Thursday, May 3, 2012

>PUNJ LLOYD: Positive developments on ONGC-Heera contract

Ahead estimates – EBITDA margin at 8.4%, APAT at Rs90 mn
Punj Lloyd posted its highest operating profit in past 11 quarters on back of healthy revenue growth as well as operating margins (1) Led by a healthy order backlog and execution, revenues grew 31% yoy to Rs30.4 bn (2) Post dip in Q3FY12, EBITDA margins returned to +8% levels to 8.4% (-50 bps yoy) – ahead estimates. (3) Consequently, EBITDA growth was ahead estimates at 22% yoy to Rs2.6 bn (4) However, interest costs continued to trend up (+89% yoy to Rs1.9 bn), negating operational gains – attributed to higher borrowing costs and debt (5) Consequently, net profit declined by 49% yoy to Rs90 mn – though ahead estimates.

Key highlight – Operating performance stabilizing… addressing a primary investor concern
For the past 5 quarters, Punj has posted +20% revenue growth – on back of healthy order backlog and order book execution, in turn outperforming its peers. Further, barring for Q3FY12, operating margins have remained in the 8-9% range. Lower EBITDA margins in Q3FY12 (5.6%) were attributed to sharp rise in contractor charges with fixed expenses remaining stable. Importantly, no instances of extraordinary or one-off expenses and provisions have marred the performance – addressing a primary investor concern.

But balance sheet remains weak with net DER at 1.4X – stalling re-rating
Despite visible stabilization of operating performance, Punj’s profitability and balance sheet health remains weak. Punj’s working capital remains stretched at 113 days – cascading into deterioration of net DER (up from 1.1X in Mar’11 to 1.4X in Mar’12) and low RoE (sub-2% for FY12P) – increasing risk of equity dilution. Improvement in balance sheet health and return ratios alongside stable operating performance sans cost over-runs and provisions is imperative to address investor concerns and trigger stock re-rating.

Order book robust at 2.7X revenues
Punj Lloyd secured orders worth Rs10.0 bn in Q4FY12 and Rs138.2 bn in FY12 – thereby achieving its FY12 target order inflows. Order book also grew 20% yoy to Rs272.8 bn with cover at 2.7X revenues – lending revenue visibility for next 2 years and amongst the best in peer group. Infrastructure (44%) dominates the order book composition followed by Process & Power (36%), Pipelines (13%) and Tankages (6%). Geography-wise South-Asia comprises bulk of the order backlog at 48% followed by Middle East (21%), Africa (16%) and Asia Pacific (15%).

Key takeaways from conference call – Profitability improvement at the core
■ On reducing borrowing cost – With 80% of debt denominated in high-cost domestic currency, Punj has planned to reduce its debt financing cost by swapping INR denominated debt with low-cost foreign currency loan. Average borrowing cost for FY12P stood at 11.4%

 Improving working capital cycle and debt ratio – Punj indicated improvement in working capital cycle and corresponding reduction in debt as its core business strategy. It expects to achieve the above through debtor realization and active measures to de-leverage the balance-sheet.

■ Positive developments on ONGC-Heera contract – Punj Indicated that $85 mn were released by ONGC. Further, Punj the case was suspended under arbitration and is being referred to an external settlement agency for faster resolution.

■ Cut FY13E earnings by 33% - Factor higher debt
We have cut our FY13E earnings estimates by 33% to Rs1.7 per share to factor steady rise in debt (net DER up from 1.1X in Mar’11 to 1.4X in Mar’12) and related interest expense. Reduction in borrowing costs or debt will lead to earnings upsides. We also introduce FY14E earnings at Rs2.1 per share.

■ Reiterate Accumulate rating – Upsides from operational & financial leverage
We reiterate receding investor concerns on the back of (1) stable and consistent operating
performance for the past 5 quarters (2) reducing auditor qualification and release of
retained funds (3) strong revenue visibility – on back of robust order backlog alongside
strong order-bid pipeline. Further, upsides to earnings estimates from high operational and
financial leverage exist – increased probability to play out with management plan to reduce
financing costs, the same are not factored in EMKAY earnings estimates. We retain our
Accumulate rating on the stock with a price target of Rs74. Though, concerns on operating
& free cash flow, low ROE and high DER remain and need to be continuously monitored.


>PERSISTENT SYSTEMS: Earnings Review Q4FY2012

Persistent Systems’ operating results for Q4FY12 were inline with expectations with a topline growth of 1.1% at ` 2.7bn as against our estimate of ` 2.7bn. Revenue growth was largely driven by IP led efforts - contributing 12% to revenues (up 38% QoQ) also includes Openwave numbers. Non IP revenues were up by just 1.5% QoQ all on better pricing of 1.7% as volumes remained flat for the quarter.

