Thursday, March 15, 2012


■ Gujarat Apollo has been observing sluggish demand across Mobile Equipment Group (MEG) divisions. Public spending in new road construction and maintenance has slowed down due to 1) increase in interest rates 2) issues related to land acquisition and environmental clearances continues to affect execution 3) elections in five states including Uttar Pradesh led to a halt in government spending in respective areas.

 Margins are expected to remain subdued in short and medium term for the company on account of higher input prices. Company has taken few price hikes in the past to partly pass on the raw material pressure to its customers.

 Unlike TIL (that operates in North and East India), GAL has not been observing significant increase in receivables. Company continues to enjoy strong balance sheet at the end of 9MFY12. We highlight that company's stock has outperformed the BSE MIDCAP index in past one year. 

 We believe that the company is well positioned to benefit from the likely recovery in road construction and maintenance activity in India over FY13. We maintain our 'BUY' recommendation with a one year DCF based unchanged price target of Rs 170.

Company Highlights
We recently interacted with the management of GAL to get perspective on the overall business environment unfolding mainly in the domestic markets. Below are the key highlights of our interaction.

 Company has been experiencing moderate pick up in the Industrial Product Group (IPG) segment which includes Asphalt Batch-mix plants, Asphalt Drum-mix plant and Crushing and Screening plants. However, the pickup in demand in still significantly lower than expected.

 Order flows from NHAI have expedited in 9MFY12 and we believe that this is likely to benefit the company and its peer group (TIL, Greaves Cotton) with a lag of 2-3 quarters.

 Concerns regarding muted public spending on road construction and maintenance continue to exist. Road sector has been observing sluggish growth due to 1) YoY increase in interest rates 2) issues related to land acquisition and environmental clearances continues to interrupt execution 3) elections in five states including Uttar Pradesh led to a temporary halt in government spending in respective areas.

 Company has been observing slowdown primarily in the MEG segment. Demand for Asphalt Paver and Hydraulic paver has significantly declined vis-à-vis last year.

■  In 9MFY12, GAL has reported muted YoY revenue growth in IPG segment to Rs.1.2 bn. However, revenues in MEG segment at Rs 409 mn were significantly lower vis-à-vis last year at Rs 542 mn. We highlight that in last quarter, MEG segment was negatively impacted by inability of BSII and BSIII compliant engines for Hydraulic Pavers. This has led to the production halt of over one month in the quarter.

 Managements expects operating margins to remain under pressure over the next few quarters due to 1) volatility in raw material prices and 2) inability of the company to take price hike effectively (it has taken marginal hike in Q1FY12) across key product categories.
n IPG segment reported EBITDA margins at 12.2% for 9MFY12 vis-à-vis 16.7% in 9MFY11. For MEG segment operating margins stood at 11.7% which is far lower than the historical average of over 20%.

 Management has stated that it is difficult to take price hike in the current situation where its key customers are facing headwinds from increasing interest rates and sluggish public spending. However company has taken moderate price hikes in certain product categories earlier.

 Company has been experiencing a slight pickup in the business after sluggish 1HFY12. However, the pickup in demand in still significantly lower than expected. 

 Our interaction with the other industry players highlights that the major part of the new demand is driven by the small and medium size road contractors. Demand from larger players like IRB, IVRCL etc. has been broadly stagnant.

 Interest charges have gone up significantly over 9MFY12 at Rs 33 mn vis-à-vis Rs 18 mn for the company due to increase in working capital requirement. However company has effectively managed its debtors and inventories at close to 45 days and 50 days respectively.

 We highlight that road contractors have been experiencing significant amount of delays in payment from various government bodies. Therefore construction equipment companies have been observing substantial increase in debtor days leading to an increase in working capital requirement. TIL, which operates mainly in North and East India in the same space has reported debtors at 70 days in 9MFY12 vis-à-vis 52 days last year.

 Management expects to maintain its leadership position in key product categories. Company enjoys nearly 30-35% market share in key product categories with over 50% market share in Asphalt pavers.

 Going ahead, company's revenue mix is expected to remain more or less same with 35% contribution from BMP (Batch mix plants) and 30% from Pavers (both Hydraulic and Mechanical). Company has been observing a slight pick-up in demand for Drum mix plants.

