Monday, April 2, 2012

>The General Anti-Avoidance Rules (GAAR)

Avoidance –An attempt to reduce tax liability through legal means, i.e. to regulate your affairs in such a way that you pay the minimum tax imposed by the Act as opposed to the maximum
Example –Mr. A forms a company to sell his products. The company pays 25% tax, but if he himself sold the products he would pay 30%

Evasion –Use of illegal means to reduce tax liabilities, i.e. falsification of books, suppression of income, overstatement of deductions, etc.
Example –Mr. B sells his products for cash and does not bank the cash.

“Every man is entitled to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be”
                                                                                   –Lord Tomlin (IRC v. Duke of Westminster)

Anti Avoidance rules can be classified into following:

‒Measures based on general principles in the law
•This refers to principles which are not codified in the legislation (non-statutory)
•They include a range of philosophies and approaches including “substance over form” “abuse of law”

‒General Anti Avoidance rules
•It has same meaning as “anti avoidance rules based on general principles in law” except that it is codified and included in the legislation

‒Specific Anti Avoidance rules
•These are the specific anti-avoidance rules which applies to the specific situations-CFC, Thin Capitalization rules, Exit Tax etc.

To view presentation: GAAR

>RELIANCE INDUSTRIES: Share buyback to provide only near-term support to valuations; Neutral

  Business fundamentals to drive long-term stock performance: RIL's 2012 share buyback announcement of INR104b (120m shares; 3.7% of outstanding equity and 7% of free float) "to increase shareholder value" is meaningful, though we will have to wait to know the actual buyback (25% mandatory; 1.7% till date) quantum. We expect the buyback to act as a support to valuations in the near term. However, over the long term, stock performance would be driven by (1) business fundamentals, and (2) cash utilization.

  Outlook for core businesses not very encouraging: Refining and petchem margin performance will be primarily governed by the global economic environment (particularly Europe). We remain cautiously optimistic on refining margins, primarily due to increased refinery closure rate in US and Europe. On the petchem front, we believe that the margins have bottomed out. Gas production at RIL's flagship KG-D6 block is declining. While BP's stake purchase is positive for the E&P business, RIL has not shared any concrete ramp-up plans yet.

  RoE-accretive cash deployment a key challenge: Cash deployment has been a key challenge for RIL post the completion of the new refinery and KG-D6 development. Apart from annual cash generation of USD6b, RIL has ~USD22b for deployment. The company has made investments of over USD8b in new ventures, but we do not expect meaningful positive contribution from these businesses before end-FY14. Though the most tax efficient way to reward shareholders, we believe share buyback is only a short-term solution.

  Cutting estimates; maintain Neutral: We are cutting our FY12/FY13 EPS estimates by 3%/4% to factor in lower GRM in FY12 and cut in KG-D6 production assumptions from 43/35mmscmd to 42/28mmscmd in FY12/FY13. The stock trades at 10.8x FY13E adjusted EPS of INR66.9 and at an EV of 7.3x FY13E EBITDA. Maintain Neutral with a target price of INR800.

To read full report: RIL


Q3FY12 & FY11 Results 
During FY11, sales advanced by 2.8% to `726.2 crore but net profit fell by 43.6% to `50.6 crore. OP and NP margin stood at 13.4% and 7.0% against 22.3% and 12.7% respectively in the corresponding period last year. HIL was forced to briefly shut down its Dharuhera plant because of certain labour and regulatory issues, which resulted in decline in revenue from this segment. FY10 was an exceptional year in view of the decreased cost of production.

EPS for FY11 stood at `67.4.The DER as at FY11 stood at 0.29:1 whereas the value of the gross block at `444.5 crore.

During Q3FY12, sales rose 14.8% to `194.3 crore and net profit by 59.5% to `10.2 crore. (YoY). OPM and NPM stood at 10.5% and 5.2% compared to 8.5% and 3.8% respectively in Q3FY11. EPS for Q3FY12 stands at `13.6.

HIL continues to expand its production capacity from time to time. HIL setup a new 90,000 tpa cement sheet plant at Balasore, Orissa, which started commercial production in Q3FY09. It also augmented its cement sheet capacity at Vijayawada plant by 90,000 tpa (commercial production started in Q2FY10) taking total capacity to 8.5 lakh tonnes a year.

