Monday, March 5, 2012


Results Highlights
■ The company has registered a robust revenue growth of 70.4% yoy to Rs. 4,106 mn, showing superior execution strength of the company. This strong execution was seen in the building segment as well as in the road projects viz., Manor Wada Bhiwandi, Nagar Kopargaon and Patiala Malerkotla.

 EBIDTA margins remained under pressure and declined by 34 bps yoy at 16.9%. This was mainly due to marginal rise in cost of materials as a percentage of sales by 332 bps yoy. Going ahead we expect the margins to remain between 16.5% to 17%.

 At the PAT level we saw a decline in margins by 179 bps yoy at 6.1%. The decline was mainly due to rise in interest cost as a percentage of sale by 185 bps yoy at 6.2% and in addition to that we also saw increase in cost of deprecation by 58.5% yoy which further dented the margins.

 Average cost of borrowing stands between 13% to 13.5%.

Other Highlights
 The present order book stands at Rs. 37,725 mn including L1 of Rs. 4,210 mn (49.4% Roads, 5.85% Bridges, 0.44% Railways, 41.62% Buildings, 0.27% Irrigation, 1.94% Power & 0.48% Others) which gives the revenue visibility for next 24 to 30 months. The order book to bill ratio stands at ~4.0x FY11 sales. During the quarter SIIL, added orders worth ~Rs. 8,123 mn and YTD order inflow stands at ~Rs. 14,354 mn. We saw improvement in order inflows from last quarter and management expect to maintain the decent flow of orders going ahead. Additionally, the company is targeting ~Rs 40 bn as its closing order book by end of FY12 while the outstanding bids as on date stands at ~Rs 25 bn.

 During the last quarter the company has added two new BOT projects viz., Sangli Shiroli in Maharashtra and Patiala Malerkotla, an ongoing project at Punjab which the company bought from the original concessionaire. Today the company has 9 BOT project of which two projects are operational viz., Kasheli Bridge and Nagar Kopargaon.

 Recently in the month of Jan, 2012 management entered into a Private Equity deal with 3i India Infrastructure Fund to off load 49% stake in its four road BOT projects for US$61 mn. The road BOT projects includes Panvel Indapur which is under a separate SPV and the rest i.e. Sangli Shiroli, Nagar Kopargaon & Ahmednagar Karmala which is under Supreme Infra BOT Holdings Pvt. Ltd., as informed by the management. This deal will help the company to bring down the debt levels, meet its project equity requirement (~Rs 5.4 bn) and will ensure early financial closure of projects. With this deal we can see improvement in margins and higher execution which will drive the top line going forward.

Valuation & Outlook
In view of the growing order book, efficient execution of ongoing projects, backward integration and improving track record, we expect the company’s top line to grow at a healthy CAGR rate of ~39% during FY11A to FY13E. We also expect that the operational BOT projects wpuld generate steady cashflow to the company going forward. At current market price of Rs 223.75 the stock is trading at a P/E multiple of 4.4x and 3.5x to its FY12E and FY13E EPS of Rs. 51.1 and Rs. 63.8 per share. We maintain ‘BUY’ with a target price of Rs. 304 per share with an upside of 36% based on SOTP method. For the construction business we arrive at a price of Rs 255 per share which discount FY13E EPS of Rs 63.8 by 4.0x. For BOT projects viz., Manor-Wada-Bhiwandi (MWB) and Nagar Kopargaon (NK), which are valued on NPV basis gives a value of Rs. 49 per share.



To read full article: WARREN BUFFET

>GLOBAL EQUITY STRATEGY: Multiple expansion

■ A slowing growth backdrop . . .
Global earnings growth is set to slow significantly in 2012 as the cycle matures. Further, ongoing public- and financial-sector deleveraging are apt to result in a persistently sluggish economic growth backdrop.

 . . . with mounting margin pressure
Another implication of the maturing cycle is increased margin pressure. Corporate profit margins have begun to roll over in recent quarters. Historically, these turns have been followed by anaemic earnings growth (which we detail below). In fact, in nearly half of the episodes we examined, earnings contracted over the 3-year period following a peak in profit margins.

