Tuesday, April 24, 2012


■ CIL reports modest 4QFY2012 results: CIL’s top line declined marginally by 0.1% yoy to `3,651cr (above our expectation of `3,437cr). Gross crude oil realization increased by 16.0% yoy to US$109.3/bbl. Operating margin contracted by 207bp yoy to 81.6%, resulting in a 2.6% yoy decline in operating profit to `2,981cr for the quarter. CIL recorded an exceptional loss of `217cr due to forex fluctuation during 4QFY2012. Excluding this exceptional gain, adjusted net profit declined by 4.4% yoy to `2,403cr (above our estimate of `2,263cr).

■ CIL reports rise in potential resources: During 4QFY2012, CIL reported that its estimated potential resources increased to 7.3bboe compared to earlier estimate of 6.5bboe. The recoverable reserves estimate also increased from 1.4bboe to 1.7bboe during the quarter.

■ Outlook and valuation: CIL has the infrastructure in place to ramp up production to meet its targets. Hence, we expect production to gradually increase in the coming quarters to reach a capacity of 175kbopd by FY2013 and 205kbopd by FY2014. Further, there are various untapped exploratory upsides in Barmer Hills and other fields waiting to be developed. Hence, we recommend Accumulate on the stock with a target price of `372.

To read report in detail: CAIRN INDIA

>STRATEGY: THE POWER OF EQUITIES- 16 companies' dividend in FY2011 was greater than their market value in FY 2002

Investors have several instruments to invest their surplus funds. Some of the popular avenues include bank fixed deposits (FDs), gold, postal saving schemes, mutual funds, real estate, insurance, and equities. A comparison between these set of instruments on the basis of risk and reward is common. For instance, over the last 10 years, bank FDs would have generated a return of 115.9% (point to point gain) assuming interest rate of 8% per annum and the principal amount plus interest earned for one year is reinvested at the end of every year. As against this, investment in gold would have returned 458.9% over the last 10 years.

In comparison, the Indian stock market barometer, the BSE Sensex, would have provided return of 400% during the same period. Now for small and retail investors, the relevant question is whether it is sensible to take the plunge in equities for the extra gain of 285.8% compared with FDs where returns are almost certain. Measured against the second option, that is gold, equities have underperformed by 57.2%. Does equity investment make sense?

First of all, as a basic principle, one instrument of investment cannot be pitted against another. Each of these investment instruments has its own pros and cons. In fact, different features and risk and return profile make them complementary rather than competing investment instruments. The real question should be how much of surplus funds should be invested in each of these instruments.

How much to invest in which the instrument is governed by factors like risk profile of the investor, which largely depends on his age and objective of investment, future fund requirement, and investment horizon. Equities have their own charm as they have the potential to generate manifold gains over the long term.

To read report in detail: POWER OF EQUITIES

>Tribhovandas Bhimji Zaveri: IPO FACTSHEET

Objects of the issue
The company is mobilising funds to establish new showrooms (with Rs19.2 crore), finance incremental working capital (with Rs160.5 crore) and for other general corporate purposes.

Company background
TBZ is a well-known and trusted jewellery retailer in India with 14 showrooms in nine cities across five states, with an aggregate carpet area of approximately 48,818 square feet (sq ft). The company primarily sells gold jewellery and diamond-studded jewellery. It also sells other products, including platinum jewellery, jadau jewellery and silverware. The design and manufacture of its products including silverware is done either in-house or by third parties. The company has its flagship showroom in Zaveri Bazaar, Mumbai, which has been in existence since 1864. Since 2001 it has opened 13 showrooms, including the seven showrooms opened between August 2007 and October 2008.

Investment positives
A play on the growing organised jewellery retailing in India: TBZ is a play on the growing organised jewellery retailing market in India. With volume of about 567 tonne, India is the largest gold jewellery market in the world with a 29% global demand for CY2011. The country’s investment-related gold demand in CY2011 was 366 tonne, which was 25% of the global demand at that time. According to the Centre for Monitoring Indian Economy (CMIE) estimates, the overall gold demand, including the demand for jewellery and investment, is likely to expand at 29% to 1,200 tonne in FY2021. With the exception of 2009, India has registered a strong value growth in the last decade despite an over 450% surge in the price of gold.

