Thursday, April 26, 2012

>GEOMETRIC: One‐off marred, otherwise a decent quarter

Geometric posted a steady revenue growth in line with expectations, however EBITDA margin deteriorated by 544bps QoQ to 12.5% due to extra ordinary items of expenditure & currency fluctuation. In our upgrade note in the previous quarter, we indicated presence in growth market, with focus on margins yielding stronger performance. But this quarter performance marred our expectation due to volatility. We retain ‘Accumulate’, with a TP of Rs80.

 Steady performance accompanied by lower than expected margins : Geometric reported in-line revenue growth of 2.7% QoQ to Rs2.25bn (PLe: Rs2.21bn, Cons:Rs2.20bn) and 5.4% QoQ in USD terms to $44.92m (PLe: $43.91m). EBITDA margin dipped by 544bps to 12.5% (PLe: 17.4%, Cons: 16.5%), due to rupee depreciation, higher utilization & extra ordinary items of expenditure. EPS degrew by 39.9% QoQ to Rs2.04 (PLe: Rs3.23, Cons: Rs3.15).

 Two‐fold performance – Revenue growth and margin expansion: We believe that the company’s strength in PLM and PES space is playing out well. The company’s ability to cross-sell strength of different geographies has started paying-off. We expect steady margin performance as these extra-ordinary is not going to be part in FY13. The management didn’t give detail for extra-ordinary.

■ Conference call highlight 1) Volume growth at ~5.1%, no change in pricing 2) New contracts amounting to $11.71mn awarded during the quarter (Q3FY12 : $3.55mn) 3) Total headcount is 4567 (Q3FY12: 4447) 4) Growth from emerging verticals like ship building, Oil & Gas & Energy 5) Effective tax rate to be ~28% for FY13 6) Fresher Hiring for FY13 to be ~200+ 7) DSO stood at 65.28 for Q4FY12 (Q3FY12: 71.36)

■ Valuation & Recommendation: We believe that Geometric’s operational performance is expected to strengthen from here. We expect a steady revenue performance for the company in FY13 with improved margins. We reiterate our ‘Accumulate’ rating, with a TP of Rs80, 6x FY13E earnings estimate.


INSURANCE: Business traction improves in last month of FY2012.

Business traction improves in last month of FY2012. Private insurance companies reported 6% growth in APE collections for March 2012 on the back of subdued performance for the past several months. Most large insurance companies (except Birla SL and Reliance Life) reported positive yoy APE trend. Bajaj Allianz (up 26% yoy) was the major surprise. We believe that private players will need to sustain APE growth trends order to maintain/improve expense ratio.

Higher APE growth last month
Private insurance companies reported 6% growth in APE collections for March 2012 after subdued performance for the past several months. LIC’s APE for the past two months of FY2011 was distorted and hence we don’t read much in its 16% yoy growth for March 2012.

Most companies fared well
Most large insurance companies (except Birla SL and Reliance Life) reported yoy growth in APE. Bajaj Allianz (up 26% yoy), Max NY (up 20% yoy) and HDFC SL (up 16% yoy) were the key fastgrowing players. ICICI Pru Life reported marginal yoy growth but 50% mom growth; Birla SL also reported almost 170% mom growth.
FY2012E APE significantly weaker than expected

APE for FY2012E was down 22% for private players; Bajaj Allianz, Birla SL, ICICI Pru Life, Reliance Life and SBI Life reported over 20% decline. LIC reported 12% positive growth. Base effect of the new IRDA regime pulled down APE by 44% for private players in 1HFY12. In 2HFY12, HDFC SL was the only large player to report yoy growth (up 8% yoy); other companies reported yoy decline in 2HFY12: Bajaj Allianz (down 10%), Reliance Life (down 21%), Birla SL (down 9%), SBI Life (down 8% yoy), Max (down 6% yoy).


>Ambuja Cements

Realizations decline in peak construction season. Ambuja Cements saw its net
realizations decline by Rs90/ton in 1QCY12 despite a Rs10/bag increase in its key
markets, as the benefits of price increase were likely passed on to dealers in the form of
higher trade discounts. Inability to effect an improvement in realizations in the peak
construction season does not augur well for full-year earnings that will likely be
susceptible to higher input costs. Maintain SELL rating and target price of Rs150/share.