The company has indicated better than industry growth (NASSCOM projects 11-14%) for FY13 along with margin maintenance at FY12 levels of 19.6% at PBT levels. The company has not given quantitative guidance and has earmarked a soft fresh hiring plan of 350 employees in FY13. It will review salary hikes post Q2FY13 and have indicated better reward than peers.

We believe that the company going forward would rely less on fresh hiring as it used to be till FY10. We expect 15% volume growth for the company in view of challenging demand in the discretionary (new development) budgets. It would also focus on non linear opportunities and improved efficiency; incrementally. It continues to remain focused on its next generation technologies and expect its sales strategy along with opportunities in ‘Bigdata’ to drive the revenue growth in the coming period.

We remain positive on the stock for its attractive valuations of 6.6 (x) for FY14E
EPS of ` 49.4 with a BUY rating on the stock with a target of ` 444 valued at 9x
of its FY14E earnings.

Financial Highlights:
Persistent Systems’ operating results for Q4FY12 were inline with expectations with a topline growth of 1.1% at ` 2.7bn as against our estimate of ` 2.7bn (Revenues up 4.9% in USD terms). Revenue growth was largely driven by IP led efforts - contributing 12% to revenues (up 38% QoQ). Non IP revenues were up by just 1.5% QoQ all on better pricing of 1.7% as volumes remained flat for the quarter. EBITDA grew 11% QoQ at ` 773mn on lower travel cost and flat non IP expenses (employee count down by 78 QoQ) thus resulting in better operating margins of 28.5% (up 260bps) for the quarter – DE at ` 677mn.

PAT grew by 1.6% qoq to ` 412mn ahead of our estimate of ` 398mn as gains on operating margin got negated to certain extent on higher depreciation and weak other income (loss of ` 34mn as against gain of ` 27mn).

The company managed to achieve its PBT margin maintenance but fell short of its USD revenue guidance of 29% (actual achieved 22%) for FY12.

The company has named Mr. Rohit Kamat as the Chief Financial Officer with effect from April 23, 2012, in place of Mr. Rajesh Ghonasgi who has resigned citing personal reasons. Brief profile of Mr Kamat is annexed below for your reference.

Valuation & Outlook:
We believe the series of efforts such as acquisition of S&M team of Agilent & Openwave location services, sales with strategy (pre-emptive effort to deploy codeveloped products), and investment in next generation technologies would lead into higher than industry growth rate. We remain positive on the stock for its attractive valuations of 6.6 (x) for FY14E EPS of ` 49.4 with a BUY rating on the stock with a target of ` 444 valued at 9x of its FY14E earnings.


>INDIA CEMENTS: Q4FY12 Result update

Higher costs lead to disappointing performance

India Cements’ Q4FY12 result was sharply below our estimates led by lower than- expected sales volume (2.6mt vs. est. 2.7mt), higher employee expenses (Rs921mn vs. est. Rs780mn) and higher power & fuel cost (Rs1,221/tonne vs. est. Rs1,150/tonne). Impacted by lower sales volume, the company reported revenue of Rs11.2bn against our estimate of Rs11.9bn. EBITDA at Rs2.15bn was 14.7% lower than our estimate of Rs2.5bn due to higher employee cost and power & fuel cost and EBITDA margin was at 19.3%, 1.9pp lower than estimate of 21.1%. Higher employee cost was due to higher directors’ remuneration and provision for leave encashment. Higher-than-expected cost pressure resulted in EBITDA/tonne of Rs828 against our estimate of Rs897/tonne. Adjusted profit was 20.5% below our estimate of Rs649mn. Cement despatches in the south region grew 9% in Q4 against a negative growth of 3% in 9MFY12. However, going forward, the management expects demand growth at 7-8% in FY13E. Cement realization increased by 25% YoY in FY12 despite lower utilization rate of 67% and the management is confident of passing on any cost push to consumers. Led by higher realization EBITDA margin improved to 20.3% in FY12 against 12.1% in FY11 and we
expect it to reach 22.8% in FY13E. We maintain Buy on the stock with a target price of Rs118 (upside of 35% from CMP).

 Higher realization and sales volume leads to improved performance:
Revenue of the company increased 11.8% YoY to Rs11.2bn driven by a) 11.4% YoY increase in cement realization to Rs4,248/tonne and b) 2% YoY increase in cement sales volume to 2.6mt. Improvement in realization and sales volume led to 20.4% YoY growth in EBITDA to Rs2.15bn and EBITDA margin improved 1.4pp YoY to 19.3%. Adjusted profit of the company increased 18.6% YoY to Rs649mn.