Strong brand equity and trust enjoyed in western India: TBZ has very strong presence in western India with its base in Mumbai, Maharashtra (it started its first showroom at Zaveri Bazaar, Mumbai, in 1864). The company has many firsts to its credit, like the introduction of 100% pre-hallmarking system and providing the 100% gold buy-back facility to customers. Around more than 50% of its stores (eight stores) are present in the western region, predominantly Mumbai where it has five stores. Owing to its strong heritage, the company enjoys strong brand equity, and trust and brand recall amongst its customers.

Balanced business model with sufficient back-end integration and complete control of front-end: TBZ’s business model is balanced on the back end as well as the front end. The company sells diamond as well as gold jewellery. In case of gold jewellery, it has over the years built strong relationships and repute with around 150 wholesalers and jewelers. Through them it procures gold on an outright sale basis which provides it economies of scale and reduces the making charges. In the diamond and studded jewellery segments, the company has its own manufacturing facility at Kandivali with capacity of around 1 lakh carat, enabling it to benefit in various ways, like saving on making charges and allowing it to charge a premium on superior designs. At the front end of the system, all its 14 retail showrooms are run and managed by the company itself with no franchisee involvement. This, the company believes, helps in maintaining the brand image and the trust of the consumer.

To read report in detail: TBZ


>RELIANCE INDUSTRIES LIMITED: RIL to set up a petcoke gasification plant (4QFY2012 Results)

For 4QFY2012, Reliance Industries (RIL) reported 17.2% yoy growth in its top line. However, EBITDA and PAT declined by 33.3% yoy and 21.2% yoy, respectively, due to a decline in KG-D6 gas production and lower gross refining margins (GRMs).

Lower gas production leads to a decline in bottom line: RIL’s net sales increased by 17.2% yoy to `85,182cr, in-line with our estimate of `84,669cr. However, EBITDA decreased by 33.3% yoy to `6,563cr on account of lower profits from all its three main segments. GRM stood at US$7.6/bbl in 4QFY2012 compared to US$9.2/bbl in 4QFY2011 and US$6.8/bbl in 3QFY2012. Production from KG-D6 stood at 35mmscmd in 4QFY2012 compared to 41mmscmd in 3QFY2012 and 51mmscmd in 4QFY2011. Other income increased by 150.3%
yoy to `2,295cr and depreciation expenses decreased by 21.5% yoy to `2,659cr. Hence, despite the 33.3% decline in EBITDA, PAT decreased by only 21.2% yoy to `4,236cr (slightly above our estimate of `4,177cr).

RIL to set up a petcoke gasification plant: During 4QFY2012, RIL finalized its plan to set up a petcoke gasification plant for a capex of US$4bn. The company also downgraded its KG-D6 reserves by 12-15% due to reservoir complexity.

Outlook and valuation: RIL’s refining and petrochemical segments’ profits declined during 4QFY2012. Going forward, although there are some concerns on the KG basin gas output, we believe RIL along with BP will optimize its producing blocks in KG-D6. Moreover, the stock is currently trading at a PE of 11.1x FY2013E and 10.4x FY2014E, compared to its past five-year trading average of 17.0x forward PE. Thus, we maintain our Buy recommendation on RIL with an SOTP target price of `872.

To read report in detail: RIL

>MULTI COMMODITY EXCHANGE LIMITED: Initiate at Buy; Scarce Commodity

  Initiate at Buy: Structural growth opportunity — We initiate on MCX at Buy with a Rs1,580 target price based on 22x 1yr fwd PE. MCX is the dominant exchange (over 86% market share) for commodity derivatives trading in India. It has a highly scalable business, high returns and strong execution track record, and it looks well positioned to benefit from the industry’s strong growth potential long-term.

 India’s unique, competitive industry structure — a) Commodity exchanges distinct from stock exchanges with a separate regulator; b) Multiple competitors (five national exchanges); c) Closely regulated list of products and participants; and d) Pricing is low and based on turnover rather than number of contracts. It is still evolving in structure (regulations, products, competition) and has high growth potential. While this is likely to throw up significant opportunities, there will also be some challenges.

