Friday, June 8, 2012




Foreign fund flows - India

Fund flows - Asia ex-Japan

Fund flows - Global emerging markets (GEM)

Fund flows - All emerging markets (EM)

To read report in detail: FOREIGN FUND FLOW

>EDUCOMP SOLUTIONS: Pricing revives in Smart Class

Educomp Solutions’ (Educomp) Q4FY12 EBIT at Rs1.2bn and PAT at Rs0.6bn were in line with our expectations, though lower than the management’s guidance which was sharply cut a quarter ago. The management has guided for 25-30% revenue growth in FY13 and EBITDA margin improvement of 150-250bps YoY. However, it refrained from providing PAT guidance. We expect FY13 recurring PAT to be flat YoY mainly due to expected surge in interest cost by 53% YoY owing to likely refinancing of US$110mn FCCB maturing in July 2012 including premium which was not getting charged off earlier. While the volume growth momentum in the core business of Smart Class remains strong, pricing and hence margins are likely to remain under pressure because of intense competition. Other businesses like K- 12 schools and supplemental education are in nascent stage and in investment mode. Educomp is unlikely to turn FCF positive over the next two years. The stock has corrected 40% since our downgrade last quarter and is down 70% YoY, and with valuations at FY13E P/E of 8.6x and EV/E of 6x, we believe that the downside
is limited. Hence, we upgrade the stock to REDUCE from SELL with a revised target price of Rs148 (6x average FY13-14E EV/E), however, it is still not the time to accumulate the stock. Higher-than-expected Smart Class additions and any stake sale of assets are the key risks to our negative stance.

  FY13 – a year of consolidation – unlikely to regain investor’s confidence. We cut our FY13E EBITDA by ~8% due to lower than expected margins in Smart Class and PAT by 25% owing to likely higher interest costs. We now factor in revenue and EBITDA CAGR of 20% and recurring PAT CAGR of 10% over FY12-14E.

  Educomp unlikely to turn FCF positive over next two years: In spite of full securitisation of Smart Class receivables in FY12, DSO days remained high at 252 days and the same is unlikely to reduce significantly in the medium term. While absolute capex in K-12 schools is likely to come down, 43 new schools (21 greenfield schools and 22 schools under asset-light JVs) are likely to be constructed and the existing 69 schools would require upgradation and maintenance.

  Pricing revives in Smart Class, but margins declined: Smart Class pricing went up 10% QoQ in Q4FY12 to Rs0.37mn per classroom after a 17% QoQ fall in the prior quarter. Average classrooms per school also went up to 6.8 vs 5.3 in Q3FY12. In spite of this, the EBIT margin declined 60bps QoQ to 39% owing to higher marketing expenses. The company added a massive 17,815 classrooms in Q4FY12 and ~40,000 classrooms (guidance of 40,000-45,000) in FY12 vs ~27,000 classrooms in FY11. The company securitised all its FY12 Smart Class receivables amounting to Rs6.9bn under the reduced guarantee model and received Rs6.33bn till March 2012.

To read report in detail: EDUCOMP SOLUTIONS

>PSU Banks with High Dividend Yield – Worth Investing

Banking Sector has seen consistent pressure due to series of monetary measures adopted by RBI to curtail sticky inflation since March 2010, in turn transmitted by banking system. This along with global uncertainty resulted in high interest rates environment, slowing credit demand, and weak business sentiments in last one year. The pressure deepened further in last six months on the back of worsening domestic macro-economic factors. Concerns over several key parameters like credit growth, asset quality, profitability etc led many banking stocks to touch their 52-week low.

Bank Nifty has given negative returns in last one and three months i.e. 4.49% and 8.02% respectively.

PSU Banks underperformer as compared to Private Banks: Banks have declared their quarterly results for fourth quarter of FY12 and complete financial year 2011-12. Considering the overall pressure in banking space, performance posted by private banks is much better than PSU banks in terms of credit growth, asset quality, margins, profitability etc. Most of the PSU banks have experienced pressure on asset quality, drop in NIMs, slower growth in deposits and advances, deteriorated returns on equity and assets, etc on the back of downturn witnessed by overall economy. It was the only SBI announcing better than expected results with significant improvement in financial parameters after horrible performance in last few quarters. The prices of PSU Banks are eroded by a good percentage in last one year and many of them are trading at attractive valuations.