In FY09, HIL had increased its thermal insulation capacity from 3,000 tpa to 6,000 tpa. HIL is further expanded its cement sheet capacity by setting up a 90,000 tpa plant at Jharkhand at cost of `40 crore; and increased capacity at existing UP plant by 90, 000 tpa at cost of `30 crore. A new unit at Golan, near Surat, Gujarat for manufacture of AAC blocks started commercial production during July 2010.

The total capacity of the cement sheet is at present 8, 54, 500 tpa. Prefab building panels at 4, 60, 000 tpa and prefabricated autoclaved capacity is increased to 3, 05, 000 from 1, 00, 000 tpa in 2010.

Aerocon Panels 
Aerocon Panels, used for construction of prefab structures and partition walls, has been extensively used in the infrastructure sectors like roadways, irrigation, power plants, airports etc and also in the construction of malls, schools, colleges etc.

Aerocon Panels business is expected to grow in excess of 25% a year for next few years. Aerocon AAC – Blocks, another key offering of HIL as part of its Green Building Products initiative also registering a good growth. This was possible due to the newly commissioned plant at Golan. After the stabilization period of six months of operation, the Golan plant is operating at above 60% of its capacity.

This has helped HIL to capture significant portion of the markets in west and south in a short time amidst intense competition, which is a reflection of the HIL’s aggressive and successful strategies in developing this business. The division will continue to grow in volumes in the coming years, although there will be pressure on prices as competition is likely to intensify further with new entrants in the market. However, the high acceptance of its Aerocon brand and focus on quality and reliability will help HIL to grow this business.

Thermal Insulation Products
This group of Calcium Silicate based insulating materials supplies to industries such as cement, power, petrochemical and fertilizer plants. Due to their superior properties and high quality, HIL’s products have gained good acceptance over its substitutes. Efforts are being made for developing new applications to expand the market size.

The thermal insulation products, which face capacity constraints, also suffer owing to surge in imports from China. The augmented capacity, improvements in efficiency and costs will help in recovery of this product
segment in 2011-12 and going forward on account of fresh investments in green field projects and replacement and modernization of plants in the Cement, Fertilizer, Petrochemicals and other industries.

To read full report: HIL


Q3FY12 & 9MFY12 Results:
During Q3FY12, net profit surged by 42.3% to `22.2 crore (`15.6 crore) on 50.0% higher sales of `345.0 crore (`230.0 crore). OP and NP margin stood at 18.0% and 6.4% as against 18.2% and 6.8% respectively in Q3FY11. (YoY)

During 9MFY12, net profit advanced by 24.7% to `60.0 crore on 43.2% higher sales of `953.2 crore. OP and NP margin stood at 17.9% and 6.3% Vs 17.5% and 7.2% respectively in 9MFY11. 9MFY12 EPS works out to `46.5 Vs `37.3 in 9MFY11.

Tie-up with Hindalco
PAL has an exclusive tie-up with Hindalco, the only container grade raw material manufacturer in the country, for supply of Raw material. In this context, the Company also benefits from the almost ‘zero’ inward freight cost due to being in close proximity to Hindalco.

Major Airlines viz. Indian Airlines , Air India, Jet Airways etc. All the sectors of Indian Railway Catering and Tourism Corporation [IRCTC], entire Indian Railways viz. Western, Southern, South Central, Northern, Eastern and South Eastern and Railway Contractors; Flight Kitchens such as Sky Gourmet, Taj Air Caterers – Mumbai, Chennai, Delhi, Ambassador Flight Kitchen, Oberoi Flight Service etc. Bakers and confectioners such as Monginis,

Ambassador’s Croissants, Taj Birdys etc. Retailers such as Pantaloon Retail (Food Bazaar) and Reliance Retail (Reliance Fresh), P.S.U.s such as N.T.P.C., Rihand Nagar, Terminal Ballistic Research Laboratory, Chandigarh (Ministry of Defence), Many leading Hotels, Restaurants of Mumbai, Delhi, Kolkatta, Chennai, Hyderabad, Bangalore, Baroda, Pune etc.

Global clients include B.E. International, U.K. (Danone Group company), SOP International, U.K. (Major in Food packaging industry), Majors in Food and catering supplies in U.K. such as J.K. Foods Ltd Spiral Packaging, General catering supplies, Indus Foods Limited, Gafbros Limited, Wallace Packaging, Topmark Cash and Carry, Ethnic Foods, Seewoo, Kavis Ltd., Perk-up amongst others;

Alupack Gmbh and Devpack from Germany, USA, Kari-Out, Abaline, Universal, Pioneer etc. Major airlines such as Emirates Airlines, Singapore Airlines, Thai Airways, Gulf Air, Etihad Airways, Air Asthana, Srilankan Airlines, and International flight kitchens like Emirates Flight Catering Co., CIAS Flight Kitchen, and World Aviation Services.

