Friday, June 1, 2012


Volumes under pressure, tariffs improved….

 GSPL's Q4FY12 result is better than our estimates. The company reported a PAT of Rs.1.29 Bn as against our estimate of Rs.1.2 Bn.

 The Company's bottom line has increased mainly on account of higher transmission tariffs. A higher transmission tariff has offset lower gas volumes.

 We would like to highlight that in Q4FY12 tariffs have increased by 21.1% YoY and 6.3% QoQ to Rs. 956.2/KSCM. This is primarily due to increased long distance transportation of gas which typically earns
higher gas transmission charges and partly due to take or pay clause thereby pulling the averages up.

 Gas transmission volume had fallen by 6.1% QoQ and by 11.6% YoY to 31.1 MMSCMD in Q4FY12, mainly due to fall in domestic supply of gas. In FY12E, transmission volumes are lower due to lower off take by few power plants which were undergoing maintenance.

 In Q4FY12, GSPL has made a total equity investment of Rs.400 Mn in two companies - GSPL India Gasnet Ltd. (Rs. 200 Mn) and GSPL India Transco Ltd.

 In FY13E, GSPC (holding company) is expected to import one cargo of RLNG per month which will improve GSPL's volumes (2.5-3 mmscmd).

 The recent fall in international LNG prices has resulted in higher demand from refineries and steel plants but demand from power plants is yet to pick-up.

 The Company recorded flat operating margin on sequential basis. In Q4FY12, the operating margin was 91.2% as against 91.9% in Q3FY12 and 90.0% in Q4FY11.

 On a quarterly basis, the Company reported an EPS of Rs.2.30 and CEPS of Rs.3.13.

 In FY11, PNGRB had granted authorization for setting up the pipeline, which will be laid from Mallavaram in Andhra Pradesh to Bhilwara in Rajasthan, Mehsana in Gujarat to Bhatinda in Punjab and Bhatinda to Jammu. It will have capacity to carry ~ 95 MMSCMD of gas. We believe it will take at least three years for completion. On a conservative note, we have not considered this for our valuations.

 Key risk remains in terms of capping of margins by PNGRB at 18% pretax ROCE. Based on Q4FY12 rates GSPL is earning around 27.3% pre-tax ROCE.

 GSPL has declared a dividend of Rs.1/Share for FY12.

 We expect GSPL’s earnings to remain flat at Rs.7.8 in FY13 & FY14 respectively. This is mainly due to lower gas supply and concern of tariffs as directed by PNGRB.

 The recent correction in the stock price has made the valuations attractive. Hence, we retain Accumulate rating on GSPL with a revised target price of Rs. 72/Share (earlier Rs.92). The downward revision in price target is mainly on account of 1). Concern of tariff cut indicated by PNGRB and 2). Falling domestic gas supply.


 In Q4FY12, consolidated revenues stood at Rs 10.6 bn driven by consumer durable and E&P business.

 On Consolidated basis, operating margins for the quarter stood at 8.1% vis-à-vis 9.9% in Q4FY11. Being a net importer, company has been observing margin pressure in the lighting and partly in fans business due to depreciating rupee trend.

 We highlight that the company's imports comprises of 15-20% in fans and appliances business and 35-40% in Morphy Richards. Lately, company has been trying to minimize its exposure to the overseas saucing and produce major products domestically.

 Management has indicated that with the current INR trend and considering various overheads such as forwarding charges etc, sourcing from India is becoming more viable than importing from countries like China etc in majority of product categories.

 In 2HFY12, company has received some relief from drop in input prices, mainly aluminum and copper. Management has been trying to maintain margins by employing steady cost management across the board and maximizing contribution from new products.

 Consumer appliances division revenues stood to Rs 4.4 bn vis-à-vis Rs 4 bn in Q4FY11. Sales in the consumer division got negatively impacted by significant drop in fans and 'Cooler' sales this year on account of lighter summer in major parts of the country.

 Fans and Cooler sales has dropped over 50% YoY in Q4FY12 resulting in significant inventory build-up for each of the two product categories. While, company has started to observe some demand pick up in Q1FY13, the channel inventory might require two to three quarters to get cleared.

 Ex-Fans and Coolers, Consumer division has grown by over 30% YoY in the quarter and new product launches like 'Induction cooker' has reported over 40% YoY growth in Q4FY12. Management plans to introduce new products through the existing dealer network and through 'Bajaj World', company's exclusive retail outlets that currently includes 10 stores across various cities in India. Lighting division reported 23% YoY growth in revenues at Rs 2.4 bn in the quarter. 

 We believe that the Indian consumer space has been undergoing a change in terms of consumer preference toward the branded products manufactured by the company and peer group (Havells, Crompton Greaves etc) over the unorganized sector.

 Current order book in E&P segment stands at Rs 6.1 bn that includes Rs 1.3 bn in high mast and Rs 3.0 bn in special project. The segment has been observing pressure due sluggish public spending in infrastructure projects and building up of overcapacity in the T&D space.

 In the quarter under review, E&P segment has reported the operating profit of Rs 205 mn vis-à-vis Rs 397 mn in Q4FY11 and Rs 65 mn in Q3FY12.


