Friday, May 25, 2012

>PETROL PRICE HIKE: Heralding Stagflation? (May 24, 2012)

State-owned oil companies increased petrol prices by Rs7.50/litre with effect from Wednesday midnight. They hiked petrol prices by Rs6.28/litre excluding local sales tax or VAT. The price hike came just a day after Prime Minister Mr. Manmohan Singh called for implementation of strict measures to help the economy. The government had decontrolled petrol prices in June 2010 and since then they were hiked just once in November 2011. While the hike was on the cards and expected, the quantum of the hike has surprised all. While the move may bring some short-term reprieve for oil marketing companies (OMCs) grappling with higher under-recoveries, it would lead to inflationary pressure as other administered prices would also increase even as Wholesale Price Index (WPI) in April 2012 stood at 7.2% YoY and food inflation at 10.5%. We have factored in such price hikes for our FY13 WPI inflation estimate of
8.5%. The immediate inflationary impact may be limited on account of petrol having a lower weight in WPI.

The hike in petrol prices by state-owned oil companies should not merely be viewed in isolation but as part of a broader strategy of increasing administered prices and reducing subsidies. The petrol hike will have no impact on fiscal deficit and hence we can expect diesel, public distribution scheme kerosene, domestic liquefied petroleum gas (LPG), urea, and electricity prices also to be hiked in future as the government wants to align domestic prices with global prices. Such a strategy, policy makers believe, will result in short-term spike in inflation but will thereafter result in higher GDP growth. We believe the rise in administered prices will result in higher inflation, higher interest rates, and decelerating demand with no assurance of laying a foundation for future economic growth. Indeed, stagflation may be the likely fallout of such a policy. We reiterate our negative stance on the banking sector and view this development as a major setback for sustained efforts by the Reserve Bank of India (RBI), which has been struggling to contain inflationary pressures.

Oil & Gas: The steep petrol price hike could bring some respite to the financials of OMCs, but what is important is the intention behind the price hike – is it meant to ease the financial stress on OMCs or is an indicator of forthcoming bold decisions for other regulated petroleum products. India is currently facing a double whammy of elevated crude oil prices and a sliding rupee and in such a state, without a hike in the prices of regulated petroleum products, the overall under-recoveries may touch Rs2,000bn(US$36.36bn) in FY13E compared to Rs1,385bn(US$28.76bn) in FY12. The government, in the 2012-13 budget, mandated only Rs430bn of oil subsidy for FY13E and showed its intention to rein in subsidy to 2% of GDP and so keeping in mind the strain on government finances, we believe the hike in the prices of regulated petroleum products is imminent. We have already factored in Rs5/litre hike in the price of diesel, Rs50 hike per LPG cylinder and Rs3/litre hike in kerosene in our FY13E under-recoveries estimate. We believe the petrol price hike and restricting upstream companies’ subsidy burden at ~40% in FY12 could bring some semblance of positive undertone for companies in our coverage universe, but we will review our ratings and target prices only after the likely revision in the prices of regulated petroleum products.

To read report in detail: PETROL PRICE HIKE


RKFL results were almost in-line with our estimates. It reported net sales of INR 1428 mn, up by 14.5% YoY  and 10.9% QoQ & profit of INR 80 mn, up by 5.9% YoY and 43.1% QoQ. EBITDA margins at 16.01% contracted  by 83 bps YoY, led by higher fuel expenses. We introduce FY14 estimates & roll-forward our valuations by  12 months and retain our BUY recommendation.

Results in-line with our estimates
In Q4FY12, RKFL has reported net sales of INR 1428 mn, up by 14.5%  YoY & 10.9% QoQ. PAT at INR 80 mn was up by 5.9% YoY & 43.1% QoQ. Overall capacity utilization improved to 90.6% in FY12 vis-àvis 77.3% in FY11. Its steel forging unit is operating at full capacity utlisation levels. Utilization in case of ring rolling (which is a high  margin product) has improved to ~79% vis-à-vis ~69% in FY11. It has also taken a small price increase in Q4FY12 to offset increase in input costs.

