Friday, April 20, 2012

>SKF INDIA: Developed the revolutionary “StopGo” bearing for the two-wheeler sector

SKF India has developed the revolutionary “StopGo” bearing for the two-wheeler sector on the lines of the “Start-Stop” technology, which shuts down the engine when a vehicle is not moving. The installation of this bearing in two-wheelers can increase fuel economy by 6-10%.

In Q1CY2012, the company’s other expenses/sales ratio was the lowest in three years for any quarter as there were no foreign exchange (forex) losses. In CY2011, the company had suffered a forex loss of Rs15.4 crore.

The company has planned capital expenditure (capex) of Rs100 crore for CY2012 which remains modest. It proposes to expand all three plants, ie the Bangalore, Pune and Haridwar plants.

The company passed an enabling resolution for Buyback of shares. This may act as a support for the stock. Promoters currently hold 53.5% stake in the company.

The company’s sales in Q1CY2012 were affected by a slowdown in the industrial bearing sector. Concerns specifically pertain to the wind power sector where the accelerated deprecation scheme ended on March 31, 2012. Some reports expect atleast a 15% decline in the demand for wind turbines if the accelerated depreciation scheme is not extended beyond March 31, 2012.

SKF India continues to support SKF Technologies (a company owned directly by SKF Sweden) and has increased the loan amount to the company from Rs162 crore in CY2010 to Rs209 crore in CY2011. The company received interest income on the same but it is difficult to ascertain the commercial and transfer pricing arrangement.

View: We see continued challenges in growing the sales in CY2012 as the overall industrial activity remains subdued. There is also an overhang of the wind power sector slowing down which will affect the industrial revenues of the company in the next few quarters.

The automotive business also faces a challenging growth environment in the second and third quarters of CY2012. We are lowering our revenue growth projection for CY2012 to flat revenue year on year (YoY). There is no change in the contribution margin. Unusually low other expenses/ sales ratio reported in Q1CY2012, would inch back to 14.5% as it contains write-back of Rs7.5 crore pertaining to extra provisioning done in employee expense during Q4CY2011.

Our earnings per share (EPS) growth projection for CY2012 stands at Rs43.3, indicating a growth of 9.5%. At Rs700 the stock trades at 16.2x CY2012 earnings and prices in the positives fully.

The stock’s valuation is towards the higher end but the revolutionary “StopGo” bearing product for two-wheelers seems to have a great application. While we do expect the two-wheeler industry to introduce products on the “StopGo”, the expensive valuation and muted growth leaves little room for any meaningful upside. However, we also take note of a strong possibility of buy-back of shares. This keep us neutral on the stock.


>Illusive recovery in GRMs

Crude traps sector and government likely to rescue in Q4FY12

GRMs seemed to be recovering in the month of January but it was an illusive recovery. With rising crude prices the GRMs also felt the heat and started declining from February, continuing till March. Benchmark Reuters Singapore Complex GRMs which averaged US$9.1/bbl in January declined to US$5.7/bbl in the month of March. Overall, the GRMs averaged US$7.7/bbl in Q4FY12 against US$7.9/bbl in Q3FY12. Sequentially, Gasoline-Crude and Naphtha-Crude cracks improved while Diesel-Crude, Jet Kero-Crude and FO-Crude cracks declined thus eliminating the benefit. GRMs have recovered a bit and are now hovering around US$7/bbl.

■ Iran issue leads crude to US$125/bbl
EU embargo on Iranian crude kept the crude prices (Brent) higher during February and March which averaged US$119.8/bbl and US$125.1/bbl respectively. Thus Q4 crude prices averaged
US$118.6/bbl. Even rising Libyan production did not arrest the rising crude prices. Crude prices are likely to remain higher in near to medium term due to the Iranian issue. We have recently upgraded our crude price assumption for FY13E and FY14E to US$120/bbl and US$110/bbl from US$104/bbl and US$100/bbl respectively.

 Under-recoveries scale higher at Rs448bn: Devoid of price hikes in regulated fuels, under-recoveries scaled up further to an estimated Rs448bn in Q4. However, the OMCs are expected to be adequately compensated through upstream subsidies and cash from the government.