  4QFY12 ahead of estimates, on account of stronger revenues, oneoffs: ENIL's reported financials are ahead of estimates on account of stronger than expected revenue growth (+14% y/y), as also lower administrative expenses on account of private treaties provision write back. Decline in employee expenses (-13% y/y, -28% q/q), likely on write backs of incentives provided for earlier, further contributed to the strong PAT.

  Revenue growth strong on account of higher non-radio solutions: The management said that efforts of the company to provide more solutions to client needs, via activations, and new division "Mirchi Innovation" have led to strong growth in revenues, even as (radio) industry revenues have grown at a soft pace in the quarter. 75%-80% of the company's revenues have come through sale of commercial time (compares with 85%- 90% in earlier years), while the remaining have come in via other initiatives taken by the company. We note that other activities have lower margins than radio business of the company.

  Adex environment weak, expect soft growth in FY13: As per management, growth in radio industry revenues has been soft, and the scenario is comparable to 2009, in terms of curtailed client activity. The company expects to continue outperforming industry on account of greater ability to provide integrated marketing solutions to clients. However, the same shall affect margins adversely (non-radio margins are lower). The management has guided for ~30% margins in the near future, with hope to take it up to mid-30s over the longer term.

  Phase - 3 auctions still some time away, ENIL geared up with a stronger balance sheet:Phase - 3 auctions are delayed, and shall likely take place around August, the management said. The company has, meanwhile, focused on strengthening its balance sheet and has Rs 2.2Bn in cash. ENIL reiterated that the company would not aim to have the largest network, but would focus on adding potentially profitable stations in the bidding.

  Change in Estimates, Price Target; Maintain REDUCE: We make changes to our FY13 estimates for the company on account of a weaker advertising environment, and softer margins, and we see -0.8% growth in EPS in FY13 (revised est. is 0.5% ahead of prior est). We note that the company shall not benefit from private treaties write-back any further, and (normalized) expenses shall rise faster than income. Also, we note that the changing composition of revenues that shall exert pressure on marketing expenses. We cut our price target to Rs 212 (Rs 233 earlier), on account of weaker advertising environment and lack of visibility in earnings. We maintain REDUCE. We would reconsider our rating/ price target closer to the Phase-3 auctions, or upon having greater visibility on revenue growth.


>JAGRAN PRAKASHAN: Naidunia investments shall likely be calibrated

  Disappointing 4QFY12 Results:Jagran reported 4QFY12 advertising revenue growth of 11%, below our estimates. Although the growth is above industry average for the quarter, we note that Jagran enjoyed a better exposure to assembly elections held in 4QFY12. We believe stringent restrictions imposed by the EC on advertising, as well as increased competition (UP) have resulted in a somewhat soft revenue growth for the quarter. Reported PAT was broadly in line with our expectations, on account of higher other income (reversal of forex losses).

  Revenues to be under pressure, cost management is the key: We believe that advertising revenues of JagranPrakashan, as well as newspaper publishers at large, shall continue to remain under pressure. We expect Jagran's advertising revenues to grow 5% in FY12. While circulation revenues shall likely register stronger growth (higher circulation, cover price increases), revenue growth shall be modest in FY13. We therefore believe that management of expenses is the key here.We expect margin gains in FY13/FY14, to the extent of 1.4 ppt/ 1.2ppt. WE forecast FY13/ FY14 EPS at Rs 6.3/ Rs 7.3 (FY13 estimates reduced 22%).

  Several areas of improvement in costs, margins likey to expand if newsprint prices don't play spoilsport: The management has guided for a modest rise in newsprint consumption, and newsprint prices have declined, although marginally, from average levels of FY12, and may bring margin benefits (newsprint expenses shall likely be flat y/y) to JagranPrakashan. In addition, Jagran stands to gain from lower expenses on Mid-Day (closure of certain editions), and rationalization of expenses.

  Naidunia investments shall likely be calibrated: From management's comments, we believe the investments in NaiDunia are likely to be calibrated as per the economic scenario, and are unlikely to create large deviations from our earnings estimates. We note that Naidunia losses amounted to Rs600mn in FY12, and are likely to be reduced to below 250mn (large part from the now closed Delhi edition).

  Valuations reasonable, BUY with a long-term view: We find the valuations of JagranPrakashan attractive at CMP (13.7x PER FY13E), considering the presence of multiple negatives in FY13, which are unlikely to persist simultaneously in the long-term. We also believe JagranPrakashan, owing to incumbent status, is less exposed to competitive pressures than peers. We maintain a BUY rating on JagranPrakashan, with a price target of Rs 113/ share.



Bosch (BOS) reported better-than-expected operating performance for 1QCY2012 aided by EBITDA margin expansion on account of cost rationalization and localization benefits. We revise upwards our earnings estimates for CY2012E/13E, primarily on account of upward revision in our EBITDA margin estimates. We maintain our Accumulate rating on the stock.

