Tuesday, May 1, 2012

>IDEA CELLULAR LIMITED: Another strong quarter, but faces regulatory risk (Q4FY12 Results update)

Idea Cellular (Idea) reported strong performance during Q4FY12. Both topline and EBITDA margin were in line. However, the minutes of usage growth was higher than our expectation which came in at the cost of lower revenue per minutes. Idea Cellular has proved to be a strong voice player over the six quarters with consistent gain in market share of 150bp to 14.5%. While the growth rate has been strong, regulatory risk has gone up for Idea which can dent return ratios and margins. We believe the recent TRAI recommendation (dated 23rd April 2012) has led to concerns over the business model and its impact could be as severe as Rs55/share for Idea as against Rs20/share considered in our earlier assumptions. We are maintaining our Hold rating on the stock after considering the risk associated with it. We have also rolled over to FY14E for valuation and arrive at a target price of Rs74 per share after factoring in risks.

  Topline in line; EBITDA margin below estimates due to one-offs: Idea reported 6.5% QoQ growth in topline to Rs53.4bn against our estimate of Rs53bn. Minutes of usage registered strong 9.1% QoQ on the back of equally strong 6.3mn net addition in subscribers and lower tariff benefits to consumers. Revenue per minute (RPM) declined by 2.5% QoQ to 42.2p/min despite improvement in the share of value added services. EBITDA margin expanded by ~74bp QoQ to 27.3% after adjusting for Rs1.3bn (our estimate of one-off regulatory expenses). This was driven by lower SG&A expenses and marginally lower churn rate.

  Operational matrix saw mixed performance during Q4: MoU/sub increased to 379 in Q4 from 369 in Q3FY12 on strong addition in net subscribers compared to the last quarter. This indicates improvement in usage on Idea network and support from lower voice RPM (decline of 2.7% QoQ). Decline in RPM can be attributed to an increase in competition wherein players are opting for lower tariffs and higher commissions to gain market share. Both established and newer circles showed strong growth and improvement in operating margin. 3G coverage expanded to 3,000 cities and registered 2.6mn subscribers, giving incremental ARPU of Rs91 vs Rs79 in Q3FY12.

 Concall highlights: The management guided for Rs35bn capex for FY13. The competition at the circle level still exists leading to pressure on revenue per minutes and dealer commissions.

 Environment becoming weaker; Reiterate Hold with a cautious stance: Recent TRAI recommendation has increased the risk factor for the industry. There is a strong indication of 1) spectrum pricing going higher than 3G price levels; 2) spectrum re-farming and 3) 2G roaming price going away under One India plan. Risks to our target price are - 1) Reduction in reserve price by Department of Telecom and 2) Hike in tariff. Hence, we are cautious on the sector as we enter a phase where the growth rate of 2G services would come down and regulatory risk can dent the balance sheet further leading to pressure on return ratios which are already low. We reduce our target price to Rs74 (previously Rs82) despite rolling over to FY14E for valuation.


>MARUTI SUZUKI: Q4FY12 Result Update (recent launch of Ertiga)

Operating performance to improve; Maintain Buy
Maruti Suzuki India Limited’s (MSIL)'s 4QFY12 operating results were largely in-line with our estimates with EBITDA margins at 7.3% (60bps impact on account of variable pay to employees; employee cost at Rs.2.6bn vs. est. Rs.2.1bn) compared to our estimate of 7.8%. However, adjusted PAT stood higher at Rs.6.4bn compared to our estimate of Rs.5.65bn due to higher than expected other income (Rs.2.97bn vs. est. Rs.1.6bn). Driven by favorable product mix net realization moved up by Rs.12,000 QoQ. We continue to remain positive on the stock and expect strong growth in FY13E to be driven by the diesel portfolio and the recent launch of Ertiga. Also we expect operating performance to improve from current levels. We continue to maintain Buy rating on the stock with revised TP of Rs.1,577 (earlier Rs.1,307) as we roll forward our valuations to FY14E basis.

 Operating results in line; PAT beats expectation: MSIL registered 16%/50% YoY/QoQ
revenue growth in 4QFY12 to Rs115bn. The discounts per unit for 4Q stood at Rs.13,493
compared to Rs.12,500 in 3Q largely to push petrol models. Despite this due to higher
contribution from diesel models, the net realizations for the company moved up by Rs.12,000
QoQ. EBITDA margin contracted 268bps YoY, however expanded by 203bp QoQ. Employee
costs were 22% higher than expectations on account of the variable pay given to the
employees (impacted EBITDA margins by 60bp). However, adjusted PAT stood higher at
Rs.6.4bn compared to our estimate of Rs.5.65bn due to higher than expected other income
(Rs.2.97bn vs. est. Rs.1.6bn).

 Conference call highlights: 1.) the company indicated it would increase diesel-engine
capacity to 450K by 2HFY13E and to 600K by 2HFY14E from 300K in FY12. It plans to spend
Rs17bn on diesel-engine capacity expansion in Gurgaon. To add to its own capacity of
300,000 diesel engines, the company will source 100,000 diesel engines from Fiat India 2.) 

The recently launched “Ertiga” in the MPV space has been well received and the company
indicated an order book of 22,000 units for the model. Positively 85% of the bookings are for
the diesel variant. 3.) The company has covered 40% of its direct and indirect Yen exposure
and indicated that the rate at which the company has taken cover is more favourable than
current rates. 4.) For FY12 the management indicated that Petrol portfolio for the industry
registered a volume drop of 14% over FY11, while the diesel portfolio registered a strong
volume growth of 37% over FY13E. Management expects this trend to continue going
forward as well. 5.) The company has a total capacity of 1.6 mn vehicles and it plans to
increase this to 1.85 mn by the end of FY2013.