 Why we like MCX? — We believe MCX management is a step ahead in innovation, product mix and business volumes, and should retain its potent mix of high returns and potentially high growth. Key reasons for our positive bias: a) Rise in market share to 86% (FY12) from 45% (FY06) despite increase in competitive intensity; b) Strong turnover growth (59% CAGR over FY06-12) even amid declining commodity prices; c) High profitability (EBITDA margins of 59% in 9MFY12) and profit growth (36% CAGR over FY06-12); and d) Cash surplus, with no debt/capex requirements in near future.

 Key stock drivers — We believe key catalysts for the stock could be: a) Continued high turnover growth (we believe 20-25% growth sustainable without regulatory opening up); b) Hike in dividend payout; c) Regulatory changes allowing new products (options, indices, intangibles) and participants (FIIs, domestic institutions) – though timing is uncertain; and d) Potential value unlocking from strategic stakes in DGCX, MCX-SX (we assume nil value currently).

 Key risks — a) Cyclical business; b) Mono-line business segment and high concentration; c) High commodity prices; d) Competitive industry; e) Regulatory changes, and f) Potential conflicts of interest with parent and technology provider, FT.

To read report in detail: MCX

>TATA CONSULTANCY SERVICES: Guides for Gross additions of 50000 employees for FY13E

TCS results offered respite to the IT sector with topline marginally above street estimates and EBIDTA margins inline with street expectations. TCS offered positive commentary on the business environment citing uptick in discretionary spending at clients as well as new deal signings which has enabled strong order pipeline for the company. This was in sharp contrast to its earlier commentary during Q3FY12 in which it hinted of slower discretionary project starts and slower decision making cycles. Despite tapering Utilization rates and moderate hiring guidance for FY13E , TCS guided for wage hikes across the board and hinted at 8% wage hikes in India which could put nearest peer Infosys in a fix ( Infosys has not provided any wage
hikes to its employees post Q4FY12 fiasco) . BFSI vertical revenues were also flat on a sequential basis and TCS hinted at growth outlook in the BFSI vertical over the coming period driven by new deal wins. Barring rupee depreciation drive EPS upgrades we see few positive triggers for the stock in the near term and growth outlook is fairly priced in the valuations. We value TCS at a P/E of 16x on FY14E EPS of Rs70.4/share which yields target price of `1126/Share.

  Reiterate Underperformer.
Revenues above expectations, EBIDTA Margins inline with street estimates TCS reported Q4FY12 revenues of USD2648mn up 2.4% on a QoQ basis ahead of our estimates (our estimate was USD2630mn). Volumes growth at 3.3% on a QoQ basis was ahead of peers Infosys which has reported a sequential drop in volumes. Revenues in INR terms came at `132.5bn up 0.4% QoQ and 30.5% on a YoY basis. Volume growth of 3.26%, Constant currency pricing was down 0.97%, currency impact was negative by 1.87% bps leading to rupee term revenue growth of 0.4% on a QoQ basis. EBIDTA margin came at 29.6% down
140bps QoQ predominantly driven by rupee appreciation and strong hiring by the company. PAT at `28.9 bn was marginally above our estimate due to beat in revenues and lower tax rates.

  BFSI flat on a sequential basis, North America grows sequentially
North America, UK and APAC showed strength on sequential basis while Continental Europe declined QoQ. Retail, Manufacturing, Hitech verticals were growth drivers for the quarter while BFSI was flat on a sequential basis. BPO, ADM and asset managed services outperformed on the service line front while discretionary service lines like Business intelligence and Enterprise solution declined QoQ.

  Guides for Gross additions of 50000 employees for FY13E
TCS guided for gross hiring of 50000 employees for FY13E (Of which 43000 are campus offers) and hinted at staggered intake during the year based on demand offtake. Utilization rates (excluding trainees) came at 80.6% down 140 bps on a sequential basis due to slower volume growth. Revenues from Top 10 clients grew by 0.2% QoQ while client mining improved across bands which hints at strong cross capabilities.


