Sunday, July 15, 2012

>Jain Irrigation (JISL) has finally received RBI’s approval to launch its NBFC

Jain Irrigation (JISL) has finally received RBI’s approval to launch its NBFC. This, we believe, will help the company ease its stretched working capital cycle (steep gross receivable days of MIS at 340 days at FY12 end). JISL plans to expand this NBFC into a pan-India player over the next 3-4 years. Maintain ‘BUY’.

NBFC launch to be followed up with aggressive expansion
• The NBFC will be incorporated as a JV named, “Sustainable Agro-commercial Finance Limited” (SAFL; pronounced as SAFAL). It will initially be promoted by JISL, promoter entities of JISL and International Finance Corporation (IFC) – a member of the World Bank group. Post the launch of SAFL and the initial phase of its expansion, JISL plans to bring in some banks and financial institutions into the equity shareholding of the JV.

• Main activities of SAFL would include financing farmers for MIS, agri projects, contract farming, small businesses, setting up solar pumps and other appliances.

• JISL indicated sometime back that the initial investment into SAFL would be ~INR0.8bn, in the proportion of 10% by IFC, 40% by JISL and rest by promoter entities. In the second phase, INR1.2bn is likely to be infused by bringing in strategic partners.

• SAFL plans to commence its business activities post the monsoon period this year, by setting up ~25 offices in Maharashtra by Aug 2012 end and another 15 offices in the state by Dec 2012. In the second phase, SAFL plans to expand operations to Karnataka, Andhra Pradesh, Tamil Nadu, Gujarat, Madhya Pradesh and Rajasthan. In the phase three, it plans to cover the remaining states. SAFL envisages a pan- India presence with over 150 offices within the next 3-4 years.

Outlook and valuations: WC likely to ease; maintain ‘BUY’
While high working capital, high leverage and unhedged forex loans remain key concerns, the NBFC license coming through after a long wait will accelerate the pace of rationalizing the WC cycle. Consequently, leverage concerns for JISL are likely to subside. The stock is currently trading at 9.9x and 8.0 x P/E for FY13E and FY14E, respectively. We maintain ‘BUY’ with a target of INR110 based on DCF.

To read report in detail: JAIN IRRIGATION

>Tata Consultancy Services

Tata Consultancy Services (TCS) reported Q1FY13 results touch-ahead of PLe/ consensus expectations. The management indicated no worrying signs in clients’ spending behaviour. Moreover, they indicated that some of the delays that they had witnessed at the beginning of the last quarter are allaying away. We see uncertain demand environment and weak pricing environment to restrict consensus estimate upgrade. We retain our ‘Accumulate’ rating, with a revise target price of Rs1,290.

􀂄 Beaten expectation in a challenging environment: TCS reported Q1FY13 results touch ahead of PLe/consensus expectation. Revenue grew by 12.1% QoQ to Rs148.69bn (PLe: Rs145.85bn; Cons: Rs146.41bn) and 3% QoQ in USD terms, led by better-than-expected volume growth of 5.3% QoQ (PLe: 3.7%). EBIT margins eroded by 20bps (PLe: +30bps, Cons: -20bps) to 27.5%. EPS grew by 11.7% QoQ to Rs16.76 (PLe: Rs16.53, Cons: Rs16.01).

􀂄 Is pricing at risk? The pricing in Q1FY13 declined by 1.06% QoQ in constant currency. However, the management sees no pressure on pricing. Nevertheless, as the demand environment gets challenging, the competitive landscape will give opportunities to client to take advantage and seek pricing cut. Moreover, peers would use pricing as a strategy to regain market share. We see pricing to remain under pressure in the near term.

􀂄 Growth ‐ broad‐based or select few? According to the management, the deal pipeline is more broad-based and the growth has come across the vertical. The strong growth in BFSI and telecom is led by one client ramp-up in each vertical. We see the growth getting scarce as the demand environment gets challenging. However, already pocketed deals for TCS gives better visibility of revenue compared to peers. The management is confident of achieving higher end of NASSCOM guidance in the constant currency terms.

