Wednesday, April 4, 2012

>HDFC LIMITED: Major structural drivers of housing finance industry in India remain intact...

The major drivers of the housing finance industry in India as stated below remain intact:-

• Large population with a favourable demographic profile wherein 65% of the population is below 35 years
• Rising and high disposable income with high propensity to spend on assets like real estate for shelter as well as for investments
• Increasing urbanisation — currently only 31% of the population resides in urban areas
• Nuclearisation of families leading to higher demand for houses
• Due to demand-supply mismatch, the total housing shortage is ~88 million as on FY11, of which urban housing shortage is 28.9 million (as per Crisil Research)
• Tax incentives available in the form of deduction of interest and principal repayments, which results into lower effective interest rates borne by the borrower
• Improved affordability

■ Opportunity for mortgage finance industry remains huge….
There continues to remain huge potential for growth of the Indian housing finance industry. This is evident from the fact that mortgage as a percentage of India’s GDP at 9% remains one of the lowest in the world. The corresponding figure for developed countries like the US and UK stands at 81% and 88%, respectively, while for China it is at 20%.

■ India’s under-penetrated market to offer long-term growth visibility
Mortgages as a percentage of GDP in India are just 9% compared to developed countries where it is above 80% and China where it is 20%, providing long-term visibility for growth. We expect HDFC’s loan book to witness a healthy CAGR of 20% over FY12-14E to | 1995 billion.

■ Volatility in spreads contained
HDFC has been able to minimise deviation in reported spreads by maintaining it in the range of 2.15% to 2.35% in the past five years despite volatile interest rates owing to its flexible borrowing profile and stable asset-liability management. We expect FY13E calculated adjusted spreads to be stable at 2.9% as compared to 2.83% in FY11.

■ Seasoned loan portfolio, nil NNPA
HDFC’s assets are seasoned and have witnessed various cycles still maintaining resilience with nil NNPA and 0.8% GNPA as on FY11. Going forward, we expect the asset quality to remain strong with GNPA of 0.9% and nil NNPA for FY13E owing to its strong in-house recovery team.

To read full report: HDFC LIMITED

>MINDTREE LIMITED: Product Engineering Services(PES) predominantly consists of R&D services (RDS) and software product engineering (SPE) services

■ Back to IT business but not before burning ~$14 million cash
In September 2009, MTL paid US$6 million to acquire Kyocera Wireless India Pvt Ltd, the Indian arm of Kyocera Wireless, with the intention of developing android powered 3G handset and IP in the 4G long term evolution (LTE) wireless infrastructure. However, the company called off its products foray in Q2FY11 earnings after investing ~$5 million in H1FY11. The rationale was that MTL underestimated the capital expenditure requirement including sharing of marketing costs & product inventory risks (MTL’s earlier estimate was $10-15 million vs. its revised estimate of $70- 75 million). Subsequently, MTL booked a restructuring charge of ~$3.2 million ($12-15 million earlier estimate) in FY11 to account for employee costs, cancellation of purchase orders and product prototype write-offs. Though the restructuring charge was significantly lower than the company’s earlier estimate, the series of events heightened investor concerns. However, they moderated subsequently led by renewed management focus on revenue growth through select service lines and verticals and operating margin expansion.

■ Reorganisation led to focus on select service lines & verticals
MTL identified PES and IMTS as growth areas and strengthened the same by acquiring Aztecsoft in May 2008 for $72 million and 7strata in April 2010 for | 7.2 crore, respectively. Signing of $70 million worth of deals in the infrastructure management services space manifests management focus and could help improve revenue visibility. Simultaneously, the
company did away with projects in the discrete manufacturing, energy & utility vertical to focus on core verticals and earned 48.6% of its Q3FY12 revenues from three verticals viz. manufacturing, banking & financial (B&F) and travel & transportation. Manufacturing (15.4% of Q3FY12 revenues) client roster includes six of the world’s top 10 CPG players including P&G, Unilever and Pepsi. Financial services (20.9%) counts AIG, ANZ and Symantec as its customers while travel & transportation (12.3%) has Avis and Sita as its customers.

■ Margins may improve led by different levers
MindTree’s margins performance was likely a reflection of strategic missteps rather that operational weakness. MTL’s EBITDA margins declined 717 bps to 11.8% in FY11 vs. 18.9% in FY10 led by the unsuccessful handset manufacturing foray and aggressive hedging. Note,
as of Q3FY12, MTL had ~$160 million hedges outstanding out of which $42 million pertain to the levered options taken in 2007 and would expire in March 2013. These options do not qualify under accounting standard AS-30 (MTL changed its accounting treatment to AS30 from AS11 effective April 1, 2008) and would have mark-to-market P&L impact till expiry. That said, some of the margin improvement levers include employee pyramid and admin expense rationalisation. Administrative expenses stood at 20.4% of Q3FY12 revenues. Employees with less than three (<3) years of experience constitute a modest 36.7% of the total employee base but could improve as MTL has offered ~3000+ (2,400 for FY12E) campus offers for FY13E. Assuming 70% acceptance ratio yields a net fresher intake of 2,100 employees and could help flatten the employee pyramid yielding EBITDA margin expansion.

