Saturday, August 18, 2012


Jet reported better than expected results for 1QFY13 with pre-ex PBT of Rs.456m after five successive quarters of losses. Yield improvements, particularly in the international business, helped drive 30% revenue growth. Costs remained under control and helped drive a 113% YoY increase in Ebitdar. Looking ahead, a strong yield environment, focus on route utilisation and tight cost control should help sustain performance. We now expect profitability to sustain over FY13-14 and significantly upgrade estimates. Upgrade Jet to BUY with a TP of Rs500.

Back in black after five quarters of losses
Jet’s 1QFY13 results reflected rising yields and high cost discipline amidst pressures from fuel, currency and higher airport charges. Ebitdar rose 113% YoY/100% QoQ with a margin recovery in both segments. Pre-exc PBT returned to positive territory after five quarters of losses, coming in at Rs456m against a loss of Rs2.7bn in 1Q12 and Rs3.3bn in 4Q12. At the reported level, FX losses were largely offset by gains on sale and leaseback of two aircrafts and net profit stood at Rs247m – the highest since 3QFY11.

Domestic – yields strong, focus turns to costs and efficiency
Domestic seat factors were at 76.2% (74.6% in 1Q12) while yields were up 10% YoY/9% QoQ amidst strong industry pricing. Fuel costs rose 8% QoQ/27% YoY as rupee depreciation filtered through while other costs grew slower than sales. Ebitdar margins stood at 15.0% (+700bps YoY/1040bps QoQ). Looking ahead, while 2Q will see seasonal weakness, the overall yield and load environment remains strong. Margin performance is being  complemented by tight cost control with Jet controlling staff, selling, maintenance and other costs to target a 5-8% reduction in cost/ASKM.

International – yields and loads strong, route optimisation in focus
The international business saw yields increase 21% YoY/10% QoQ while loads increased 5.8% YoY to 86.3% - an all time high. The improvement is being driven by route rationalisation and an uptick in gulf markets. Fuel costs rose 25% YoY while selling and staff costs declined. Ebitdar margins improved 580bps YoY/440bps QoQ to 17.0%. Looking ahead, the focus on profitable routes and recovery in gulf markets should help sustain margins.

Asset sales easing balance sheet pressure; upgrade to BUY
Jet is focusing on debt reduction with a target of US$400m for the year. The sale and leaseback of two aircrafts and engines in 1Q helped raise Rs720m and an additional 8-9 aircrafts are planned for 2Q. Given the improved performance in international and cost discipline in domestic, we now expect improved profitability over FY13-14, driving significant upgrades. Continuing strength in operating performance and debt reduction leaves room for upside. Upgrade to BUY from SELL earlier (TP Rs500, 6.9x FY14 Adj EV/Ebitdar).

To read report in detail: JET AIRWAYS



Revenue up 22% YoY, led by 62% YoY volume growth in motorcycles Eicher Motors reported top-line revenue at `15.9bn, up 22% YoY led by ~8% YoY volume growth in M&HCV. The company sold 11,979 medium and heavy commercial vehicles (M&HCV). It sold 27,244 motorcycles in 2QCY12, up 62% YoY.

Operating margins decline 180bps QoQ to 8.8%
The company’s operating margins declined 180bps QoQ to 8.8%. This was mainly led due to higher staff costs and other expenses. Staff costs was in line with expansion plans. The higher incentives to push sales led to higher other expenses. EBIDTA for the quarter was ` 1.4bn, up 11% YoY.

PAT reported at ` 760mn, flattish YoY
The company reported its PAT at ` 760mn. This was because of lower other income. The EPS for the quarter stood at ` 28.2.

View and valuation
Macro headwinds may affect the demand in the commercial vehicle segment. Accordingly, we estimate volume growth of 12% in CY13 in the CV segment. Its demand in the motorcycle segment continues to be strong with a waiting of almost 2-3 months. With supply issues being sorted, we expect this segment to grow 30% YoY. We also believe margins may remain stable at these levels. The stock is currently trading at a P/E of 13.9x CY14E. We recommend Accumulate.

To read report in detail: EICHER MOTORS

>UNITECH: New launches geographical breakdown

Unitech’s struggles in improving its execution continue, as liquidity for the company remains tight. In this scenario, its revenue recognition is faltering, and 1QFY13 results disappointed yet again on the top line, which missed our and consensus estimates by 30% and 38%, respectively. EBITDA margins at 20% were in line with our estimate of 21%, while a lower interest cost recognized on the P&L helped the company report a PAT of INR459 mn, slightly below our estimate. Our target price and rating are under review.

The sales run rate has started dipping, as Unitech now focuses more on execution than new launches. Also, with execution significantly delayed on many projects, the scope to launch new projects remains limited. The company sold 1.5mn sqft of projects in 1QFY13 worth INR7 bn, down from 1.8mn sqft in 4QFY12 and 1.9mn sqft in 1QFY12, a fall in line with the dip in the overall property market. The company managed to deliver only ~0.8mn sqft in 1QFY13. Deliveries of older projects launched before 2009 at 0.3mn sqft in 1Q were still extremely slow, despite 80% of the older projects being in finishing or handover stage. The company has provided the balance sheet for FY12, where consolidated net debt is down INR3.25 bn YoY at INR54 bn, which is a minor positive.