 Lower sales, higher operating cost lead to below expected EBITDA/tonne:
Cement and Clinker sales volume was at 2.6mt against our estimate of 2.7mt, which led to below expected revenue. Higher employee expense (Rs921mn vs. est. Rs780mn due to Rs110mn each for director’s remuneration and provision for leave encashment) and higher power & fuel cost (Rs1,221/tonne vs. est. Rs1,150/tonne) resulted in lower-than-estimated EBITDA margin of 19.3% (est. 21.1%) and EBITDA/tonne of Rs828 (est. Rs897/tonne).

 Increase in operating costs offset by steep increase in realization:
Operating cost for the Cement division increased 10% YoY to Rs3,426/tonne due to higher power & fuel cost, freight cost and employee expenses. Employee expense increased 34.8% YoY to Rs354/tonne and freight cost by 10.6% YoY to Rs815/tonne due to higher railway freight charges and diesel price. Power & fuel cost increased 24.1% YoY to Rs1,221/tonne due to a) increase in Electricity charges by Tamil Nadu and Andhra Pradesh SEBs, b) increase in domestic coal price and c) higher use of imported coal in Q4.

 Maintain Buy on attractive valuations: At the CMP, the stock trades at 6.3x FY14E EPS, 4.3x EV/EBITDA, and EV/tonne of US$73.3. The company is set to benefit from commissioning of power plants and coal procurement from Indonesian mines. We maintain Buy on the stock with price target of Rs118.


> GUJARAT GAS: Q1CY12 Result update

Volume growth to stagnate, cost pressures to continue, regulatory concerns remain; Sell

Although, Gujarat Gas’ (GGAS) Q1CY12 PAT soared significantly on a QoQ basis from Rs247mn to Rs650mn, cost pressures continued to hit the operating performance. We estimated the price hikes exercised during the quarter would aid the company to report a PAT of about Rs950-960mn but higher LNG prices impacted the overall performance. We believe the cost pressure is likely to hamper GGAS’ performance going ahead which will stagnate the volume growth. The company will not be able to pass on the increase in sourcing cost completely to the customers thus hitting the operating margins. Regulatory concerns (as in case of IGL) would also keep the stock price under check. Hence we maintain our negative view on the stock with a ‘Sell’.

  Price hike across segments keep the average realisations up: GGAS’ average distribution rate jumped 15.0% QoQ at Rs23.5/scm from Rs20.4/scm on the back of price hikes taken during the quarter across all the segments. We believe some volume loss also happened due to price hike as the volumes declined by .1% QoQ to 3.3mmscmd from 3.4mmscmd.

  EBITDA/scm at Rs2.2/scm, still lower than average of about Rs3.0/scm: Sequentially, gas sourcing cost jumped by 7.9% to Rs19.6/scm which led to margin contraction. Gas sourcing cost jumped as GGAS’ LNG sourcing has been linked to crude prices and crude prices jumped during the quarter from about US$105/bbl to US$125/bbl thus elevating LNG prices. Higher LNG prices partially nullified the impact of price hikes. EBITDA/scm thus stood at Rs2.2/scm up QoQ from Rs0.7/scm yet lesser than the normalized Rs3.0/scm.

■ One offs keep other income high: Other income for Q1 jumped by a massive 41.0% QoQ and 190.5% YoY at Rs294mn due to one off items (about Rs90-100mn). Higher gas prices along with higher other income led to 163.5% QoQ jump in bottom-line at Rs250mn yet declined by 9.9% YoY.

 No volume growth in near term, margin pressure to continue, regulatory concerns remain, reiterate ‘Sell’: GGAS’ Q1 performance although better sequentially did indicate cost pressures. We believe that the cost pressures are likely to continue owing to high crude prices which will keep up the LNG sourcing costs for GGAS. Volume growth would also be constrained due to higher fuel prices. After IGL’s tariffs, concerns over GGAS’ tariffs have also emanated which will remain till the time tariffs are not notified by the regulator. We believe that there are multiple headwinds for GGAS going ahead like no volume growth, margin pressure and regulatory concerns which will affect the financial performance of the company and even the valuation multiple. We have reduced our volume growth for CY13E and CY14E and revised our estimates. We maintain ‘Sell’ rating on the stock with a price target of Rs284 (earlier Rs302).