 Crude estimate and rupee-dollar exchange rate for FY13E and FY14E revised: We have revised our crude price assumption to US$120/bbl and US$110/bbl and rupee-dollar exchange rate to Rs50/US$ to Rs48/US$ for FY13E and FY14E respectively. Incorporating these changes we have revised our estimates for RIL, Cairn, Gujarat Gas, Petronet LNG and IGL with subsequent changes in our target price and recommendation.

To read report in detail: OIL & GAS SECTOR

>Bharti Airtel launches TD LTE in India; Bharti kicks off 4G in India

Bharti Airtel launches TD LTE in india Bharti Airtel, India’s largest wireless operator, became the first operator in India to launch 4G services. The company launched TD LTE in Kolkata, one of the four circles in which it acquired spectrum in June 2010. Our interaction with the company indicated that it is a city-wide commercial launch and the company will be launching in other circles shortly.

Early days; high service and device price implies urban focus Bharti has launched LTE with a service price largely in line with high usage 3G data plans. However minimum monthly commitment is much higher than for 3G services, at INR999/month (USD20). Bharti has launched 4G with data card and a Wi-Fi device with a minimum cost of INR7,750 (USD155). We expect initial focus to be urban markets.

No significant impact on earnings or capex estimate
We do not expect any significant impact of LTE launch to our estimates, including capex, considering the limited geographical launch, and high device and service price. 3G, which had a much wider launch, has also not had much success one year since launch. Bharti paid INR33b to acquire spectrum in 2.3Ghz band in four out of 22 circles. RIL, which is the only company holding pan-India 2.3Ghz spectrum, will be the key operator to watch for. Our checks indicate that 1) a meaningful launch by RIL in 2012 is unlikely, and 2) RIL will closely watch for developments on 700Mhz spectrum auction as it is much more capex efficient compared to 2.3Ghz. We have a DCF-based TP of INR400 for Bharti.

To read report in  detail: BHARTI AIRTEL

>HDFC BANK LIMITED: Q4FY12 Result Update

Consistently consistent but limited upside

HDFC Bank’s Q4FY12 performance was in line with our expectations (PAT at Rs14.5bn). The bottom-line performance was primarily driven by healthy growth in NII while higher opex was offset by lower provisioning during the quarter. Asset quality held up well with stable %GNPA, restructuring & PCR. While consistent performance and strong asset quality have made the stock one of the safest bets in banking sector, limited upside (8%) to our fair value estimate leads us to maintain our Hold recommendation.

 NIM stable QoQ, Loan growth @ 22%: NII grew by a moderate 19.3% yoy (in-line) to Rs33.9bn led by a healthy credit growth (22% yoy) while the reported NIM was stable sequentially at 4.2%. Loan yields benefitted from higher share of retail business (incremental growth skewed towards unsecured/high yield products). However, this was offset by increase in cost of funds leading to QoQ flattish NIM (reported) at 4.2%.

 Asset quality holds up well: Asset quality continued to remain strong with GNPA stable in both absolute and relative terms. Restructured loans (including applications received and under process) were stable at 0.4% of gross advances. Despite lower provisions sequentially, PCR improved to 82.4% (from 80.3% in Q3FY12). While the slippage rate for FY12 came in at an enviable 1%, we expect this to inch up in FY13 to 1.3% led by 1) higher share of unsecured/high yield products and 2) impact of general deterioration in credit quality due to moderation.

 Healthy credit growth, CASA ratio up QoQ: The advances book grew by a healthy 22% yoy to Rs1,954bn primarily driven by the retail segment (33.7% YoY with strong growth in unsecured/high yielding products). For FY13, the share of retail segment may come off a bit due to weaker demand in key segments (auto & housing) though anticipated improvement in corporate segment should help maintain a healthy growth of 20.6% YoY. Meanwhile, deposits grew by 18.3% yoy and 6% QoQ to Rs2,467bn with CASA improving sequentially to 48.4%.


>ACC: Continued cost pressures and fears of CCI imposing fine on cement companies

 Revenues of the company during Q1CY12 grew by 19% YoY primarily due to improved cement realizations during Q1CY12 as well as higher sales volume.