After a steep correction, most of the PSU Banks are trading at below their book value and adjusted book value. We are still not convinced that upcoming quarters will throw positive surprises in terms of earnings and asset quality. Now, the question arises what should be the strategy for investors for these PSU Banks?

High Dividend Yield- A Silver Lining: PSU Banks have announced dividend also along with their FY12 results varying in the range of 20% to 350%. Investment at current prices may deliver very attractive dividend yield to investors for the current year as well for the next year as we believe majority of the negative factors are already priced in at current levels and situation is going to be improved by FY13. Hence, Investment at current levels in PSU banks can reward investors in three ways- (1) Dividend Yield of FY12 (2) Dividend Yield of FY13 (3) High Probability of Price Appreciation from hereon and even if we see further downside in PSU stocks, the capital invested will be protected by the dividend amount received. Another interesting part is that dividends are tax free and do not form part of total income for the purpose of tax. Hence, we have found out few PSU Banks with good dividend track record and recommend our clients to consider investments in these stocks as a strategy to insulate their portfolio from capital erosion upto some extent.

To read report in detail: PSU BANKS

>SESA GOA: Sterlite signs bauxite supply agreement

Sterlite signs bauxite supply agreement with companies holding mining concessions
Sterlite Industries mentioned in its recent 6K filing to the SEC that it has entered into a tripartite agreement with Larsen & Toubro Limited (L&T) and Raykal Aluminium (Raykal). L&T holds certain prospecting licenses for bauxite mines located at Sijmali and Kurumali of Rayagad and Kalahandi districts of Orissa. STLT will acquire 100% of equity share capital of Raykal in a phased manner at a total consideration of INR18bn in a milestone based acquisition. We understand from the Directory of Geology, Government of Odisha, that the mines have c250mt of reserves and parts of land are under 'village forest' category, thereby requiring Forest Clearance under Stage 2 of Ministry of Environment & Forests (MoEF) approvals.

If mine eventually starts functioning after 3-4 years, we look at upsides in various scenarios Since L&T has a Prospecting License only, we understand that it would take significant amount of time for the company to finally sign a Mining Lease, if it manages to get the requisite approvals. Assuming that it takes 3-4 years for the mine to start, and STLT incurs additional exp of INR15b, we calculate potential upsides to our TP on a DCF-to-firm basis, based on these scenarios. Please refer exhibit 1 for a detailed summary of our assumptions 

A) Assuming current capacities at Vedanta Aluminium (VAL) alumina (1mtpa) and aluminium (0.5mtpa) are only functional we derive a potential upside of INR1 per share of SESA STERLITE.

B) Assuming that eventual approval from is obtained for operating expanded alumina capacities (alumina expansion currently put on hold), and accounting for the incremental USD1.5bn capex which VAL will have to incur, we derive a potential upside of INR14 per share of SESA STERLITE.

Valuations & risks: We value SESA on an SoTP basis at INR210 per share and rate SESA Neutral. 

To read report in detail: SESA GOA

>MERCATOR LINES: Expenses on the damaged vessel and higher dry docking


PRICE TARGET……………………………………………….Changed from | 34 to | 18
EPS (FY13E)............................................................................. Changed from | 4.6 to | 1.3
EPS (FY14E)………………………………………………………….Introduced at | 2.3