Tiny equity capital of `12.9 crore is supported by huge book value of the share of `286. PAL’s gross block increased 160% to `572.7 crore from `220 crore in FY10 owing to its expanded capacity becoming operational. Debt equity ratio as at FY12 works out to 1.5:1.

The above both expansion was financed through internal accruals, debt and issue of preferential warrants converted at a various price of `260, `225, `115 and `105 from time to time. With its two manufacturing facilities situated strategically in the tax haven of the Union Territory of Dadra and Nagar Haveli, India, the tax outgo is rather minimal.

Packaging accounts for around 11% of aluminium usage in India as compared to a global share of around 20%. Given the rising middle-class and with an increasing disposable income, health awareness and the preference for eco-friendly packaging and serving solutions, the demand for AFCs is set to increase at a rapid pace. As the Indian economy matures, this share is expected to move towards the global level of 20%.

The industry in which PAL operates is at a very nascent stage in India as the usage is largely restricted to airlines and railways. However with increased awareness for health and hygiene the demand for AFCs and AFRs is expected to pick up over the next couple of years in a big way.

Moreover, AFCs and AFRs are slowly and steadily replacing other packaging substitutes like plastic, porcelain and glass containers as AFC’s offer various advantages; Aluminum Foil has amazing properties. It is light weight, aesthetic, attractive, resistant to odour, water, air, light, gas, oil and grease and possesses high thermal and electrical conductivity features. All this adds up to a highly versatile product that can be used in myriad applications from the traditional food industry to the hi-tech electronics and telecommunications industry.

 Railways: Indian Railways is the world’s fourth-largest railway network, transporting more than 18 million passengers daily. It runs more than 17,000 trains a day. Even a marginal change in aluminium packaging consumption by the Indian Railways can potentially increase demand for such products in a significant way. The Railways announced the addition of 56 trains in Budget 2011-12, and the construction of four lines. This is expected to translate into increased demand for aluminium packaging products.

Food processing industry: The Indian food processing sector is the fifth largest in the country in terms of production, consumption and export. The US$100 billion Indian food processing market is estimated to grow 13 percent annually.

Food retail industry: India’s food retail turnover is expected to grow from `3, 39,365 crore in 
2009-10 to `7, 27,212 crore by 2025, enhancing the demand for aluminium packaging solutions. This is expected to translate into an increased consumption of aluminium foil containers, lids and foil rolls. Besides, the Indian fast food industry is expected to grow at a CAGR of 30-35% during 2010-2013, which is expected to increase downstream foil packaging applications.

Growing urban population: India's urban population is growing and the proportion of urban Indians is expected to rise from around 30% to 40% in a decade. This is likely to translate into an increased consumption of aluminium foil containers, lids and rolls.

Airports: The size of, India’s aviation market trebled in five years, according to the latest report by the International Air Transport Association (IATA). India is currently the world’s ninth-largest aviation market; domestic passenger traffic is estimated to reach 150–180 million by 2020. The Indian commercial aerospace market is estimated to absorb about 1,100 commercial jets worth US$130 billion over the next 20 years, widening the market for aluminium packaging products.

Growing working population: In 2010, half of India’s population was younger than 25 years old and 781 million individuals comprised the working-age population of 15-64. These numbers are expected to increase sharply over the next two decades. By 2020, the country’s working-age population is expected to reach 916 million and by 2030, India’s working-age population should reach an impressive 1.02 billion.

Valuation & Recommendation
PAL enjoys healthy position in the international market. Quality of the products is best and comparable to any other products of World Class suppliers. The expansion shall enable to capture the export market and the ever expanding retail market. Considering all these factors PAL is very much optimistic about times to come. The installed capacities have increased three times from the existing capacities with a wide range of product mix, which shall result in higher turnover & profitability going forward.

India is the world’s eleventh largest packaging consumer, with a market size of US$550-billion that is expected to grow 18-20% (presently 15%). Evidently, it is projected that increased incomes will translate into higher industry growth.

The large manufacturing base, long term supply contracts with leading clients, almost zero inward freight cost, zero excise, octroi and sales tax benefits, strong brand, huge replacement market, the potentially large addressable market coupled with major expansion give strong revenue & profitability visibility for PAL going forward.

