Sunday, March 25, 2012

>PGCIL orders : Chinese back with a vengeance in transformers

» PGCIL orders see a sharp pick-up in Feb, 2012 post a lull in January; Feb orders at Rs34bn (+106% YoY) and YTD orders at Rs154bn (+87% YoY). Transformer orders see the sharpest jump YTD with orders up 350% YoY and substation orders up 98%; transmission line orders up 61% YoY. We expect the traction in orders to continue into March.

» Competitive intensity remains high across segments; Chinese transformer players win 45% of the orders YTD and 55% of the 765kv orders while 765kv substation orders seeing increased domestic participation on PQ dilution. Consolidation being witnessed in the transmission line EPC segment

» We maintain our BUY rating on Crompton Greaves and SELL on Siemens India in the T&D space. KEC International is our preferred play in the transmission line EPC space

Orders gain traction in Feb, 2012; up 87% YTD
PGCIL orders in the period Apr-Feb12 at Rs154bn are up 87% YoY. Transformer orders have seen the sharpest jump with orders up 350% YoY to Rs19bn (12% of total orders) lead by higher ordering in the 765kv segment. Substation orders jump 98% YoY to Rs26bn (17% of total orders) while transmission line ordering remained robust up 61% YoY to Rs71bn (46% of total orders). There has been a clear shift towards 765kv voltage level across equipment and transmission line orders. We expect PGCIL orders to pick up further strength in March which historically sees the highest amount of ordering. For FY12, we expect orders to be ~Rs190bn compared to last year’s order flow of INR183bn.

Competitive intensity high – Chinese aggressive in transformers
Within transformers, the Chinese players (TBEA Shenyang and Baoding) took a 45% market share and a 55% share in the 765kv segment; this has been at the expense of the Koreans and Crompton Greaves. TBEA Shenyang (36% share of the 765kv orders) is setting up a factory in Gujarat and appears to be aggressively bidding for new orders. Within substations, entry of domestic players in the 765kv substation segment has lead to a sharp fall in share of the Indian MNC’s (32% YTD vs. 100% share in FY11). Within the transmission line EPC space, signs of a consolidation continue with the top 5 players garnering 70% of the orders (77% in FY11 and 57% in FY10).

Valuation and picks
Our top pick in the sector remains Crompton Greaves and upgrade KEC International to BUY; KEC International is our preferred play on the easing interest rate cycle. We maintain our SELL rating on Siemens India on expensive valuations along with a declining margin profile. Key risks to our ratings include slower than expected interest rate cuts and a sharper than expected rise in raw material prices.

>INDIAN PHARMACEUTICALS: 4Q CY11 Drug Master Files (DMF) filings update

  • Indian DMF share recovers to c46% of overall DMF filings in 4QCY11, breaking out of the recent slowing trend in filings
  • Large generics filings seem to be stagnating; small players more aggressive registering an increase on yoy basis
  • DRRD sole DMF on Prasugrel (potential FTF), Lupin files ophthalmic brimonidine
 Indian DMFs share jumped to c46 %( +22% yoy) of overall DMF filings in 4Q CY11 after witnessing a slower rate over the last few quarters. For the full year CY2011, Indian DMFs share in overall DMFs filings remained at similar 50% level as in CY2010 (c9% yoy growth). China’s DMFs share of total DMFs fell from 20% in 4Q10 (18% in CY2010) to 16% in 4Q11 and CY2011. Global DMFs increased by c10% for CY2011.

■ Indian large cap generics filings seem to be stagnating: Barring DRRD which increased its filings in CY2011, most players’ filings stagnated for the year as a whole. The number of filings from CIPLA and RBXY actually declined materially. DRRD CY2011 filings were strong at 14; SUNP and LPC filed 6 each, CDH 8, RBXY had 2 and CIPLA 0. TRP and IPCA each filed three DMF during the year. Small players like Hetero Lab, Alembic were the most active with DMF filings of c12-13.