􀂄 Valuation & Recommendation: The current price factors in strong performance by TCS. We tweak our model; hence revise our target price to Rs1,290 (from Rs1,270), 17x FY14E earnings estimate. We value TCS on FY14 due to better revenue visibility compared to Infosys, which we value on FY13 estimates.

To read report in detail: TCS


>ONGC: Aspiration to double overall production by 2030

Ad-hoc subsidy a near-term risk; sector reforms in the offing

 ONGC has chalked out a perspective plan, under which it targets to double overall production and increase production of its overseas subsidiary, OVL, six-fold by 2030.

 The company expects to increase its gas production to 100mmscmd by 2016-17, led by the development of its deepwater fields in KG basin and Daman offshore.

 Ad hoc subsidy sharing is near-term risk. Given the precarious government finances and easing of inflationary pressure, it believes sector reforms are in the offing.

 The stock trades at >40% discount to global peers at 10.3x FY13E EPS of INR27.3. Buy

To read report in detail: ONGC


>RALLIS INDIA: Metahelix Lifesciences and Zero Waste Agro Organic is a long-term growth driver

Key Highlights: Rallis India AR - 2012
􀁺 Competitively placed as a complete agri-service provider
􀁺 Focus on greener molecules & fast-growing segments along with scaleup of recent launches to aid topline growth
􀁺 Commencement of CRAMs business at Dahej facility to catapult sales from contract manufacturing
􀁺 Increase in revenue contribution from recent acquisition (viz., Metahelix Lifesciences and Zero Waste Agro Organic) is a long-term growth driver.

Industry Snapshot:
􀁺 Rising world population and economic growth in developing nations have led to significantly higher global food demand.

􀁺 Domestic agrochemical industry declined during the year; global counterpart grew 17% to USD 44.9bn.

􀁺 The Indian seed industry, world’s sixth largest (>` 70bn) has grown at 12% p.a. in the past couple of years compared to 6-7% internationally. In India, commercial seeds account for only 25% of the potential, providing tremendous opportunity in this space.

Rallis Poised Agenda: Harvesting growth
Rallis has an extensive network across India through its distributors and retailers, covering around 80% of India’s districts. Through this network, it supplies innovative products and services to maximize crop protection and production in response to evolving needs of farmers. Rallis Kisan Kutumb (RKK) now has 700,000 farmers enrolled and the company has launched “Samrudh Krishi” program in FY12, as a means to leverage on this database.

To read report in detail: RALLIS INDIA


>RELIANCE COMMUNICATIONS: Update on RCOM’s submarine cable assets’ IPO

Preliminary submarine cable prospectus released on 5th July

RCOM released the preliminary prospectus for the listing of its cable assets as a business trust in Singapore last week. At this stage the pricing hasn’t been determined, but press articles indicate a pricing range of USD1.09-1.32 per unit, with an implied market cap of USD1.27- 1.54bn. The prospectus states a payout of at least 90% of distributable free cash in dividends and projects USc12.5 for FY13F. This implies a 9.5%-11.5% yield at the offer price indicated as per press, which is attractive vs the average telco yield of 6-7% across the region. However, this pricing range also implies a listing EV/EBITDA of ~10-12x FY13F
(on pro-forma EBITDA forecast of USD131mn with no debt at end of FY12F). Hence, we recommend some caution, and also given the lack of clarity/ inconsistency around group strategy, a ~10% yield alone may not be enough to entice many investors. We are, in general, positive on submarine cable businesses given their inherent cash/margin potential, but we don’t have enough comparables/ details to assess the merits of this transaction yet. (Source: Reliance’s GTI Said to Offer Up to 11% Yield in Singapore, Bloomberg, July 9 2012).

Positive catalyst, but only the first step to deleveraging
A listing of its submarine cables assets could be a positive catalyst for RCOM given its many attempts to monetize its various assets. However, if we assume a 65% divestment in cables (or roughly US$1bn proceeds based on price indicated by press), and these proceeds are used to reduce debt at RCOM level, gearing still remains high at close to 5x on our estimates.