To read full report: MINDTREE

>Godrej Properties partners with private equity firm ASK Group (PRESS RELEASE)

The Mumbai-based real estate developer sells 49% equity stake in a subsidiary developing its redevelopment project in Chembur, Mumbai

Godrej Properties Ltd. (GPL) (BSE scrip id: GODREJPRP), the real estate development arm of the Godrej Group, today announced that it has entered into an agreement with ASK Property Investment Advisors, a leading Real Estate Private Equity player to sell a 49% stake in Godrej Landmark Redevelopers Private Limited (GLRPL). GLRPL had recently entered into a tripartite agreement with Kamla Landmarc Property Leasing and Finance Private Limited (Kamla) and 18 societies to undertake a residential redevelopment project in Sahakar Nagar, Chembur, Mumbai. The project, spread over approximately 14,600 sq. mtrs, will offer approximately 600,000 sq. ft of saleable area and is proposed to be developed as a modern group housing residential development comprising 2, 2.5, and 3 BHK apartments. ASK Group along with GLRPL will invest in the Sahakar Nagar redevelopment project. ASK will pay a Rs. 20 crores premium to GPDPL for its 49% stake in the project.

Mr. Pirojsha Godrej, Executive Director, Godrej Properties said, “We are very happy to have reached this agreement with ASK Group. This fits in well with GPL’s strategy of efficient capital management and demonstrates our continued ability to attract equity capital in difficult market conditions.”

Mr. Sunil Rohokale, CEO & Managing Director of ASK Investment Holdings said “It is our privilege to partner a reputed name like Godrej. We are excited as well as confident about this partnership. Redevelopment is the need of the hour to make Mumbai a world class city and raise the living standards of its citizens. With the entry of a strong brand like Godrej, redevelopment is bound to grow exponentially.”

About Godrej Properties Ltd.:
Established in 1990, Godrej Properties Limited (GPL) brings the Godrej Group philosophy of innovation and excellence to the real estate industry. GPL has completed several landmark projects and is currently developing significant projects in 12 cities across India. Throughout its operations, GPL aims to deliver superior value to all stakeholders through extraordinary and imaginative spaces created out of deep customer focus and insight.

Godrej Properties Ltd. is listed on the Bombay Stock Exchange (BSE) and The National Stock Exchange (NSE).

GPL has received several recognitions for its processes and performance which include receiving the „Best Emerging National Developer‟ award at the Zee Business - RICS Real Estate Awards 2011. GPL has also featured as the #1 ranked real estate developer for three consecutive years in 'India‟s Best Companies to Work For‟ survey, conducted by „The Economic Times‟ and „The Great Place To Work Institute‟. GPL has been featured for six consecutive years as one of “India‟s Top 10 Builders” by Construction World magazine.

About ASK Group:
The ASK group is a diversified Financial Services group renowned for its strong research infrastructure and investment advice. Over the years the group, through its subsidiary ASK Property Investment Advisors Pvt. Ltd., has emerged as a leading player in the Real estate Fund business currently managing funds of more than Rs 1100 Cr. The group has already collected over Rs. 750 Cr from its second Real Estate Fund and is well on its way to raising another 250 Cr under the Green Shoe option.


>GRASIM INDUSTRIES: Insights on Viscose Staple Fibre (VSF) and Cement pricing scenario



■ We recently met with the management of Grasim and Ultratech Cements to get insights about cement and VSF demand and pricing scenario.
 Cement demand continues to remain high due to spurt in infrastructure activity primarily in western and northern region.
 VSF prices have stabilized and pulp prices are also softening. This can aid margin improvement.
 With excellent ordering seen in the road segment and pre-election spending for infrastructure projects in Gujarat, we expect cement demand to remain strong going forward. Cement prices are also expected to remain strong for next two quarters till monsoons. We thus revise our estimates for Ultratech Cements and Grasim Industries to factor in improved pricing and volumes for FY13 and continue to maintain our positive bias for both the companies.
 We thus continue to maintain ACCUMULATE on Ultratech Cements and would advise investors to use declines in the stock to buy (Price target Rs 1592) and BUY on Grasim Industries (Price target Rs 3109 )

Key highlights about the company

Cement demand and pricing
Cement demand has been witnessing an improvement since past few months with improvement in the demand from infrastructure segment as well as residential real estate segment. Cement prices have also remained strong after witnessing declines in Dec, 2011 to Jan, 2012. Prices have moved up in line with improvement in cement demand as well as increase in cost pressures. Company's domestic dispatches stand at nearly 35.7MT for Apr,11-Feb,12 vis-a-vis 34.57MT for the full year in FY11.

