Saturday, July 28, 2012

>CEMENT SECTOR: Regional Impact of delayed monsoons on cement prices

■ All India prices at Rs308/bag +2.3% mom. Supply shortage led by plant shutdowns & delayed monsoons helping demand; prices in north hiked +6% mom, central + 4% & western 3% mom. Price likely to soften with pick up of monsoon in August ¾ Subdued demand exerting downward pressure in eastern region-prices decline 3.6% mom. Electricity cuts drive AP upwards Rs20/bag hikes. Other southern regions remain flat 

■ Prices trend has surprised in June –July period despite some unusual decline seen during April-May period. Price recovery positive for producers

■ Cost pressure peaking out with international coal prices decline. Prefer ACC & Shree Cement. Retain HOLD on Ultratech (prefer Grasim). Maintain REDUCE on Ambuja & India Cement

Our recent channel checks suggest that plant shutdowns in Chattisgarh (4 cement plants-2 plants of UltraTech and 1 each of Ambuja Cement and Lafarge shut on alleged violation of air pollution control norms by Chattisgarh Environment Conservation Board) along with routine maintenance shutdowns (for some kilns) taken by cement producers in this period has resulted in a shortage of supply of cement. This together with delayed monsoon (which usually affect construction activities) is helping demand remain above expected seasonal levels, and has led to a temporary un-seasonal demand-supply mismatch; thereby fuelling cement prices hikes in Northern, central and western region. On the other hand owing to normal rainfall received in the eastern part of the country prices remain under pressure with a 3% mom decline. Price trend in Southern region remains flattish with the exception of Andhra Pradesh where electricity cuts drive prices up by Rs20-25/bag.

■ Industry Growth estimated at ~9-9.5%
The top 5 producers have posted a growth of 10.2% in the month of June. The industry growth normally trends at 80-90% of the top 5 producer’s dispatch growth trend (exception in the month of April-12) thereby pointing towards estimates of 9-9.5% yoy dispatch growth for industry in the month of June-12.

■ Regional Impact of delayed monsoons on cement prices
Northern Region: Rainfall in the northern region remains deficient with departure from long period average (LPA) of almost ~50-70%. The effect of this can be seen in pockets like Chandigarh and Punjab where prices have been hiked by 10.2% and 8.8% mom.

To read report in detail: CEMENT SECTOR


Capacity expansion to drive volume growth
Foreseeing huge opportunity with increasing demand-supply mismatch, PLL has chalked out aggressive capex plans to increase its capacity from current 10 MMTPA to ~17.5 MMTPA over the next 3 years with the total capital outlay of ~Rs.54 bn. This would be majorly led by Greenfield expansion at Kochi (5.0 MMTPA – Dec’12) & capacity expansion at Dahej (2.5 MMTPA – FY15) by way of additional jetty. Apart from above, the Company also plans to set-up additional capacity of ~10 MMTPA i.e. 5.0 MMTPA each at Gangavaram & Dahej, taking its total capacity to ~27.5 MMTPA by 2017-18. However considering the long-gestation period, we have not factored in the 10 MTPA expansion in our earnings estimates.

Petronet LNG – ‘Ideally positioned to capture huge opportunity in LNG space’
With increasing gas demand coupled with reducing domestic gas supplies, LNG seems to be the optimal solution to bridge the gap. PLL being the largest established player in the space is well positioned to capture this huge opportunity. Also, Gail being one of its promoters enables the Company to have access to its vast distribution network which not only provides easy access to its clients but also helps in exploring newer markets. Besides, the Company also enjoys the lower capital cost for its Dahej facility compared to current cost of setting up new facilities resulting into lower re-gasification charges which would act as a strong entry barrier for its competitors.

Healthy Balance-sheet coupled with strong operating cash flows provides comfort
Despite huge ongoing capex, the Company has been able to maintain its D/E in comfortable zone (~1x) largely due to its strong operating cash flows, which provides enough room for further leverage. On an average, the Company has been able to generate cash-flows to the tune of ~Rs.7-8 bn every year, which is further likely to improve going ahead. Also the Company has strong return ratios with ROE & ROCE pegged at 34% & 27% respectively. Healthy balance-sheet, strong operating cash-flows coupled with robust return ratios would not only provide better financial stability but would also support huge expansion plan in near future.

OUTLOOK & VALUATION PLL being the largest established player is well placed to capture the huge opportunity in the LNG space which has emerged due to strong domestic gas demand. Aggressive capex plan (10 to 17.5 MMTPA) to meet the increasing gas demand is likely to result in strong volume growth over the next few years. Also strong parental support coupled with capital cost advantage at Dahej provides competitive edge over its peers. Healthy balance-sheet along with strong operating cash-flows not only provides better financial stability but would also support huge expansion plan in future. At the CMP of Rs.147, the stock is quoting at 10.4x and 2.2x its FY14E EPS & BV of Rs.14.1 and Rs.67.6 respectively. Hence, considering the sound business model, huge capacity expansion coupled with strong financials, we maintain our positive outlook on the stock & recommend ‘HOLD’ with a DCF based price target of Rs.167.

