Thursday, March 29, 2012

>Iran Sanctions Crisis Roils Energy, Shipping (REUTERS)

  • Iran oil exports fall as sanctions take toll
  • Shell scrambles to pay $1 bln bill for Iran oil
  • U.S. exempts 11 states from Iran sanctions; China, India exposed
  • India pushes refiners to cut Iran imports, despite sanctions scorn
  • Saudi oil sales to US jump; Iran response or just business?
  • Catch me if you can - oil sanctions against Iran
  • RBS halts India tanker payment due to Iran sanctions
  • Shell scrambles to pay $1 bln bill for Iran oil
  • U.S. exempts 11 states from Iran sanctions; China, India exposed

To read report in detail: Oil sanctions against Iran

>CUMMINS INDIA LIMITED: Expansion at Phaltan Megasite to fuel Cummins future growth Engine

■ Substantial Revenue growth despite multiple headwinds: Despite of high interest rates and commodity prices coupled with uncertain global environment, the company has been growing at a CAGR of 16.47% for the last 5 years. It is poised to grow at a CAGR of 14% for the next 5 years with improved outlook on export demand and substantive growth across all segments, particularly in segments like power generation and industrial business which contribute around 45% and 20% to the total revenue respectively.

■ New products to aid to future growth; Margins bottoming out: Cummins elasticity of adopting the new technology and using the same efficiently will help the margins to bottom out. It will significantly benefit from the enhanced products built‐in with new emission power generation norms and industrial engines due to superior product development capabilities. Hence, with the improving demand scenario and correction in commodity prices, there will be an upside in EBITDA margins, going forward.

 Expansion at Phaltan Megasite to fuel Cummins future growth Engine: Cummins is well placed with its expansion initiatives at Megasite, Phaltan. It constitutes almost 10 facilities in total, out of which 4 are operational and remaing would be operational by 2016 and contribute additional INR1500 crores to the overall revenue. The 2 operational facilities namely Upfit centre & MIDC SEZ would add up annual capacity of 20,000MW & 51,000MW respectively.

■ Power Generation Business to act as power booster: The company expects the Power generation business to grow at a CAGR of 12‐15%% over the next five years. The growth will be mainly driven by 1) market growth 2) LHP export opportunity at MIDC SEZ 3) larger penetration in the domestic LHP market (though might come at lower margins) and 4) tapping the bio mass opportunity. The company anticipates some pre‐buying behavior to show up before the change in the emission norms in July 2013 which would contribute heavily to the revenues. Cummins is confident that it will be able to penetrate the market much better post the norm change, given its technology leadership and readiness with the product to meet the revised needs of the customers

■ Cummins‐Cash enriched and Steady Balance Sheet: The Company has enough cash to carry on its future operation and expansions. It has strong balance sheet with healthy reserves and low debt.

To read full report: CUMMINS INDIA

>INDIA GAS: Growth will hinge upon the pricing of regasified liquified natural gas (RLNG)

Shifting focus from availability to affordability

We believe India’s gas sector growth will hinge upon the pricing of regasified liquefied natural gas (RLNG) rather than being a function of the widely accepted notion of supply constraint. The sector, which set a new paradigm in the energy space on the back of domestic gas in 2010, will now be driven by RLNG until domestic supply perks up. We believe that despite the euphoria over surging domestic gas supply fading, the earnings of players in this sector are fairly intact. We assign Buy rating to Gujarat State Petronet, Petronet LNG and GAIL (India) who are direct beneficiaries of the RLNG play in India, while we have Sell rating on city gas distribution (CGD) companies such as Indraprastha Gas and Gujarat Gas Company as they
seem to be entering a phase of margin contraction.