Strong performance boosted by operating margin expansion: BOS registered healthy top-line growth of 10% yoy (12.5% qoq) to `2,295cr, in-line with our expectation, primarily driven by ~15% and ~16% yoy growth in the after-market and power tools segments, respectively. While the diesel systems segment reported ~8% yoy growth, the gasoline systems segment registered flat growth on account of slowdown in the passenger car industry (petrol variants). Exports also grew at a sluggish pace of ~3% and stood at `250cr mainly on account of slowdown in Europe. The company posted better-than-expected EBITDA margin of 20.8%, registering an increase of 192bp yoy (331bp qoq), mainly on account of a decline in raw-material expenses. Raw-material expenses as a percentage of sales declined by 170bp yoy (54.6% of sales), led by cost savings due to localization benefits, strategic buying decisions carried out by the company and cost-cutting measures. As a result, net profit registered strong 22.4% yoy (19.5% qoq) growth to `336cr.

Outlook and valuation: We expect BOS to register a ~15% CAGR each in its net sales and earnings over CY2011-13E, leading to EPS of `420.2 and `471.4 for CY2012E and CY2013E, respectively. At `8,781, the stock is trading at 20.9x CY2012E and 18.6x CY2013E earnings, respectively. We retain our Accumulate rating on the stock with a target price of `9,429, valuing the stock at 20x its CY2013E earnings.


>UNITY INFRA PROJECTS: 3 road BOT projects in its kitty

Witnesses robust revenue growth and healthy margins: The net sales of Unity Infraprojects (Unity) during Q4FY2012 grew by 26% year on year (YoY) and 47% quarter on quarter (QoQ) to Rs718 crore owing to scheduled execution of the company’s ongoing projects. On the operational front as well the company posted good results with margins contracting by just 129bps YoY to 12.5% which is still healthy. This contraction is on account of a hike in cement and steel prices during the quarter. The operating profit is thus up by 14% YoY.

Strong PAT growth led by lower tax outgo: Despite a 14% growth at the earnings before interest, tax, depreciation and amortization (EBITDA) level, the profit after tax (PAT) was up by 27% YoY due to flat depreciation and lower tax outgo. The interest cost was up 14% YoY as debt was at similar levels.

Healthy order book on back of good order inflow: Unity has bagged fresh orders worth Rs2,850 crore in FY2012 as compared to an order intake of Rs1,725 crore in the previous year. With this the order book for FY2012 stands at Rs4,380 crore which is 2.2x its FY2012 revenues. Further the company is the lowest bidder (L1) in orders worth nearly Rs1,000 crore. Thus, there is good revenue visibility for the company over the next two to three years.

3 road BOT projects in its kitty: Unity currently has three road build-operate-transfer (BOT) projects with itself with two projects won recently towards the end of Q4FY2012 and one won in early part of FY2012. The financial closure for two laning of the Chomu to Mahla project in Rajasthan has got delayed and is expected to take place in a month or two. The concession agreement for the two recently won projects will be signed next month, after which, it will take another four to six months for financial closure. The total equity required to be invested for these projects is approximately Rs250 crore which will be invested over the next two to three years.

PE fund raising in real estate projects depending upon their progress: Unity is looking at raising upto Rs175 crore from private equity (PE) in two of its real estate projects viz in Nagpur and in Bangalore. It has identified a few funds. However the deal closure in Nagpur would happen once Unity ties up with a hotel operator out there. The company is in the final stage of such a tie up with Hyatt. In Bangalore, the deal closure would happen post the project’s launch. However, due to political upheaval in Bangalore, the last few clearances are still left.

Maintain Buy with a price target of Rs107: We continue to like the company given its strong order inflow momentum and healthy L1 position considering the adverse macro environment picture. Further we like its diversification in the road BOT space with prudent caution. Even its working capital days have improved by 12 days while debt is maintained at the same levels. We keep our estimates unchanged and expect a 20% revenue compounded annual growth rate (CAGR) over the next two years with 14% EBITDA margins. Further, successful PE fund raising would remove some overhang on account of real estate projects. We have not given any value to its road BOT projects as well as real estate projects which would further add to the valuation. We maintain our Buy recommendation on the stock with a price target of
Rs107. At the current market price the stock is trading at a price earning (PE) multiple of 2.3x FY2013E and 1.8x FY2014E earnings respectively.


>MAHINDRA & MAHINDRA: Subsidiary - Mahindra Automotive Distributors Pvt Ltd (MADPL)

M&M: Q4FY2012 results mixed; automotive business saw MADPL consolidation  Mahindra & Mahindra (M&M) has consolidated the full year impact of its 100% subsidiary - Mahindra Automotive Distributors Pvt Ltd (MADPL), the makers of Verito cars in Q4FY2012’s standalone results. This has added Rs740 crore in Q4FY2012’s standalone revenues. Excluding this impact, the standalone revenue came 4% higher than our estimates as compared to 13.5% seen on reported revenues.

Farm equipment segment (FES) realisations in Q4FY2012 jumped 7.3% sequentially on account of price hikes taken in January 2012 as well as inclusion of higher Powerol and construction equipment sales. Similarly, automotive realisations jumped 20.6% quarter on quarter (QoQ) in Q4FY2012 on consolidation
of MADPL financials during the quarter.

