Friday, February 10, 2012

>GLOBAL ECONOMICS VIEW: Rising Risks of Greek Euro Area Exit

■ We raise our estimate of the likelihood of Greek EA exit (‘Grexit’) to 50% over the next 18 months, from 25-30% previously. This is mostly because we consider the willingness of EA creditors to continue providing further support to Greece despite Greek non-compliance with programme conditionality to have fallen substantially.

■ We think that the costs of Grexit to the rest of the euro area would be moderate, as we expect post-Grexit exit fear contagion would be contained by policy action, if needed. In September, we viewed the likelihood and scale of exit fear contagion as much higher and the willingness of the euro area authorities to respond as lower.

■ In our view, the likelihood of policy action by the ECB and EA creditors to support fiscally weak and vulnerable, but compliant EA creditors has increased over the past six months. Policymaker ability to contain exit fear contagion remains large.

■ We continue to think that uncontained exit fear contagion would have grave implications for the rest of the euro area, the EU and the world at large.

■ We think that the Greek government will achieve an orderly but most likely coercive debt restructuring in its current negotiations with private creditors about private sector involvement and with the Troika on ECB involvement. We also expect agreement with its official creditors on a 2nd bail-out. Greece is therefore likely to avoid disorderly default when its next bond redemption is due (which is on March 20, but a seven-day grace period applies).

■ To remain in the euro area, the Greek government needs to exhibit a minimum degree of compliance with the fiscal and structural conditions of the bail-out programme. Alternatively, it could choose to temporarily cede authority over certain budgetary decisions to EU/EA representatives.

To read full report: ECONOMICS VIEW

>NAVA BHARAT VENTURES LIMITED: Continues to remains an ideal play on Indian Power Sector

NBVL came out with lower than expected set of numbers due to lower power generation on the back of forced and planned maintenance outage of its power plant. However, this adverse impact on Power business was neutralized to some extent by improved contribution from Ferro Alloys & Sugar segment, leading to YoY decline of 34% in net profit to INR 325 mn
(+33% QoQ). Improving merchant power rates & scheduled commissioning of 214 MW power plant will lead to improved contribution from power segment. We maintain a BUY rating on the stock with a target price of INR 298.

■ Higher fuel cost & maintenance shutdown - dents profitability
Revenues declined by 5% YoY to INR 2336 mn (-10% QoQ) led by 11% decline in power division's revenue to 1134 mn (accounting for 41% of total revenue), on the back of 19% decline in volumes to 315 MU. Power segment's operation was impacted due to the forced and planned maintenance outage (for 45 days at its Orissa unit) resulting in reduced generation (a YoY decline of 75 MU).

Despite 11% surge in merchant power realisations to INR 3.73/ unit (+13% QoQ), PBIT of power segment declined by 64% YoY to INR 167 mn due to increased cost of fuel.

■ Improved performance from Ferro Alloys segment
Ferro Alloys segment registered 8% YoY increase in revenues to INR 1301 mn led by 40% surge in volumes to 27882 tn. Volume growth was driven by 26% increase in Silico Manganese volumes & over 3x surge in ferro chrome sales due to commencement of Ferro Chrome conversion contract with Tata Steel. PBIT increased by ~25x YoY to INR 197 mn (+6% QoQ) aided by 1449 bps improvement in margins. This was on the back of better margins from sale of silico-manganese alloys & fixed margin of INR 1000/tn earned from contract with Tata Steel.

■ Merchant power rates on the boil
NBVL expects merchant rates to remain firm at-least for next 4-6 quarters due to low capacity additions and unavailability of fuel, resulting in continuing power deficit. It has already contracted its merchant capacity at an average rate of INR 4.5/unit for the period Jan 12-May 12. The company realized ~INR 3.8/unit as blended merchant power rates in 9MFY12. We expect NBVL's blended merchant power realisations to improve to INR 3.9/kwh and INR 4.1/kwh in FY12 and FY13 respectively.

■ Expansion plans on track
Domestic operations: NBVL has secured approval from the Ministry of Environment and Forests for its 64 MW power plant in Orissa and is all set to commence operations by Q4FY12. The construction of the 150 MW Paloncha plant is ahead of schedule and is on track for commissioning by Q4FY13. 

 International operations: Coal extraction has commenced in
Q3FY12 and subsequent sale of high grade coal is expected to commence from April 2012 onwards. The 300-MW mine mouth thermal plant in Zambia has secured most clearances, and
principal contracts are under finalisation. The plant is all set to start operations by FY15.

■ Outlook & Valuation
Nava Bharat Ventures continues to remains an ideal play on Indian Power Sector. Massive capacity additions lined up in power segment will hold the company in good stead.
At the CMP of INR 184, the stock trades at a P/E, P/BV and EV/EBIDTA of 7.1x, 0.7x and 4.6x respectively its FY13E earnings. Subsequent to dismal performance registered by NBVL, we have reduced FY13E EPS estimates from INR 27.7 to INR 25.9. We maintain our BUY rating on the stock and with SOTP based target price of INR 298.