Gradual soft pricing of LNG in the offing: We have assumed average LNG free-onboard (FOB) spot price of US$15/mmBtu for FY13E as well as FY14E compared to an average of US$16.18/mmBtu in the first nine months of FY12, implying the cost economics of natural gas will continue to be favoured by the non-core sectors. We believe the current trend of softening spot LNG prices will continue on account of companies preferring to rely more on spot/medium term cargo rather than on long term contracts due to price distortion caused by the advent of shale gas. Our interaction with industry stalwarts indicated that ~35mtpa of RLNG capacity is being withheld by suppliers as they feel current spot prices are depressed and ~8.2mtpa of
contracts will be available for renewal from 2014.

Pricing to drive medium-term consumption growth: In the wake of dwindling production of domestic gas, consumption growth will hinge upon the ability of midstream companies to source LNG at US$15/mmBtu FOB in the medium term. Our analysis reveals that gas consumption can post a 9% CAGR over FY11-16E if noncore sectors remain dependent on RLNG with the core sector continuing to rely on domestic gas. Average LNG cost of US$15/mmBtu is vital for consumption growth as historical evidence shows that this level acts as a threshold limit for oil refineries, petrochemicals and CGD companies to determine their propensity to consume natural gas or switch to other liquid fuels.

Slim chances of across-the-board limit on marketing margin: The oil ministry has asked the regulator, PNGRB (Petroleum & Natural Gas Regulatory Board) to set the quantum of marketing margin that can be charged by a gas marketer. Our interaction with PNGRB officials indicated that as per the PNGRB Act, the regulator has no legal standing to limit marketing margin unless under Section 11(a) it finds concrete evidence of profiteering, or unless natural gas gets a notified status. Upcoming gas infrastructure to allay fears of tight gas supply: Indian companies will be investing US$28-37bn in gas infrastructure over the next four-five years. With the infrastructure in place, gas supply potential over this period is expected to increase to 336mmscmd from 185mmscmd currently by FY16, of which ~40% will be accounted for by RLNG terminals.

To read full report: INDIA GAS SECTOR

>ANIL: High growth potential for Indian starch industry compared to global average (STARCH APPLICATIONS)

Well placed to cash in on the potential opportunity

  High growth potential for Indian starch industry compared to global average: The starch industry in India is at a nascent stage with the per capita consumption of starch in the country being the lowest at 1.3kg compared with 64.5kg in the USA and over 10kg in many comparable Asian countries. However, the same is likely to improve in the coming years, as
starch finds diverse applications in the food and beverage, paper, pharmaceutical, textile and animal feed industries. Thus, with the rising demand for starch products from various industries, the Indian starch industry is expected to grow by around 15% per annum in the coming years.

■  Anil, largest player with wide product portfolio: Anil is one of the top three players in the domestic starch industry with an organised market share of close to 20%. However, in the high-margin value-added starch products it has a market share of 40-50%. Research and development (R&D) has played pivotal role in Anil’s success, helping the company to gradually shift from a commodity product business to a business of value added products. The company has reputed clients including players like ITC, Nestle India, Amway, Dabur, Heinze, Lupin, Arvind Mills and Raymond.

Robust track record with aggressive expansion plans: Anil has grown its revenues at a robust 31% compounded annual growth rate (CAGR) in the tough period of FY2008-11. The improving revenue mix in favour of value-added products has enabled it to double its operating profit margin (OPM) to 17.2% from less than 10% earlier, resulting in an exponential growth at
76.7% CAGR in its earnings during the three-year period. Going ahead, we expect Anil’s revenues to grow at a CAGR of 25% over FY2011-14 and the increasing proportion of the value-added products would further boost the margins to around 19% in the next two years.
To achieve the same, the company is expanding its manufacturing capacities to 1,000 tonne per day (tpd) in a phased manner, aims to launch new products and enhance its geographical reach to newer overseas markets.
■ Additional triggers—food processing park and land bank: The Anil group of companies received the approval from the ministry of food processing industries of India to set up a Mega Food Park project in Gujarat. The group will form a special purpose vehicle (SPV; a
consortium of companies from the food processing, logistic and infrastructure businesses) in which Anil will have a majority stake of 40%. The group will bring in land of 87 acres (valued at around Rs25 crore) for its 40% stake in the SPV. Once the project is completed it will add tremendous value to the stock of Anil. The company’s manufacturing facility is located at
Bapunagar, Ahmedabad in an area covering 1.5 lakh square metre. In future the company could shift its manufacturing facility to a special economic zone / tax benefit zone, thereby unlocking value in terms of land bank (the Bapunagar land area is currently valued
at Rs800-900 crore).