 But multiples can expand
Within economic cycles, earnings growth and valuation multiples typically have an inverse relationship. So while we’re stuck with a lousy growth backdrop, the good news is that multiples do typically rise at this stage of the cycle. Further, the combination of undemanding current valuations and an elevated risk premium lend additional support to the re-rating case.

 Piecing it together: Total return expectations
We expect global earnings growth in the low-single-digit range over the next few years. Add the current 2.7% dividend yield and some modest multiple re-rating, and it’s not overly demanding to expect total returns in the high single digit range in coming years. This outlook is predicated, of course, on fading cyclical and systematic risks, which would allow the equity risk premium to moderate.

To read full report: EQUITY STRATEGY

>Sugar sector at a critical juncture

The Indian sugar sector stands at a cross road. The sector awaits to hear advance estimates of production from both Brazil and India as we enter the crushing season in a few of months in Brazil coupled with the advance estimates on acreage for India for the next sugar season. The Brazilian output estimates will be watched very closely, as the country emerges out of two consecutive years of bad weather conditions, which adversely impacted the production. The extent of recovery in production will be watched closely, as far as international sugar price expectations are concerned. On the domestic front, acreage increase/decrease will be watched closely, as arrears have started building up in the key cane growing states and the impact of the same on acreage will play a critical role, as far as expectation for the next years sugar cycle is concerned.

On the regulatory front, the Indian sugar millers are closely awaiting any incrementally positive news flow, as far as de-regulation is concerned. Given the pace of activity lately, partial de-control seems likely, though we are of the opinion that it would largely be in a phased manner. We are, hence, of the view that any news flow emerging out of India or Brazil which points towards lower production in the next sugar season would be incrementally positive coupled with positive news flow on the de-regulation front. On the negative side, higher than expected production and acreage gains in Brazil and India, respectively, may put pressure on sugar prices.

Key Highlights
 Global sugar markets: Regional dynamics at play
The sugar industry globally is dominated by two key producing countries — India and Brazil. Together the two countries account for ~38% of the total global production. While India is the key sugar consuming market globally, with total consumption being pegged at ~22-23 mn tonnes per annum (mtpa), Brazil is the largest exporter of sugar accounting for 46% of the total sugar exports in 2010-11. The global sugar market balance is largely determined by the policy measures at play within the various countries. In India, the sugar industry is largely protected and controlled by the government regulations ranging from fixing of minimum support price (MSP) of sugarcane to distribution of sugar. The European Union (EU) markets also adopt a similar policy for protecting the domestic sugar industry, however, post World Trade Organisation (WTO) negotiations in mid 2000; EU has started importing sugar from preferential countries. Further, as per the agreement signed between the WTO and EU, the EU’s total out of quota sugar sales (i.e. sugar exports) are capped at 1.35 mtpa. The Brazilian sugar industry, on the other hand, largely operates in a free market system with large government focus on development of ethanol, since the early 1980s. Hence, the prices in the world sugar markets are largely determined by the forces of demand and supply along with the government responses towards the sector within different countries and regions.

■ Global ethanol market: US and Brazil, the two dominant players Ethanol, also known as ethyl alcohol, is produced through the hydration of ethylene and via fermentation of agricultural produce such as sugarcane and corn. Ethanol is a low carbon emitting fuel as compared to hydrocarbons and has found its use world-wide as clean energy. Ethanol is used both as a blend and direct automotive fuel globally with countries promoting the fuel primarily on two counts (i) to reduce dependence on oil imports and (ii) to reduce carbon emissions. US and Brazil are the largest suppliers of the fuel contributing ~86.5% of global ethanol supply. The Brazilian ethanol market received a push, post the 1973 oil shock, wherein the government started the pro-alcohol programme with a view to reduce dependence on imported oil. Further, the government also provided tax incentives for the use of flexi fuel cars, which can run on 100% ethanol and gasoline.