Sequential decline in realizations despite price hikes
ACEM reported revenues of Rs26.3 bn (19% yoy, 13% qoq), operating profit of Rs7.4 bn (22%
yoy, 77% qoq) and adjusted net income of Rs5.1 bn (25% yoy, 96% qoq) against our estimate of Rs28.3 bn, Rs7.3 bn and Rs4.6 bn respectively. Despite cement prices increasing by Rs10-12/bag over the past quarter, ACEM’s average realizations declined by Rs90/ton likely on account of higher dealer margins eating into the pricing benefits. Sharp sequential jump in profitability (53%) was largely aided by (1) decline in raw material cost and (2) leverage benefits of higher volumes. We note that reported net income of Rs3.1 bn includes prior-period depreciation of Rs2.8 bn as the company retrospectively changed its depreciation policy for captive power plants from SLM to WDV. We discuss key details of the result in a subsequent section.

Pricing discipline continues to remain precariously positioned
We further note that the under-utilization of capacities is likely to continue even in CY2012E
despite factoring 8% consumption growth. In our view, pricing discipline continues to remain
precariously positioned in the wake of (1) a weak demand environment coupled with a continued capacity overhang and (2) potential action by the Competition Commission of India (CCI) apart from the hefty penalty that could be levied in case of an unfavorable ruling.

Valuation indicating an optimistic scenario, ignoring potential regulatory risks; SELL
We maintain SELL on ACEM with a target price of Rs150. ACEM is currently trading at 9X
CY2012E EBITDA and EV/ton of US$186/ton on CY2012E production as against a replacement cost of US$110-120/ton. We note that the current market price implies 25% yoy growth in profitability in CY2012E on a multiple of 8.5X CY2012E EBITDA (see Exhibit 3), which in our view does not take cognizance of risk to earnings given (1) the continued demand-supply overhang and (2) threat of an unfavorable regulatory action. We note that our estimates factor sustenance of pricing discipline as well as demand revival (to an extent) as we build 6% and 13% growth in volumes and realizations and a corresponding 20% improvement in profitability in CY2012E.


>STRATEGY: No escaping GAAR.

No escaping GAAR. The Government issued certain clarifications on GAAR and clarified that GAAR would apply on all impermissible arrangements from April 1, 2012. However, GAAR provisions will not apply with retrospective effect. The Government’s clarifications effectively extinguish hopes of postponement of GAAR provisions or implementation of a ‘sunset’ process to allow sufficient time for affected entities to deploy alternatives.

GAAR will apply to all impermissible structures
The Revenue Secretary categorically stated that GAAR would apply to all ‘impermissible arrangements’. As part of the clarification on ‘impermissible arrangements’ in the context of foreign institutional investors (FIIs), he stated that an arrangement would be deemed impermissible if it did not have a reasonable operation in a country (and where it does not have to pay tax) and the actual operations, such as fund management and trading, are done from some other country.

GAAR will apply from April 1, 2012; no retrospective application
The Government clarified that the provisions of GAAR would apply from April 1, 2012. However, it would not apply with retrospective effect. Besides, GAAR would not be invoked if the entities pay short-term capital gains tax or income tax, as the case may be, in India. The Government will put in place sufficient safeguards to ensure that GAAR provisions are not applied haphazardly. In terms of procedural issues for taxing an entity under GAAR, the IT department will have to prove that (1) an arrangement is impermissible for it to invoke GAAR provisions and (2) the arrangement has been made for the sole purpose of avoiding taxes.

GAAR would apply to P-Note providing FIIs if the structure is deemed impermissible
On the specific issue of P-Note providing FIIs, the Revenue Secretary clarified that GAAR applied to investors investing in India and an FII would be liable for tax under GAAR if the arrangement were not permissible. The Government clarified that GAAR would apply to all investors (foreign or resident) and it is not directed at any country or investor.


>INDUSIND BANK: Firing on all cylinders

IndusInd reported better‐than‐expected PAT of Rs2.23bn (up 30% YoY) led by a beat in loan growth and stronger‐than‐expected fee income momentum. Apart from improving profitability and strong growth, IIB continues to deliver on all its cycle II growth strategies, and like HDFCB, is well placed to deliver strong PAT growth in FY13. Current valuations at 3.1x FY13 book are not cheap but consistent and all round performance inspires confidence. Hence, we maintain our ‘BUY’ rating, with a revised PT of Rs400/share.

 Surprise in top‐line performance: NII was ~4% higher-than-expected due to strong sequential loan growth (8% QoQ) and surprise in margins, with ~5bps accretion QoQ v/s a marginal contraction expected. Fee income growth has been exceptionally strong at ~60% YoY growth in Q4FY12, with growth across all segments. With margins expected to improve in FY13, we believe IIB will be able to sustain its top-line growth momentum in FY13.