To read report in detail: PETRONET LNG

>TATA STEEL: Overseas business had an erosive impact on net worth

Despite free cash flows of INR22b, net debt increased 5% to INR524b Operating cash flows were up significantly due to working capital release in FY12 against large increase in FY11. Also, half of the INR120b capex was funded by asset sales. Despite free cash flows of INR22b, net debt increased 5% to INR524b.

Net worth driven by asset sales and translation gains, not by business profit
The net worth of the Tata Steel group increased by INR77b to INR433b largely due to equity infusion, asset sales, goodwill and asset translation gains. Core profit from India business after paying dividend contributed INR47b, but this was offset by INR42b of after tax loss in overseas operations. Actuarial loss of INR24b in overseas business had an erosive impact on net worth.

Adjusted EPS 11% lower than reported EPS
EPS adjusted for the distribution expense of INR2.25b towards hybrid perpetual securities (HPS) was INR18.6, 11% lower than reported EPS. From the common shareholder’s perspective, HPS is debt and the interest in the form of distribution expense should be adjusted against EPS.

Other highlights
 The management highlighted that Tata Steel Europe (TSE) is under enormous stress due to prolonged recession in Europe. Stricter environmental norms ahead will increase costs. The covenants on acquisition debt are also concerning.

 Full commissioning of the Jamshedpur Brownfield expansion is delayed by further three months. Poor 1QFY13 volumes and project delays have put the guidance of 1m tonnes of incremental volumes in FY13 at risk, in our view.

 Coking coal shipments have started from Mozambique in June 2012. Iron ore shipments from Canada are likely to start in 4QFY13. Outlook not very encouraging

 Significant cost increases on account of power, freight, iron ore, etc for India operations are sticky in nature. For TSI (Tata Steel India), the increase in revenue in FY12, driven by volumes and prices, was offset by increase in costs.

 TSE not only faces the challenge to deal with the steel price and raw material cost squeeze, but also rising specific fixed costs due to production loss.

To read report in detail: TATA STEEL

>Deepak Fertilisers & Petrochemicals Corporation

Beats estimate, cost pressure continues…

􀂄 Better‐than‐expected quarter: Deepak Fertilizer and Petrochemicals’ (DFPC’s) net sales grew by 33.8% YoY to Rs6,341m (PLe: Rs4,839m). Higher fertiliser trading sales resulted in better-than-anticipated Q1FY13 sales. Chemicals and Fertiliser volumes grew by 9.6% and 2.2% YoY, respectively. Complex fertiliser volumes de-grew by 6.5% YoY on account of liquidation of inventory as industry had pushed the same during Q4FY12. DFPC’s EBITDA de-grew by 9.5% to Rs1,022m (PLe: Rs966m). EBITDA margins have fallen by 770bps YoY (up 320bps QoQ) to 16.1% mainly due to higher input cost (ammonia and propylene) in the chemical segment. Further, higher contribution of fertiliser trading business (low
margin business) has resulted in lower EBIT margin in the fertiliser business. We believe that the rupee depreciation has also impacted the same. Chemical segment’s EBIT margin has came down by 800bps YoY to 20.4% (up 410bps QoQ). Finance cost is up by 109.6% YoY to Rs266m (up 9.0% QoQ) due to an increase in working capital with the delayed receipt of government subsidy and full capitalization of new TAN plant. Adjusted PAT de-grew by 28.8% YoY to Rs455m (PLe: Rs389m).

􀂄 Key Highlights: Management believes that global ammonia prices would ease from H2FY13 which would consequently ease the stress on company margins, going forward. Company is steadily ramping up the capacity utilization at the new TAN plant and is expected to produce 2L MT (~70% utilization level).

􀂄 Maintain ‘Accumulate’: During FY04-12, stock traded in the P/E band between 4x-7x. We maintain our “Accumulate” rating on the stock, with the target price of Rs148 (i.e.6xFY13E). Stock has dividend yield of 4.2% at CMP. We believe that cost pressures will continue in the next couple of quarters and further, issue of KG basin gas allocation to P&K producers would be a near-term risk to the stock.