To read full report: SUGAR SECTOR


The equity markets continued to build on the gains of January 2012 in February also. Many common investors missed out on the rally because they were waiting on the sidelines either in a bid to time the market or because they were simply petrified by a slew of negative news flow globally.

Timing the market is an obsession with many common investors or even some institutional investors. However, many successful fund managers and investment gurus do not worry too much about timing the market but rather focus on stock picking and valuations. Since inception of their funds, Warren Buffet and one of the most successful fund managers in India (Prashant Jain of HDFC Mutual Fund in case of HDFC Prudence Fund since 1994) have given close to 20% annualised returns over a period of decades without worrying about timing the market.

As they say, it is not about timing the market but the time in the market that really matters to the equity investors. And the equity market has its own ways to remind the same to investors. The recent sharp rally is a case in point.

No doubt, the equity market can test your conviction in the near term but investment decisions made at right valuations in quality stocks tend to generate healthy returns over a longer period of time. Analysis of the past data suggests that the market has given returns of over 100% in a period of three years if the investments were made at multiples of below 12x one-year forward earnings (one can adjust the consensus estimate to factor in the potential earnings downgrades).

After the sharp rally in the past two months, the major excesses of the pessimism in the valuations have been filled up now. Our research team points out that the Sensex’ multiple has moved up from just below 12x forward earnings to over 14x forward earnings and is only at a slight discount to the long-term average multiple of around 14.8-15x one-year forward earnings. From here on, the market’s re-rating will depend upon the domestic triggers, such as policy push and the Reserve Bank of India’s stance on the pace of monetary easing.

Do not rue the missed opportunity. The market seems to be taking a break to digest the sharp gains of the past two months and is waiting for the outcome of the major policy related events scheduled for this month. Moreover, there is always value to be explored in the broader market. There are still many quality stocks available at discounted valuations. Our research team’s endeavour is to help you identify some of these stocks that have a secular growth story and are available at reasonable valuations.

To read full report: PERILS OF TIMING THE MARKET

>The 25 Smartest Things Warren Buffett Ever Said

The most daunting task wasn't finding 25 memorable quotes -- it was in weeding out an overabundance of intelligence down to "just" 25 favourites.

25. "If past history was all there was to the game, the richest people would be librarians."

24. "The best thing that happens to us is when a great company gets into temporary trouble. ... We want to buy them when they're on the operating table."

23. "Someone's sitting in the shade today because someone planted a tree a long time ago."

22. "Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results."

21. "Managers and investors alike must understand that accounting numbers are the beginning, not the end, of business valuation."

20. "I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will."

19. "Time is the enemy of the poor business and the friend of the great business. If you have a business that's earning 20%-25% on equity, time is your friend. But time is your enemy if your money is in a low return business."

18. "You only find out who is swimming naked when the tide goes out."
Anyone can pick a winner in a bull market. Picking out winners in a declining market is where true greatness is found.

17. "[The] stock market serves as a relocation center at which money is moved from the active to the patient."

16. "The most common cause of low prices is pessimism -- sometimes pervasive, sometimes specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It's optimism that is the enemy of the rational buyer."

15. "It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently."

14. "Wall Street is the only place that people ride to work in a Rolls Royce to get advice from those who take the subway."

13. "Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac's talents didn't extend to investing: He lost a bundle in the South Sea Bubble, explaining later, 'I can calculate the movement of the stars, but not the madness of men.' If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases."

12. "You only have to do a very few things right in your life so long as you don't do too many things wrong."
        Very key point here. You don't have to be right all the time -- you just have to let your winners ride and cut your losers early.

11. "There are all kinds of businesses that Charlie [Munger] and I don't understand, but that doesn't cause us to stay up at night. It just means we go on to the next one, and that's what the individual investor should do."

10. "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

9. "Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years."

8. "I am a better investor because I am a businessman and a better businessman because I am no investor."

