Tuesday, July 24, 2012


EC could delay 400m to 1.2bn of carbon auction in Phase 3 Reuters reported on 14th June that the European Commission’s draft proposals to stimulate the carbon market could involve delaying the sale of 400m, 900m or 1.2bn permits during 2013-15 and then releasing them over 2016-18. The EC declined to comment, citing market sensitivity. But market fundamentals do not change without a structural solution

The 1.2bn figure clearly cheered up a carbon market, which has been desperate for some good news, and carbon prices edged up over EUR8/t. However, we are of the view that simply delaying the auction of some permits in Phase 3 does not change the long-term fundamentals of the EU ETS. This appears to be more of a way to kick the can down the road and prevent the market from crashing.

Three basic options to deal with carbon, two unlikely, in our view
Out of the EU’s three basic options for dealing with the EU ETS – a temporary delay, a permanent set-aside or doing nothing – we think the last two are unlikely. Intervention in the European carbon market has become more a question of when and how, not if, but it is hard to imagine a permanent set-aside being implemented in the next 12-18 months due to the lack of political support from carbon-intensive countries, especially the Eastern Europeans and those countries that are struggling with recession. ST impact of the delay: from minimal to significant…

We estimate that ~1.8bn of surplus will be coming into Phase 3, and hence a mere 400m delay over three years will be unlikely to move the carbon market materially, if at all. Meanwhile, an action towards the upper range, e.g., 900m or 1.2bn, will likely create a temporary scarcity in the system, thereby boosting the carbon prices. Regarding a 1.2bn delay, we think the EUA price could be pushed upwards to EUR9-11/t by end-2013.

To read report in detail: CARBON MARKET


Volume & Price driven growth
HCIL reported a healthy revenue growth of 22.6% YoY to INR 3050mn, led by volume growth of 6.5% to 0.77 mt coupled with 15.1% improvement in cement realisations to INR 3941/tn. Strong demand in Central & Western region enabled the company to operate at almost full capacity utilisation levels (93% in Q2CY11). Going forward we expect HCIL to clock volume CAGR of 29% over CY11 - CY13E led by increased capacity from Sept 2012.

Sharp improvement in margins
EBIDTA margins expanded by 283 bps YoY & 398 bps on QoQ basis to 12.1% led by firm cement prices. Freight cost increased by only 3.7% QoQ to INR 523/tn, due to shift in rail:road mix from 49:51 to
61:39. (June Quarter witnessed full impact of the ~20% increase in rail freight announced in March 2012). Power & Fuel cost increased at a slower pace by 2.3% QoQ to INR 1003/tn due to optimization of power consumption.

EBIDTA/tn improved by 50.2% YoY & 64.9% QoQ to INR 478 in Q2CY11. Net profit rose by 46.4% YoY & 68.6% QoQ to INR 193 mn.

New capacities on track
HCIL's new additional capacity of 1 mpta grinding unit in Damoh (MP) & 1.9 mtpa grinding unit in Jhansi (UP) remains on track and is all set to commission operations from September 2012. This expansion is well timed as it will enable the company to maintain its market share and enjoy the economies of scale. HCIL is also setting up a conveyor belt from limestone mines to the clinkerisation unit (20 kms), which will lead to ~30% savings in transportation cost.

Increasing usage of pet coke
HCIL has increased its usage of pet coke from 20% of its total fuel requirement in CY11 (balance 80% through linkage coal/imported coal) to ~35% in the last quarter due to decline in prices of pet coke.

Banking on central region to drive growth
HCIL is focussing on central region to drive growth. We expect the central region to outperform the industry with an estimated demand growth of ~10% in CY12. MP has witnessed a YoY growth of 22% in the last quarter and we expect this growth momentum to sustain due to state elections due next year. While currently it sells ~65% of its total production in this region, HCIL expects this share to increase to 85% post expansion.

Outlook & Valuation
We remain positive on the cement sector and HCIL which has strong foothold in Central & Western India is well placed to benefit from the growth opportunities in these regions. Increasing cement capacity, savings on transportation front and higher utilisation levels places HCIL on a superlative growth path. At the CMP of INR 33, the stock trades at P/BV of 0.8x & EV/ EBIDTA of 5.0x its CY13E earnings and EV/tonne of $34 (CY13E capacity). We have changed our estimates to factor in improving margins and retain our BUY
rating on the stock with a target of INR 50/share.

To read report in detail: HEIDEILBERG CEMENT

>RANBAXY: Launch of CIP‐Isotretinoin

Ranbaxy Laboratories, is positive on impending opportunities like CIPIsotretinoin, Atorvastatin and others. Derivatives as an overhang will decline 15 % by Apr’13, Ranbaxy will be able to leverage rest of the revenues at better realizations. We upgrade our rating on the stock to “BUY”..

CIP‐Isotretinoin: This branded prescription product is likely to be launched in Q4CY12 and scale up will happen only in CY13. We believe the product had revenues of US$60‐70 mn before the product was withdrawn. We upgrade our revenues from the same to US$15 mn (vs. US$10 mn) in CY12E and to US$75 mn (vs. US$60 mn) in CY13E.

Atorovastatin: Despite 4 weeks of generic competition and price erosion of 96 % plus, Ranbaxy enjoys 44 % market share. Genericisation of Atorovastatin has resulted in a 10% reduction in volume of Simvastatin, which have benefited Atorovastatin. We factor US$82 mn revenues from Atorvastatin for CY12.