 Operating margins witnessed an improvement sequentially led by cement price hikes and stood at 21.5% for Q1CY12 as against 15.56% in Q4CY11. However due to higher costs, margins remained lower than

 Net profit registered a decline of 56% for Q1CY12 due to higher depreciation charge on change in the depreciation policy for captive power plants.

 At current price of Rs 1248, stock is trading at 19.4x P/E and 8.9x EV/ EBITDA multiples on CY12 estimates. Stock has corrected by nearly 10.5% since our last recommendation due to steep valuations, continued cost pressures and fears of CCI imposing fine on cement companies. Based on high valuations, we continue to maintain REDUCE recommendation on the company with a revised price target of Rs 1235 (Rs 1246 earlier) and would look for better entry points to invest in the stock if demand and pricing scenario remains strong.

Revenue growth led by price hikes and volume growth
 Revenues of the company during Q1CY12 grew by 19% primarily due to improved cement realizations during Q1CY12 as well as higher sales volume.
 Dispatches of the company stood at 6.72 MT in Q1CY12 as against 6.16 MT in Q1CY11, showing a growth of 9.1% on YoY basis. Dispatch growth is expected to remain steady going ahead with improvement in demand. We thus expect dispatches to grow by 9% to 26MT in CY12 for the company.
 Stubborn pricing discipline led to healthy improvement in average cement realizations for the company. Cement realizations stood at Rs 4256 per tonne during Q1CY12 as against Rs 3893 per tonne during Q1CY11. Demand has also started recovering in most parts of the country resulting in increase in cement prices during Q1CY12. Companies have also passed on hike in excise duties and railway freight to the end users. Though marginal correction in cement prices is being witnessed now in some regions, we expect cement prices to remain firm for Q2CY12 and expect it to witness correction from June, 2012 onwards with
impact of higher supplies as well as monsoons.
■ We thus maintain our revenue estimates. We expect volumes to grow to 26MT in CY12 and expect pricing to improve by 10% in CY12 in comparison with CY11.

Margins down on yearly basis due to continued high cost pressures
 Operating margins witnessed an improvement sequentially led by cement pric hikes and stood at 21.5% for Q1CY12 as against 15.56% in Q4CY11.
 EBITDA/tonne during the quarter stood at Rs 917 per tonne as against Rs 900 per tonne during Q1CY11. However, on a sequential basis, EBITDA per tonne has improved as against Rs 654 per tonne witnessed during Q4CY11 due to improvement in cement prices, decline in staff cost and other expenditure per tonne.
 On yearly basis, raw material costs per tonne moved up due to higher fly ash and gypsum prices. Power and fuel costs also moved up due to increase in production as well as higher prices of coal coupled with increase in purchased power tariff. Power and fuel costs are likely to remain high going forward also. For the full year, freight costs moved up due to increase in freight rates as well as sales volumes.
 We maintain our estimates and expect EBITDA/tonne of Rs 859 for CY12, translating into operating margins of 19.9% for CY12.

Net profit performance impacted by one-time write-off related to depreciation
 Net profit registered a decline of 56% for Q1CY12 due to higher depreciation charge on change in the depreciation policy for captive power plants.
 During the quarter, company has recognized an additional depreciation charge of Rs 3.4 bn since it changed the method of providing depreciation on captive power plants from 'Straight Line' to 'Written Down Value' method with retrospective effect. Adjusted with this, net profit would have been Rs 3.8 bn as
against our estimate of Rs 3.9 bn.
 We tweak our estimates to incorporate these one-time charges and expect net profits to be around Rs 12 bn for CY12(against Rs 13.4 bn earlier)

Valuation and recommendation
 At current price of Rs 1248, stock is trading at 19.4x P/E and 8.9x EV/EBITDA multiples on CY12 estimates.
 Stock has corrected by nearly 10.5% since our last recommendation at Rs 1389 due to steep valuations, continued cost pressures and fears of CCI imposing fine on cement companies.
 Based on high valuations, we continue to maintain REDUCE recommendation on the company with a revised price target of Rs 1235 (Rs 1246 earlier) and would look for better entry points to invest in the stock if demand and pricing scenario remains strong.