7. "I don't look to jump over 7-foot bars: I look around for 1-foot bars that I can step over."
Keeping your expectations realistic and in check are important when investing. There's never any shame in making a profit, no matter how small.

6. "Rule No. 1: never lose money; rule No. 2: don't forget rule No. 1."

5. "Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful."

4. "'Price is what you pay; value is what you get."

3. "We've long felt that the only value of stock forecasters is to make fortunetellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children."

2. "The stock market is a no-called-strike game. You don't have to swing at everything -- you can wait for your pitch. The problem when you're a money manager is that your fans keep yelling, 'Swing, you bum!'"
              You never "have" to buy anything. Waiting for the values to come to you will undoubtedly make you a better investor.

1. "When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever."

>GUJARAT GAS: BG stake sale to keep the stock price in check

Gujarat Gas (GGAS) reported dismal set of numbers for Q4CY11 with bottomline declining by 70.0% YoY and 69.4% QoQ to Rs247mn on the back of rupee depreciation and higher spot LNG prices. Since GGAS’ entire sourcing is dollar denominated, rupee depreciation took a toll on the operating performance, further hampering profitability. The company hiked CNG prices marginally during the quarter but did not raise prices for other segments. Q1CY12 would be a better quarter as the company raised prices for all the segments (industrial retail, PNG etc.) excluding CNG. Devoid of any new natural gas sourcing, distribution volumes remained stable during CY11 on a YoY basis. We have thus lowered our earnings for the company and downgraded our rating to Hold from Buy. However, we believe that the near term stock performance would be dependent on the pricing for BG stake sale.

 Realisations jump sequentially owing to price hikes: GGAS’ revenues remained almost stable QoQ at Rs6.5bn but average realisations jumped 3.5% QoQ at Rs20.4./scm due to the full effect of the price hikes effected during Q3CY11. Distribution volumes declined 3.7% QoQ to 3.4mmscmd due to seasonality factor.

 EBITDA/scm plummets to Rs0.7/scm: GGAS’ Q4 performance was impacted by over 16% QoQ jump in gas sourcing cost. Gas sourcing cost was higher due to rupee depreciation and higher spot LNG prices. Since GGAS’ entire gas sourcing is dollar denominated, the increase in sourcing cost devoid of any hike in gas prices led to EBITDA/scm declining to Rs0.7/scm from Rs3.3/scm in Q3 and Rs3.9/scm in Q4CY11. Operating profit thus plummeted by a massive 74.6% QoQ and by 76.8% YoY to Rs300mn.

 Higher other income supports bottom-line: Depreciation was in line at Rs155mn while other income jumped by 86.3% QoQ and 170.0% YoY at Rs209mn thus supporting the bottom-line. Higher gas sourcing cost led to GGAS’ worst ever quarterly performance for Q4 with PAT at Rs247mn declining 69.4% QoQ and 700% YoY.

■ Stock price to follow news flow on BG stake sale: GGAS’ Q4 performance was an aberration due to higher natural gas sourcing cost which is likely to reverse in Q1CY12 as the rupee is appreciating. Spot LNG prices have soothed and price hikes in industrial retail, PNG etc. are in place. We believe that concern still exists on gas sourcing as the company has not been able to show any serious increase in YoY distribution volumes. We have thus lowered our volume and EBITDA/ scm estimates for CY12E and CY13E. We have thus downgraded the stock to Hold from Buy based on our new estimates. However, we believe that the near term stock performance would be governed by news flow on BG stake sale.



Results Highlights
⇒ The topline of the company stood at Rs. 3,397 mn a growth of 26.9% yoy. Second half of the year being strong in term of execution which is being reflected in the topline of Q3FY12 and we expect the same run rate to continue. We saw good execution on the EPC front especially road segments. Management has informed that substantial construction work has commenced on newly procured road BOT projects.

⇒ EBIDTA margins stood at 15.3% a decline of 46 bps yoy, primarily due to higher operating expenses as a percentage of sales by 66 bps yoy. Management has guided to maintain its margins between 13% to 14%.