■ Delivering on all its cycle II growth drivers: After the 08-11 growth phase, management had laid out it’s cycle II growth drivers and we continue to see management delivering on most counts including (1) improving liability franchise with ~2.5% SA accretion post SA re-regulation (2) filling up the product gap (LAP/credit cards) on the retail side and most importantly (3) gaining significant fee income traction in personal distribution and IB business.

 Strong PAT growth to sustain in FY13: With a large fixed rate asset base, we expect margins to improve by ~15-20bps in FY13 and drive profitability improvement. We increase FY13/14 estimates by ~7-8% on higher growth and margins and with credit costs at ~75bps for FY13, there could be further upsides.

 Maintain ‘BUY’, with a PT of Rs400/share: Current valuations at 3.1x FY13 book are not cheap but high loan growth, strong fee income momentum and very limited asset quality risk inspire confidence. We maintain our positive view on IIB.


>IDBI Bank: Sustainability of performance remains in question

IDBI Bank reported a PAT of Rs 7708 mn up 49% yoy and 88% qoq. Bottom-line stood well above expectations due to an improvement in asset quality and a spurt in fee based income. Additionally the bottom-line of the bank was aided by a lower tax rate as the bank took advantage of tax deductions under Sec 36 (1) (viii). However going ahead, fee based income and CASA are expected to come off and sustainability of asset quality remains questionable
NIM remains stable sequentially

IDBI Bank reported a NIM of 1.9% for Q4FY12, which was in line with that of the previous quarter. The yield on advances came off by 37 bps qoq due to continued focus on priority sector lending which has lower yields. However the fall in the yield on advances was compensated by lower cost of funds during the quarter. The cost of funds came off by 49 bps qoq as the CASA ratio improved sequentially. In FY13 the NIM is expected to fall in a range of 1-9%-2.1%.

Advances growth spurts sequentially due to higher PSL lending
Advances grew by 16% qoq and 15.3% yoy. The spurt in sequential lending was on account of higher bought outs as the bank prepares to meet priority sector lending targets by FY13.
Higher fee based income due to closure of assignments boosts other income Non-interest increased by 80% qoq as certain loan syndication and project appraisal assignments achieved closure in Q4FY12 which led to a 94% qoq increase in fee based income. Fee based income is likely to come off in Q1FY13.

Asset quality improves sequentially, slippages come off
Slippages for the quarter stood at Rs 3760 mn (slippage rate of 1.0%). Slippages were significantly lower than that of the previous quarter. Due to lower slippages and strong reductions, absolute GNPAs came off by 1.9% qoq and NNPAs came off by 4.8% qoq. On a relative basis asset quality improvement was stronger due to the high sequential growth in the advances book.

Restructured assets at 5.5% of total advances
The banks restructured book increased by 5.4% qoq to Rs 100373 mn as the bank restructured loans of around Rs 14980 mn during the quarter. Of this amount, Rs 7630 mn was due to restructuring of Air India.

Revise price target to Rs 117 from Rs 120 earlier
IDBI Bank has reported a strong set of numbers for Q4FY12 on the back of a spurt in fee based income, strong CASA growth and an improvement in the asset quality. However going ahead, fee based income and CASA are expected to come off and sustainability of asset quality remains questionable. As a result we maintain our Hold recommendation on the stock with a revised price target of Rs 117. At the CMP of Rs 105, the bank trades at 0.8x its FY13E ABV and 0.7x its FY14E ABV.



Gearing up for growth

Nestl√© India's performance has been below expectations with a further slowdown in volume growth during 1QCY12 due to substantial price hikes (13%). However, going ahead, over the next six months, we believe that it would post a recovery in volumes with ramp up in marketing
spends and increase in distribution. Additionally, the rising awareness for nourishment in the rural markets augurs well for the long-term growth plans of the company. We maintain a HOLD recommendation.

 Net sales grew by 13.1% to INR20.5bn in the backdrop of a 13.7% growth in domestic sales at INR19.5bn and 3.3% growth in export sales at INR1.01bn. In our view domestic volume growth during the quarter has been almost flat.

 EBITDA grew by 19% to INR4.57bn and EBITDA margin expanded by 104bps to 22.3%. The improvement in EBITDA margin was on account of 301bps drop in raw material cost to 45.8%. However, this improvement in EBITDA margin was below our expectations due to a 90bps increase in staff cost to 7.6% of net sales and 107bps increase in other expenses to 24.3% of net sales. The increase in staff cost has been due to increase in headcount to support the company's expansion initiatives. Additionally, the increase in other expenditure we believe has been because of ramp up in marketing expenditure.