>PRIME FOCUS: Market leader in 2D to 3D conversion & VFX capabilities

3-D to propel growth

Prime Focus is a market leader in 2D to 3D conversion and has created a mark globally by working on 10 of the top 30 worldwide blockbusters in the past 3 years. Its global world sourcing model from its 15 facilities, 4,500+ people, 24x7, 365-day work schedule makes it a strategic partner to global studios. Favourable industry trends along with strong management team give us confidence on 30.7% revenue CAGR over FY11-14E. Initiate coverage with a BUY on the stock with an upside of 86%.

 Unique global network of integrated studios: Prime Focus has offices across 3 continents in all time zones. Its 15 facilities, over 4,500 staff, 24x7, 365-day work schedule give it major time and cost benefits. This unique platform offers all services under one roof – right from pre-production to distribution for clients across the film, broadcast and commercials space worldwide.

 Well-positioned to capitalize on its 3D and VFX capabilities: The increasing use of visual effects (VFX) and 3D in movies opens huge market potential for Prime Focus. It has built a ‘state-of-theart’ facility at Royal Palms, Mumbai, and Chandigarh with 3,000+ seats to convert existing 2D films to stereoscopic 3D format. It is the first company worldwide to successfully complete an entire movie, Clash of the Titans from 2D to 3D in a record 8 weeks simultaneously across 7 facilities worldwide.

 Technological leadership makes it strategic partner for content owners: Given its highly differentiated offering and high execution track record the company has been able to garner some of the most important projects from studios. It is focusing on widening and deepening studio partnerships across 2D to 3D conversion and VFX along with making the relationships global. Its customers include Hollywood studios such as Warner Bros., Lucasfilm, DreamWorks Animation, Paramount, Twentieth Century Fox, Walt Disney, Summit Entertainment, Relativity
Media and Sony.

 Strong visibility on financials: We expect revenues to grow at a CAGR of 30.7% to Rs11.2bn over FY11-14E on the back of strong growth in 2D-to-3D conversion. Operating margins are set to expand from 29.6% in FY12E to 33.6% in FY14E on the back of increase in outsourcing to India. Profitability of the company will grow at a CAGR of 28.7% to Rs1771mn over FY11-14E led by strong topline growth and margin expansion.

 Valuations: The stock is currently trading at 5.7x and 4.2x FY13E and FY14E EPS of Rs8.76 and Rs11.89 respectively. Prime Focus trades at a significant discount to its Indian M&E peers even though it has higher revenue growth, high RoE, higher margins and leadership in domestic operations along with strong global presence. We value Prime Focus at 8x FY14E EPS of Rs11.89 and arrive at a target price of Rs95, 86% upside from current levels.

 Key Risks: i) Sharp fall in pricing for 2D to 3D conversion due to increase in competition; ii) Sharp currency movements that could impact profitability considering that major revenue is from UK and North America; iii) Outstanding FCCB of USD55mn which it is expected to re-pay before December 2012 with 43% premium amounting to a total of ~USD79mn.


>Coromandel International Ltd- Q4 FY2012 Result

Coromandel International Ltd (CIL), a Muragappa Group company is engaged in fertilizer, pesticides, speciality nutrients, farm mechanization and life style products businesses. On 23rd April 2012, CIL announced its Q4 FY12 and FY12 results. The consolidated result includes the audited results of company’s subsidiaries/JV’s/Associate concerns namely Parry Chemicals Ltd, Coromandel Brasil Limitada, Tunisian Indian Fertiliser SA, Mauritius ltd, Coromandel Getax Phosphates Pte Ltd, Coromandel SQM (India) Private Ltd and consolidated results of Sabero Organics Gujarat Ltd and its subsidiaries. A glimpse of the company’s consolidated Q4 FY2012 results is as follows:

The revenue increased by 133% and 30% on quarterly y-o-y and annual basis respectively. The top line growth was driven by 994% higher subsidy income on quarterly yoy basis and higher volume sales through the push selling method to the dealers by giving higher commissions and credits. The operating profit margin (OPM) of FY12 (annual) declined by 293 basis points despite 312 basis points OPM rise on Q4 FY12 due to the increased raw material prices, international fertilizer prices and currency volatility. Furthermore, the Net Profit Margin dropped by 374 basis points and 269 basis points on y-o-y quarterly and annual basis respectively.