To get a closer assessment on Q4FY2012 margins, we saw M&M+ Mahindra Vehicle Manufacturers Ltd (MVML) automotive earnings before interest and tax (EBIT) segmental margins drop 140bps YoY while FES’ EBIT margins as reported in standalone financials dropped 130bps YoY. While there has been a sequential margin improvement in both the segments, we see them moderating in H1FY2013 compared to corresponding period of previous year.

The consolidation of MADPL with M&M saw an exceptional write back of impairment charge worth Rs108 crore in Q4FY2012. The tax outgo was lower on account of the tax shield worth Rs148 crore available to set off MADPL losses.

M&M’s key strength is its strong product pipeline and its aggressive launch plan. The benefits of the same would accrue in H2FY2013 and beyond. However, we are concerned on likely lackluster volume growth in H1FY2013. Hence, we are reducing our FY2013 & FY2014 estimates as we incorporate lower volume growth. Our sum of the parts (SOTP) valuation incorporates FY2014 expected earnings and gives a target of Rs757/share on the stock. Inspite of valuation based upside, we would keep our recommendation on Hold as we see volume and margin related issues in H1FY2013. The policy overhang on taxing diesel vehicles has resurfaced post a status quo in the budget and will be a major negative.


>ISMT: Power plant commissioned

Sluggish revenues performance: For the quarter ended March 2012, ISMT reported a sluggish revenue performance on the back of a slowdown in domestic demand. Net sales fell 6.5% year on year (YoY) to Rs447.2 crore with a drop in volumes of both the tube and steel segments. The tube and steel segments reported a volume drop of 8.4% and 27.2% respectively. The realisations remained resilient, up 11.7% and 6.4% for tube and steel segments respectively. The company is seeing some sluggishness in the domestic demand and going ahead it remains uncertain about the domestic demand. The export business has continued to pick up pace with export sales accounting for close to 37% of the tube segment sales for FY2012, up from 30% in the previous year. The ‘other operating income’ was benefited by a refund against regulatory liability charges to be received from Maharashtra State Electricity Board of Rs9.9 crore.
OPM decline continues: The operating profit margin (OPM) continued its downward trend. For the quarter, the OPM was down 180 basis points to 10.9%. The drop in OPM can be attributed to the drop in volumes which led to higher fixed costs as a percentage of sales. The power & fuel costs also increased in the quarter with the power cost up to Rs7.03 per unit up from Rs5.97 per unit in Q4FY2011. On a segmental basis, the profit before interest and tax (PBIT) margin of the steel segment declined by 337bps to 8.5% whereas that of the tube segment fell by 170 basis points to 6.3%. Going ahead we expect the margins to improve on the back of lower power cost on commissioning of the 40MW power unit. We have maintained a subdued margin performance going ahead on the back of sluggish demand environment in FY2013.

Forex charge dents bottom line: Despite the rupee appreciating against the US dollar in the quarter, the company saw the adverse impact of higher foreign exchange (forex) loss of Rs12.3 crore up 416% on rupee depreciation and adoption of AS-30. Also, the interest\ charges were higher by 44.9% YoY to Rs37 crore. On the back of tax credit of Rs6.1 crore, the net loss was restricted to Rs2.2 crore against a profit of Rs17 crore in the corresponding quarter of the previous year.

Power plant commissioned: The company has announced the commissioning of the 40MW captive power plant at Chandrapur district, Maharashtra on May 28, 2012. The commissioning of the power plant would help in lowering the power costs for the company. The company has applied for coal linkages, however, we expect the same to take time and hence the company would have to acquire the coal from e-auctions leading to a higher coal price. Currently, the power costs are on an average at Rs6.7-7 per unit. We have assumed a lower plant load factor (PLF) for FY2013. For FY2013, we are now expecting savings of Rs29.2 crore and Rs45.7 crore in FY2014 as the PLF increases.

Valuation and view: The quarter gone by saw the company being impacted by the sluggish domestic demand with the margin fall continuing. However, the export side of the business has been picking up pace. Going ahead we have revised downwards our FY2013 estimates and introduced our FY2014 estimates. We believe that the demand environment would gradually improve from the third quarter of FY2013 and expect a better FY2014. On the margins front, with the commissioning of the power plant, we expect the margins to be safeguarded. We roll over our multiple to FY2014, lower our target multiple to 5x FY2014 estimates and arrive at a reduced price target of Rs29 maintaining our Buy rating on the stock.


>GDP growth slips to 5.3% in Q4FY2012

India’s gross domestic product (GDP) for Q4FY2012 came in at Rs1,395,071 crore, registering a year-on year (Y-o-Y) growth of 5.3%, which was significantly below the market’s expectation. This was contributed by a negative growth in the manufacturing segment,
and a slower growth in the agriculture and services segments. For FY2012 the GDP growth was at 6.5% as against 8.4% in FY2011.

All the three segments of the GDP, agriculture (up 1.7% vs 2.8% in Q3FY2012), industry (up 1.9% vs 2.5% in Q3FY2012) and services (up 7.9% vs 8.9% in Q3FY2012) have reported a slower growth for the quarter on a sequential basis.