Financial Outlook
 In 9MFY11 NHAI has awarded approximately 4382 Kms of new road orders visà- vis 5000 kms in FY11. We believe that this augers well for the company and peer group viz. TIL, Greaves Cotton etc.
 We believe that execution of these orders remains the key challenge for the industry as bottlenecks exists w.r.t. land acquisition and environment clearances.
 We believe that company is likely to report meaningful growth in FY13E on back of 1) investments from NHAI in new road projects and 2) lower base of FY12. We project 15% revenue growth in FY13E at Rs. 2.7 bn.
 We opine that the company would continue to prudently manage its overhead expenses and mitigate the impact of increasing commodity prices to some extent. We build an EBITDA margin of 16.2% for FY13 in our forecasts.

Valuation and recommendations
 At current price of Rs.136, stock is trading at 9.5x P/E and 5.3x EV/EBITDA on FY13E respectively.
 We maintain BUY rating and a DCF based unchanged target price of Rs.170, over a 12-month horizon.


>ZYDUS WELLNESS: Concentrating on niche segments i.e. Nutralite, Ever Yuth,

■ Concentrating on niche segments & attaining competitive position
Sugar Free – India’s largest selling low calorie sweetener 
Sugar Free has consolidated its position in the low calorie sugar substitute market at the top with a market share of more than 86%. Both, Sugar Free Gold – the aspartame based sweetener and Sugar Free Natura – the Sucralose based sweetener have maintained the top two slots. With this dominant market share, Sugar Free continues to be one of the driving forces behind the overall category growth in the market place. 

Nutralite – ‘Health First, Taste Always’ Nutralite – 75% market share
Maintaining its strong position in the market, Nutralite consolidated its business in terms of distribution and capacity expansion. Nutralite continues to enjoy a premium image and in spite of several me-too products being introduced in the market, remains virtually unaffected. Looking at the current as well as future
potential, the production capacity has been enhanced with investments in superior technology to offer best quality products.

EverYuth – Celebrating Youth!
EverYuth range of skin-care products maintained their leadership positions in the scrubs and peel-offs category, in spite of the stiff competition from big ticket launches by MNCs and other Indian players.

■ Sub-segmentation strategy for major brands an advantage
Zydus’ sub-segmentation strategy helps it create niche brands and grow without too much competition. A steady flow of variants, extensions and new SKUs aids consumer addition and helps expand the present brand loyal consumers to other categories. This results in creating a range of brands around the mother brand as also becomes a moat around the brand.

■ Various launches within the branded segments -
• Sugar Free Herbvia - the first herbal sweetener under the brand Sugar Free.
• Sugar Free Natura Sweet Drops, making it extremely convenient to be used in beverages and for extended
table top applications apart from cooking and baking.
• EverYuth Golden Glow Peel-Off highlighted a shift in the product’s usage.
• Its foray in neutraceuticals space by launching ActiLife, a nutritional milk additive for adults.

■ Momentum in product launches
Zydus has rolled out three variants of ActiLife, a health food drink that offers cholesterol lowering properties. The drink is targeted at consumers above 30 years of age. Zydus has also rolled out SugarFree Herbal and Nutralite Mayonnaise. The company is test marketing Purify hand sanitizers, which is differentiated with herbal properties.

■ Expansion on Distribution front going forward to boost revenue
Zydus has considerable potential to expand its distribution network to 1.5m retail outlets from 0.5m currently. Going forward, Zydus will leverage on the distribution network of its parent company i.e. Cadila Helathcare to utilize the prescription route for promoting its products.

■ Debt free company with good amount of cash and cash equivalents on books
The company is a zero debt company and has cash and cash equivalents of Rs. 864.5mn for FY11. This gives it an opportunity to leverage and expand its activities without stretching its balance sheet much. The cash could also be used for synergetic acquisitions.

To read full report: ZYDUS WELLNESS

>BHARTI AIRTEL: Read through MTN results for Bharti

Over the last two days, two developments pertaining to Bharti Airtel (Bharti) have taken place- (1) MTN’s results were declared which provided some understanding on the competitive scenario in Bharti’s major African regions of operation and (2)the Telecom Regulatory Authority of India (TRAI) issuing a consultation paper on auction of spectrum. We present below the analysis of the same and their likely implication on Bharti Airtel.

MTN results- Read through for Bharti Africa
MTN declared its full year FY2011 results on March 7, 2011. Bharti Africa competes with MTN in six countries (which are Nigeria, Ghana, Uganda, Rwanda, Zambia and CongoB) of its 16 African countries. In these countries MTN enjoys either the leadership position or a second spot. Hence we analyze MTN’s results in these countries to get a read through in terms of competitive landscape and market analysis for Bharti Africa.

