Tuesday, February 14, 2012

>The worst-case scenario for Greece and Portugal: What effects?

Let us assume that the worst-case scenario for Greece and Portugal unfolds: their fiscal solvency does not improve and they decide to default completely on their public debt, for all the holders.

- What would be the effects in that case?

- they would not leave the euro, given the weight of their imports;

- they would have to nationalise and recapitalise their banks;

- if their banks went bankrupt, the European System of Central Banks would incur losses on their holdings of Greek and Portuguese debt, both directly and as collateral for repos to Greek and Portuguese banks;

- the losses for other euro-zone banks (non-Greek or Portuguese) would amount to 0.2% of their total assets, which is very little; those for non-bank investors of all kinds would amount to 5% of their total assets, which is considerable;

- after the default, the fiscal solvency of Greece and Portugal would practically be restored; these two countries’ external solvency would be greatly improved;

- the contagion to other euro-zone government bonds would probably be quite limited, which would not have been the case one year ago.

We imagine that the worst-case scenario in Greece and Portugal unfolds: a total and across-the-board default on their public debt (Charts 1A and B). It may be impossible to avoid this default, given the irreversible deterioration in their fiscal solvency: negative growth (Chart 2), making the restrictive fiscal policies inefficient in terms of reducing the fiscal deficit (Charts 3A and B), which is already the case in Greece; fall in public (Chart 4A) and productive investment (Chart 4B), leading to a loss of potential growth.

To read the full report: WORST-CASE SCENARIO

>THERMAX: Declining orders are a concern

Action: Medium-term concerns, valuation drives stock downgrade Thermax’s Q3FY12 order inflow fell ~40% y-y, thus driving a 19% y-y decline in its orderbook. Continued deferral of order inflow in the power utility sector and the industrial customers has raised concerns on Thermax’s medium-term revenue visibility. Weak results and dismal management commentary concur with our view of risks to medium-term revenue growth and margins. Despite being strongly managed, we believe it would be difficult for the company to escape from cyclical pressures.

 The Projects business faces medium-term concerns due to the industrial slowdown and rising competition, despite slowing demand.

 Slower order inflow and rising competition in the utility space are likely to lead to slower sales growth over FY12-13F, though longer-term order flow will be driven by demand pick-up from process industries.

 While we had first highlighted slowdown concerns in our Anchor report Assessing earnings risk, the order inflow and margin outlook has worsened further since then, thus driving our earnings cut by 5-15%.

■ Catalysts: Macro factors to drive stock performance
Continued delay in policy reforms, industrial capex, poor order inflows and sustained high levels of commodity prices are key negative catalysts.

■ Valuation: Trading at ~18x FY13F EPS; downgrade to REDUCE
At ~18x FY13F EPS, Thermax is now trading at the upper end of peer group evaluation and its own historical trading band. We continue to value the stock at 14x Sep-13F EPS which is in line with 12-year mean multiple for TMX. With ~10% downside, we downgrade TMX to REDUCE.

To read the full report: THERMAX

>JK CEMENT: Stellar performance, maintain Buy

JK Cement’s Q3FY12 PAT at Rs435mn was significantly above ours (est.:Rs304mn) and Bloomberg consensus estimates of Rs204mn primarily due to steep improvement in realization of grey cement (Rs3,757/tonne vs. Rs2,927/tonne in Q3FY11 and Rs3,323/tonne). EBITDA increased 120.3% YoY (and 100% QoQ) to Rs1.2bn and EBITDA margin improved 795bps YoY (and 773bps QoQ) to 19.4%. Cement prices continue to remain firm in the key markets of the company (South and North regions) and hence, grey cement realization increased Rs820/tonne YoY (up 27.9%) and Rs434/tonne QoQ (up 13% QoQ) to Rs3,757/tonne. We have factored in higher cement prices for the company due to prolonged sustainability of cement price at higher levels in the South region despite industry utilization rate of 60-65% over the past one year contrary to our expectation of a decline in cement prices due to lower utilization rate. On the back of higher realization, adjusted PAT of the company increased 9.3x YoY to Rs971mn (88% of Bloomberg consensus estimates for FY12E) in 9MFY12E and hence, we believe that consensus estimates of the company would see a significant revision. We have revised our EPS estimates by 39.5%/38.1%/2.6% for FY12E/FY13E/FY14E to Rs21.9/Rs24.8/Rs28 respectively considering higher realization of grey cement. We maintain Buy on the stock with a revised price target of Rs204 (earlier: Rs167), an upside of 50.9% from CMP.