Contraction in EBITDA Margins
EBITDA margins at 16.01%, contracted by 83 bps YoY & were up  by 40 bps QoQ. Foreign exchange losses of INR 15 mn on exports  receivables reported in Q3FY12 has also been reversed in this quarter. Raw material to sales stood at 53.5%, up by 282 bps YoY & down by 367 bps QoQ. Power &  fuel expenses increased to 9.2% of net sales increasing by 197 bps YoY & 37 bps QoQ.

Capacity expansion plans
RKFL is looking to further enhance its product portfolio with  plans to manufacture front axle beams & crankshafts used in CVs. Total investment in the project would be INR 5000 mn, which would be financed through debt-equity ratio of 65:35. RKFL expects financial closure of the same to come by the end of June 2012 & expects the capacity to become operational by FY15.

RKFL has tied up with two new players in Turkey & Mexico for exports in Q4FY12. This will lead to better utilization of its ring rolling capacity leading to improved realizations. We expect exports to contribute ~10% in FY13E & ~12.5% in FY14E vis-à-vis 9% in FY12.

Outlook & Valuation
We expect growth in H2FY13 to be better than the 1st half. Given the expected slowdown in the CV segment, we expect the top-line growth to slow to ~10% in FY13E & 12.5% in FY14E. With current capacity almost getting exhausted, tepid outlook of the CV sector in the near term & 2 years time for new capacities to become operational, we retain our BUY recommendation with a revised target of INR 189 in 18 months, implying a discount of 5.5x FY14E EV/EBITDA & 10x FY14E earnings.

To read report in detail: RKFL


Operating margins decline…
Container Corporation (Concor) reported its Q4FY12 numbers with a topline of | 1071.1 crore and PAT of | 227.1 crore. Revenues, which grew 7.6% YoY, were marginally above our estimates mainly on account of better-than-expected Exim (| 843.3 crore vs. expected | 833.6 crore) and domestic sales (| 227.8 crore vs. exp. | 206.7 crore). Exim volumes stood at 535575 TEUs, exhibiting a 3.4% YoY increase while domestic volumes of 124907 TEUs continued to exhibit a downward trend by declining by 10.4% YoY. Domestic volumes have reduced considerably since the sharp hikes in haulage charges on certain commodities and due to private players chipping away at Concor’s market share. The EBITDA margin of 20.9% in Q4FY12 contracted by 251 bps due to yearend discounts, higher other expenses on account of break van charges paid to Railways and higher empty running cost. Other income grew 49.3% YoY due to higher interest income, increased number of auctions to clear old containers and dividend payment from JV partners.

Outlook for Concor
Concor’s FY12 Exim volumes increased 5.8% while domestic volumes decreased 13.9% due to a change in rail haulage structure and competition from private companies. Going forward, we expect 8% and 6.3% CAGR in Exim and domestic volumes, respectively, factoring in inclusion of pig iron and sponge iron in notified commodities. We expect lower EBITDA margins of 23.5% and 23.6% in FY13E and FY14E, respectively

Concor maintains its market leadership and has the strongest balance sheet among its logistics peers. However, privatisation of container haulage has put pressure on its operating margin and put its market dominance at risk. We recommend a BUY rating on the stock based on 13x FY14 EPS with a target price of | 994.


>CHAMBAL FERTILIZERS AND CHEMICALS: Strong Q4FY12 operational performance

Chambal Fertilisers and Chemicals’ (Chambal’s) Q4FY12 net sales, EBITDA and PAT have shown strong growth of 132.6%, 83.4% and 43.5%, respectively on YoY basis. EBITDA and PAT were broadly in-line with our expectation, while sales was higherthan- expected on account of strong trading sales. We expect Chambal’s EPS to grow by FY12-14 CAGR of ~11% on account of lower depreciation and interest. Stock had corrected ~13% and ~22% in the past one and six months, respectively. We believe that stock valuation has been reasonable post correction and is providing good medium-term investment opportunity (six months). We are upgrading the stock to ‘BUY’ with a TP of Rs83 (10xFY13E EPS). Any positive policy outcome could be an upside to our TP.