MTN’s top line showed a high single to double digit growth in Nigeria as well as Ghana on a constant currency basis (achieved on back of falling tariff rates and high traffic growth). Further the EBITDA margin in Nigeria as well as Ghana showed a dip (Nigeria by 120bps from 62.9% to 61.7%, while Ghana’s margin showed a sharp 380bps contraction from 43.9% to 38.9%). The contraction in the margin was a result of increased fuel cost coupled with increase in the interconnect charges. It is worthy to note here that like the market leader MTN, Bharti too is exposed to these competitive forces and the cost structure. Further MTN’s standing in both the markets is very strong with its market share at 50% and 52% in Nigeria and
Ghana respectively, and thus is in a very comfortable position in defending its growth and market share.

Bharti’s African capex intensity to remain high
MTN in its annual release has guided for an aggressive capital expenditure (capex) in both Nigeria as well as Ghana (+45% and 16% respectively over FY2011 levels). Its guidance for Nigeria for CY2012 capex stands at $1.4 billion, while for Ghana, the company has guided for a capex of $146 million. MTN in its release, further indicated the need to build more capacity and improve network quality and these would be the key capex drivers. Thus in such a scenario where the leader is getting aggressive on capex and network building, we think that Bharti will have to show the same speed and aggression in terms of capex if it wants to continue its journey of market share gain. In our results update note dated February 8, 2012, we had mentioned that sustaining low capex for Africa remains a question mark. An extract from our report dated February 8, 2012 goes as follows - “The capex for the quarter came significantly lower at Rs2,123 crore (approximately 50% of the regular capex), resulting in a sharp improvement in the free cash position. Though we acknowledge the company’s view of peak capex being behind it [in India as well as Africa], we believe that sustaining such low capex is difficult.” MTN’s move further provides impetus to our doubt and hence we believe Bharti will have to up its ante on capex.

Stated objective of 40% margin by FY2013 will be dragged ahead
■ On the Africa business front, in Q3FY2012, the revenue performance for Bharti was modest (constant currency +5% quarter on quarter [QoQ]). The margin enhancement pace appeared slow with a marginal 10-30bps improvement on a sequential basis. For the quarter under consideration the margins improved by 33bps. With such a snail-paced margin improvement, we have doubts of Africa meeting its stated guidance of attaining a margin of 40% by FY2013.

■ TRAI releases consultation paper on spectrum pricing and other contentious issues-

 TRAI has issued a consultation paper on auction of spectrum to seek views of various stakeholders and then give its recommendation to the Department of Telecom (DoT). The key issues raised in this paper are amount of spectrum to be auctioned, liberalisation and reframing of spectrum in 800/900MHz bands, structure of auction, spectrum block size, eligibility criteria for participating in the auction, reserve price, roll out obligations, spectrum usage charges and trading.

The consultation paper shows 60Mhz and 413.6Mhz of spectrum will be vacated in 800Mhz and 1800Mhz spectrum bands respectively from the cancellation of 122 2G licenses by the Supreme Court.

■  In the consultation paper issued, TRAI has put forward various models that can be used for auction. Similarly for deciding the minimum value for spectrum to start auction, TRAI has not specifically indicated price but has asked for model that should be used for determining the base price.

■ Most of the telecom operators, whose licenses have been cancelled by the Supreme Court, have asked for fixing it at around Rs1,658 crore which is equivalent to the license fee that has been charged for allocation of pan-India license to new telecom players after 2001. Further the consultation paper talks of initiation of spectrum refarming in the 900 as well as 1800MHZ bands.

■ TRAI has given time till March 21 for written comments and March 28 for counter-comments on this consultation paper.

Bharti to remain under pressure in short term: Taking cues from these two developments; viz consultation paper that talks of spectrum refarming, (that would entail high operational cost for incumbent players like Bharti and Idea those have substantial spectrum in the efficient 900MHZ band), coupled with MTN results that implicitly state that if Bharti Africa has to continue gaining market share in the African region, it has to up its ante on the capex front, would put some strain on its African cash flow position. Further the competitive and cost landscape in Africa would continue to remain though (as seen from MTN’s results and comments). Thus we believe that Bharti Africa is likely to miss its stated objective of reaching 40% market share by FY2013 and attaining the same may get stretched by a 12-18 month time frame. In the absence of potential revenue enhancement as well as sentimental triggers, coupled with constant overhang and negative outcome of regulatory policy, we believe that Bharti is likely to remain under pressure in short term. We however continue to maintain our Buy rating on the stock with price target at Rs450 (8.1x FY2013EV/EBITDA). Further any clarity on pending regulatory issues is likely to drive
stock performance in the near term.