Outlook and valuation: With the enhancing capacity, Anil is well poised to cash in on the opportunity created by the increasing demand for starch in the domestic market. With most of the starch consuming industries growing at a healthy rate we expect Anil’s top line to grow at a CAGR of 25% over FY2011-14. Further, with an expected improvement in the OPM, the bottom line is expected to grow at a CAGR of 37.0% over FY2011-14. At the current market price the stock trades at 3.5x its FY2013E earnings per share (EPS) of Rs70.4 and 2.3x its FY2014E EPS of Rs106.1 (rough estimates). We see potential for a substantial upside in the stock over the next 12-24 months. Historically, the stock has traded at price/earnings (PE) multiple of 4-5x its one year forward earnings.

Company background
Anil is the flagship company of the diversified Anil group. It is a leading player in the Indian corn wet milling industry having a robust manufacturing infrastructure as well as R&D and application development capabilities. The company, established in 1939, manufactures a varied range of corn-based products, such as native starch, chemical starch, modified starches, dextrins, dextrose monohydrate, liquid glucose, corn syrup and sorbitol. Anil’s manufacturing facility is located in a prime locality in Ahemdabad spanning an area of 150,000 square metre and is close to an international airport. Its core strengths are R&D, technology and product development, which led to a strong improvement in its profitability in a short span of time. Anil’s top line and bottom line grew at CAGR of 31% and 77% respectively over FY2008-11.

Starch industry: an overview

Global starch market
Starch is one of the most popular biomaterials having diversified applications in the food and beverage, paper, pharmaceutical, textile and animal feed industries across the globe. The present global starch market is around 70 million metric tonne (MT) and is expected to grow and reach around 80 million MT by 2015. The modified starch market is expected to be the fastest growing segment over this period, thanks to the rising health awareness across the globe and the growing functional and nutritional needs in the global economy that are resulting in a higher usage of innovative modified starches. Though corn starches, wheat starches and potato starches are popular starches across the globe, corn starches are the most popular and most widely used across applications. China has the highest production of starch with 17.5 million tonne production, surpassing the USA with 13 million tonne of starch output.

Indian starch industry
The Indian organised starch industry has an estimated size of around Rs2,000 crore. The industry is at a nascent stage comprising around 40 products from corn derivatives while the international market comprises more than 800 starch and derivative products. With companies globally focusing on innovations in their product portfolio through R&D, the demand for starch sweeteners and other derivatives has picked up in a number of industries in India as well as in the international markets. During the period 2005-10, the Indian starch industry grew at a CAGR of 21.81% and is expected to grow at 15% per annum in the coming years.

Key positives
 Anil, largest player with wide product portfolio: Anil is one of the top three players in the domestic starch industry with an organised market share of close to 20%. However, in the high-margin value-added starch products segment it has a market share of 40-50%. The company’s capacity utilisation in FY2011 stood at 75%, which was an improvement over the 60% capacity utilisation recorded in FY2008. To grab a larger share of the domestic starch market and meet the increasing demand, Anil is planning to enhance its capacity to 1,000 tonne per day in a phased manner. R&D has played a pivotal role in Anil’s success, helping the company to gradually shift from a commodity product business to a business of value-added products.
It has strong clients such as Nestle India, Dabur, Heinze, Lupin, Raymond, Vardhaman, Arvind, Century Textiles and BILT. The top five clients contribute close to 10% of the company’s top line.