To read full report: NB VENTURES 

>JSW STEEL: Lower volumes/higher costs; Delays in captive raw materials; Deterioration of performance in US plates/pipes business; Delays in Ispat cost-cutting

■ Receding uncertainties — We upgrade JSW Steel (JSTL) to Buy from Neutral as: 1) Ore availability should improve gradually on positive Karnataka developments – helping reduce average ore procurement costs; 2) Capacity utilisation should continue the uptrend – helping reduce costs and improve profitability; 3) Falling raw material costs; 4) Better domestic steel demand which has rebounded to 7.7% in 3QFY12. While JSTL has rallied from its bottom, we see further upside from current levels and it is now our Top Pick in the steel space.

 Earnings revision & increased TP — We raise FY12E/FY13E consolidated PAT 6%/9%, but cut FY14E 21% (mainly due to higher raw material costs & lower profits from subs). We value the India business at 5.5x EV/EBITDA, JSW Ispat at 5x EV/EBITDA, the US business (operating at 15-40% utilization levels) at 1.5x EV/Sales (prev. 3x; higher volumes but continued losses), and Chilean iron ore at 8x PE (prev. 7x; shipping commenced). Roll forward to Mar-13E (prev. Sep-12E) for a TP of Rs920 (prev. Rs631).

 Expansion: Lower costs & higher value — Current expansion plans will help reduce costs and increase value-add. Cost savings from: 1) Captive power to rise by 300MW to 830MW by Mar-12 (meeting 100% at Vijaynagar); 2) Iron ore beneficiation from 10mtpa to 20mtpa by Sep-12 (more usage of lower quality ore); 3) Own coking coal (10-15% of usage in FY13-14); 4) Own iron ore mine restart (taken at 50% utilisation; upside risk in FY13). Value-add from: 1) Hot rolled coil capacity rising 1.5mtpa to 8.2m tpa by Sep-12; 2) Gain from cold rolled steel capacity rising in stages by end-FY14 (2mtpa to 4.3mtpa).

 Ore availability to improve — Press articles indicate the CEC has recommended that ~45 mines (of ~166 in Karnataka) be allowed to mine as soon as the mining ban is lifted and some more (~70) after paying penalties. As JSTL has limited captive ore, the Supreme Court decision on re-start of Karnataka mines is key to future output as eauction stocks will soon be exhausted, making alternative ore essential.

 Downside risks — Lower volumes/higher costs; Delays in captive raw materials; Deterioration of performance in US plates/pipes business; Delays in Ispat cost-cutting.

To read full report: JSW STEEL

>JAIPRAKASH POWER: (1) funding NCD repayment, (2) forest clearance for Dongri-tal II & (3) use of captive coal in Bina

 Better than expected quarter on higher VERs and merchant rates
JPVL’s 3Q12 results have surprised us with PAT reported at Rs595mn against our estimate of Rs317mn. The performance is driven by (1) higher revenues booked from sale of Verified Emission Reductions (Rs292mn,+30% yoy) and (2) better merchant realizations at Karcham (Rs4.7/unit). Net revenues grew by 162% to Rs3.7bn while gross generation volumes grew by 75% to 1.2BU. EBITDA margins have improved by 648bps yoy to 90%, though declined by 362bps sequentially.

■ Fine tuned our estimates, revise FY12E/FY13E EPS by -0.9%/-1.1%
We have done some fine tuning of our numbers to incorporate better than expected realizations at Karcham during FY12E, higher revenues from VER and lower other income. Consequently we revise our FY12E/FY13E EPS by -0.9%/-1.1% respectively.

■ Many issues addressed; clarity on a few yet to emerge
Many of the issues faced by JPVL have been addressed with (1) Offtake at Karcham after favorable HC order (though SC case pending); (2) management putting on hold all the under development projects (Karchana, Lower Siyang etc) resulting into limited funding and fuel requirement, (3) Govt’s softened stance on no-go and forest approvals. However we would like to wait for further clarity over 1) funding for NCD bullet payment in Feb 2013, 2) forest clearance for Dongri Tal II mine and 3) approval for use of captive coal mine for Bina, to blend with linkage coal. One more big risk that we see is, in case HP levies water cess – Karcham being a merchant power plant would be impacted severely. However, as of now there is no indication/proposal.