 Improvement in grey cement realization and sales volume lead to higher revenues….: Revenue of the company increased 29.9% YoY to Rs6.2bn led by 27.9% YoY growth in grey cement realization to Rs3,757/tonne and 18.7% YoY growth in white cement realization to Rs15,537/tonne. Grey cement sales volume grew 6.5% YoY to 1.27mt (including Clinker sales of 0.04mt).

 ….. Leading to significant increase in EBITDA and profits: Driven by improvement in realization of both grey and white cement, EBITDA of the company increased 120.3% YoY (and 100% QoQ) to Rs1.2bn. EBITDA margin improved 795bps YoY (and 773bps QoQ) to 19.4%. Profit of the company increased 23.8% YoY (and 12.2% QoQ) to Rs435mn.

 Significant improvement in earnings in 9MFY12: Profits of the company increased 9.3x YoY to Rs971mn in 9MFY12 primarily due to 16% YoY increase in grey cement realization in the same period. EPS of the company for 9MFY12 stands at Rs13.9 against Rs1.5 in the same period last year.

 Earnings estimates revised upwards: We revise EBITDA estimates upwards by 17.2%/17.9%/2% to Rs4.5bn/Rs4.7bn/Rs5bn for FY12E/FY13E/FY14E to factor in higher realizations in key markets of the company. Our EPS estimates stand revised upwards by 39.5%/38.1%/2.6% to Rs21.9/Rs24.8/Rs28 for
FY12E/FY13E/FY14E respectively.

 Maintain Buy on attractive valuations: At the CMP, the stock trades at 4.8x FY14E EPS, 3x EV/EBITDA and EV/tonne of US$46.1. We maintain Buy on the stock with a revised price target of Rs204 from Rs167 earlier considering the improvement in realizations and operating margins due to lower pet coke price and higher realizations.



 In Q3 FY12, City Union Bank’s (CUB) NII grew 17.3% YoY to ` 1.2bn — in line with our estimates. However, NIM fell to 3.24% from 3.48% in Q3 FY11 and 3.41% in Q2 FY12.

 Operating expenses rose 34% to ` 686mn, whereas other income grew 40% to ` 508mn from ` 363mn in Q3FY11, resulting in a 17% YoY jump in operating profit to ` 1.05bn (Dolat est: ` 1.01bn).

 CUB reported a bottom-line of ` 722mn compared to our estimates of ` 628mn and consensus estimate of ` 677mn. Sharp decline of 67% YoY in tax expenses to ` 71mn from ` 215mn aided bottom-line growth.

 During the quarter, gross NPA ratios largely remained stable at 1.17% on sequential basis. Provision coverage ratio decreased to 76% from 79% in Q2 FY12. Overall, asset quality remains firm, though the bank made lesser NPA provisions.

 We see business growing 28% CAGR in FY11-13. We factor in margin compression of 25bps in FY12 as well as FY13 to 3.07% and 2.82% respectively (yearly average). We estimate that CUB will report RoAA of
1.3-1.6% and RoAE of 19-24%.

■ We increase our FY12 earnings estimates by 6% due to better asset quality; however, we maintain our FY13 earnings estimates and target price at ` 53 at 1.5x adjusted book value FY13. We reiterate our Buy rating on the stock with a potential 23% upside. At current market price, it trades 1.2x FY13 (ABV) respectively.

Strong business growth: In Q3 FY12, City Union Bank’s (CUB) total business grew 29% YoY to ` 264bn. Deposits and gross advances grew 28.7% and 29.5% to ` 154bn and ` 110bn respectively. Credit-deposit ratio slightly increased to 71.5% from 71.1% in Q3 FY11. On the deposits side, the CASA share declined to 16.8% from 18.64% in Q3 FY11 and 17.9% in Q2 FY12 account of a sharp rise in term deposits (up 32% YoY) as compared to only 16% growth in CASA deposits.

On the credit book side, trading & MSME loans, which earn higher yields, constitute over 50% of the credit book. CUB’s major industry exposure is to textile and iron & steel industries.

The management expects 25-28% growth in FY12; we expect business to expand 28% CAGR in FY11-13. We also expect CUB’s credit book and deposits to grow 28.7% and 27.6% CAGR respectively in FY11-13. On the credit book front, growth will mainly come from the MSME and agriculture sectors. Rapid branch expansion and entry into new geographies will aid low-cost deposit mobilization.