Top line growth to sustain at 25% in the coming years: Anil manufactures a varied range of starch products used in various industries, such as food processing, beverages, confectionery, textiles, pharmaceuticals and paper. Most of the industries are growing at 15-25% per annum. With an increase in the demand for value-added products in the domestic and international markets, we expect Anil’s top line to grow at a CAGR of 25% over FY2011-14. The growth will be driven by a mix of volume growth and improved sales realisation over the same period. While the volume growth is likely to remain in mid single digits, the realisation growth would be in the 16-18% range in the coming years.

OPM to stand at 19% in FY2014: The company has increased its focus on selling value-added high-margin products which has helped it to clock better realisations. The contribution from the value-added products has risen from 30% in FY2008 to 70% in FY2011. This along with stringent cost reduction measures has aided the company to achieve a strong improvement in the OPM. The OPM of the company improved to 17.2% in FY2011 from 9.1% in FY2008. The company expects the contribution from the valued-added products to go up to 80% in FY2014, which will help it to achieve an OPM of around 19%. Thus, the company is expected to post a strong operating performance in the coming years.

Key risks and concerns
A working capital intensive company: Being in a commodity-linked business the company has a high conversion cycle of around 180 days. Since most of Anil’s value-added products are in the introductory phase, the credit period given to the customers for such products is high in comparison with that for some of the other products in the portfolio. Unless these value-added products attain certain maturity, we don’t expect the cash conversion cycle to improve
substantially and hover in the range of 180-190 days in the coming years.
Debt/equity ratio stands at 2.0x: The company’s debt/ equity ratio currently stands at 2.0x, as it requires short-term debt for its working capital requirement. Also, the company is planning to fund its capacity expansion plan by raising funds through debt. Hence, we expect the debt/equity ratio to stand at around 2.0x in FY2012E. The higher interest cost is likely to
put some pressure on the bottom line growth in the near term. However, we expect the debt/equity ratio to improve to 1x by FY2014.
Increase in raw material prices to affect marginsMaize is one of the key raw materials for manufacturing starch. The maize prices have gone up to Rs13.5 per kg in March 2012 from Rs12.9 per kg in March 2012. The prices have currently stabilised at around Rs12 per kg. However, any significant upward movement from the current level would put pressure on the
company’s margins if Anil is not able to pass on the entire hike in the raw material prices.

Outlook and valuation
With the enhancing capacity, Anil is well poised to cash in on the opportunity created by the increasing demand for starch in the domestic market. With most of the starch consuming industries growing at a healthy rate we expect Anil’s top line to grow at a CAGR of 25% over FY2011-14. Further, with an expected improvement in the OPM, the bottom line is expected to grow at a CAGR of 37.0% over FY2011-14. At the current market price the stock trades
at 3.5x its FY2013E EPS of Rs70.4 and 2.3x its FY2014E EPS of Rs106.1 (rough estimates). We see potential for a substantial upside in the stock over the next 12-24 months. Historically, the stock has traded at PE multiple of 4-5x its one-year forward earnings.


>ZENSAR TECHNOLOGIES LIMITED: Akibia - Consolidated efforts yielding results

■ We interacted with the management of Zensar recently. The meeting reinforces our optimism on the long term prospects of the company.
■ The management has not seen any cause of concern within its top clients, as yet.
■ Cisco, which has been facing scale up issues over the past three quarters, is expected to see higher revenue growth, going ahead.
■ According to the management, Zensar is expected to get additional revenues as one of the large Indian vendors has been rationalized by Cisco.
■ Post the acquisition of Akibia, Zensar is in a position to cross sell services to the mutually exclusive set of clients and this is expected to help growth rates. Order booking for combined services is at about $12mn
currently, we understand.
■ Rationalization of low-margin business, focus on utilization and cost optimisation should sustain margins in FY13, we opine.
■ The management detailed the four focus areas to take the revenues to an aspirational level of $1bn by FY16.
■ We maintain our FY12E and FY13E earnings estimates at Rs.38.3 and Rs.40.7, respectively.
■ The stock is available at 4.4x FY13E earnings. We maintain BUY, with a DCF-based price target of Rs.220.
■ A delayed recovery in major user economies and a sharper-than-expected appreciation in rupee v/s major currencies are the risks for a relatively small player like Zensar.