>Navneet Publications (Navneet) is a dominant publication house in Maharashtra and Gujarat

Navneet Publications (Navneet) is a dominant publication house in Maharashtra and Gujarat producing both curriculum and non-curriculum books. We expect the growth momentum to pick-up backed by a change in syllabus in the states of Maharashtra and Gujarat leading to 12.3% CAGR in revenue over FY11-14E. The strategy of the company is to focus on its content business which has a stronger business profile that leads to profitable growth. We like 1) the business profile, 2) consistency in terms of growth rate and operating margin which is slated to improve with better sales mix and 3) consistent dividend payout (dividend paid since listing). We initiate coverage on the stock with a Buy rating and a target price of Rs75, implying 15x FY14E earnings.

 Strong track record: Over the years, the company has demonstrated solid track record which is visible from its leadership position (especially publishing business in its areas of operation in Maharashtra and Gujarat) and its financial performance. Over FY06-11 (5 years) the company has achieved revenue CAGR of 13.5% and EBITDA margin in the range of 20-22%. We believe that this leadership status will be maintained with pick up in growth profile going forward.

 Publishing revenue to deliver 15% CAGR: Publishing business, 60% of revenue, caters to both curriculum (state board) and non-curriculum books. Our expectation of higher growth for the next two years stems from the change in syllabus in the states of Maharashtra and Gujarat. Navneet is expanding its market in the content business to Andhra Pradesh which together will contribute 15% CAGR over FY11-

 Margin to improve with better sales mix: We expect EBITDA margin to improve by 200bp as 1) Sales mix changes in favour of publication business which generates 33-34% operating margin; 2) stationery business reaches its bottom in terms of sales and margin in FY12E and 3) the turnaround of its subsidiaries.

 Valuation to pick up on better growth prospects: With 60% revenue coming from publishing business, revenue visibility of the company is strong and is fairly insulated from the volatile macro economic environment. We expect revenue and net profit to register 12.3% and 21.3% CAGR respectively over FY11-14E driven by better sales mix and improvement in EBITDA margin. Also, the return ratios would improve consistently and go up to 25-26% by FY14E on the back of profitable growth and limited capex needs. We believe these reasons force us to build a case for multiple rerating and return to one year forward price-earnings of 15-18x. The company has been distributing dividend since listing and the dividend yield stands at 2.6% considering FY11 payout. We initiate our coverage with a Buy rating on the stock with a target price of Rs75, implying 15x FY14E earnings.


>WYETH: Wyeth’s flagship brand Prevenar 13 is the market leader

Wyeth is a leading MNC pharma company with strong product portfolio in the domestic market. Its six major brands are growing faster than the market and are likely to drive future growth. Wyeth has plans to launch vaccines and OTC products of its parent company. The company is a leading player in the oral contraceptive (OC) segment and has 27% MS. We initiate coverage on the company with a Buy rating and target price of Rs1,267 based on 15x FY14 earnings.

 Strong product portfolio: Wyeth’s six major brands appear in the list of top 300 brands. These are: Folvite, Mucaine, Ovral-L, Wysolone, Ativan and Prevenar 13. All these brands are growing faster than the market and are likely to drive future growth for the company.

 Prevenar – largest selling vaccine: Wyeth’s flagship brand Prevenar 13 is the market leader and is the largest selling vaccine in India. It generated sales of ~Rs1.2bn in CY11. With the introduction of 13 variant Prevenar 13, Wyeth has launched a superior product at the same price. We expect Prevenar 13 to maintain its leadership position in the domestic vaccine market.

 Prominent presence in OC segment: Wyeth has prominent presence in the OC segment with 27% MS. The company markets Loette, Ovral-L, Ovral-G and Premarin in the domestic market. These products are likely to be future growth drivers for the company.

 Enjoys benefits of rationalisation: Wyeth has rationalised its employees over the years. The company has been successful in reducing the number of employees from 920 in FY06 to 512 in FY11 (16m). The maximum reduction of 37% from 813 to 512 was achieved in FY11 by transferring over 200 MRs from Wyeth to Pfizer. With this, the employee cost of Wyeth has come down sharply. We expect Wyeth’s margin to improve from FY12 onwards due to the expected reduction in employee cost.

 Initiate coverage with a Buy rating: At the CMP of Rs858, the stock trades at 12.2x FY13E EPS of Rs69.9 and 10.1x FY14E EPS of Rs84.5. We expect the company to maintain strong growth in vaccines, oral contraceptives and folic acid segments. We initiate coverage on Wyeth with a Buy rating and target price of Rs1,267 based on 15x FY14E earnings of Rs84.5.