■ 4QCY11 noteworthy filings include Dr Reddy’s sole filing on Eli Lilly’s antithrombotic
drug Effient (prasugrel), which has cUSD100mn sales in the US. This could be a potential first-to-file opportunity given no other DMF yet (though ANDA can only be filed after July 2013). Lupin continued its filing momentum in ophthalmics with a recent filing on brimonidine (Alphagan-P) used in glaucoma. Among mid caps, Ipca’s filing on primaquine, Cadila’s on erlotinib (Tarceva) and Torrent’s on darfenacin (Enablex) are noteworthy. Other small players’ filings including Hetero’s DMF on etravirine (Intelence) and Gland Pharma’s filing on agratroban and dalteparin (Fragmin) are the sole Indian DMF filings and hence potentially strong. Reliance Life Science filed two niche products including loteprednol etabonate (ophthalmic corticosteroid) and injectable nandrolone. Among MNCs, Apotex’s filing on lansoprazole hints at a possible increase in competition in Prevacid generic (currently four players only). Mylan’s filing on iloperidone (Fanapt) is also worth mentioning.


>TATA COMMUNICATION’s acquisition of Tyco and Teleglobe in FY06 has not been very encouraging

UW: TCOM taking the M&A route
TCOM is evaluating cash offer for CWW according to reports
Potential synergies would be about cost rationalizations, capex savings and vendor consolidation
We remain UW and maintain target price of INR205

■ Newsflow suggests TCOM is close to making a formal cash offer to acquire Cable
and Wireless Worldwide PLC (20 March 2012, Wall Street Journal). The move is in
line with our thesis that TCOM will have to raise capex given revenue growth challenges.
In the broader context this move needs to be seen in the larger overseas acquisition
strategy of the Tata Group (which has yielded mixed results – Corus not much success yet
while JLR has had a successful turnaround). Vodafone has also stated that it is evaluating
the merits of a potential offer.

■ CWW (CW/LN, UW(V), 37.35p, target 27p) is a low margin business offering managed
voice and data, with more than 75% of its group revenue exposure in the UK, and the bulk of
the remainder serving UK corporate outside the UK. We have an UW(V) rating on the stock
given the structural decline in voice revenues, commoditization of data connectivity and
pricing pressure from BT, under-investment and an overall challenging business environment.

 We value CWW at cUSD1bn (P/B 0.8x, stock traded at an average P/B of 0.9x over the
last 12 months) and as such believe payout for CWW above our fair value could be
negative for TCOM. Assuming the deal goes through, CWW’s EBITDA would account
for c70% of total EBITDA and as such the swing factor would be CWW margin
expansion (without any material change to capex/sales ratio). In our view potential
synergies will be largely from cost rationalization, capex savings and vendor
consolidation. CWW has substantial tax assets with USD5.2bn of UK Capital Allowances
and USD25.6bn of tax losses (March 2011). But with limited details we are unable to
compute to what extent TCOM could benefit from this.

■ TCOM’s acquisition of Tyco and Teleglobe in FY06 has not been very encouraging.
TCOM’s revenue has grown at CAGR of c7% during FY07-11 and EBITDA CAGR
during the same period has been c8% (both adjusted for Neotel). Improvement in network
and transmission cost witnessed in FY08 were attributed to realization of synergies from
the acquisitions of Teleglobe and TGN. However, the improvement was temporary as the
subsequent increase in ILD revenues wiped the benefits.

■ Valuation. We continue to value TCOM on a DCF-based SOTP approach. We value the
core business at INR75/share, surplus land at INR97/share, and investments in TTSL at
INR33/share. We retain our UW rating on the stock and target price of INR 205. Upside
risks for the stock include the ability to benefit from global consolidation and higher-than estimated margin expansion at Neotel.

To read full report: TATA COMMUNICATIONS

>INFORMATION TECHNOLOGY SECTOR: Accenture and Oracle numbers indicate at a resilient demand environment…

Accenture Q2FY2012: Seeing strong traction in outsourcing and order booking..
Accenture reported another strong set of numbers in Q2FY2012 with revenues at the upper end of the guidance and exceeding the consensus estimates for the eighth straight quarter. Revenues were up 12.3% year on year (YoY) and down 3.9% quarter on quarter (QoQ) to $6,797 million. The order booking remained strong at $7.9 billion, up 13.8% YoY and 1.8% QoQ.