Though prices have moved up but margins may remain at similar levels on sequential basis since cost pressures continue to remain high. Freight cost per tonne may remain high going forward due to hike in railway freight rates as well as expected increase in diesel prices. Power and fuel cost per tonne may also remain high due to expected increase in domestic coal prices by Coal India. Imported coal prices have come down in past few quarters but corresponding rupee depreciation has netted off its impact to some extent.

VSF demand and pricing
VSF prices have stabilized in the range of Rs 120-125 per kg for the company. Demand growth revival has not happened since textile value chain has adopted a cautious approach amidst uncertainties related to euro zone. Out of the total production, nearly 80% is sold domestically while 20% is exported. However, domestic sales are also indirectly dependent upon global markets. Along with this, price of competing fibres like PSF and cotton has also remained subdued.We expect VSF prices to remain in the similar range till demand revival and inventory build up starts again in the value chain.

However, raw material prices especially pulp have witnessed a correction of nearly 6% QoQduring Q4FY12. Further rupee depreciation from the current levels may play a spoilsport since it can increase the landed cost of the imported pulp.

Capex schedule
Grasim's expansion plan in VSF is under implementation and is progressing well. Company is adding greenfield plant of 1,20,000 TPA at Vilayat, Gujarat and carrying out a brownfield expansion of 36,500 TPA at Harihar, Karnataka which will increase its capacity by nearly 50%. Both the projects are expected to be commissioned by Q4FY13. Along with this, it is also setting up 182,500 TPA caustic capacity and 90MW power plant at Vilayat for its captive use. Company is also planning to set up a greenfield project of 180K TPA in Turkey in JV with group companies but is currently awaiting necessary approvals.

For cement, company is in the process of setting up 4.8 MT plant at Raipur, Chattisgarh and 4.4 MT plant at Malkhed, Karnataka along with a captive power plant of 75MW and waste heat recovery plant of 45MW. It had earlier targeted to spend nearly Rs 47 bn as capex for cement division for FY12 and Rs 63 bn for FY13 and onwards. However, now company has lowered its capex target for FY12 and expects to spend nearly Rs 38 bn for cement division capex. However, we had already factored in lower capex in our estimates taking into account the capex done till 9MFY12.

Financial outlook for Ultratech Cements
  We revise our cement volume and realizations estimates upwards for the company and expect domestic cement volumes of nearly 40.1MT and 44 MT for FY12 and FY13 for the company. White cement volumes are also likely to remain robust going forward and thus we expect revenues of Rs182bn(Rs175bn earlier) and Rs207bn(Rs201bn earlier) for FY12 and FY13 respectively.
  Operating margins are expected to be 21.5% and 22.5% for FY12 and FY13 respectively. Despite increase in the cement prices, margins are expected to remain largely stable since power and fuel cost and freight cost per tonne may witness an increase going forward.
  As a result, we expect net profits to grow to grow to Rs 22.3 bn and Rs 25 bn for
FY12 and FY13 respectively as against our earlier expectation of Rs18.7bn and
Rs21.9bn for FY12 and FY13 respectively.

Financial outlook for Grasim industries
■ With change in the estimates for Ultratech Cements, our revenue estimates for Grasim Industries stand revised upwards. We expect consolidated revenues to grow at a CAGR of 11.6% between FY11-FY13.
 Imported coal prices and pulp prices have come down in past one quarter but corresponding rupee depreciation may mitigate the impact of fall in the prices. We thus expect margins to be around 21.6% and 22% for FY12 and FY13 respectively. 􀂄 Net profits are expected to grow at a CAGR of 5.7% between FY11-FY13.

Valuation and recommendation

Ultratech Cements at current price of Rs1507 is trading at 16.5x P/E and 8.7x EV/ EBITDA on FY13 estimates. We value Ultratech Cements at 9x EV/EBITDA (8x earlier) and arrive at a revised price target of Rs1592 (Rs 1241 earlier). We would continue to maintain ACCUMULATE rating on the stock and would advise investors to use declines in the stock to buy with a long term view.

Grasim industries at current price of Rs2629 is trading at 10x and 9.5x P/E and 4.1x and 3.8x EV/EBITDA on FY12 and FY13 estimates respectively. We value Grasim on sum of the parts valuation and arrive at a revised price target of Rs3109 (Rs 2867 earlier). Our price target also got enhanced due to change in market value of holding investments of Grasim as well as change in estimates for cement volumes and pricing. We remain positive on the company since we expect company to benefit from improvement in cement volumes as well as improved pricing in cement.