The Board of Directors have recommended final dividend of INR 3 per share on the face value of INR 1 per share.

View: We are having a long term positive view about the company as price of key raw materials like phosphoric acid, ammonia and sulphur jump down by around 11%, 30% and 14% respectively which is likely to increase margins. In addition to that, increasing number of retail stores is likely to boost company’s profitability. Moreover, by acquisition of 74.57% equity stake of Sabero Organics, CIL enhanced its product portfolio.


>HINDUSTAN ZINC LIMITED: Expansion at Kayar mine is progressing (Q4FY12 results)

Silver lining in operations remains, maintain buy

Hindustan Zinc (HZL) reported better-than-expected Q4FY12 results with net sales of Rs30.9bn, up by 12.6% QoQ and PAT of Rs14.1bn, up by 10.9%QoQ. EBITDA stood at ~Rs16.6bn with margin at 53.6% (against our expectation of 52.7%), 250bps higher QoQ as new capacities in lead and silver stabilised and operational costs began to rationalise. We expect robust lead and silver volumes ahead as stabilisation process of new capacities is almost complete and maintain our positive stance on the stock on account of sound operations and attractive valuations. We factor in 50% increase in royalty from FY14E and revise our FY14E estimates lower by ~7%. Reiterate Buy with a revised lower target price of Rs151.

 Lead and silver volumes increase more than expected: Lead and silver sales went up sequentially by ~30% and ~56% respectively as both the lead smelter and silver refinery stabilisations were faster than our expectations. Zinc volumes remained subdued with closure of high cost Vizag smelter and due to falling grade in Rampura Agucha zinc mine.

 Margin shows sequential improvement: EBITDA improved by ~18% QoQ to Rs16.6bn and EBITDA margin stood at 53.6% (lower than our estimate of 52.7%) as operational costs were rationalized on account of stabilization of new capacities in lead and silver. Also, closure of high cost Vizag smelter and improvement in LME realizations helped in margin improvement QoQ.

 Conference call highlights: New lead smelter of 100ktpa operated at ~80% capacity utilization in Q4FY12 and HZL expects 90% utilization in FY13E but would require some concentrate purchase from outside. Silver refinery of 350 tpa is fully commissioned and higher silver production is expected as SK mine ramps up to 2 mtpa. Expansion at Kayar mine is progressing well and mining at Rampura Agucha is expected to go underground by Q4FY14E with cost of production at ~US$300-310/tonne. The company closed its Vizag smelter and plans to make up for its ~30000 tpa zinc capacity from its Rajasthan smelters going forward. For FY13E, zinc production is expected to remain flat whereas lead and silver integrated production is expected at ~110 lakh tonnes and 350 tonnes respectively. Total lead and silver production expected is ~150 lakh tonnes and 400 tonnes respectively in FY13E. Dividends at 20% of PAT are expected going forward.

 Earnings revised downwards for FY14E on royalty increase: We revise our earnings estimate for FY14E as we factor in ~50% increase (against proposed 100% increase in mining bill) in royalty on zinc, lead and silver from FY14E. We revise our zinc volume estimates lower for FY13E/14E and remain conservative on our LME zinc and lead realization assumptions but see upside risk to the same going forward as demand starts to improve globally. Our EBITDA and PAT for FY14E are revised downwards by ~8% and ~7% respectively. We have revised FY13E estimates upwards due to higher silver and lead volumes and cost savings on account of closure of Vizag smelter.

 Valuations remain attractive, Reiterate Buy: We continue to like the stock due to expected strong volume growth in lead and silver, lower overall cost proposition, improvement in LME zinc and lead prices going forward and attractive valuations with favorable risk-reward. We continue to value the stock at 5x FY14E EV/EBITDA. We maintain our Buy rating on the stock with a revised target price of Rs 151.