Along with the strong set of numbers, the company also increased its revenue growth guidance for 2012 to 10-12% from the 7-10% growth guided earlier. In 2011, the company had started with a revenue growth guidance of 7-10% and ended up with a growth of 18%. On the new order booking front as well, the company has upgraded its expectation, coming closer to its upper end of the new booking guidance of $28-31 billion. The management commentary remains optimistic on the outsourcing side of the business which is currently driving growth and seeing an increase in new order bookings.

Oracle Q3FY2012: New license sales drive growth
For the quarter ended February 2012, Oracle reported new license sales growth of 7.2% YoY to $2.4 billion. The growth comes after a soft Q2FY2012 performance when the growth stood at 2.5%. Going forward, for the fourth quarter of 2012, the company has guided at an 1% to 11% growth, indicating an improving demand environment. The management has indicated that it is not seeing anything negative in terms of demand and that the Q4FY2012 guidance is on a conservative basis with an expectation of outperformance

Accenture’s key management commentary
Company guidance: Going forward, for Q3FY2012 the company has guided at revenues of $7.1 – $7.3 billion, up 3.7% - 6.7% on a Q-o-Q basis and 4.9%– 7.9% on a Y-o-Y basis. After increasing the guidance range in the second quarter to $300 million against its traditional range of $200 million to guard against the uncertain macro environment, the company has returned to the $200 million guidance range, which indicates at an early sign of moderation of volatility in the demand environment.

For FY2012, the company has increased its revenue guidance for a constant currency growth to 10%-12% against its earlier guidance of 7-10% implying revenues of $27.3-$28.1 billion on the back of the year to date performance and the demand expectation in the coming two quarters.

On demand environment
Management indicates at seeing a robust demand environment across most parts of the world
The company is in constant contact with its clients and is carefully looking at the macro-economic environment. The company is not seeing any significant change in client environment and also does not expect it to change drastically in the coming quarters. The clients are looking at operational efficiency and short term benefits from spends. The management expects outsourcing to drive growth with moderation in consulting growth rates.

On Europe: Europe is softer from an economic standpoint compared to the rest of the world. The company is closely tracking the financial services sector in some parts of Europe. However, the outsourcing demand is still quite strong in Europe.

Financial services: Financial services’ revenue growth reflects clients' focus on cost takeout and operational effectiveness leading to higher outsourcing. The company expects this to remain as a strong imperative across this industry globally. The company did see a modest growth in consulting and also in the overall financial services stream, mainly due to a decline in the capital markets and slow growth in banking led by Asia-Pacific.

Outsourcing business: In technology outsourcing, the company is seeing increasing demand across all geographies including in Europe. This is on account of clients continuing with the reduction and making variable their IT operating costs to enable them to channel more IT investments toward the adoption of emerging technologies.

Consulting business: The company expects that the Y-o- Y growth rate in consulting will be more in the mid-single digits kind of range next quarter. The company continues to see very good demand, as can be seen in new bookings being over $4 billion. Moderation is expected in the Americas and the Asia Pacific region with Europe remaining the lowest in terms of growth.

Valuation: Impressive quarterly numbers from Accenture and Oracle for the February ended quarter indicate at a resilient demand environment despite macro uncertainties. The headline numbers and management commentaries from both the companies suggest at a stable demand environment for the sector with increasing spend on outsourcing, which augurs well for the Indian IT sector. Meanwhile, as we run-up to the upcoming quarterly numbers for the fiscal FY2012 next month, we believe the stock performance of top tier IT companies is likely to remain weak with increased volatility owing to soft quarterly numbers and uncertainties on the Infosys’ guidance front. We continue to maintain our cautiously optimistic stance on the IT sector, with our top pick being TCS. 


>BHARTI AIRTEL: Any slippage in Africa however carries the maximum downside

 Have expectations finally moderated? – Consensus has continued to miss and moved down. Bharti has clearly under delivered over the last 8-9 qtrs. That’s a problem but at the stock level it’s been compounded by the fact that the expectations have tended to be very high, reflected in the 3-5% downgrade in EBITDA and 26-41% in EPS for FY12/13 in the last 12 months. We believe, looking at Street estimates 9 quarters ahead and our own proprietary model, that it is no longer the case.