Key highlights from the preliminary prospectus
 RCOM has created the Global Telecommunications Infrastructure Trust (GTI Trust), which now owns the submarine cable assets. This trust released the preliminary prospectus for an IPO listing in

 Total number of units after the IPO is expected to be 1,163mn and RCOM could potentially look to divest 55-65%, we understand, based on press reports, which highlight a price range of USD1.09-1.32 per unit. This implies a market cap in the range of USD1.27-1.54bn.

 As per the prospectus, the trust expects to at least distribute 90% of cash flows to unit holders. For FY13F, USc12.5 per unit is estimated to be distributed. This implies a yield in the range of 9.5-11.5%, based on above mentioned unit price range. However, these are preliminary estimates at this stage and are also subject to actual performance of the company (share price).

 As per pro forma statements, GTI Trust has no debt as on March 2012. This would imply a FY13F EV/EBITDA multiple of 10-12x (based on FY13F pro forma projections provided in the prospectus). This compares to the current regional average of 6-7x.

To read report in detail: RELIANCE COMMUNICATIONS


Following a management meet with Unichem Labs, we believe that the worst is now past and expect a gradual recovery in its domestic formulations business. We upgrade the stock from a Sell to a Buy, with a revised price target of `168. We raise our net profit estimates for FY13
and FY14 by 2.4% and 8.5%, respectively, as revived domestic growth is likely to lead to a better EBITDA margin.

 Recovery in domestic formulations. Unichem’s domestic formulations business has declined in the last five quarters due to the high attrition in 4QFY11 and inventory rationalization measures. We believe that the impact of these is now past and growth is likely from 1QFY13. We expect 12% revenue CAGR in domestic formulations over FY12-14.

 Exports scaling up. Exports growth of 55% drove overall revenue growth in FY12. The high growth was led by commencement of a supply contract with an MNC from its Ghaziabad plant. We expect standalone exports to register 18% revenue CAGR over FY12-15 and expect 6%
CAGR in revenue from Niche Generics (the UK subsidiary).

 Raising estimates. We raise our revenue estimates for FY13 and FY14 by 2.9% and 3.3%, respectively, to factor in the anticipated recovery in domestic formulations and favourable currency movements. We also raise our FY13 and FY14 net profit estimates by 2.4% and 8.5%, respectively, led by the expected better margin in FY14 on account of the likely turnaround in Niche Generics. We also introduce FY15 estimates, with a net profit growth estimate of 17.3%.

 Valuation. Considering the revived growth outlook and reasonable valuations, we upgrade the stock from a Sell to a Buy, with a revised price target of `168 (`143 earlier). Risks: Currency fluctuations and regulatory hurdles.

To read report in detail: UNICHEM LABS


>SHIPPING SECTOR JULY 2012: Update on Baltic Dry Index (BDI) & Dirty Tanker Index (BDTI)

• The Baltic Dry Index (BDI) improved marginally by 8% MoM and is currently inching upwards. The rates have consolidated during the month. However, China’s iron ore inventory remained at an elevated level, which continues to put pressure on the index. The Capesize index continued its negative trend and is down by 10% due to lower Chinese imports of iron ore from Brazil. The Baltic Supramax index rebounded strongly, increasing 21% over its previous month, compared to a decline of 6% in the month before

• The Dirty Tanker Index (BDTI) continued its slump and declined 5% MoM while the Clean Tanker Index also followed the weak trend and was down 7% MoM. The VLCC day rate fell significantly by 57% MoM and has been the worst sufferer in the segment. Suezmax rates fell 23% after making a comeback in May.
However, Aframax freight rates continued to rise (up 17% MoM) providing some relief to owners

• LPG freight rates improved marginally by 2% MoM in the higher end category and displayed a negligible fall in the medium carrier segment

• Utilisation levels for drill ships, semi-subs and jack-ups were at 91%, 91% and 83%, respectively, in June 2012 Outlook

Dry bulkers
Dry bulk rates, which suffered largely in May recovered this month albeit at a slow pace. China iron ore imports increased 11% on an MoM basis providing some relief to rates. The expansionary monetary policy followed by the People’s Bank of China to ramp up the economy is acting as an important factor for demand growth. Its impact on freight rates needs to be seen over the coming months. However, due to dry bulk carrier’s fleet capacity build up with H1CY12 net addition of 40 million dwt and another gross addition of 80 million dwt expected in H2CY12, which is approximately 12% of the total dead weight tonnage capacity in the dry bulk category, any significant upside is highly unlikely.