We met up with the management of Zensar recently. Following are the takeaways

No concerns at micro level; Cisco to scale up 

■ While accepting that, the macro scene is still uncertain, the management has indicated that, it has not seen any major changes at the micro levels, which may cause concern.
■ The company has not seen any major delays in project ramp-ups or start of new projects - discretionary or non-discretionary.
 A survey of the top clients in 3QFY12 had indicated a 10% - 15% increase in budgets for 3 out of the Top 5 clients. Cisco's budget is expected to rise by about 5-7% for CY12.
 The top clients of the company continue to scale up business along expected lines.
 Cisco, the largest client for Zensar, is also expected to start scaling up revenue from the current quarter.
 We note that, Cisco revenues had not scaled up over the past three quarters because of internal restructuring within the client.
 Zensar is also likely to benefit from the recent vendor rationalization exercise conducted by Cisco.
 According to the management, Cisco has rationalised its vendor base to cut costs
(Zensar, TCS, Wipro and Accenture were the vendors).
 In this process, Cisco has discontinued work with one of the large Indian vendors and Zensar is expected to benefit in terms of additional revenues.
 We note that, post Akibia's acquisition, Cisco's contribution to Zensar's revenues has fallen from the higher levels of about 34% to less than 20%. This was one of the factors limiting additional business from Cisco.
■ The management is confident of strong growth from Cisco going ahead because of cost pressures on Cisco.
 We view this potential scale up positively as it will provide support to the overall revenue growth of the company.
 Zensar has benefitted due to vendor consolidation by 2 of the Top 10 clients.
 The management maintains that, it has and will further rationalize some of the accounts which are yielding low margins. This is with a view to re-align the work force to better yielding projects. Thus, revenue growth may be impacted in the short term by this initiative.

Akibia - Consolidated efforts yielding results
 The consolidated service offerings along with Akibia are getting increased acceptance from the company's clients.
 About 14 clients are getting services jointly. The management has also indicated that, the order book for consolidated service offerings is currently at $12mn, with more in the pipeline.

Future focus areas
 The management has detailed the four focus areas, which are expected to take Zensar to an aspirational revenue level of $1bn by FY16.
 These are : IM, BFSI, Healthcare and Manufacturing/Retail/ Distribution.
 IM currently brings in about 35% of the total revenues and Zensar plans to grow this into a $400mn revenue business by FY16.
 Zensar will target to grow its existing US relationships while growing the RIMS business in European countries like UK, Germany and Benelux.
■ It has also decided to penetrate the Cloud, Social Media and Mobility (CLOSOMO) markets.
■ In IM, the company has already won $10mn worth of orders through the joint value proposition (Zensar and Akibia).
 In Cloud, the partnership with Google has already brought in 2-3 clients and Zensar will be providing cloud platforms to them.
 BFSI currently brings in 15% of revenues and the target is to get about $200mn revenues by FY16.
 The focus of Zensar will be more on Insurance, we believe, where it will likely use more platform based services.
 The company enjoys strong relationship with its clients that include UBS, Credit Suisse, Investec, Nomura etc. On the other hand, Akibia has some marquee customers like Federal Reserve Bank, JP Morgan chase etc.
 Company plans to cross sell some of its own and Akibia products across globe. This is also expected to increase the client mining - for instance Nomura is

Zensar's client in Asia Pacific and Akibia's client in USA.
■ Manufacturing/Retail/Distribution (MRD) currently brings in 50% of revenues and is targeted to grow to $300mn by FY16.
 Currently 25% of the company's revenues and nearly 50% of the MRD revenues come from the hi-tech companies.
 Zensar is looking at SMEs as an area of growth and will target these through solutions and platforms.
 Within retail, the focus will be on sub-segments like apparel retail and e-tailing. The oracle and SAP expertise will lead to new customer engagements, we believe.
 Healthcare is a relatively new vertical for Zensar. It is currently focused on the ICD-10 business and has an order book of about $8mn in ICD.