 Strong Q4FY12 operational performance: Chambal’s Q4FY12 standalone net sales grew by 132.6% YoY to Rs18.8bn (PLe: Rs13.0bn), primarily on account of 8.2x YoY growth in trading sales. Better-than-expected sales were mainly on account of higher trading sales (Rs7.9bn v/s PLe: Rs6.0bn). Trading sales was higher as industry as well as company has pushed non-urea fertiliser product into the market to claim higher subsidy because government has cut down the subsidy for FY13. Urea sales volume was up by 2.0% YoY to 4.5Lac MT. Urea realization and EBIT/MT was higher by 34.4% YoY and 244.6% YoY, respectively, primarily due to accounting of import parity price (IPP) linked subsidy. Company has taken urea price of US$415/MT for IPP accounting on conservative basis v/s average of global urea price for FY12 – US$460/M). Sales of shipping and textiles businesses were as per our expectation. Chambal’s EBITDA grew by 83.4% YoY to Rs2.3bn (PLe: Rs2.3bn). EBIT/MT in urea business grew by 244.6% YoY to Rs3,733/MT (up by 84.4% QoQ, PLe: Rs3,000/MT).

 Q4FY12 PAT grew by 43.5% YoY: Chambal’s depreciation de-grew by 20.3% YoY to Rs0.5bn (lower by 29.3% QoQ) because company’s urea Gadepan-I plant got fully depreciated (operational in 1993) during the year. Interest cost has gone up by 34.9% YoY to Rs0.3bn (up 15.2% QoQ). Company PAT has shown growth of 43.5% YoY to Rs1bn (PLe: Rs1.1bn). Company has received one-time dividend from one-third joint venture IMACID of Rs0.9bn (net of tax Rs0.8bn) during the quarter. Further, company has taken exceptional deferred tax and tax reversal of Rs0.9bn and 0.1bn, respectively, during Q4FY12. We have considered dividend income and tax adjustment as exceptional item. Hence, reported PAT stood at Rs0.9bn.
􀂄 Snapshot of FY12 consolidated results: Chambal’s consolidated net sales, EBITDA and PAT grew by 32.6%, 16.4% and 41.0% YoY to Rs75.4bn, Rs9.2bn and Rs3.3bn, respectively (PLe: Rs72.3bn/Rs8.9bn/Rs3.3bn). IMACID has shown net sales growth of 51.8% to Rs6.4bn (PLe: Rs6.3bn) led by higher phosphoric acid prices globally. IMACID EBIT grew by 1.6x YoY to Rs0.9bn (PLe: Rs0.9bn). Company’s IT business has shown improvement during FY12. IT business has reported loss of Rs0.7bn during FY12 v/s Rs1.1bn in FY11 (PLe: Rs0.7bn). Chambal’s gross and net debt stood at Rs34.7bn and Rs29.9bn, respectively (v/s Rs25.8bn and Rs19.6bn in FY11) because of higher debtors led by inventory push during Q4FY12. Company’s working capital days have gone up from 42 days in FY11 to 100days in FY12.

■ Expansion Projects: Chambal has approved setting up of Single Super Phosphate (SSP) plant in Dahej, Gujarat, with an annual capacity of 5Lac MT at a project cost of Rs122cr. Company is yet to receive environmental clearance for the project which is expected to take 24 months to complete. Land has already been allotted during Q3FY12 to the company. We have considered capex as CWIP in our FY13 and FY14 estimates. Further, company is also setting up a SSP plant in its existing facility at Gadepan, Kota (Rajasthan), with a capacity of 2Lac MT at the capex of Rs32.5m. Project is likely to get operational by Q1FY13 (June 2012). We have considered production of 1Lac MT and 1.5lac MT in our FY13E and FY14E estimates, respectively.