■ Clarity awaited over funding and coal

We believe that the stock is fairly valued at CMP, factoring in current operational and under construction projects along with upsides from the issues that are being addressed recently like HC order providing clarity over Karcham offtake (pending before SC) and funding concern for capex has eased out after management putting under-development projects on hold. However, we believe that JPVL will require equity infusion of at least Rs10bn for repayment of NCDs as BS will be under stretch with D/E expected to increase over 5 times by FY13E. Moreover JPVL is waiting for forest clearance for Dongri Tal-II and approval to use excess coal for Bina. Thus, in our view, further clarity is required to emerge over these issues to trigger any further upside in the stock. After the recent run-up, we downgrade the stock from Buy to Hold with TP of Rs45 (no revision).

To read the full report: JP POWER

>ONGC: Uncertainty on subsidy sharing prevails

As expected ONGC reported a weak set of numbers in Q3FY12 owing to higher than expected subsidy burden of Rs125bn (about 38% sharing for upstream during 9MFY12). Operationally however, crude and natural gas production was largely in line. Earnings got boosted due to reversal of Rs31bn royalty payment from Cairn for the period August 2009 till September 2012. We believe there is still concern over ad-hoc subsidy sharing for upstream which we assume will be higher at 44.5% for FY12E.

 Revenues decline due to higher subsidy outgo: ONGC reported Rs185.1bn in revenues, a decline of 11.0% YoY and 19.2% QoQ due to the higher subsidy burden. However, this included the component of entitlement for Royalty paid for Cairn of Rs6.2bn.

 Crude production marginally down QoQ; gas production flattish: Crude production declined marginally from 6.04mmt in Q2 to 5.96mmt in Q3 while natural gas production remained fattish at 5.86bcm. Although crude production is likely to remain flattish in near term, gas production could move up with incremental production from marginal fields. Due to higher subsidy burden the net realisation for Q3 declined to US$45.0/bbl from US$83.7/bbl in Q2.

 DDA jumps, one time payment from Cairn supports bottom line: Dry wells write offs jumped from Rs11.8bn to Rs20.5bn sequentially. Depletion also increased from Rs15.0bn to Rs18.3bn due to expenditure on platforms for marginal fields. ONGC paid Rs125bn subsidies for the quarter thus impacting the bottom line. Conversely, it received Rs31.4bn payment from Cairn for the royalty paid from August 2009 to September 2012 which partially offset the impact of higher subsidy burden. Thus, the company reported PAT of Rs67.4bn against PAT of Rs47.4bn adjusted for Cairn payment.

 Subsidy sharing uncertain, operational issues at OVL: Upstream subsidy burden for 9MFY12 has been pegged at 38% while for FY12E this would increase to over 44.5% due to higher quantum of under-recoveries (our estimate of Rs1,340bn for FY12E) which is likely to be a concern for the time being. Also, the management indicated that it was facing some production issues in Sudan and Syria which could hurt OVL performance. Imperial Energy crude production is also not moving up and has been stable at about 14,000- 15,000bpd. However, the company could get some respite from Venezuelan crude production which is likely to start from December 2012 with an initial rate of about 20,000bpd, reaching a plateau at 400,000bpd by 2016. We believe the uncertainty over subsidy sharing will remain a key concern for the time being. Despite marginally toning down our estimates for FY13E, we estimate an upside of 13% from current levels and hence maintain ‘Buy’ rating on the stock with a target price of Rs319 (earlier Rs327).


>POWER GRID CORP OF INDIA: 3QFY12 earnings – Actual vs. Consensus; Solid 3QFY12; capitalisation broadly on track

■ 3QFY12 – Sales, EBITDA in line, net profit 12% above forecast
At Rs8.1bn, PWGR’s 3QFY12 net profit was 12% and 10% above our and consensus forecasts, respectively; while revenues / EBITDA were in line with our forecast (2%/4% above consensus), the positive surprise at the bottom line was on account of lower-than-expected ‘net’ interest outgo, and an exchange fluctuation ‘gain’ (elaborated below). If we were to normalise for the net exchange ‘gain’, 3QFY12 adjusted net profit would be Rs781mn – still 8% and 6% above our and consensus forecasts, respectively.

■ 9MFY12 capitalisation at Rs63bn; our FY12F target (Rs88bn) appears in sight
We understand that incremental capitalisation in 3QFY12 stood at ~Rs22bn, expectedly lower than the Rs32.5bn capitalisation in 3QFY12. As 9MFY12 capitalisation stood at Rs63bn, while our FY12F capitalisation (Rs88bn) appears very much achievable, management’s long-standing FY12 capitalisation target of Rs100bn may just be a stretch – we expect more colour on this at the 10 Feb analysts’ meeting.

■ Transmission revenues up 10.4% q-q, a tad above our forecast
At Rs22.5bn, 3QFY12 transmission revenues posted a 10.4% q-q rise (up 18% y-y), which was largely expected as capitalisation in 2QFY12 was back-ended and Phase-I of the Mundra UMPP transmission system was capitalised on 1 Oct, 2011. However, overall revenues were a tad below our forecast (but 2% above consensus) as revenue from shortterm open access (STOA) and telecom business lines came in over 20% below expectations. We note that rebate to customers during the quarter stood at 0.6% of transmission revenues, sharply lower than ~1.3% in 1HFY12, potentially indicating lengthening of the revenue recovery
period (debtor days).