 But what could still be at risk? – We think its rev/min and tower tenancy. Continuing price arbitrage could undermine the 2p increase in rev/min that the market is currently factoring in. We also believe that the tenancy, assumed to increase to 2.5x, could be on the higher side. If these risks were to materialize - there could be a 4-7% downside to consensus.

 Where are expectations high but not at risk? – That’s in Africa where expectations are of a 3-4% increase in topline per quarter which, barring the odd quarter, the company has managed to deliver. This is backed by a 9% increase in EBITDA margins – reasonable given the likely increase in network utilization and benefits of cost control. Any slippage in Africa however carries the maximum downside.

 Which segments have some cushion? – Expectations from other businesses – fixed line and enterprise look fine in our view with a 2-4% increase in topline per quarter accompanied with reasonable margins.

 Where are we vs. consensus – We are 4-7% below on EBITDA and there could possibly be some downgrades but we believe the 10% underperformance since Feb (16% YTD) prices in the negatives. Market has got too attuned to look at surprises on the downside; any upside surprise should result in material outperformance and that could come from 1) faster-than-expected reversal in rev market losses and 2) wireless
margin expansion.

To read full report: BHARTI AIRTEL

>GAIL INDIA LIMITED: Twin worries of gas shortage and rising subsidy -

Gas supply a worry but FY12 subsidy may be as expected

■ Twin worries of gas shortage and rising subsidy
GAIL’s 9M FY12 EPS factoring the actual subsidy (under-provision in 3Q) is up just 6% YoY. In 9M, GAIL was hit by flat gas transmission volume and 75% YoY rise in subsidy. GAIL’s volume growth was capped by gas output from the KG D6 block declining sharply. There was a concern that share in subsidy of GAIL and its upstream peers, which was 37.9% in 9M FY12, may go up further in FY12. However, now no further negative surprise on subsidy appears likely in FY12. Gas supply and subsidy would remain worries for FY13. Retain Underperform.

■ Gas supply shortage to continue; will margins be capped?
GAIL’s 9M FY12 gas transmission volume is up just 1% YoY. Its FY12 volumes are likely to be flat. Reliance Industries (RIL) has guided decline in KG D6 gas volume by 15.5mmscmd in FY13. LNG imports (capacity constraints) would not be able to make up for fall in output. Thus GAIL’s gas volume may remain flat even in FY13. GAIL’s gas transmission and trading EBITDA is up 10% YoY in 9M FY12 despite flat volume boosted by marketing margins on LNG imports. There is a risk (low in our view) that marketing margins on LNG imports could get capped.

■ FY12 subsidy may be as expected; 3Q shortfall in 4Q
The subsidy provision in the FY13 budget is at the higher end of our expectation at Rs400bn. If it was lower than expected there was risk that GAIL and its upstream peers may have to bear more subsidy than as per 9M formula (38%). Thus no further negative surprise on subsidy is likely, which means GAIL’s FY12E EPS may be up 11% YoY as expected. However, GAIL had under-provided subsidy by Rs3.35bn in 3Q, which it will have to account in 4Q. We expect GAIL’s FY12 subsidy to be 40% YoY up at Rs29.5bn.

To read full report: GAIL

>Singapore GRM at 15-week low; RIL up US$1/bbl WoW but weak- MERRILL LYNCH

■ Singapore GRM halved over last seven weeks to US$5.1/bbl
Reuters’ Singapore GRM has fallen by 51% since the week ended January 27 from US$10.3/bbl to US$5.1/bbl last week. Singapore GRM last week is at the lowest level in 15 weeks. Singapore GRM in 4QTD is now at US$8.0/bbl. It has been hit by a fall in diesel, jet fuel and fuel oil cracks. Fuel oil cracks have declined the most (US$10.7/bbl) in the last seven weeks. Jet fuel and diesel cracks are also down from peak levels in 4Q by US$3.7-5.0/bbl to US$13.7- 13.9/bbl. In the last 2-3 weeks diesel and jet fuel cracks are at the lowest level since Nov-Dec’10.

