management guiding credit costs at 75bps in FY13e
Asset quality continued to improve with both absolute GNPA and NPA decreasing by 3% and 2% QoQ respectively. Coverage ratio marginally improved to 78.9% while credit costs remained flat QoQ at 58bps. Net additions to the restructured book were at INR5.7bn in 3Q taking total restructured book to INR30.7bn (1.3% of advances). Incremental restructuring in 4Q is likely to be at INR13bn (GTL and 3I InfoTech). The bank has not classified Kingfisher as an NPL given that it is performing for the bank. Bank management is not seeing a significantly large restructured pipeline as of now and is guiding at credit costs at 70bps for FY12e and 75bps for FY13e.

■ Valuation and outlook
We maintain our earnings estimates for FY12e and FY13e as well as target price of INR1,320 with a BUY rating based on 2.3 FY13e P/BV on core book.

>Mutual Fund Selection Rationale: The objective is to identify good performers on the basis of analysis of quantitative and qualitative factors

The main objective of this service is to help you identify good performers and build an effective mutual fund portfolio for your long term financial goals. We analyze schemes on various Quantitative and Qualitative factors.

ELSS is the mirror image of diversified equity scheme where 80-100% of portfolio is invested into companies across various sectors and 20-0% into Debt and related instruments. ELSS carries a lock in of 3years. Considering the market around 20% down from its all time high one can prefer locking in funds for a tenure of 3years which indeed can cover a bull business cycle. The main reason which urges investors to get into ELSS is TAX BENEFIT

To read the full report: ELSS