Slight strain on margin: A sharp rise in term deposit mobilisation resulted into 11-bps sequential increase in cost of deposits; further 11-bps decline in yield on advances impacted margins. Difficulty in passing on the higher liabilities cost led to 17-bps QoQ decline in NIM to 3.24% from 3.41% in Q2 FY12.

Operating expenses led by branch expansion: In Q3 FY12, the bank added 2 branches and 27 ATMs, taking the total branch network to 286 branches and 378 ATMs. This resulted in slight higher operating overheads.

The cost-income ratio increase to 39.5% from 36.2% in Q3 FY11 and fell from 40.1% in Q2 FY12. On the back of better operating efficiencies in place, we expect CUB’s C-I ratio to remain in the range of 41-44%.

Better asset quality on sequential basis: During the quarter, CUB’s gross NPAs rose 18% YoY and 4% QoQ to ` 1.3bn. Gross NPA ratios sequentially remained stable at 1.17%. Net NPA ratio increased to 0.51% from 0.42% in Q2 FY12. The net and gross NPA ratios declined YoY by 2bps and 11bps respectively. Provision coverage ratio decreased to 76% from 79% in Q2 FY12. Overall, asset quality remains firm, though the bank made lesser NPA provisions.

On the restructured loan book front, at the end of Q3 FY12, total outstanding stood at ` 2.8bn. Almost 88% of the restructured loan book completed one year of principal repayment after the moratorium. Most of CUB’s credit books were secured by collaterals, adding buffer to asset quality.

We increase our FY12 earnings estimates by 6% due to better asset quality; however, we maintain our FY13 earnings estimates and target price at ` 53 at 1.5x adjusted book value FY13. We reiterate our Buy rating on the stock with a potential 23% upside. At current market price, it trades 1.2x FY13 (ABV) respectively.

>MAHINDRA & MAHINDRA: Combined results for M&M+MVML in line; Maintain Buy

Mahindra & Mahindra’s (M&M) 3QFY12 standalone operating results were disappointing with adjusted EBITDA margins at 11.7% (adjusted for exchange gain of Rs.398mn) compared to our estimate of 13%. However, EBITDA margins combined for M&M and MVML (Mahindra Vehicles Manufacturing Limited) stood at 13.3%. MVML is a 100% subsidiary of M&M set up at Chakkan with a capacity of 270k units and currently manufactures Genio, Maxximo and XUV500 range of vehicles. Also while the standalone PAT was lower than our estimate by 6%, combined with MVML, the reported PAT stood in line at Rs.7.1bn against our estimate of Rs.7.1bn. Going forward, we believe that it makes sense to look at the combined financials for M&M and MVML as this represents a more realistic picture of its Auto operations. Our dealer check indicates long waiting period for its Automotive portfolio (Scorpio - 15-30 days, Bolero – 2 months for ZLx models and 10 days for the rest, Pick-ups – 1month). We continue to remain positive on the stock and maintain BUY with a revised target price of Rs.813 (earlier Rs.855).

 Operating results in line combined for M&M+MVML: While standalone numbers disappointed, combined figures for M&M+MVML were impressive. Combined EBITDA margins stood at 13.3% (adjusted for forex gain) and PAT stood at Rs.7.1bn in line with our estimate.

 Conference call highlights: 1) Management expects tractor sales to remain flat over the next 2 months. It guided for 8-10% volume growth for the segment for FY13E, if monsoons were healthy 2.) Capex guidance for M&M and MVML stands at Rs.56bn over next 3 years and Rs.20bn for investments 3.) XUV500 has been received well with 25+K applications; management indicated another price hike after the 7,200 units (out of 25k applications) are delivered.

 Valuations and Recommendations: At the CMP of Rs705, the stock is trading at 11.5x FY12E core EPS of Rs40 and 11.3x FY13E core EPS of Rs41. We continue to remain positive on the company and maintain BUY rating with a revised target price of Rs813, valuing the stock at 14x FY13E Core EPS + subsidiary value of Rs244 and assign 15% to holding co discount.