Large tonnage tanker freight continues to suffer with rates dipping below the operating levels denting the margins of the owners significantly. Oil inventory in the US is already at a high level and strategic stock piling of China is happening according to its defined pace. Any significant change in these parameters can seriously ruin the hopes of revival in tanker freight rates. The geopolitical crisis in Iran continues to plague the segment as a drop in oil supplies impacts demand arising from the region.

LPG carriers
LPG rates remain stable with a marginal improvement over the previous month. Large segment vessels showed some strengthening of rates whereas middle segment rates remained mixed.

Offshore vessels
Offshore vessels continued to have high utilisation levels. Continued spending by major global oil exploration/drilling companies led to higher utilisation of offshore vessels.

To read report in detail: SHIPPING SECTOR



Down…But Not Out

 PLNG: Future perfect; near-term regulatory risks reduced — With the regulation of mktg margins virtually ruled out in the near term following the HC ruling on IGL as well as the oil min’s comments (source: ET) that marketers may be free to negotiate mktg margins for gas sold at mkt rates (à la LNG), PLNG arguably faces the least near-term regulatory headwinds among its peer set. Longer term, we remain sanguine about the prospects of LNG usage in India, which should benefit PLNG.

 GSPL: Offers best value — While GSPL’s upcoming tariff review continues to be viewed with caution, our view remains that downside, if any, is not very meaningful. This would make GSPL the most attractive investment opportunity in the space, trading at an adj. EV/CE of 1.1x vs. 1.5-1.9x for peers (P/E of 8x vs. 12x for GAIL).

 IGL: Oversold; price hike reduces near-term earnings risk — With the 8% CNG price hike just announced, IGL has belied market concerns on its ability to pass on higher input costs given regulatory uncertainty. We believe the stock is pricing in sustainable ROEs of a mere ~12% (post-tax ROCE of ~9%), which does not compensate it adequately for the risks inherent in the city gas business. Our new TP of Rs300 is based on sustainable ROEs of ~16% (~12% ROCE). We, however, acknowledge uncertainty on tariff evolution and maintain our High Risk rating.

 GAIL: Dearth of catalysts; buy another day — Earnings disappointments and lack of vol growth (with risks of degrowth) are yet to be fully factored in, in our view. While 1Q could sport a sharp (albeit unsustainable) recovery, we maintain Neutral.

 LNG demand hits a brief lull, but should recover in 2H — The bounce in Asian spot prices through 1H (Japanese demand, supply disruptions, production delays – highlighted in our May 8 ‘Upgrade to Buy’ on PLNG) and the sharp fall in liquid alternatives (crude weakness) has impacted spot LNG demand in India, which could cap 1Q vol gains for PLNG, GAIL, GSPL. However, with Japan restarting its nuclear plants, new production (Aus./Angola) coming shortly, and crude down sharply (LNG typically follows with a lag), spot prices to India have come off sharply in recent weeks, from >$15 to <$13 levels which should drive a pickup in 2H.

 Long-term prospects remain sound — Longer term, we remain sanguine about prospects for LNG in India, and are enthused not only by expansion plans of several players (capacity to grow ~4x in 5 yrs; PLNG to control ~50% of this), but also of the capacity that GAIL/GSPL are building to transport this gas to new areas.


>EDUCATION SECTOR: Q1FY13 Results Preview

Seasonally weak quarter

Education companies are likely to deliver lower growth in Q1 as it is a lean period from a business stand point. However, we expect the companies under active coverage to register flat growth during Q1FY13 due to the seasonality factor. In the coverage universe, Navneet Publication is likely to post strong growth of 16%. But, NIIT and Educomp will register lower growth due to the seasonally weak quarter. Within the space, we like Navneet Publication and NIIT considering attractive valuations, strong topline growth and better prospects of improving theirmargin profiles in FY13E.