■ We expect EPS of Rs8.3 during FY13: We believe that company’s net sales would de-grow by 13.3% YoY to Rs65.2bn mainly on account of lower trading fertiliser sales led by lower subsidy as well as volumes. We expect Chambal’s EBIT to grow by 1.9% YoY to Rs6.2bn. Company’s Gadepan–I urea plant is fully depreciated now and we expect ~Rs0.5bn savings in depreciation during FY13. Hence, it is expected to boost profitability of urea business. But, it would be set‐off by lower contribution by trading business. We believe that IMACID is likely to report lower profit during FY13 on account of lower phosphoric acid. We are assuming EBIT Rs0.5bn (v/s Rs0.9bn in FY12) in IMACID. Further, Chambal’s IT business is operating at ~US$1.5m‐2m loss/quarter at present. Hence, we are assuming EBIT loss of Rs0.3bn (v/s Rs0.7bn in FY12), considering the present run‐rate. We expect 4.2% YoY growth to Rs3.4bn during FY13.

■ Valuation and Outlook: We expect Chambal’s consolidated PAT to grow at FY12-14E CAGR of 10.9% (v/s 10.8% in FY05-12). At present, stock is trading at one-year forward P/E of 8.5x (v/s trading range of 6x-13x for the past ten years). Stock has corrected ~13% and ~22% in the past one and six months, respectively. We believe that stock valuation is reasonable post correction and it is providing good medium term investment opportunity (i.e. six months). We are upgrading the stock to ‘BUY’ with the TP of Rs83 (10xFY13E EPS). Any positive policy outcome could be an upside to our TP. Our industry interactions suggest that government is likely to modify the present urea policy by increasing fixed cost reimbursement by Rs350/MT to urea players. If it gets approved in the near term, then we expect Chambal’s FY13E earnings to upgrade by 12.2% to Rs9.3.


>BHEL: Q4FY2012 Result highlights

Audited results better than provisional results, however order inflow remains a concern

For Q4FY2012, the turnover of Bharat Heavy Electricals Ltd (BHEL) grew by 9%, which was slightly higher than the provisional numbers. The industry division’s revenues grew by a solid 26% year on year (YoY) while the power division reported a subdued 3% yearly growth. The operating margin at 23.9% for the quarter was an improvement of 253 basis points from Q4FY2011. The net profit of the company grew by 21% to Rs3,380 crore which was also 5% higher than the provisional net profit.

For FY2012, the turnover of the company grew by 14%. The net profits grew by 17%, that is, higher than the provisionally reported net profit of Rs6,868 crore. The company has modified the accounting policy on employee benefits during the year in respect of leave liability, which increased the profit before tax (PBT) by Rs180.5 crore in FY2012.

The management refrained from providing a concrete futuristic outlook. It however indicated that the margins could be maintained at healthy levels in view of its cost optimisation efforts and high indigenisation of technology. It indicated that the order inflow could pick up in the subsequent quarters. The company is also increasing focus on non-power sectors like railways, transport, power transmission and distribution etc, along with exports to diversify away the concentration risk faced from the power sector.

Estimates fine-tuned: While FY2012 results were above expectations, order inflow has been hugely disappointing. For FY2012 the company has reported a total order inflow of Rs22,096 crore, which is way below the FY2011 level of Rs60,507 crore. The order book stands at Rs135,000 crore, down 18% on a yearly basis. The current book-to-bill ratio of 2.7x is the lowest in at least the past 20 quarters, aggravating the concerns on the future growth path. In view of the low growth rate in order inflows, we have downgraded our sales assumption by 3% and 11% respectively for FY2013 and FY2014. We have also fine-tuned our estimates on the back of subdued growth in employee expenses and a lower tax rate. Overall, we are estimating a negative compounded annual growth rate (CAGR) of 1% in the top line and that of 2% in the adjusted earnings over FY2012-13.

Price target cut to Rs250 on poor future growth visibility: Overall, the company’s performance wa outstanding in terms of operating margins but disappointing on the order inflow front. The current bookto-bill ratio of 2.7x is the lowest in at least 20 quarters, aggravating the concerns on the future growth path. While the management has denied the probability of more order cancellations in the coming quarters, but the same cannot be ruled out in the current turbulent investment sentiments especially in the power generation space. It also said that there is a marginal delay in payment by clients, which is reflected in the elongated working capital cycle. The supercritical orders expected from NTPC could boost the company’s order book in the coming quarters. But these orders are largely priced-in now. At the current market price, the stock trades at 7.5x FY2014E earnings. In view of the above concern, we are also downgrading our target multiple to 9x (last six monthly average) from the earlier 12x. We have revised our price target to Rs250 (9x FY2014E). We maintain our Hold rating on the stock.