At the CMP of `314, the share of PAL is trading at a P/E of 5.1 on FY12E. We recommend 
BUY with a target price of `390 at which the share will trade at a P/E of 6.5.


Analysis of tenders awarded by PGCIL indicates that ordering in FY12 has been healthy possibly due to it being the final year of the 11th plan period. However, our interaction with an industry player suggests that PGCIL ordering may decline in FY13 as it being the first year of the 12th plan period.

Equipment prices have fallen sharply in recent tenders especially in the higher rating of 765 KV transformers and reactors. Chinese companies have made a major headway in winning orders in this segment.

We continue to maintain a negative outlook on the sector in view of intense price competition from domestic and foreign players as well as sluggish market growth for T&fD. We maintain negative bias for ABB (Reduce with Target Price of Rs 670), Siemens (Reduce with Target Price of Rs 780), Crompton Greaves (Reduce with Target Price of Rs 130), Alstom T&D (Reduce with Target Price of Rs 158).

Equipment prices in 765 KV range have come under pressure
  Ordering from PGCIL has remained strong in Apr-Feb 2012 as the company nears end of the XIth plan period.

  In 11M-YTD FY12, the central transmission utility placed orders worth Rs 145 bn vs Rs 92.9 bn in the corresponding period of the previous fiscal. However, this is not a cause for cheer as indications are that PGCIL ordering is likely to peak out in FY12 and there could be a period of slack in the initial phase of the 12th plan period.

  The BTG market in the power generation had already slowed down in FY11-12 and its lag impact on the T&D market has begun to feel now. 

  The private sector demand for T&D equipment continues to remain morose. While there are projects coming up from the state electricity boards, these could face funding issues as banks have turned cautious on lending to SEBs. Change of state governments is also a risk as orders awarded by previous government could be reviewed/cancelled. There is already indication of a large T&D order being cancelled in UP.

  We also understand that product pricing is under severe stress and likely to remain so in the foreseeable future. This is especially so in the higher range of transformer ie 765 KV.

  There has been significant increase in competition from Chinese players. This is also corroborated by our findings from the PGCIL ordering trend in February 2012. Chinese companies like TBEA and Baoding have won 765 KV reactor orders worth Rs 5.9 bn accounting for 87% of the total ordering in the segment in

  Interactions suggest that TBEA has become aggressive in bidding as its manufacturing facility in India is expected to come onstream by the end of CY12.

  Bulk of the order awards were accounted by the transmission line tower segment at 57%. The competition in the transmission towers segment continued to remain strong with many as 17 players announcing order wins. Having said that, top five players accounted for 63% of the ordering on the transmission line towers business. Tata Projects was the leading contractor with a 19% share in Apr- Feb 2012 period.

 PGCIL had excluded circuit-breakers from the Sub-station package. This has significantly
reduced the entry barrier for non-T&D equipment players. As a result, competition in the substation space has increased from EPC players like Jyoti Structures, KEC, Kalpataru Power, L&T etc.

 As discussed earlier, since banks have been reluctant to finance SEBs, cash conversion cycle for equipment companies has turned longer. Consequently, the working capital cycle of equipment companies could continue to remain on the higher side in the near term.
Near-term outlook on T&D spending remains negative

 Our interactions with industry players indicate that ordering from state utilities
has been slack since past 18 months.

■ Due to issues like delays in land acquisition, domestic coal scarcity and soft merchant tariffs, investment in power generation has taken a hit in FY12. 

 While Power Grid Corporation of India Limited (PGCIL), has signaled to continue investment into 12th plan period and plans to invest Rs 1.0 trn (nearly double the investment during the 11th Plan (2007-2012)), the spending tends to be slack in initial plan period. This could put further downward pressure on the equipment pricing in the market.

 Even as the T&D market remains lackluster, entry of new players like TBEA has aggravated the pricing situation.

 We see continued challenges (in terms of orders, margins and cash generation) for T&D equipment companies in FY13.

Remain Negative on the T&D equipment sector
We continue to maintain a negative outlook on the sector in view of intense price competition from domestic and foreign players as well as sluggish market growth for T&D. ABB (Reduce with TP of Rs 670), Siemens (Reduce with TP of Rs 735), Crompton Greaves (Reduce with TP of Rs 125), Areva T&D (Reduce with Rs 158).