On recovery path

Merck’s results for Q2CY12 were better than our expectations. The company reported 16%YoY growth in revenues, 40bps improvement in EBIDTA margin and 14%YoY growth in net profit. The growth was driven by the chemical business (32% of revenues), which grew by 23%YoY. However, the pharma business (68% of revenues) grew by 13%YoY. Merck is a debt-free company with cash/share of Rs85. We expect the growth momentum to be maintained due to strong growth in the chemical business. We have a Buy rating for the scrip with a target price of Rs687 (based on 14x CY13E EPS of Rs49.1).
■ Strong growth in chemical business: Merck reported 16% YoY growth in revenues from Rs1.60bn to Rs1.85bn due to strong growth in the chemical business. The company’s pharma business (68% of revenues) grew by 13%YoY from Rs1.14bn to Rs1.28bn. The growth was lower than the market growth of ~15%. The company’s chemical business (32% of revenues) grew by 23%YoY from Rs496mn to Rs610mn.

Margin improvement: Merck’s EBIDTA margin improved by 40bps YoY from 14.6% to 15.0% despite sharp rise in the material cost. On a QoQ basis, the margin improvement was 380bps. The company’s material cost increased from 42.0% to 44.7% of revenues due to the rise in imported raw material cost with the depreciating rupee. Merck’s personnel cost declined by 60bps from 13.1% to 12.5% due to higher sales growth. Other expenses declined by 240bps from 30.3% to 27.9% of revenues.

Strong growth in chemical business: Merck reported strong growth of 23% in the chemical segment. The company manufactures vitamin E, Oxynex ST, thiamine disulphide (TDS) and guaiazulene at its Goa facility and exports some of these products to its parent company.
■ Major brands growing slowly: As per IMS MAT-May’12 data, Merck’s major brand Neurobion Forte grew by 6.6%, Evion 10.1% and Polybion SF (4.3)%. However, its OTC brand Nasivion grew by 23.3%.   

■ Valuations: We expect EPS of Rs41.1 for CY12 and Rs49.1 for CY13. At the CMP of Rs606, the stock trades at 14.7x CY12 and 12.3x CY13 earnings. We have a Buy rating for the scrip with a target price of Rs687 (based on 14x CY14E EPS of Rs49.1) with 13.4% upside over the CMP.



• ICICI Bank reported PAT of Rs.1815 crore in Q1FY13 v/s market expectation of Rs.1730 crore.
• Net Interest Income was Rs.3193 crore in Q1FY13 v/s market expectation of Rs.3061 crore.
• NIMs have improved YoY from 2.6% n Q1 FY12 to 3.01% in Q1 FY13.
• Advances have grown by 22% YoY to Rs.2,68,429.9 crore in Q1FY13
• Deposits grew by 16% YoY to Rs.2,67,794.2 crore in Q1FY13.
• Asset quality has improved YoY but has stayed flat sequentially. GNPA stood at 3.5% in Q1FY13 v/s 4.4% in
Q1FY12 and 3.6% in Q4FY12. Net NPA was 0.7% in Q1 FY13 v/s 1% in Q1 FY12.



 1QFY13 adjusted PAT higher than estimates: During 1QFY13 adjusted PAT stood at INR1.9b v/s our estimate of INR1.6, consolidated PAT boosted by higher generation. JSWEL reported forex loss of INR2.3b pertaining MTM on Buyer's credit availed from bank (USD442m as at Jun-12) towards coal imports and is marked at INR56/USD as at June 2012. Subsidiaries performance was impacted by one-off charges as accelerated depreciation of INR100m led to losses of INR200m at SACMH and at Jaigad transmission, company booked reversal of arrears of INR240m. Raj West recorded improvement in performance with PAT loss INR100m for 1QFY13, vs ~INR450m YoY.

 Robust operating performance, gross margin on up move: JSWEL net generation during the quarter stood at ~4.7BUs units (up 95% YoY), led by better PLFs at all the projects. In 1QFY13 gross margin improved to INR2.1/ unit, vs lows of INR0.2/unit in 2QFY12. Fuel cost was flat QoQ as entire coal inventory of the last quarter was consumed and benefit of lower prices would be realized from 2QFY13.

 Key takeaways from Analyst meet: a) Target to commission all units of Raj West project by Sept-12, hopeful of getting clearance for ~7mtpa production from Kapurdi mines, all units to operate from 3QFY13E, b) Booked entire Vijaynagar capacity for next 12 months at ST realization of INR4.25/unit+, c) Limit Buyer's credit (USD442m as at Jun-12) exposure to USD400m mark to avoid huge forex exposure, and d) fuel cost to see moderation in 2QFY13 as high cost inventory at Ratnagiri is fully consumed in 1QFY13.

 Valuations and view: We JSWEL to report consolidated net profit of INR6.2b (up 88% YoY) in FY13E and INR10.5b (up 69% YoY) in FY14E. Stock trades at PER of 8.3x and P/BV of 1.3x (RoE of 16%) on FY14E basis. Maintain Buy.