Financial prospects
 We maintain our FY12E and FY13E earnings. We assume the rupee to average 49 / USD in FY13.
 Revenues are expected to rise by 55% in FY12 (Akibia consolidation WEF 4QFY11) and by 14% in FY13.
 Margins are expected to remain largely stable in FY13 as the salary increments set-off the benefits coming from cost optimization, rupee depreciation and better utilization rates.
 We have assumed tax at lower levels of 30% in FY13 because of the expected increase in revenues from SEZs.
 Consequently, PAT is expected to rise by about 6% to Rs.1.76bn, leading to an EPS of Rs.41 in FY13E.

Valuations: We maintain BUY on Zensar Technologies with a price target of Rs.220
 We have done our DCF analysis wherein we have also incorporated a WACC of about 15% to compensate for the higher risks.
 Our price target is Rs.220 for the stock, based on FY13E earnings.
 Sustained rise in margins and stable revenue growth profile may lead us to accord higher valuations to the stock.

■ A sharp appreciation in rupee from the current levels may impact our earnings estimates for the company.
 A delayed recovery in major global economies could impact revenue growth of Zensar.


>THERMAX: Thermax had entered into a technology transfer agreement with Wilcox and Babcock

Thermax is a global solutions provider in energy and environment engineering. It caters to a wide range of industries such as cement, fertilizers, petrochemicals, power, textiles, dairy, sugar, food, pharmaceuticals, refineries, distillery and aluminum. Its business covers areas such as boilers and heaters, absorption cooling, chemicals, water and waste water solutions, power and air pollution control.

■ Diversified business model
Thermax caters to project and product requirements of diverse user industries. This diversity helps the company to reduce dependence on a single sector. Thermax two mainstay segments are energy (81% of the revenue) and environment (19% of revenue). In these segments, it provides business solutions to end-user industries such as power generation sector and textiles, petrochemical, food processing, cement, metals and mining industries and municipal bodies,.

■ Foray into super-critical boiler market through JV route
In CY08, Thermax had entered into a technology transfer agreement with Wilcox and Babcock for manufacturing and selling sub-critical boilers up to 300mw in India. This has helped Thermax to tap the market demand arising from small IPPs and captive power plants. With the power utility industry shifting towards more efficient super-critical technology, Thermax has entered into the super-critical boiler market through a JV (51:49) with Wilcox and Babcock.

■ Slow capex cycle resulting in deteriorating order book position
The existing high interest rate scenario, coupled with government’s policy deadlock, has resulted in weak a capex cycle, which has culminated into deteriorating order inflow for the company. Thermax derives a major portion of its revenue from the economy-linked segments such as steel, cement, and power. Thermax’s order inflow has deteriorated over the past six quarters. The company currently has an order book of Rs58bn providing revenue visibility of over a year.

■ Valuation and Rating
The stock currently trades at 17x FY13E earnings of Rs28.3 and 14.4x its FY14E EPS of Rs33.1. The stock, over the past six years has traded at average P/E of 20x its one-year forward earning and clocked 27% revenue CAGR and 30% earnings CAGR. We believe the current sluggish revenue CAGR of 4% and earnings CAGR of 1.6% over FY11-14E call for derating of the stock. However, the valuation of the company may remain at current levels in anticipation of a reversal in Interest rate cycle and capex cycle. We initiate coverage with hold rating and target price of Rs450 at 16x its FY13 estimated earnings of Rs28.3.

To read full report: THERMAX