Topline growth to remain subdued on seasonality factor: Q1 is seasonally a weak quarter. Educomp and NIIT will consequently report lower growth. In the case of Navneet, revenue is likely to grow 16% YoY on the back of strong growth in the publication segment. Career Point, on the other hand, is facing challenges due to the change in entrance exam pattern.  

Operating margin too is likely to remain weak: NIIT’s margin would be subdued as the individual learning segment is in the process of integration and lower topline growth will put pressure on margin. We believe that NIIT’s margin will expand in FY13E on the back of better sales mix in favour of individual learning solutions and school learning solutions.

Prefer Navneet Publication and NIIT in the space:We prefer NIIT in the space considering attractive valuations and prospects of margin expansion in FY13E. Within the Publication space, we like Navneet Publication given its strong growth momentum for FY13E/14E and margin expansion and improvement in return ratios.

Career Point (Rating – Neutral; Target Price – Rs158)
 We expect Career Point to register 8.1% YoY revenue decline in Q1FY13 on the back of a drop in enrollment. Changes in entrance exam pattern and delay in AIPMT counseling are prime reasons for lower enrollments.
 We expect the company to report an operating margin of 23.4%, higher by 400bp despite lower sales as the marketing spend is likely to be lower and the company has curtailed its spending on uniforms and study material.
 We expect net profit to decline by 5.1% to Rs44mn mainly due to lower other income on YoY

Educomp Solutions (Rating – Buy; Target Price – Rs203)
 We expect Educomp to register 9.9% YoY revenue growth driven by 13.6% YoY growth in
school learning solutions which contributes 64% to the total revenue. Q1 is seasonally a weak
quarter for the company.
 Operating margin is expected to contract marginally to 31.6% on YoY basis mainly due to lower
margin in smart class segment as pressure on realization due to stiff competition.
 We expect net profit to decline by 48.5% YoY on the back of higher depreciation and interest

Navneet Publications (Rating – Buy; Target Price – Rs75)
 We expect Navneet Publications to register 16.2% YoY revenue growth on the back of 17% YoY growth in the publication segment. Q1 is a strong quarter for the company.
 Operating margin is expected to expand marginally by ~100bp to 32.6% on YoY basis mainly
due to better sales mix in favor of the publication segment.
 We expect net profit to grow by 17.3%YoY on the back of higher EBITDA. NIIT (Rating – Buy; Target Price – Rs54)
 We expect NIIT to register 25.7% YoY revenue decline mainly due to the sale of Element K
business during Q3FY12. We expect the company to post 6.4% growth (ex-corporate learning
 Operating margin is expected to contract by 130bp to 8.3% on YoY basis mainly due to lower
sales in individual learning solution and relatively higher fixed cost. The margin profile is likely
to expand in FY13E with better sales mix in favor of individual learning solution.
 We expect net profit to decline by 24.1%YoY on the back of lower EBITDA.


>V-Guard Industries

Comprehensive product portfolio and new products to drive growth
V-Guard Industries (VGI) has a wide array of products which cater the requirements of consumer durable industry (stabilizers, heaters, fans and UPS), agriculture (pumps) and construction (cables) sectors of the country. The Indian household appliance market has grown at CAGR of 11% between FY04-FY12. We expect the growth pattern to continue till FY14E on the back of a)power deficiency in India, b) strong GDP growth in India, c) growth in middle class population and rising urbansisation, d) rising income levels and e) Growth of consumer electronics led by low penetration levels. Give the fact that VGI's product portfolio caters to the mass market and meets the basic requirements, demand for these products is expected to remain strong.

The company has strategically introduced new products over the last two decades. This has
enabled the company to register a 37% CAGR in revenues from FY07-12. VGI also added new
products like a) switch gear and b) induction cooker in FY12 which are expected to gain traction in the current fiscal. As VGI has a good market share in the house wiring segment, domestic switch gears can be conveniently marketed and has been launched in the southern markets. Also with a view to offer more products in the home segment, Induction Cooker were launched with different models.