Slide in operating margin continues…
Mercator Lines (Mercator) reported a below estimate performance on both the revenue and profitability front. On a QoQ basis, revenues declined 7% to | 1019.5 crore (I-direct estimate: | 1122.6 crore) mainly on account of lower realisation of coal and lower fleet utilisation of its
shipping and dredging fleet. In spite of a 5% increase in coal volumes to 2.29 million tonnes, coal revenues declined due to a decline in coal realisation by 10% QoQ to | 3000 per tonne. EBITDA declined 31% to | 115.9 crore (I-direct estimate: | 178.3 crore) due to a 410 bps decline in EBITDA margin to 11.4%. The decline in EBITDA margin can be mainly attributed to lower fleet utilisation and higher repairs and dry dock expenses. One of Mercator’s tankers, which had met with an accident in December 2011, has not been operational and two dredgers were under dry docking during the quarter. Expenses on the damaged vessel and
higher dry docking expense on dredgers has led to the decline in EBITDA margin. In spite of an extraordinary gain on forex to the tune of | 30.08 crore, lower EBITDA generation and higher interest cost (up 10.7% to | 59.5 crore) led to Mercator reporting a net loss of | 24.3 crore.

Lower fleet utilisation impacts revenues and EBITDA margin
During Q4FY12, two dredgers of Mercator were dry docked while one tanker was not operational as it had met with an accident in December 2011 leading to low fleet utilisation. Mercator now operates 18 dry bulk carriers, eight tankers, seven dredgers, one MOPU and one FSO.

Considering the significant ramp up in coal trading volumes (low margin business) and pressure on margin in the shipping segment, we expect the EBITDA margin to decline from 15.8% in FY12E to 13.4% in FY14E. Consequently, we have revised downward our EPS estimates for FY13E from | 4.6 to |1.3. We have valued the stock at a 45% discount to global
average of 0.3x at 0.18x FY14E book value of | 101 to arrive at a price target of | 18. We recommend a HOLD rating on the stock. Existing investors can also hold the stock.

To read report in detail: MERCATOR LINES


>GUJARAT PIPAVAV PORT LIMITED (GPPL): Strong parentage of AP Moller Maersk; hinterland connectivity

PRICE: RS.56                                                           RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.64                                                            CY13E P/E: 18.6X

GPPL is the first private sector port concessionaire which is responsible for introducing the concept of private sector investment in landlord port model in India. The multi-commodity port currently has a capacity to handle 5 mn tonnes of bulk cargo and 1.3 mn TEUs (Quay side) besides a berth to handle LPG cargo. Strong parentage of AP Moller Maersk (APMM) with a 43% stake provides assured container volumes to the port. This forms ~50% of the container traffic at the port. With congestion at JNPT and proximity to NCR, the company is strongly placed to attract container volumes going forward. We expect container volumes for the port to grow at a healthy 12% CAGR over CY11 to CY13E. We are not very optimistic about the bulk and liquid cargo in near term as captive liquid and bulk volume would depend on revival or restart of certain stalled projects in the vicinity. Overall we estimate volumes for the port to grow at 12% CAGR over CY11 to CY13E with significant contribution from containers. With improving operating leverage, we expect the margins of the company to improve. The stock at
CMP trades at 18.6x CY13 earnings. We also expect the debt situation of the company to improve going forward. We are optimistic about the future performance of the company and initiate coverage on the company with a ACCUMULATE rating with a target price of Rs.64 for the stock.

Investment arguments
■ Strong infrastructure already in place to support medium term growth.
The container terminal at GPPL is fully mechanised and professionally managed. It has five reach stackers and 18 rubber-tyred gantry (RTG) cranes. Plus it has two mechanised bulk berths (with a conveyor belt from the berth to the storage yard). Total channel length of 1,075 metres is used for handling bulk and containerized cargo with a room to expand upto 4,550 meters. We believe its infrastructure is adequate for three to four years of strong growth. The capex requirement is expected to be small. We thus believe the port is poised for strong traffic growth, which we estimate at 12% CAGR over CY11-13E for container traffic (0.77 mn TEU in CY13E from 0.61 mn TEU in CY11) and 4% CAGR over CY11-13E for bulk cargo traffic (4 mn tonnes in CY13E from 3.69 mn tonnes in CY11).