⇒ Adjusted net profit margins stands at 6.6% a decline of 208 bps yoy. High cost of borrowings, rise in depreciation and higher tax outgo resulted in reduction of margins. Interest cost as a percentage of sales stands at 4.6% a rise of 85 bps yoy. Average cost of borrowings for the company stands at 13% and we expect steady margins for the next few quarters.

Other Highlights
⇒ Order book of the company stands at ~Rs. 22.2 bn constituting 21 projects and the major order flow constitutes from govertment organization. The order book to bill ratio stands at 2.2x FY11 sales which gives us the revenue visibility for next two years. The fresh order inflow for last four months stood at ~Rs 11 bn while year to date fresh order inflow stood at ~Rs. 14 bn. Outstanding bids for various projects as on date stands at ~120 bn. We expect order inflow to improve which was not the case nine moths back which saw aggressive biddings. Now we see upward correction cycle in the industry which would increase the fresh order book inflow and we have estimated fresh order inflow of ~Rs. 30 bn in FY13.

⇒ On the BOT projects front company has started booking revenue on the Rimuli Roxy Rajamunda project, Orissa (Toll) where the company has 50% stake while, the balance is with SREI infra and company has made equity investment of Rs 250 mn as on date. The other two BOT projects i.e. Seoni Katangi, MP (Toll) bagged during second quarter and Waraseoni Lalbarra, MP (Toll + Annuity) bagged last quarter has achieved financial closure and substantial construction work has started as informed by the management. The new BOT project Bikaner Suratgarh, Rajasthan (Toll) bagged in the month of Jan 2012 in 50:50 JV with SREI Infra costing ~Rs. 5 bn is expected to achieve financial closure by end of FY12.

In view of the growing order book flow form NHAI, efficient execution of ongoing projects, backward integration and improving track record, we expect the company’s top line to grow at a healthy CAGR rate of ~30% during FY11A to FY13E.The company is well poised to capitalise on the opportunities and grow faster than its peers. The company is also diversifying into dedicated freight corridor which will give company an opportunity in different line of segment. With the increase in BOT project from one to five projects which will improve the cash flow of the company going forward. We maintain “Buy” on the stock with a target price of Rs 265, an upside of 50% from the present levels based on SOTP method of valuation.

Other Highlights
⇒ The toll collection at Seoni Balaghat Rajegaon operational BOT project for 9m FY12 stood at ~Rs. 103.2 mn and the management expects to achieve toll collection of ~Rs. 120 mn by end of FY12.

⇒ Recently the company has recommended as interim dividend of 15% which comes to Rs 1.5 per share on paid value of Rs. 10 per share.

The fair value of the company stands at Rs.265 per share using the SOTP method. We have measured the EPC business on P/E basis and BOT business on DCF basis

⇒ EPC Business
We have valued the EPC business on relative valuation basis by assigning P/E multiple to its standalone business. MBL EPC Business trades at a P/E of 4.2x and 3.0x to its FY12E and FY13E EPS of Rs. 42.1 and Rs. 59.6 which we think is available at a steep discount to its peers considering its high growth rate and healthy return ratios. Going forward we expect the valuation gap to narrow in the medium term and the company will trade at valuation in comparison to its peers. We have reached at standalone target price of Rs 238 per share, which is ~4.0x FY13E EPS of Rs.59.6 per share.

⇒ BOT Business
Seoni - Balaghat - Rajegaon, BOT project which is operational has been valued using DCF basis which gives a value of Rs.27 per share.

In view of the growing order book flow form NHAI, efficient execution of ongoing projects, backward integration and improving track record, we expect the company’s top line to grow at a healthy CAGR rate of ~30% during FY11A to FY13E.The company is well poised to capitalise on the opportunities and grow faster than its peers. The company is also diversifying into dedicated freight corridor which will give company an opportunity in different line of segment. Even addition of BOT projects form one operation project to current total of 5 projects will improve the cashflow of the company going forward.