From an expenditure perspective, consumption grew 
by 5.8% year on year (YoY) led by a 6.1% Y-o-Y growth in private consumption and a 4.1% growth in government consumption. The gross fixed capital formation grew by 3.6% YoY in Q4FY2012 as compared to a decline of 0.3% Y-o-Y in Q3FY2012.

The GDP growth of 5.3% was the lowest since the beginning of the new series (2004-05) and reflects the impact of the RBI’s monetary tightening and policy paralysis. The FY2012 growth of 6.5% was below expectations and growth estimates for FY2013 continue to get revised downwards (to 6.5% from 7.5% earlier). This calls for coordinated actions from the government
and the RBI to revive growth. Given the extremely weak IIP numbers and below expected GDP growth, the probability of RBI taking action on CRR or repo rates (reduction by 25bps) in July (if not immediately on June 18 mid quarter monetary policy review) has increased substantially.


>EROS INTERNATIONAL MEDIA LIMITED: Successful movies drive revenue growth

Eros International Media Limited reported better than expected numbers in Q4FY12; sales, EBITDA and net profit grew y-o-y at 81%, 156% and 119%, respectively. The company’s strategy of pre-selling all the movie rights has given good results in derisking the business model and increasing the margins. Eros International has released a total of 77 films in FY12 across Hindi, Tamil and other regional language films. The company has increased its revenue visibility by increasing the future movie slate with an addition of films scheduled to be released over the next 12 to 18 months. In our opinion, the company will report better Q1FY13 numbers, mainly on the back of better net collections from Housefull 2 (Rs 1440 mn) and Vicky Donor
(Rs 450 mn). Higher purchase/operating expenses has restricted the margin expansion for the company in FY12. We have increased our estimates for operating expenses and reduced our EBITDA estimates to Rs 3030 mn for FY13. Considering the improving movies’ pipeline and its quality, increasing demand for satellite rights, better monetisation of catalogue and focus on improving cash flows, the company is likely to perform better in the future. We have maintained our Overweight rating on the stock, but have reduced our target price to Rs 251 from our previous target price of Rs 291 after adjusting for the increased operating expenses.

Key Highlights
 Successful movies drive revenue growth
Revenues for Q4FY12 have increased by 81% y-o-y to reach Rs 2068 mn. This was mainly because of successful movies like ‘Agent Vinod’ and ‘Agneepath’ (International only) and a few Tamil films. Revenue for FY12 has increased by 34.5% to Rs 9632 mn as compared to Rs 7159 mn in FY11. Four of the top 10 box office grossing Hindi films in India in CY11 were Eros International films — Ra. One, Zindagi Na Milengi Dobara, Ready and Rockstar.

 Higher purchase/operating expenses restricted margin expansion
The company’s purchase/operating expenses has grown at 34.4% y-o-y to reach Rs 6655 mn in FY12 as compared to Rs 4951 mn in FY11. The EBITDA margin has expanded only 42 bps to 22.5% in FY12 as compared to 477 bps margin expansion witnessed during FY10-11.

■  Addition to films pipeline for FY13E and FY14E provides revenue visibility
The company has expanded its portfolio by adding new films such as Ferrari Ki Sawaari, Teri Meri Kahaani, Maatran (Tamil), English Vinglish to the existing film slate, which includes Kochadaiyaan, Cocktail, Tanu Weds Manu 2 and Khiladi 786. The company continues to pursue avenues to monetise content via different digital platforms, as entertainment is shifting to the new digital distribution channels.

In our opinion, the company’s sales, EBITDA and net profit is likely to grow at 16.6%, 42.7% and 41.1%, respectively in FY13E on the back of better portfolio of movies, improved satellite deals and de-risking strategy. Considering the success of movies, in terms of box office collections, improving satellite deals and higher catalogue revenues, the financial performance of the company is likely to improve along with profitability in FY13E. We value Eros International at P/E of 11x FY13E EPS to arrive at a value of Rs 251, implying a potential return of 52%. Thus, we maintain our Overweight rating on the stock with a target price of Rs 251.

Key Risks
 Slowdown in TV licensing income, non-performance of movies in theatres and sporting events, such as cricket match series, are likely to impact the company negatively.

Eros International Media Ltd Overweight


>SUN PHARMA INDUSTRIES LIMITED: Supplies generic Doxil to US

Strong growth across geographies

Sun Pharma Industries’ (SPIL) Q4FY12 results were better than our expectations. The company reported 60%YoY sales growth due to good growth across all geographies. SPIL’s EBIDTA margin improved by 1080bps YoY from 30.4% to 41.2% due to overall decline in costs. The company’s other income grew by 63%YoY from Rs1.30bn to Rs2.12bn. The company’s tax rate has increased from 0.4% to 16.4% of PBT due to the expiry of EOU benefits. Net profit grew by 85%YoY from Rs4.43bn to Rs8.20bn. We have revised the rating from Hold to Buy with a target price of Rs657 (based on 25x FY14 earnings of Rs26.3).

 Strong revenue growth: During the quarter, the Indian formulation business reported 49%YoY growth from Rs5.89bn to Rs8.77bn due to the Rs1.80bn onetime sales from change in distribution system. Excluding the one-time effect, sales growth was 21%. The US formulation business grew by 83%YoY from Rs5.53bn to Rs10.11bn due to price revision of Taro products, supply of generic Doxil to US and favourable currency effect. RoW formulations grew by 45%YoY from Rs2.23bn to Rs3.23bn.