Growth aided by increasing geographical presence
VGI earlier focused mainly in the Southern parts of India where it has built a strong brand name
as well as distribution network. 97% of its sales (FY07) came from southern market concentrated in 4 Southern States of Andhra Pradesh, Karnataka, Kerala and Tamil Nadu.
However, over the past few years it has expanded its geographical area of operations pan-India.

Over the years, the company has made a strong distribution channel in the southern region. We
believe the traditional products like stabilizers, water heaters, and pump has reached a near
maturity level in the south. Hence, the company has rightly ventured into the non south market.
We hence expect a strong brand equity and extensive distribution network to help VGI roll out
its consumer durables products and gain strong foothold going forward in Rest of India (ROI)
market and expect the market share of ROI to rise to 40% by FY14E from 22% in FY12.

Mix of manufacturing and outsourcing to be beneficial in the long run
VGI adopts a manufacturing as well as outsourcing model for its product portfolio. In FY12, it
operated with ~41% of its products being manufactured while the remaining 59% being
outsourced. The company has tie-ups with various SSI/self-help group units in the southern
states to manufacture products to meet its needs. Depending on the purchase order, which is
normally given one month in advance, the products are manufactured in these units. This
enables to keep control over its cost and meet the increased demand without undertaking
significant capital expenditure. While VGI assists these units to purchase the raw material and
places its quality assurance team at the units.

Extensive investment in distribution network
VGI has created a wide distribution network with over 9,500 retailers, 208 distributors and 353
service centers spread across all states in India except North East and Jammu & Kashmir. In India, the dealer plays a vital role in the sales pitch of consumer products which is highly fragmented by nature. Of the total 28 branches owned by VGI, 18 are located in ROI which is expected to aid growth with greater brand visibility in the coming years.

At CMP of `272, the stock is trading at a PE of 11.6x in FY13E and 8.4x in FY14E. We are
optimistic on VGI’s growth story and believe it can replicate its success story of southern market in other parts of India. We recommend a BUY rating on the stock with a target price of `329 per share (PE of 10.2x in FY14E), an upside of 21% for a long term view.


>GITANJALI GEMS: Penetration in real estate sector

Gitanjali Gems Ltd. (GGL) is one of the largest integrated diamond and jewellery manufacturers and retailers in India. The company is engaged in sourcing of rough diamonds from primary and secondary source suppliers in the international market, cutting and polishing the rough diamonds, manufacturing and selling of diamonds and other branded and unbranded jewellery.

• Substantial share in the gems and jewellery segment GGL has secured substantial market share in the customized gems and jewellary market in India with more than 35% share. With the robust distribution network across retail and wholesale markets, we expect the firm to maintain its market share.

• Indian gems and jewellery segment is expected to grow by at a 15% CAGR by FY16 During the last 4 years, the sector has grown at a CAGR of 12% till FY12. However, going forward with the rising domestic consumption, India is likely to remain as the major gold consumer in the world. Further the government initiatives like setting up of SEZ, relaxing import duties on some components is likely to help the sector.

• Strong distribution network The firm has an established network in the domestic market with around 3,000 distributors and 200 own stores. Further, acquisition of Crown Aim Limited is likely to enhance distribution network in the overseas market. Besides, the company has invested Rs 4.14bn for expansion in the UAE.

• Domestic gold consumption will remain the major revenue driver Despite the recent hike in import duties on gold and more than 25% depreciation in INR; the gold imports have remained robust during the last one year. It suggests that the domestic gold consumption will continue to grow. Therefore, we believe that GGL which has an established network is likely to benefit from stable increase in domestic gold consumption.

• Penetration in real estate sector As a strategy to diversify, the company has invested into real estate market across Mumbai and the sub urban areas. Besides this, Gitanjali Infratech has large land bank which will help the company to secure more revenue out of the real estate business.

To read report in detail: GITANJALI GEMS