>BAJAJ FINANCE LIMITED: Company is focusing on sweating the current network instead of expanding it

Bajaj Finance Limited (BFL), a subsidiary of Bajaj Finserv Ltd., is a leading and diversified NBFC in India. We like BFL due to its diversified portfolio, strong growth and healthy asset quality, and strong management. The company has a well-diversified portfolio bouquet with loan book spread across nine business lines and balanced in terms of scale and profitability. BFL has exhibited strong growth momentum with 75% CAGR growth in AUM over the last three years. The company has maintained healthy asset quality with net NPA of 0.3% in FY12E. Over the years, BFL has built pan-India presence, covering 225 points across India and more than 4,000 distribution partners and dealers. We recommend ‘BUY’ on the stock.

 Growth momentum to continue
AUM increased by 75% CAGR during the last three years from INR 2,539 crores in FY09 to current levels of INR 11,919 crores, expected to go to INR 16,000 crores by FY13E; the key contributors to growth are strong traction in existing businesses and entry into new segments. Within existing businesses, Consumer Durables and Mortgages business has strong momentum. The addition of Infrastructure Financing and Construction Equipment businesses will assist BFL in maintaining growth momentum; growth has been widespread with number of new loans disbursed increasing from 5,94,000 in FY09 to 17,19,000 in 9MFY12.

 Strong return ratios
During the last three years, return ratios have improved significantly - RoA has improved from 1.3% in FY09 to 3.8% in FY12E, while RoE has jumped from 3.2% in FY09 to 24.1% in FY12E. With interest rates expected to peak out, we do not see any risk in margins in the near future. There will be marginal dip in return ratios with the scale up of new, low-margin businesses like Infrastructure Financing, but it will assist in gaining scale. BFL will maintain its stance of keeping leverage around 6x.

■ Healthy asset quality
Over the past three years, there has been significant improvement in asset quality. Gross NPA ratio has reduced from 4.90% in FY10 to current levels of 1.3% in FY12E. During last two years, net NPA ratio has come down from 2.2% in FY10 to current levels 0f 0.3%. Long-term sustainable net NPA ratio is expected to be 60-75 bps. The provision coverage ratio has increased from 55% in FY10 to current level of 81%.

 Outlook and valuations: Positive; ‘BUY’
On the back of 75% CAGR in AUM over the last three years and launch of new business lines like Construction Equipment and Infrastructure Financing, we expect PAT CAGR of 75% during FY10-13E, with RoE in excess of 22%. At current market price of INR 810, the stock is trading at 1.6x FY12E and 1.3x FY13E P/BV. We recommend ‘BUY’ with a target price of INR 1000, an upside of 23%.

Investment Rationale
■ Diversified loan book
Over the years, BFL has moved from financing only Bajaj Auto vehicles to a well-diversified loan
book. The loan book has been divided into three main categories:
1) Consumer Finance – Consumer Durable Financing, 2-Wheeler (2W) and 3-Wheeler (3W)
Financing, and Personal Loan
2) SME Business – Mortgages (including loan against property), Small Business Loan and Loan against Shares
3) Commercial – Construction Equipment Financing, Infrastructure Financing and Secured Vendor Financing

Currently, Mortgages business (including loan against property) has highest weight of 32% in the aggregate loan book, while 2W and 3W financing comes second at 22%. The management aims to maintain equal weight across three categories. The addition of new businesses, Construction Equipment Financing in FY11 and Infrastructure Financing in FY12 will lead to further diversification of loan book; this diversification will help provide stability and BFL will be able to maintain balance between scalability and profitability.

■ Growth momentum to continue
AUM increased by 75% CAGR during the last three years from INR 2,539 crores in FY09 to current levels of INR 11,919 crores, expected to go to INR 13,000 crores by FY12E and INR 16,000 crores by FY13E. Growth momentum has been strong across all business verticals. Normally, Q1 and Q3 are strong quarters for the company due to robust rural demand as well as Consumer Durables (mainly Air Conditioner and Refrigerator) demand in Q1 and festive season in Q3.