 Enviable margins: SPIL reported 1080bps improvement in EBIDTA margin from 30.4% to 41.2% due to overall reduction in costs. The company’s material cost declined by 40bps from 21.4% to 21.0% of revenues due to strong revenue growth. Personnel expenses dropped by 240bps from 17.3% to 14.9%YoY. Other expenses declined by 800bps from 30.9% to 22.9%. SPIL has one of the highest margins among the pharma companies.

 Supplies generic Doxil to US: SPIL supplied generic Doxil (doxorubicin HCl injection), an anti-cancer product to the US due to the critical shortage of this product in the US market. The supply has been made under its own brand name Lipodox.

 Taro performing well: For Q1CY12, Taro Pharma has reported 35%YoY growth in revenues from $108mn to $145mn. Its EBIDTA margin has improved by 1460bps YoY from 31.0% to 45.6% due to the price increase of selected products in the US market. Taro’s net profit grew by 84%YoY from $25.7mn to $47.2mn.

 Attractive valuations, Reiterate Buy: We expect SPIL to report good growth across all geographies and from new product launches in the domestic and US markets. We expect Taro to perform well in the US market. We have revised our EPS estimates downwards by 2% for FY13 and upwards by 6% for FY14. At the CMP of Rs577, the stock trades at 27.0x FY13E EPS of Rs21.3 and 21.9x FY14E EPS of Rs26.3. We have revised the rating from Hold to Buy with a target price of Rs657 (based on 25x FY14 earnings of Rs26.3).


>SAIL: Q4FY12 Result update

Operational struggle continues, reiterate sell

SAIL’s operational performance remained below expectations with Q4FY12 EBITDA at Rs18.7bn and margin of 13.7% (lower by 100bps QoQ). Reported PAT at Rs15.8bn included exceptional gain of Rs7.2bn on account of entry tax write-back for Bhilai steel plant and forex fluctuations. Adj. PAT stood at Rs10.8bn (~5% lower than our expectation of Rs11.4bn). Realisations improved 4.5% QoQ but costs remained higher as other expenses and raw material costs went up sequentially. Also, a decrease in stock in trade was seen which we believe would have been due to old high cost inventory sales during Q4FY12. Expansion progress still remains slow and incremental volumes from IISCO and Bokaro are not expected before H2FY13E. We revise our volume and EBITDA estimates lower for FY13E/14E. Maintain sell.

 Volumes and realisations improve: Steel sales volume stood at ~3.2MT (our est. ~3.1 MT), higher by ~2.2% YoY and ~22% QoQ. Sales volumes improved after a dismal Q3FY12 but remained lower than production of 3.3 MT as the company continues to find it hard to push volumes in a competitive domestic steel market. Realizations improved by 4.5% sequentially as steel prices improved in the domestic market (especially for longs).

 Inventory remains high, EBITDA lower on high costs: SAIL’s inventory remains high with total steel products inventory reaching ~1.4 MT as on Mar’12. EBITDA stood at Rs18.7bn (margin of 13.7%), lower sequentially on account of ~Rs6.3bn reduction to stock in trade on account of previous high cost inventory sales during the quarter. Power, fuel and other operational costs remained high and SAIL continues to remain the highest cost converter among the large domestic steel players on account of high operational costs.

 Expansion projects to start coming on-stream from FY13E: SAIL’s expansion projects continue to progress at a slow pace and capex during FY12 stood at a lowerthan- expected Rs11bn (against guidance of Rs12.5bn). The company has guided towards Rs14.5bn capex for FY13E towards modernization and expansion activities and expects commissioning of IISCO and Bokaro expansions during FY13E. SAIL has seen its interest earning cash investments drop by Rs11bn during FY12 on account of substantial debt repayments and capex from internal accruals. This is expected to reduce other income for SAIl from FY13E onwards and also increase debt funding going ahead. We remain concerned on the slow progress of expansion projects and have apprehensions over the ability of the company to sell higher quantities in a competitive domestic market with new capacities brought on-stream by all large domestic steel players well before SAIL. We revise our earnings estimate lower factoring in lower steel volumes, higher blended realizations and higher other expenses. We revise our FY13E/14E EBITDA lower by 3.6%/5.7%.

 Maintain sell: We maintain our bearish stance on SAIL on account of reduced competitive capability and high operational cost. We remain skeptical on the company’s ability to push volumes in a competitive market going forward and simultaneously maintain margin and realizations. We value the company at 5x FY14E EV/EBITDA (discount of 10% to global average) and FY14E expected outstanding CWIP at 0.6x to arrive at a target price of Rs88. Maintain Sell.