■ RIL’s theoretical GRM up US$1.0/bbl WoW at US$4.5-5.7/bbl
RIL’s theoretical GRM last week at US$4.5-5.7/bbl is up US$1.0/bbl WoW with higher end of the estimate being at US$0.6/bbl premium to Singapore GRM. RIL has gained from Arab heavy being at US$0.4/bbl discount to Dubai and not producing fuel oil (cracks down sharply). However, RIL’s GRM was boosted most by our assumption that its new refinery uses Souedie crude (API of 24), which was at US$6.3/bbl discount to Dubai. If use of Oriente crude (also API of 24) is assumed, RIL’s GRM last week would be lower at US$3.6-4.7/bbl.

■ RIL’s theoretical GRM in Mar’12 lowest since Dec’09
RIL’s theoretical GRM to date in March 2012 at US$3.9-5.0/bbl is at the lowest level since December 2009.

■ RIL’s 4QTD GRM below Singapore GRM and down YoY
RIL’s theoretical GRM in 4QTD at US$5.3-6.5/bbl is down US$2.7-3.9/bbl YoY (US$9.2/bbl in 4Q FY11). It is also US$1.5-2.7/bbl below Reuters’ Singapore GRM of US$8.0/bbl. RIL’s gain from QoQ product cracks rise is less than that of Reuters’ product slate. Discount to Dubai of crude RIL uses is also QoQ lower.

 RIL’s 4Q profit down 20-30% YoY at 4QTD GRM
RIL’s 4Q profit works out to Rs37.4-43.1bn at 4QTD theoretical GRM of US$5.3- 6.5/bbl and blended petrochemical margin of US$427/t (down 22% YoY in rupee terms). It would mean 20-30% YoY fall in 4Q profit (4Q FY11: Rs53.8bn). 

■ Downside to RIL’s FY13 EPS 10-20% if GRM at 4QTD level
Our FY13 EPS estimate for RIL assumes its GRM at US$8/bbl. If RIL’s FY13 GRM is at 4QTD FY12 level (ignoring shutdown) of US$5.7-6.8/bbl, its FY13 EPS would be 10-20% below our estimate of Rs66.9.

■ R&M companies GRM up WoW and QoQ
BPCL and HPCL’s theoretical GRM last week was up WoW at US$3.1-3. 2/bbl. Their 4QTD theoretical GRM (including inventory gain) is also up QoQ at US$5.8-5.9/bbl.

To read full report: OIL REFINING & MARKETING

>Higher Crude to Worsen Under-recovery Situation; Prefer BPCL- CITI GROUP

 ONGC: defensive appeal, emerging out of no-growth phase, but subsidy imponderables — With technical overhang of the share sale now behind us, we expect investors’ focus to shift to two key fundamental drivers – subsidy and production growth. Subsidy remains a persistent concern, albeit largely factored into valuations. On the +ve side, however, after several yrs of stagnant production (10-yr CAGR of -0.2%), ONGC finally seems to be at the cusp of delivering core domestic growth, with FY12-14E vols (ex-JV) expected to grow by ~3% CAGR (albeit largely back-ended). ONGC’s attractiveness rests primarily in its defensive appeal, esp. for longer-term investors, ably supported by ~4% div. yield, combined with the aforementioned core growth prospects.

We rate ONGC as Buy, although subsidy imponderables amidst the worsening underrecovery situation could keep near-term performance in check, and realisation of fair value (Rs321 TP based on 9x core FY13E P/E) could be more gradual and back-ended.

 BPCL: preferred PSU pick — Our preference for BPCL is predicated on its material E&P value (contributes Rs203/sh to our Rs842 TP), which has been underpinned by reserve upgrades (esp. in Mozambique) and the level of interest being displayed by global majors in procuring some of these assets. In the aftermath of the disappointing state election results for the ruling party, reforms could at best be piecemeal. In this scenario, BPCL is not only our preferred OMC but also our preferred PSU pick.