The key contributors to growth are strong traction in existing businesses and entry into new segments. Within existing businesses, Consumer Durables and Mortgages business has strong momentum. The addition of new business lines, Infrastructure Financing and Construction Equipment, will help BFL maintain growth momentum, expected to continue due to the huge opportunity in existing businesses and addition of new categories.

 Strong distribution network
Over the years, BFL has built a robust distribution network pan-India with strong distribution reach of more than 225 points of presence, and more than 4,000 distribution partners and dealers.

Post FY09 downturn, the company has focused on shoring up the distribution network by removing weak distributors and dealers, clearly visible in the decline of Sales Finance – Dealers from 4,500 in FY09 to 2,000 in FY10, and 2W – Dealers/ASCs from 1,400 in FY09 to 1,275 in FY10. The exit of weaker dealers from the system has made BFL’s distribution network more robust and is expected to fare well in uncertain times.

■ Strong return ratios
BFL has transformed from captive 2W Financing and Consumer Durable Financing to a fullfledged NBFC covering non-retail business. Currently, the company maintains a healthy mix of profitability and growth. Consumer Finance business with expected IRR of 22-25% will provide profitability, while SME Business and Commercial will offer growth.

Consumer Finance, comprising Consumer Durable Finance, Personal Cross-Sell and 2/3Wheeler financing has ~22-25% IRR. Interestingly, BFL is one of the few successful players in the Consumer Financing business.

The company’s market share represents 9% of the consumer durables industry. The expected IRR in consumer durable business is ~24% with average duration of four months. Another strong forte is its 2/3W financing business, which accounts for ~24% of Bajaj Auto’s domestic sales in the geographies where BFL operates . The expected IRR in 2/3W business is ~23%.

Personal Loan Cross–Sell, constituting 6% of overall portfolio, has IRR in the range of 22-23%. SME business segment is divided into two parts – Assed backed loans and unsecured loans. Asset backed loans i.e. mortgages and loan against shares provides IRR in the 12.5-13.5% range. Unsecured loans i.e. small business loan provides IRR in the 18-19% range.

The Commercial segment comprising construction equipment financing, infrastructure financing and secured vendor financing will provide 12.5-13% IRR.

BFL started its Construction Equipment Financing business in FY11. Currently, the company has decided to go slow in this segment as management believes that risk return dynamics are unfavorable at this point in time. Over a period, each of the three segments are expected to hold 1/3rd share of the aggregate loan book. This balance across segments will help the company maintain a proper balance of profitability and scale.

Over the last five years, return on average asset has improved from 1.3% in FY09 to 3.8% in FY12E, one of the key contributors being efficiency built in operating expenses.

 Healthy asset quality
BFL’s asset quality has improved significantly over the last three years. Net NPA has come down significantly from 5.5% in FY09 to current levels of 0.25%. Over the last few years, BFL started involving dealers in credit disbursement. Subsequently, dealers are entitled to receive incentive on account of credit loss remaining below estimates. The involvement of dealers for cash collection in lieu of fee has helped in keeping loan losses under control in 2W and 3W financing business.

In addition, the focus on sweating the existing distribution rather than increasing it will help BFL maintain better control over asset quality. Furthermore, in the Mortgage segment, the company is focusing on affluent customers who were less impacted during the downturn.

 Asset liability management
BFL has efficiently managed the balance between asset and liability duration. The average duration of assets is 16-17 months, while that of liabilities is 18 months. Recently, the company ventured into Infrastructure Financing; currently, infrastructure book is INR 596 crores loan book. Out of this, ~40% of book is corporate loans and balance is project financing. With an increase in the Infrastructure loan book, especially project financing book (which is long duration book), some pressure on asset liability management could follow. Since the book has been well balanced between short and long-duration loans, we believe that the company will be able to manage asset-liability balance effectively.

■ Efficient operations
BFL has shown significant improvement in operational efficiency. The operating expense-toasset ratio has come down from 8.3% in FY09 to 6.3% in FY12E.