>SIEMENS LIMITED: Projects in mobility KAHRAAMA, Essar Construction, solar thermal & Torrent Power (Earnings Review Q4FY12)

New orders fall, Adj PAT 46% below BofAMLe; Maintain UPF

2Q12 only optically in line, Revenue disconnect
Siemens (SIEM) 2Q12 Adj PAT of Rs1.63bn is 46% lower than BofAMLe. Revenues of Rs38bn beat BofAMLe by 11%, up 22% YoY. However, results include a net write back of Rs2.1bn (PBT), which we believe led to higher revenues and in-line Rep PAT Rs3bn. 1H12 order inflows declined 36% YoY (adj -27%) due to high base, lower project orders, but short cycle & SMART products drove base orders. We maintain our Underperform rating on: 1) reduced revenue visibility as orders decline from power gen, T&D and process sectors; 2) lower FY12-14E margins due to new product launches; and 3) modest 8% earnings CAGR in FY12-14E, and declining RoEs.

Mobility and new products drive revenues
We believe a) projects in mobility (Gurgaon Rs7-8bn, Chennai Rs6bn, & Kolkata Rs1.6bn), b) power (KAHRAAMA Rs25bn, Essar Const, 200MW solar thermal &  Torrent Power Rs15bn), and c) launch of new low cost products in 1Q12, were major revenue drivers in our view in absence of mgmt commentary on the impact of the write back on revenue and EBITDA.

Margins lower on comp, cost push, entry pricing & losses
Despite the write back EBITDA margins contracted 130bp YoY (13%) on price competition in T&D, cost push in industry projects and entry pricing on SMART products. Segmentally, Industry (-600bp), Healthcare (loss) and Infra &cities (-100bp) were margin drags. Energy was positively impacted due to the write back.

We are 6% & 14% lower than consensus, expect downgrades
We maintain our FY12/13/14 earnings ests despite lower than anticipated results in 1H, as SIEM aggressively provides for contingencies (3-3.5% of rev) while executing large orders. We estimate KAHRAAMA & Gurgaon metro to be mostly complete in FY12, so expect further write backs. We do not change order inflow & revenue ests as we build in for contribution from VAI and also Rs10bn order from Qatar. However, our FY12/13 ests are 6% and 14% lower than Street. Consensus has lowered ests by 13/10% in past qtr; we expect further earnings downgrades.


>MAGMA FINCORP: Q4FY12 Result update

In line with estimates

Magma’s Q4FY12 numbers, in-line with our estimates, reflect continued pressure on profitability though disbursement growth remains healthy and asset quality has held up well. It should be noted that the recent change in accounting policies renders YoY comparison inconclusive and misleading. We retain Buy rating on attractive valuations and price target of Rs101.
 Disbursements growth momentum slows but healthy: Disbursements in Q4FY12 grew by a healthy 28% YoY (though slower than 50% in Q3) with the Cars & Utility segment (48% YoY) and high yield assets (up 71% YoY) driving this growth. The mix of the high-yielding assets was stable QoQ at 25% in Q4FY12. The strong growth in Cars & Utility segment, despite moderation in overall auto sales volumes in recent months, stems from Magma’s 1) rural and semi-rural focus where demand remains healthy and 2) new branch additions.

 Spread stable QoQ: Reported spreads for Q4FY12 at 4.3% are stable QoQ, despite 30bps contraction in asset IRRs, as cost of funds came down in sync. The contraction in asset IRRs can be traced to 1) higher strategic CE disbursals and 2) shift in loan mix. From a funding source perspective, the management is making a conscious effort to reduce reliance on the banking system, which remains the chief source of funds. For FY13, the spreads should improve as banks have begun cutting base rates and liquidity should be relatively better than FY2012.

 Collection efficiency at ~101%: Collection efficiency remains strong at 101% for Q4FY12 giving us significant comfort considering the challenging in operating environment. Strong collection efficiency and healthy credit quality of the book helped contain the write offs (at 0.2% for FY12). Given the slowdown in economy and higher share of high yielding assets, we expect the write-off ratio to move up from the current level. In line, this should keep the credit costs stiff at ~85bps during FY13.

 High earnings growth ahead: Based on management’s views, if we exclude the impact of change in accounting policies during FY12 the proforma PAT stands at Rs1550mn (vs Rs780mn reported), which implies a growth of 27% YoY. For FY13, we expect Magma to report an impressive growth at bottomline level led by the fact that YoY comparison will now be possible. 

 Cheap valuations, Reiterate Buy: We continue to like the stock due to cheap valuations, large potential for growth, and a seasoned senior management team that has seen multiple cycles and has a clear focus on containing risks. Moreover, Magma would be a key beneficiary of reversal in interest rates due to its reliance on whole-sale funding and large part of loan carrying fixed interest rate. At its current multiple of 0.9x FY14 BVPS, Magma trades at a
significant discount to its peers and factors in potential risks amply. We reiterate Buy with a revised price target of Rs 101 (based on 1.3x FY14 BVPS).