>RELIANCE COMMUNICATIONS: Margins decline due to higher network operating costs

Wireless revenues were below our estimates, led by a sequential fall in the ARPU. However, overall revenues grew 5% owing to healthy growth in the Global Enterprise and Others segments. Higher network operating costs drove a 67% q‐o‐q fall in the PBT. Negative tax provisioning and minority interest, however, saved the day, helping the PAT rise 78% q‐o‐q to INR3.3bn. On the other hand, write‐offs due to bad debts and forex variations led to an INR32bn decline in the net worth. We lower our earnings forecasts up to 12% over FY13f–FY14f. Reduce TP to INR59, including the impact of likely refarming, license & spectrum renewal fees and free roaming. Upgrade the stock to Hold due to a c24% underperformance in the last three months. 

■ Wireless segment disappoints; consolidated revenues up 5% q‐o‐q The 1.3% sequential growth in wireless revenues was below expectations due to a q‐o‐q fall in the average revenue per minute (ARPM). The significant q‐o‐q drop in the ARPM after seven quarters has not led to strong growth in total minutes. Consolidated revenue grew by 5% q‐o‐q led by 4% revenue growth in Global Enterprise and 18% in Others. We expect a slower revenue growth of 9% during FY13f–FY15f. 

■ Margins decline due to higher network operating costs As a percentage of sales, the network operating costs rose 500‐bp q‐o‐q. This was partially offset by a 180‐bp q‐o‐q decline in SG&A costs, as a percentage of sales. Though the management attributed this increase to be a seasonal phenomenon, the network operating costs, as a percentage of sales, rose 600‐ bp y‐o‐y in FY12. We expect a 307‐bp improvement in the EBITDA margin over FY13f–FY15f. 

 PAT higher on one‐offs; net worth fell by INR32bn PAT was up 78% q‐o‐q to INR3.3bn led by one‐offs. This includes a negative tax provision of INR1.2bn on the reversal of provisions, which are no longer required. Also, the provision for losses worth INR1.3bn towards minority interest on restructuring of a foreign subsidiary boosted the PAT. However, the consolidated net worth declined INR32bn during the quarter (INR16/share) owing to various write‐offs, including INR11bn worth of debts due from cancelled licensees. Other write‐offs are mainly due to forex variations. 

■ Downgrade earnings; include regulatory impact; upgrade to Hold We reduce our PAT estimates up to 12% over FY13f–FY14f to reflect a moderation in our growth assumptions for the wireless segment. Furthermore, we include a regulatory impact of INR7/share for refarming, INR2/share for license renewals and INR3/share for free roaming in the new proposed telecom policy. Thus, we arrive at a Jun13 TP of INR59. Due to a c24% underperformance over the last three months, we upgrade the stock to Hold. At our TP, the stock is likely to trade at one‐year forward EV/EBITDA and P/E multiples of 4.3x and 6.0x, respectively. The success of the planned IPO of the subsea telecommunications infrastructure business is a key upward risk to our call.


>McLeod Russel India Ltd

Mcleod Russel registered a mere ~12% decline in its standalone net profit for FY’12 at `2,601 mn owing to loss of crop during the months of November, December and March. On the profit side, the company has posted a standalone net loss of `1,572 mn for the fourth quarter of FY’12 in comparison to a net loss of `1,229 mn in Q4FY’11

For the quarter ended March’12, the company has reported ~14% increase in the total sales at `2,601 mn and ~28% increase in net loss `1,572 mn. Sales for the quarter grew ~13% to 190 lakh kgs while crop size declined sharply ~72% to ~7 lakh kg. Prices remained flat at `1,373 mn per kg in quarter under review. On the price front, the season has started off on a positive note for McLeod. The ruling price today is `30 to `40 higher than last year. This is due to two reasons. From the month of November the company had lost crops due to early winter and we
lost crop in Nov’-Dec’ and March. Basically, the inventory levels at the frontend are depleted and buyers had to come in with a higher force to pick up the tea. Going into the FY’13E season, if the weather holds well, we believe that this deficit of April and May will not really catch up. However, weather forecast for the FY’13E period does not holds good & might see fall-out in crops in Q1FY’13E. 

Operating margins were under pressure and slipped 350 bps to 24.6% owing to spike in the raw material cost, power cost and employee cost.
Costs per kg were higher by `8/kg mainly on account of midterm revision of wages in Assam effective 1st Jan’12 (additional impact `2/kg) increase in fuel cost (additional impact `1/kg), irrigation and fertilizer costs due to dry weather from November to March (additional impact `2/kg). The Raw material cost as percentage of sales net of stock adjustments inched up 120 bps to ~9.2% while that of employee cost increased 50 bps to ~34.7%, power and fuel inched up 70 bps to ~9.7% and other expenses grew 50 bps to 1~1.8% in period under review. Resultantly, operating profit tumbled marginally 2% to `3,044 mn.

Valuation Uptick continues faster than we expected and output this year in North India and with the prices at `30-`40 higher, should remain at a much higher level going into the season. At CMP, the stock trades at a P/E of ~8.7x and P/BVPS of ~1.5x of FY’13E EPS. We revalue Mcleod Russel from our earlier TP of `215 to `300, however, re-iterate our HOLD stance with a potential upside of ~7.5% from current levels. At our TP, the stock would be trading at a **P/E of ~9.3x and P/BVPS of ~1.7x, factored over FY’13E EPS of `32 and BVPS of `181.