>TRIVENI ENGINEERING & INDUSTRIES: Higher sugarcane price hurts profits

Triveni Engineering & Industries’ (TEIL) Q1SY12 result was below our estimates with EBITDA at Rs215mn against our estimates of Rs449mn and operating margin at 5.1% vs. est. 10.1%. EBITDA was adversely impacted due to inventory (of previous year) valuation write-down of Rs250mn. The company reported adjusted loss (adjusted for Rs790mn paid for sugarcane in crushing season 2007-08 after the recent Supreme Court judgment) of Rs108mn against profit of Rs16m in Q1SY11. Sugar business during the quarter was impacted because of higher sugarcane price coupled with lower sales volume (down 19.5% YoY) and reported EBIT level loss of Rs229mn against profit of Rs59mn in Q1SY11. In the Engineering segment, Gear business was adversely impacted due to general economic slowdown and reported revenue decline of 24.4% YoY and EBIT decline of 39.8% YoY to Rs42mn. However, the management expects the performance of this division to improve in Q2 as it believes that off-take by OEMs should improve going forward. We believe that the profitability of the company would be under pressure given the higher State Advised Price (SAP) (Rs240/quintal vs. Rs205/quintal in SY11) fixed by the Uttar Pradesh State government and pressure on sugar prices as higher production is expected in SY12E. However, we maintain Buy rating on the stock on account of attractive valuations with target price of Rs23 (upside of 20.6% from CMP).

 Disappointing performance of sugar segment: Sugar division reported EBIT level loss of Rs229mn against profit of Rs59mn in Q1SY11 (and Rs157mn in Q4SY11) driven by 19.5% YoY decline in sales volume to 0.10mt and higher sugarcane price paid to farmers after the increase in SAP (State Advised Price) by the Uttar Pradesh government. The profit was impacted adversely due to inventory (of previous year) valuation write-down of Rs250mn. Realization of sugar improved 6.5% YoY to Rs28.5/kg.

 Improvement in realization leads to better performance of distillery segment: Led by 2x YoY sales volume increase and 20.6% YoY in realization, revenue from the distillery segment went up 141.9% YoY to Rs310mn. EBIT of this segment increased 4.8x YoY to Rs55mn and EBIT margin improved 878bps YoY to 17.7%.

 Increase in cane crushing and sugar production during the quarter: Sugarcane cane crushing increased 25% YoY to 1.8mn tonnes during the quarter and sugar production increased 20% YoY to 0.15mt. Recovery rate was 37bps lower at 8.6% during the quarter, however, recovery rate is expected to improve going forward as the crushing of new plant crop starts in February.

 Maintain Buy on attractive valuations: The stock is trading at 0.56x SY12E P/BV and 0.69x SY13E P/BV. We maintain Buy rating on the stock with a price target of Rs23, an upside of 20.6% from the CMP. The key triggers for the stock would be a) sustainability of sugar price at higher levels b) more allowance for export and c) court ruling in favour of sugar mills in the ongoing case for higher sugarcane price fixed by the Uttar Pradesh state government for SY12E (as per the management the high court of Uttar Pradesh has reserved its judgment).


>BRIGADE ENTERPRISES: 3Q earnings disappoint, office demand strong; Reiterate Buy

 3Q earnings below expectation; Reiterate Buy
Brigade reported disappointing 3Q earnings at Rs104mn (against our expectation of Rs170mn) primarily due to higher interest costs and lower revenue recognition. Positively EBIDTA margin saw sharp rebound. We reiterate our Buy rating with a lower PO of Rs100 (-9%) with potential upside of 40% from current levels. We have cut our PO to factor in a delay in residential launches and six month delay in completion of its retail mall project. We continue to like the stock given strong rental growth visibility and good pipeline of residential launches in FY13.

■ Aggressive residential launches ahead
Brigade continues to aggressively look at new residential launches with another 5mn sq ft lined up over the next 6 months. It has seen strong response to its launches in last 18months with 60% of the inventory pre sold. But the benefit of these launches will start reflecting in revenues only from 2HFY13. We have cut our earnings estimate for FY12-14 by 4-25% to factor in higher interest cost and have also pushed the revenue recognition from new residential projects by 6 months to reflect the delay in launches.

■ Solid demand for its commercial assets
Brigade’s commercial projects in Bangalore have seen strong traction on leasing with its Summit project 95% leased and vacancy in WTC reducing to 35%. The benefit of the strong leasing should reflect in earnings from FY13. It has managed to sell 30% of its inventory in WTC with the latest transaction at Rs7000/sq ft against our estimate of Rs6000/sq ft. The retail mall (pre leased 85%) is expected to start operations from 4Q with rental accrual expected from 2QFY13.

■ Debt remains under control
The debt has remained flat in FY12 at Rs8bn given strong inflow from residential and commercial sale. Brigade expects to reduce debt by over 25% in FY13.