The company is focusing on sweating the current network instead of expanding it, which implies that the business per branch will increase. As a result, going forward, the operating expenses will remain under control.

■ Capital adequacy ratio
Currently, BFL has capital adequacy ratio of 17.3%, of which Tier I constitutes 14.5%. The company has issued 60 lakh warrants on preferential basis to promoters at a conversion price of INR 650 per warrant. Post conversion, promoter stake will go up from 56% to ~62%. The funding from promoters will take care of capital requirement for the next 15 months.

On the back of AUM growing 75% CAGR over the last three years and the launch of new business lines like Construction Equipment and Infrastructure Financing, we expect PAT CAGR of 75%, during FY10-13E, with RoE in excess of 22%. At current market price of INR 810, the stock is trading at 1.6x FY12E and 1.3x FY13E P/BV. We recommend ‘BUY’, with a target price of INR 1000, an upside of 23%.

Key Risks
 Scale up in Infrastructure book will put pressure on return
BFL launched its Infrastructure Financing business in FY12. Currently, Infrastructure Financing book is 5%. On account of the scale of the book, aggregate return ratios will reduce. Since Infrastructure book is long-term in nature, it will exert pressure on maintaining asset-liability balance.

 Increase in NPA
BFL reported net NPA of 0.3% in Q3FY12. At such low levels, NPAs may be difficult to sustain over longer period. If there is slowdown in retail segment, then NPA might increase. Sustainable net NPAs are expected to be around 0.6-0.7% in the long term.


>Gujarat Pipavav Port Limited: Q4 CY11 RESULT UPDATE (BP WEALTH EQUITIES)

Result Highlights
⇒ The company reported total income of Rs 1,159 mn during Q4CY11 up 18.5% QoQ and 39.7% YoY on the back of increase in container volumes by 31% YoY and increase in bulk volume by 10% YoY. Realizations in containers increased by 17% YoY and realizations in bulk increased by 10% YoY which aided the revenue growth.

⇒ Management said that there was higher amount of fertilizer volume during the quarter as compared to the previous quarter as the government sourcing had increased due to which bulk volumes increased 10% YoY. Issues in the power sector has caused power companies in the vicinity of Port Pipavav to go slow on their proposed development of power plants which could lead to a decline in handling of coal volumes at the company’s port going forward. Capacity addition in the container business and addition of four new container lines in CY11 has helped container volumes to increase by 31% YoY.

⇒ The company achieved EBITDA margins of 50.9% in the quarter an increase of 488 bps QoQ and 702 bps YoY on the back of better realizations on containers, higher volumes of reefer cargo, favorable exchange rate and higher container storage during the quarter. There was also a one time upside on account of favorable write-backs of volume rebate provisions during the quarter which helped margins to improve by 200 bps.

⇒ The company’s net profits increased by 104.3% QoQ and by 145.2% YoY to Rs 270 mn in
Q4CY11 with net profit margins increasing by 978 bps QoQ and by 1,055 bps YoY to 23.3% during the quarter. The company’s interest cost declined marginally by 1.7% QoQ to Rs 208 mn and its depreciation cost increased by 22.6% QoQ and by 25.6% YoY to Rs 161 mn on account of addition of new assets during the year.

Expansion Plans
The company has increased its container yard capacity to 850,000 TEUs and would increase it further depending upon the needs of its clients and growth in volumes. The company is targeting completion of its High Cube Double Stack Project and expansion of its fertilizer shed by Q3CY12. It has also placed order for purchase of three Rail Mounted Gantry Cranes and has targeted installation and commissioning it by Q4CY12.

Valuation & Outlook
The company has repaid debt amounting to Rs 895 mn CY11 which has reduced its interest payment substantially and going forward on the back of capacity and margin expansion we believe GPPL to post healthy revenue and profits. At CMP the stock is trading at 11.4x CY13E EV/EBITDA and 19.3x CY13E P/E. We continue to value the stock based on DCF methodology and arrive at a target price of Rs 66. We have assigned BUY rating on the stock.