 Oil India: maintain Neutral — We maintain our Neutral with a Rs1,297 TP, and reiterate our preference for ONGC over OIL amongst upstream PSUs, given the former is expected to demonstrate relatively better production growth over FY13-14E, combined with earnings support from its international operations at high crude prices. Lesser proportion of ‘deregulated’ earnings makes OIL more vulnerable to negative surprises on the subsidy front led by high crude prices, where risks lie to the upside as geopolitical tensions keep
the oil market supported from a sentiment as well as fundamental standpoint.

To read full report: CRUDE OIL

>Earnings Surprise by Country / Sector Breakdown for 2011 Q4

Earnings, Sales and Implied Margin Surprises

 4Q Reporting Season Review — In this review, we look at both the Top Line (Revenue) and the Bottom (Earnings). To date, 54.5% of Asian companies have beaten sales estimates with 40.4% beating earnings estimates. Despite more companies beating sales estimates than not, the aggregate surprise was negative US$19.6 billion.

 Implied Margin Surprise — Given Top and Bottom Line surprises we can compute the Margin surprise. Missing sales but beating earnings is a positive margin surprise, while beating sales yet missing earnings is a negative surprise. Negative margin surprises in Asia outnumbered positive surprises 2:1, indicating Asia still has less pricing power.

 Country/Sector Earnings Hits/Misses — China and Korea have a larger proportion of negative earnings surprises relative to other markets. In aggregate, they reported over USD2bn less than expected. Healthcare, IT and Materials disappointed while Consumer Staples and Financials did relatively better.

 Pre-announcement drift — Pre-announcement spread of Quintile 1 - Quintile 5 was approximately -1.9%, 10 trading days before reporting date. Seven days postannouncement, the spread is approximately 3.8%.

 Country/Sector Margin Misses — Countries and sectors with high implied negative to positive margin ratio include Indonesia, Taiwan, South Korea, Telecoms and Utilities.

To read full report: Q4 2011 EARNINGS REVIEW

>JINDAL STEEL & POWER: Utkal mining lease to be signed soon and mining to start by Sep12

 Maintain Buy — JSPL continues to execute in a tough environment on multiple fronts. JSPL has managed to overcome many project-related challenges over past 6-8 months which demonstrates the company’s ability to interface with government and manage its environment well. Execution capability combined with disciplined capital allocation track record and structural advantages (i.e. access to captive coal and iron ore) convinces us to retain a Buy rating despite the stock outperforming the BSE Sensex by 17.4% YTD.

 Multiple catalysts over next 12 months — 1) JSPL has advanced CoD of Tamnar 2 unit 1 (600MW) to March 2013 from December 2013 to take advantage of the extension of section 80IA (CIRA est. – December 2013), 2) Angul project agitation has been resolved and work has resumed on ground (commissioning by FY13 end), 3) Dumka (1320MW) has received environmental clearance and is ready to place equipment orders, 4) 810MW (6x135MW) are operating at 75-80% PLF and remaining 540MW (4x135MW) will be commissioned by September 2012.

 Steel Tailwinds — JSPL’s product mix has been improving with sale of pig/sponge iron decreasing to 14% of total volume in FY11 from 26% in FY10 and likely to be below 10% in FY12. JSPL stands to benefit from strong long product (2/3rd of output) prices (+10% since Dec11) and falling coking coal prices. Our sales volume assumptions incorporate a 13% growth in FY13 and 32% growth in FY14. Stable pricing, falling coking coal prices and strong volume growth augur well for JSPL.

 TP and EPS change — We increase TP to Rs672 (from Rs645) and revise FY12/ FY13/FY14E EPS downwards by 2%/13%/4% as we 1) roll forward power DCF value to June12 from Dec11 and steel EV/E from Sep12 to Mar13, 2) delay Angul power/steel capacity by ~6 months which impacts FY13 numbers most, 3) no longer value Bolivia.

 Key Risks — Negative news flow on Bolivia and delay in signing of mining lease for Utkal coal block are key risks. JSPL has invested US$70mn in Bolivia so far, hence the impact, if any, is likely to be limited. The company expects the Utkal mining lease to be signed soon and mining to start by Sep12.

To read full report: JINDAL STEEL & POWER