■  Strong parentage of AP Moller Maersk helps the port. APMM (AP Moller Maersk) is one of the world's largest port operators, with CY11 revenue of ~US$60bn. It currently operates 50 terminals in 34 countries; in CY11, APM Terminals handled 35 mn TEUs with revenue of ~US$4.7bn. Strong parentage provides GPPL with benefits like 1) alignment with international shipping routes, 2) professional and experienced management, 3) best in class governance and business practices, 4) access to modern technology, 5) increased bargaining power and competitive rates for purchase of port equipment and 6) assured volumes.

■  Potential for coal and liquid cargo. The potential for thermal coal is huge for GPPL as some big corporate houses like Videocon, Torrent, Patel engineering and Sintex are in different stages of setting up thermal power plants at Pipavav. We estimate these power plants may come up in the next 3 to 4 years from today as currently the power sector is facing concerns like coal availability, environmental clearance and so on. These power plants can be a potential source of bulk cargo for GPPL and may entail a demand of 11 mn tonnes of thermal coal post CY15E. In addition, the company is negotiating with Aegis to revitalize the 2 mtpa liquid cargo berth. If these initiatives come through, the company's bulk cargo traffic could increase by about 13 mn tonnes post CY15E.

 Good location and hinterland connectivity. GPPL is strategically located at the entry point of the Gulf of Khambat, and is the largest port in the Saurashtra region of Gujarat. This gives Pipavav good access to the fast-growing hinterland. We believe competition for this market will not arise any time soon, as the proposed ports in the vicinity - Chhara, Mahuva and Sutrapada - are still on the drawing board. However, the port is at a disadvantage vis-à-vis south Gujarat ports such as Hazira, Dahej and (the proposed) Dholera as they have better connectivity to the north Indian hinterland. That said, Pipavav port is well connected via a 269 km long dedicated broad gauge railway link. It has also achieved a draft of 14 metres in its channel which can easily accommodate large container vessels.

■ Healthy overall volume growth of 12% CAGR expected over CY11 to CY13E amidst bad times. We expect GPPL to post strong growth in cargo traffic of 12% CAGR over CY11-13E. Traffic growth is likely to be driven by 1) APMM group - contributes over 50% of container traffic, 2) location advantage with access to hinterlands of Saurashtra and north India, 3) closeness to JNPT (150 nautical miles) to receive spill over traffic particularly from parent's Gateway terminal in JNPT and 4) robust demand for coal (from upcoming units in the region) and for containers from north and western India.

■ Margins to improve with increasing volumes and shift towards high margin business. We expect significant improvement in operating leverage. EBITDA margin is likely to improve from ~16% (CY09) to ~48% (CY13E) and EBITDA to post 17% CAGR over CY11-13E, in our view. Net profit margin is likely to rise from 14% in CY11 to 25% in CY13E. Other large private ports including ADSEZ have EBITDA margin of 65-70% and NPM of 25-30%.

We expect traffic at GPPL to see a strong CAGR of 12% over CY11-13E - dry bulk (4% CAGR) and container volumes (12% CAGR) driven by natural advantages, integrated logistics, good infrastructure, good hinterland connectivity & strong execution. The company's strong parentage and tie-ups will add value to the company. At CMP of Rs.56, valuations are rich with the stock trading at 18.6x P/E and 11.1x EV/EBIDTA CY13E, which is almost 20% premium to valuation of major global ports. However, we believe GPPL's superior growth in volumes (12% CAGR Vs. 6% for global companies), improving margins and healthy growth in profitability (+17% versus ~10% for global companies) and assured contracts makes a strong investment case. Our estimate of the net present value of equity cash flow of the existing businesses equals to Rs 61 per share. Pipavav Rail Corporation contributes ~ Rs 3 per share to the value of GPPL valuing the company at Rs 64 per share. We initiate coverage with an ACCUMULATE rating and target price of Rs 64.

Risk and Concerns

  • High dependence on container segment - less diversified cargo profile
  • Single client risk - 50% contribution only from Maersk Line
  • Increasing competition from other ports in Gujarat (such as Dahej, Hazira and capacity expansion at Mundra)
  • Coal imports for power plants may not materialize as expected
  • Inability to sustain tariffs
  • Concentration of container volumes amongst few customers (Maersk)
  • Lower-than-expected economic growth