 Valuations and Recommendations: At the CMP of Rs1,397, the stock is currently trading
at 15.6x FY13E EPS of Rs.89.5 and 13x FY14E EPS of Rs.107. We reiterate BUY rating with a revised target price of Rs1,577 (core business valued at 14x FY14E earnings + Rs78 as value of investments in subsidiaries + Rs317 value of cash and cash equivalents).


>Why Countries Succeed and Fail Economically

This study looks at how different countries’ shares of the world economy have changed and why these changes have occurred, with a particular emphasis on the period since 1820. As explained in this study, the rises and declines in countries’ shares of the world economy occur as a result of very long-term cycles that are not apparent to observers who look at economic conditions from a close-up perspective.

To begin, let’s look at how the world economic pie has been divided up over time and why it has changed. The table below shows the shares of world GDP by major countries and/or regions at various points in time going back to 1500. Scan that table to see how these shares have evolved over time.

To read report in detail: WORLD ECONOMY

> Metahelix performance improves after Rallis’ acquisition

Key Points-
  Adverse domestic conditions in Q4FY12 were responsible for Rallis’s subdued performance: Domestic agrochemical industry remained under pressure in Q4FY12 with industry witnessing flat to negative volume growth due to erratic rainfall, low crop productivity, poor crop economies and reduced acreages for some crops. Andhra Pradesh, Karnataka, Maharashtra & West Bengal were impacted due to erratic rainfall while crop holiday in rice deltas of Andhra Pradesh led to reduced consumption of agrochemicals domestically. Shift in farmers’ preference towards lower priced products also impacted agrochemical sales. High inventory coupled with lower demand further exerted pressure on margins.

  Innovation turnover index dropped to 11.4% in FY12: Rallis’ innovation turnover index (revenue contribution from newly launched products) dropped to 11.4% during FY12 compared to 20% during FY11. Decline is mainly attributed to low pest pressure in paddy & cotton, poor yield in pulses, low price realization of farm produce for farmers which resulted into reduced usage of Rallis’ branded & premium priced molecules. During FY12, Applaud & Takumi were also removed from the innovation turnover index as these products are now more than 4 years old. However with slew of new products in pipeline, management is confident of achieving an index of 20% in FY13.

  Metahelix performance improves after Rallis’ acquisition- Metahelix contributed Rs 810mn to revenues while net profit stood at Rs 6mn for FY12 compared to Rs 424mn of sales & loss of Rs 143mn in FY11. Rallis’ strong distribution network combined with aggressive marketing strategies has helped Metahelix performance to improve over the last year.

  Stringent focus on collecting receivables led to working capital improvement- Management’s conscious decision to focus on collection of receivables has led to working capital improvement during the quarter. Consequently, debtors reduced to Rs1bn by FY12 from Rs 2bn in H1FY12.

 Domestic agrochemical industry growth impacted due to pressure on farm incomes: During Q4FY12, domestic agrochemical industry witnessed flat to slightly negative growth due to pressure on volumes. Shrinking farm profitability due to declining farm incomes led to reduced usage of agrochemicals domestically impacting volumes. Shift in farmers preference towards lower priced molecules also impacted agrochemical sales. Pricing pressure also remained during Q4FY12 exerting further pressure on margins

 Exports fared better than domestic market in the current scenario: Exports markets have fared better than domestic markets as domestic market continues to reel under pressure of declining farm incomes. Int’l business has scaled up over the last couple of years and Rallis’ s exports now contribute 1/3rd of the total revenues.

■ Near term performance likely to remain muted- Unfavorable climatic conditions & pressure on domestic farmers’ profitability is likely to put pressure on agri-input consumption in near future. Though long term fundamentals remain intact, however near term profitability is likely to be under pressure.

 Long term strategy – Rallis’s long term strategy focuses on building & strengthening customer relationship activities, extension of MoPU (grow more pulses) initiative to Karnataka & Maharashtra, Dahej ramp up, introduction of new products which are currently in pipeline, increasing its portfolio of agri services, scale up the organic manure business.

■ Organic manure business a new avenue of growth- During the quarter, Rallis has entered into an agreement to acquire majority stake of 51% in Zero Waste Agro Organics Pvt Ltd (ZWAOPL), a Maharashtra based organic manure and soil conditioners manufacturing company. The acquisition is an all cash deal for Rs 290mn. Rallis will also have exclusive sales & marketing arrangements with ZWAOPL for domestic and int’l markets. Though management has built in conservative revenue estimate of Rs 1bn cumulative over 5 year period, however we believe this business has strong potential to exceed estimates. Margins from this business are also expected to be higher as compared to Rallis’s current product portfolio.

■ New product launches in seeds would scale up Metahelix revenues as well as lead to margin expansion- Management is hopeful that with new launches in the seeds business, Metahelix would scale up revenues in the coming year. Company is also likely to witness margin expansion due to benefits from operating leverage.

 Innovation turnover index to revert back to 20% in near future- Management expects Rallis innovation turnover index to revert back to 20% in near future with the launch of new products.

 Minimum Support Prices (MSPs) likely to be increased for certain crops which would ease pressure on farmers- Decline in market prices of certain crops like paddy & cotton below MSPs have wreaked havoc and farmers have incurred substantial losses on inventory. Government is likely to announce new MSPs for kharif season which is expected to be higher.

■ Though near term outlook remains muted, however long term future shines bright- Pressure on domestic farm incomes is likely to keep domestic agrochemical consumption under check for couple of quarters. However, we expect this short term phenomena to reverse if monsoons turn out to be normal this kharif season. Dahej ramp up, extension of MoPU, launch of new pesticides & seeds, scale up in organic manure, focus on agri services is likely to lead growth for the long term. We maintain HOLD with target price of Rs 120.