>PANTALOONS RETAIL LIMITED: De-merger to ease debt but also take away higher margin business…

Pantaloon Retail (PRIL) has announced its intent to de-merge its Pantaloon Retail format (including Pantaloon Retail and Pantaloon Factory Outlet). Aditya Birla Nuvo (ABNL) will invest | 800 crore by subscribing to debentures issued by PRIL, which will be converted into equity shares in the de-merged entity (on completion of the de-merger process). The existing shareholders of PRIL, including its promoters will continue to own shares in the de-merged entity. Also, PRIL will transfer its apportioned debt of | 800 crore to the de-merged entity. ABNL will also make an open offer for a minimum of 26% of the stake of the resulting entity. Post listing of the resulting entity and conversion of the debentures, ABNL will hold a 50% stake in the new entity. The Biyanis and the public will hold 25% each. According to a press release by ABNL, the proposed transaction will take eight to 10 months to be completed. Hence, we have not factored the impact of the same in our financials until further clarity on the issue emerges.

 Deal appears to be P&L neutral for PRIL and a win-win for ABNL
According to our quick calculations, we believe the amount saved on interest outgo (due to lower debt) will be forgone in the operating profit loss due to the high margin apparel business being parted with. ABNL, on the other hand, will be able to leverage PRIL’s strong retail presence and also diverse product mix.

PRIL has taken a considerable beating on the Street considering the mounting debt and inventory levels. While this deal seems to be P&L neutral, we believe the inventory days (that the company has been trying to reduce) will come down as the apparel business is a low churn business as compared to the food segment. However, we have not made any changes to our estimates as the deal will be completed over the next two to three quarters. Our numbers will be positively impacted by (a) relaxation of FDI norms and (b) stake sale in non-core segments. We continue to value PRIL at 0.6x FY13E EV/sales (based on 20% discount to Shoppers Stop) to arrive at a target price of | 173. Considering the reduction in debt, we have upgraded the stock from SELL to HOLD.



Dismal show on all counts…

The results were disappointing on all fronts including business growth, NIM and asset quality. Tax write-back of | 45.3 crore on account of MAT benefit and high w/offs provided some support to profitability. Even then, PAT was below estimates at | 264.9 crore (I-direct estimate: | 309.6 crore) with 20.6% YoY de-growth. Credit and deposit growth was subdued at 16.8% YoY and 12.2% YoY to | 111978 crore and | 155965 crore, respectively. Other income grew 14.6% YoY to | 343.8 crore led by strong growth in CEB fees of 21.9% YoY to | 219.3 crore. The C/I ratio was on the higher side at 46.6% in Q4FY12 (35.8% in Q4FY11) due to higher operating expense & subdued income growth. We are introducing FY14E with PAT of | 1711 crore, a CAGR of 22.4% over FY12-14E.

 Slippages uptrend continues keeping provisions at elevated levels…
Fresh slippages in Q4FY12 were high at | 1317.4 crore compared to | 698.8 crore in Q3FY12. This caused net provision towards NPA to rise from | 100 crore in Q3FY12 to | 500 crore in Q4FY12. Even after enormous write-offs worth | 541.2 crore, GNPA increased by | 348.2 crore sequentially to | 3580.5 crore. The GNPA and NNPA ratio stood at 3.2% and 2.2%, respectively. Restructuring of Air India (| 1616 crore) and Rajasthan SEB (| 1873 crore) during Q4FY12 took place, thereby increasing the outstanding restructured assets by | 3424.3 crore to | 9510 crore, constituting 8.5% of the credit book.

 Lacklustre NII growth hits profitability...
NII de-grew 6.3% QoQ to | 1068.1 crore (5.4% YoY growth) as yield on fund dipped 6 bps QoQ to 9.5% while cost of funds inched up 13 bps to 7.1%. NIM witnessed a dip of 22 bps to 2.7%. Interest income reversal of | 140 crore on account of slippages also added to the decline in NII.

High slippages and provisioning will keep profitability under pressure. A couple of stressed SEBs including UP and Punjab may undergo restructuring, thereby leading to lower profitability impacting return ratios. We estimate return ratios at RoA of 0.8% and RoE of 12.6% in FY14E. OBC has a high AFS portfolio of 28.6% with modified duration of 4.2 years leading to MTM loss on account of G-sec volatility. Our Gordon growth model leads us to a multiple of 0.7x FY14E ABV providing a TP of | 255. We recommend a HOLD rating on the stock with a negative bias.