>TATA CHEMICALS: Near term headwinds are adequately priced in, Upgrade to ‘Buy’

Tata Chemicals reported Q4FY12 results. Topline and EBIDTA numbers were in line with estimates. Sales at `34650 mn was up by 30%, while EBIDTA went up by 11% YoY. EBIDTA margin improved to 15.9% from last quarter’s low of 14.6%. Exceptional items include notional forex loss of `246.9 million, impairment of assets at `259.3 million.

■ One-off in Fertiliser segment hits profitability, Bio-fuels assets written down during FY12
TCL has taken `340 mn write down on its Bio-fuels assets (part of Exceptional items reporting under head – Impairment of Assets) and has existed first generation bio-fuels segment. `150 mn of this was taken in Q3FY12 and `190 mn was booked in Q4FY12. In Fertiliser segment, during Q4FY12, `230 mn losses were one-off items which reduced profitability. Out of this, `190 mn loss was booked during Q4FY12 on account of old Ammonia converter, while `40 mn loss was booked for Power.

 Focus on low capex, higher revenue generating businesses (except Urea)
Management indicated its focus on businesses where capex requirement is low for generating incremental revenues except for Urea plants at Babrala and Gabon. TCL has received environmental clearances for Babrala brownfield expansion and will go ahead with project only after Urea Investment Policy is in place post CCEA approval.

■ Challenges in fertiliser sector continue
There is pressure on phosphatic and potassic fertilizers due to INR depreciation and subsidy reduction under NBS policy for FY13 compared to FY12. Phosphoric acid negotiations went through a rough weather with OCP not agreeing to contract at lower rates while other suppliers such as Phoschem, Foskot and ICS with Indian industry (not TCL) agreeing at $840 – 850 levels. OCP has finally agreed to $885 per tonne after ½ of the quarter was over. During Q1FY13, IMACID would be operational for only about ½ of the quarter while DAP/NPK plant at Haldia will operational only for 15 days as it will start receiving acid from Mid-June. Urea quantities linked to IPP may be lower in FY13 compared to FY12 Ammonia plant was shut from 30th march to 1st May for replacement of converter. This will lead to urea volumes being lower than FY12 levels. In FY12, TCL achieved volumes of 1.14 mn while we are building in 1.12 mn for FY13. In a normal year, TCL has potential to achieve production of 1.25 mn tonnes.

■ Price target maintained at `390, Upgrade to ‘Buy’
We like TCL for its initiatives to ensure raw material availability at lower cost through backward integration. In long run, these will prove to be sustainable structural advantages vis-à-vis its peers. Near term remains challenging with several headwinds. At cmp of `317, TCL is trading at P/E of 8.9x and 8.0x for FY13E and FY14E EPS. We maintain target price at `390 based on 11x on FY13E. We believe that near term concerns are adequately priced in and upgrade TCL from ‘Hold’ to ‘Buy’ after correction of over 12% in last 3 months in stock price.



  Strong presence in niche segment: The Company has created niche segment by introducing Sugar free sweetener for diabetes, Nutralite butter for health conscious, EverYuth skin care and also created one more brand named Actilife which is an adult’s drink. The company being a niche player enjoys commendable market share and presence in the respective category. We expect gross revenue register a growth of 17% and 20% in FY13E and FY14E respectively.

  Launch of value added products to widen consumer offering: Zydus Wellness has launched extensions, variants, SKUs’ under the already existing brands so as to fill the product gap, to enhance the wider offering; thus, expanding the present loyal customer base to other product categories. We believe that the company enjoys the premium position in the niche segment and enjoys the first mover advantage in all the categories. We also believe rising health awareness and the growing number of people with diseases such as diabetes and blood pressure will result in wider acceptance of such products thus; boosting revenues.

  Expansion in distribution network to boost revenue: The success in the consumer business is broadly dependent on the strong distribution network. The company understands the necessity of strong distribution network and on the same context is planning to increase its current 0.5mn outlets to 1.5mn. The company is expected to use the distribution network of its parent company (Cadila) to utilize the prescription route to promote its products. We believe this will boost the revenues going forward.

  Increase in Advertisement expenditure to improve volume growth: Zydus has cut back its advertisement expenditure in FY12 as the rival companies like HUL, J&J, etc had increased their advertisement expenses. This had led Zydus to cut back their advertisement expenses which resulted into the subdued performance in EverYuth. Management expects to revive the falling volumes and register double digit growth as company resumes its brand campaign n Q1FY13.

  Debt free company: Zydus is a zero debt company and has cash reserve of Rs. 132 crores on its books. The company is also open for inorganic growth and is scouting for some viable options. We feel that with the zero debt and sufficient cash on its books, the company can leverage the situation without stretching its balance sheet.

  Lower Effective Tax rate and Excise Duty: The company earlier used to go for third party manufacturing. But recently the company has set-up a facility in Sikkim in Q2FY12. As the company is expected to pay excise duty in Sikkim, but collect the refund from the government in the next year, the excise duty is likely to drop in the 2HFY13E.

  Valuation & Recommendation
We initiate coverage on Zydus Wellness with a “BUY” rating with a price target of Rs. 477 per share (25x FY13E), an upside of 28.6%.