■ Positive surprise on lower ‘net’ interest outgo, f/x fluctuation ‘gain’
At Rs3.6bn, 3QFY12 net interest expense (excluding rebate to customers and exchange fluctuation gain/loss) was ~7% below our forecast. Notably, despite the magnitude of INR/USD depreciation in 3QFY12 being similar to 2QFY12, PWGR posted an exchange fluctuation gain of Rs110mn (vs. our forecast exchange fluctuation loss of ~Rs600mn) on account of: (1) reassessment of f/x loss recoverable from beneficiaries on the back of a Dec 2011 clarification from the regulator (CERC) given to a regulated return generating company, and (2) PWGR adopting Rule 46A provision (notified by the government on 29 Dec, 2011), which allows capitalisation of exchange variation loss on account of settlement/restatement of long-term monetary liabilities related to depreciable capital assets. Had PWGR not adopted the Rule 46A provision (which is now the default policy going forward), net profit would have been lower by Rs314mn, implying an adjusted net profit of Rs781mn (still, 8% and 6% above our and consensus forecasts, respectively)

■ We await management’s commentary at 10 Feb analysts’ meeting
At PWGR’s upcoming analysts’ meeting in Mumbai (on Friday, 10 Feb), we particularly await management’s commentary regarding: (1) capitalisation/ capex outlook (and its broad build-up) for FY12/FY13 and the XIIth Plan; (2) debtor days, payment realisation from SEBs, and (3) revenue growth and profitability prospects of ancillary business lines. 

■ Maintain BUY, we believe long-term mid-teen EPS growth prospects remain intact
PWGR remains our top pick in the power utilities space; prospects of mid-teen FY11-17F EPS CAGR remain intact, in our view. On our FY13F earnings forecast, the stock trades at 14.4x P/E and 2.0x P/BV, implying a 15%/10% discount to its three-year average rolling one-year forward multiples, and a 7% premium to NTPC on its FY13F P/BV multiple (in line on P/E).


>NATIONAL ALUMINIUM COMPANY LIMITED: Q3FY12 – Net sales declined owing to dismal performance from Aluminium division

• NALCO’s net sales for Q3FY12 showed a marginal growth of 0.4% on Y-o-Y basis, while on a sequential basis net sales de-grew by 10.2%.
• EBIDTA margin declined by 2,258bps, this was mainly on account of decline in realisation of Aluminium division and simultaneous increase in total expenditure.
• As a result of dismal performance from Aluminium division PAT for Q3FY12 declined by 80% on Y-o-Y basis.

Result Highlights

Positive Y-o-Y growth from Chemical and Electricity division, could not offset de-growth from Aluminium division
• The Y-o-Y decline in top-line was primarily on account of de-growth in revenue from Aluminium division. Aluminium division which accounted for 51.2% of the total revenue in Q3FY12 de-grew by 2.3% Y-o-Y. Owing to higher input costs and low LME prices 120 pots out of 960 pots were shut as a result of which the production of Aluminium metal was lower by 16.2% Y-o-Y and sales volume were lower by 4.9% Y-o-Y.
• Where as the other two divisions, Chemical and Electricity which accounted for the balance 48.8% of total revenue grew by 24.9% and 86.7% respectively on Y-o-Y basis.
• The EBIT for the Aluminium continued to report loss for both Q2FY12 and Q3FY12.

Valuation & Viewpoint
At current market price the stock is trading at 10.14x its EV/EBIDTA and 18.26x its P/E (trailing 12 months). The average P/E of the sector stands at 12.84x. Given the continued decline in revenue as well as continued loss from an Aluminium division, we believe that at current price the valuations are stretched and could result in the stock correcting in the future.

Concall highlights
• During the quarter company had shut 120 pots out of the total 960 pots; however company
expects to resume operation depending on the cost dynamics. Given the lower Y-o-Y LME
Aluminium prices and expected increase in use of imported coal on account of quality
issues relating to domestic coal, we believe company might not restart its 120 pots which
were shut in Q3FY12 at least in Q4FY12.
• NACLO has completed its 4th stream of Alumina production during Q3FY12 and company
expects to operate new unit at 80% utilization levels in Q4FY12 adding around 1lac MT to
sales volume of Alumina in Q4FY12.
• Q3FY12 results included an expense of `380mn pertaining to employee expenses which
were one time in nature.
• As a result of commissioning of its 4th stream of Alumina and also with employee expense
expected to decline by Rs 380mn sequentially in Q4FY12 as Q3FY12 included employee
expense which was one time in nature. Hence, we belive this would have a positive impact
on company’s margins by about 260bps sequentially.