 Profit before tax grew by 14% to INR4.16bn while recurring PAT grew at a lower rate of 10% to INR2.9bn due to an increase in effective tax rate by 248bps to 30.6% of PBT.

 Our channel checks suggest a substantial increase in marketing initiatives to fuel strong growth in sales during the next three years backed by the capacity expansion. Therefore, we believe that volume growth will recover over a period of six months led by the substantial ramp up in operations and subsiding of the impact of the price hikes. Additionally, the company's medium to long-term growth potential remains strong with rising awareness of nourishment even in the rural markets. 

Valuation and outlook
At the CMP of INR4,938, the stock is trading at a PE of 40.5x CY12e and 33x CY13e. We believe that Nestl√© India would witness a strong recovery in sales momentum during CY13e backed by the ramp up in production and distribution. We therefore upgrade our EPS estimates by 2.4% for CY13e to INR149.8. We maintain our HOLD recommendation on the stock at the current levels with a target price of INR4,495.


>ULTRATECH CEMENT: Q4FY12 Result update

Result above estimates, earnings growth to moderate

AUltra Tech’s Q4FY12 result was above both our and Consensus estimates primarily due to lower-than-expected cost pressure, higher other income and lower tax rate during the quarter. The company reported EBITDA of Rs12.6bn vs. est. Rs11.8bn and EBITDA margin was at 23.7%, 1.3pp above our estimate of 22.4%. Higher-than-expected operating margin was driven by 6.3% QoQ decline in power & fuel cost to Rs1,031/tonne. The management said that
higher usage of pet coke and improved efficiency were the reasons for sequential decline in power & fuel cost. Higher other income of Rs2bn (up115% YoY) and lower tax rate (26% against 32.8% in Q3FY12) led to adjusted profit of Rs8.6bn against our estimate of Rs7.1bn (Bloomberg consensus’ estimates of Rs6.7bn). We believe that higher domestic realization (up ~16% YoY, despite lower industry utilization rate) helped the company register robust earnings growth of 42% in FY12 (which in our view led toA outperformance of the stock in FY12 despite higher valuations, sluggish demand and concerns on sustainability of higher prices). However, going forward, with our expectation of earnings decline in FY13E due to cost pressure, decline in other income and higher interest expense, we expect the stock to come under pressure. We maintain Sell on UTCEM with target price of Rs1,179, downside of 24% from its CMP.

 Higher realization and sales volume help to post better results: Higher blended realization (up 10.2% YoY) and sales volume (up 7.9% YoY) resulted in 18.9% YoY growth in revenues to Rs53.3bn, 1% above our estimates of Rs52.9bn. Higher realizations led to 22.2% YoY increase in EBITDA to Rs12.6bn (est.: Rs11.8bn).

 Lower power & fuel cost expands EBITDA margin: Power & fuel cost declined 6.3% QoQ to Rs1,031/tonne primarily due to higher usage of pet coke in the quarter and improved efficiency. EBITDA margin during the quarter was at 23.7% (vs. est. 22.4%) and EBITDA/tonne of Rs 1,095 against our estimate of Rs1,021/tonne.

 Higher other income and lower tax rate boosts adjusted profit: Higher other income of Rs2bn (up 115% YoY) and lower tax rate (26% against 32.8% in Q3FY12) resulted in 40.3% YoY growth in adjusted profit to Rs8.6bn (our estimate: Rs7.1bn). Higher other income was due to maturity of FMPs in FY12 and subsidies related to state investment promotion scheme.

 Earnings to decline in FY13: Benefitting from higher domestic realizations (up ~16% YoY despite lower industry utilization rate), adjusted EPS (on a liketo-like basis) of the company increased 42% YoY to Rs83.6 in FY12. We believe that outperformance of the stock over the past 1 year was driven by stellar earnings growth despite concerns on the sustainability of pricing power and sluggish volume growth. Going forward, we expect EPS to decline 2.3% YoY to Rs81.7 in FY13E.

 Increasing costs remain a challenge; maintain Sell on expensive valuations: Operating costs (up 12% YoY in FY12) continue to remain higher and margins could be under pressure going forward. The stock is trading at 15.5x FY14E EPS, 8.6x EV/EBITDA and US$163.7 EV/tonne. We maintain Sell on the stock with target price of Rs1,179, a downside of 24% from its CMP.