>ALOK INDUSTRIES: Real estate monetisation: A small beginning

And the dilution continues…

Alok Industries’ (Alok) Q4FY12 numbers were broadly in line with our estimates with operating margins beating our estimates by over 200 bps. Alok reported one of the slowest growth in sales in over four years on the back of lower domestic sales. While exports grew 40.3% YoY (on the back of rupee depreciation) to | 814.9 crore, domestic sales grew only 10.3% YoY to | 1,780.5 crore. Going forward, we expect the company’s revenues to grow at a lower pace as compared to the last four years as the company has not planned any major capacity addition and also due to the impact of a higher base. While we expect revenues to grow at a CAGR
of 22.8% during FY12-14E, PAT is expected to increase at a CAGR of 39.3% on the back of savings in interest costs. Considering the delay in land monetisation and the ongoing dilution, we have downgraded Alok from BUY to HOLD.

Real estate monetisation: A small beginning
Alok has closed two deals (a) eight floors out of 20 floors of Peninsula Business Park, Lower Parel have been sold and the token consideration for the same has been received and (b) three floors out of eight in Ashford Centre, Lower Parel have been leased and the earnest money deposits have also been received.

Dilution dilemma
The Board has approved a preferential allotment of up to 2.75 crore equity shares and up to five crore warrants to promoters/promoter group company. In the past also, the promoters have diluted their stake to fund the capex requirements. While the CAGR in revenues and equity during FY07-12E has been ~45%, profits have only grown at a CAGR of 17.6% due to the burgeoning debt, which led to higher interest outgo.

The stock is likely to witness a multiple re-rating when the company reduces its debt through land monetisation and, thereby, saves on interest expenses. We have valued the stock at | 21 (based on an average arrived at by assigning a multiple of 0.4x FY14E book value and 2.5x
FY14E EPS). Considering the ongoing equity dilution and high debt levels, we remain cautious on Alok. Therefore, we have, downgraded Alok Industries from BUY to HOLD with a revised target price of | 21.

To read report in detail: ALOK INDUSTRIES

>SJVN: The defensive bet

 Strong dividend yield, negligible downside: We are turning positive on SJVN, primarily on the pretext of the deteriorating thermal power scenario, volatile market conditions and the company being the highest dividend yield (5-6%) play. The company has a sound operating history and some near-term trigger which will give an impetus to the earnings growth. We expect an EPS and book value CAGR of 7% and 9%, respectively, over FY12E-15E.

 Capacity addition of 27% to the present capacity by FY15E: SJVN’s current operational landmark, the 1500MW Nathpa Jhakri Hydroelectric Project (NJHEP) on the river Sutlej, is running at an average plant availability factor of 99-100% during FY11—12E (which is above the normative benchmark of 82%) and thus, has surpassed MOU targets. The company is now expected to commission the 412MWs’ Rampur project (located downstream to NJHEP) by FY15E and is likely to commence another 50MW wind project during the same period. Post that, an additional capacity of nearly 1.3GWs is expected to come in by FY21E.

 Annuity‐based sales guarantee ROE: NJHEP plant operates under the CERC norms and is entitled to earn ROE of 15.5% on the regulated equity of Rs41bn plus incentives based on the upside from good monsoons which aid ROEs by atleast 4-5%. We expect the total returns to grow to Rs10.5bn in FY15E from Rs8.8bn in FY12E.

 Valuation and Recommendation: SJVN is a relatively steady and safe bet on account of a proven track record in terms of operations, a small but reliable capacity addition and a superior dividend yield of 5-6%. The company trades at 0.8xFY14E which is at par with NHPC’s (Accumulate, TP Rs24) current valuations but below NTPC and Private IPPs. In the absence of any convincing sustainable story in the thermal sector, we turn positive on the hydro sector and thus initiate on SJVN with a ‘BUY’.

 To read report in detail: SJVN