Derivatives: Ranbaxy has outstanding calls to the tune of US$1.5 bn sold at Rs 44, which will be exhumed to the tune of US$40‐50 mn per mth and will be entirely extinguished by CY16E. Assuming US$100 mn net revenues Ranbaxy will be able to garner US$60 mn at higher forex rates.

Outlook & Valuation
Ranbaxy is steadily increasing its US revenue traction based on the FTFs. Opportunities such as CIP‐Isotretinoin in CY12‐end, positive news flow on consent decree, and market traction in domestic formulations stand in good stead. Better realization on the bigger pie, as the derivatives contracts get exhumed, shift of Lipitor sales to Mohali facility by Apr’13 and approval for the Indian facility would all be EBIDTA accretive for Ranbaxy.

We revise our USD rates to Rs. 52 for CY12 (Rs 49.5) and to Rs. 50 for CY13 (Rs 48.5). We upgrade our earnings for CY12E by 1.6% to Rs. 25.4 and for CY13E by 14.2% to Rs 28.9 and our rating on the stock to “BUY” with a target price of Rs 609 per share. We value the core business of Ranbaxy at Rs 578 based on 20xCY13E and add an Option value of Rs. 31 for Actos, Valcyte, and Nexium.

To read report in detail: RANBAXY


The Vodafone Group announced Q1FY13 interim results. As these are interim results, only operating metrics and revenue performance are disclosed. Vodafone India’s operating metrics continued to remain impressive with voice revenue growth of 4.1% QoQ compared to 5.2% QoQ in Q4FY12, even as total minutes growth (volume) slowed to 4.2% (6.7% in Q4FY12). Stable voice RPM after declining 1.3% QoQ in Q4FY12 is the primary highlight of Q1FY13, in our view. The company refrained from joining its peers, Bharti Airtel (Bharti) and Idea Cellular (Idea), in chasing subscriber market share, which probably helped it maintain voice RPM.

Staying away from the oft beaten path
Vodafone reported revenue growth of 4.1% QoQ in Q1FY13 in India. Its volume (total minutes) growth slowed to 4.1% QoQ as MOU increased 2.1% QoQ compared to 4.7% QoQ in Q4FY12. The stable voice RPM in the quarter compared to a decline of 1.3% QoQ in Q4FY12 indicates that it is reluctant to sacrifice yields for the sake of volume growth. It is clear that the company is focusing on higher ARPU customers, evident in the ARPU trend, which rose for the third consecutive quarter to INR180. Since these are interim numbers, Vodafone does not disclose detailed financials; hence, margin trend is missing. But, as highlighted in our Q4FY12 results note (see table 1 on page 2) the company has been garnering higher EBITDA share than revenue share among the top three operators. Thus, Vodafone has been able to demonstrate its ability to achieve profitable growth through a fine balance between maintaining yields and growing volumes.

Are postpaid customers becoming price elastic?
It is interesting to note that Vodafone’s postpaid ARPU has declined in seven of the past eight quarters while its prepaid ARPU has risen in the past three quarters. It seems that on one hand it is focusing on expanding the postpaid customer base (with lower ARPU than its existing postpaid customers, but still having significantly higher ARPUs than prepaid customers), which is indicated in the decline in postpaid ARPUs, while on other it is focusing on prepaid customers with higher ARPUs, thereby driving its blended ARPU higher. The decline in postpaid ARPU along with the increase in postpaid churn suggests that the company is losing high‐end customers. If this is on account of its reluctance to sacrifice yields, then it debunks the belief that postpaid customers are price inelastic.

Outlook: Expect price discipline
Vodafone has remained disciplined and focused on EBITDA market share. In our view, the industry will be compelled to look at profitable growth post auctions. Unlike Vodafone, we expect, Bharti and Idea to report pressure on RPMs due to their focus on volumes.

To read report in detail: VODAFONE


Urban infra play, lean balance sheet to support growth; Buy 

A management meet with J. Kumar indicates a positive outlook on its growth strategy. Its planned focus on urban infra, on geographical diversification and a lean balance sheet are key positives. Of its bid pipeline of over `60bn, most have been placed outside its core area of
Maharashtra. It has recently bid for metro works in Delhi and Gujarat and the Mumbai water transport project. Of these, it hopes to bag some orders. Its current orderbook stands at `25bn. We maintain a Buy with a target of `239.

 Strong bid pipeline. J. Kumar has a bid pipeline of over `60bn. Most of the fresh bids have been outside its core area (Maharashtra). These are bids for cash contracts in urban infra such as the Mumbai water transport project, and metro works in Delhi and Gujarat. Of these, it hopes to bag some. Its present orderbook stands at `25bn (2.8x FY12 revenue), led by `21.5bn inflows in FY12. Its focus on cash contracts in urban infra is likely to raise inflows in FY13-14.

 Improved revenue visibility. On the back of strong order inflows in FY12 and a sturdy bid pipeline, management is targeting top-line growth of over 30% in FY13. With enhanced revenue visibility, we estimate a 27%CAGR over FY12-14. J Kumar’s strong OPM of ~15% (sector range: 8-15%) resulting from its large fleet of machinery and contracts covered under an escalation clause, is likely to continue in FY13-14.

 Low gearing, high RoE. J Kumar’s gearing of 0.2x should support strong revenue growth. Lower interest charges would lead to a better-than-peers net profit margin of over 7%. Its EBITDA margin, at 15.8% in FY12, has been the highest in four years, and is likely to come at over 15% in the next two years. This would push up the RoE and RoCE during FY12-14.

 Valuation. Our target of `239 is based on a PE of 7x FY13e and an EV/EBITDA of 4x. Risks: Fewer order-flows, project execution delays.