Key results highlights
 1QFY13 revenues at INR4.1bn (-32% YoY and -43% QoQ) came in lower than our and Street expectations of INR5.9bn and INR6.6bn, respectively.

 EBITDA margins at 20% were in line with our estimate of 21%. However, from the segment results, EBIT margins in the real estate segment are extremely low at 13.5%, which is a concern.

 Below the EBITDA level, lower interest cost at INR1.2 bn vs. our estimate of INR3.4 bn saved the day for Unitech and helped it report PAT only slightly below our estimate of INR497 mn.

 The average residential realisation was up QoQ to INR4,215/sqft (vs INR 3,863/sq ft in 4QFY12). The Noida region was a larger contributor to sales in the last two quarters, with Gurgaon slowing down significantly with the dependence on National Capital Region (NCR) as a whole still continuing.

 Execution remains a key disappointment, as the company managed to deliver only an additional 0.8mn sqft even with ~80% of the older projects being in finishing or handover stage. Of this, 0.3mn sqft was
from older projects launched before 2009 and 0.4mn sqft from projects launched after 2009.

 On the balance sheet side, inventory moved up by a large INR10 bn YoY as of Mar’12, with a similar reduction in fixed assets, which could be a case of realignment of some land parcels.

 Short-term loans and advances are down ~INR5 bn. The auditors have remarked that, of the total INR43.2 bn of short-term loans and advances, INR16.1 bn has been outstanding for long period and they are unable to ascertain the recoverability of the same.

To read report in detail: UNITECH



Navneet Publications (NPL) reported strong Q1 results in line with our estimates. Revenue was up 18.4% YoY to Rs3.6bn in Q1 driven by strong growth in the publication business. Syllabus change continues to help company maintain its growth momentum. Considering inventory levels at the end of Q1FY13, we expect good growth in Q2FY13 also in its publication segment. Going forward, we believe that both the publication business and stationery segment will
continue to deliver strong growth. We retain Buy rating on attractive valuations, high growth visibility and dividend yield.

Results better than expectation during Q1: NPL reported 18.4% growth in revenue to Rs3.6bn, in line with our expectation. Operating margin remained flat compared to Q4FY12 at 31.8%.

Stationery business revenue growth picks up in Q1: After a weak FY12 performance, the stationery segment picked up in Q4FY12. Revenue grew 20% YoY to Rs1.3bn backed by better order flows from India and abroad. The PBIT margin remained lower by 100bp at 16.9%
YoY. We expect the performance of the stationery segment to improve in FY13E as the company expects strong order flow from international markets. The margin is also likely to improve from Q3FY13 as the company is now concentrating on specific states and increasing penetration there rather than opting for a pan India sales push. This will result in better output and save cost.

Publication segment registers 17.4% growth: The publication business registered 17.4% YoY growth to Rs2.25bn on the back of ongoing syllabus change in Maharashtra and Gujarat states. PBIT margin improved by 110bp to 41.1% YoY on higher sales growth.

Historically, Q1 is a strong quarter for the publication business from a margin perspective as the company gets higher sales in this quarter.  Earnings estimate changed: We have marginally upgraded our estimates for FY13/FY14 considering better visibility of revenue from
both publication and stationery segment.

Attractive valuations; Reiterate Buy: Visibility on revenue growth remains high for the next year due to higher sales growth in the publication segment due to the change of syllabus. Moreover,
government orders and Andhra Pradesh market will also contribute to the revenue. We continue to like the stock due to attractive valuation; better sales mix in favor of the publication segment and improvement in return ratios. We also upgrade our numbers considering better business visibility. We re-iterate our Buy rating on the stock as it gives an upside of  38% with a dividend yield of 2.9% (on Rs1.6 dividend per share).


>Global uncertainty + Regulatory intervention = Overhang on Oil and Gas Sector

The global economy has been affected by the ongoing Euro-zone debt crisis and slowdown in China and India on account of anti inflationary policies. To our mind, a slowdown in global economy would lead to a fall in crude oil prices which bodes well for India’s Oil and Gas sector as it would lead to lower under recoveries. However, the fragile political situation in the Middle East and the ongoing tensions between Iran and US could lead to spike in crude oil prices on account of high risk premium. This could have serious implications for the India’s Oil and Gas sector which is already reeling under record high under recoveries.

The ongoing efforts by the gas sector regulator to control marketing margins and regulate tariffs have affected the valuations of companies operating in this sector. Further, the fall in domestic gas production on account of inability of RIL to increase production at its KG D6 fields has led to increase in imports of high priced LNG, thus increasing costs for gas suppliers and consumers.

Global oil market affected by economic and political uncertainties
The global economy has been once again put to test on account of the ongoing Eurozone debt crisis. We believe that the austerity measures being implemented in Europe will lower their demand for oil, which has already been on a decline since 2005. Further, both China and India are witnessing slowdown on account of anti-inflationary policies being pursued. The euro-zone crisis and subsequent austerity measures will further affect economic growth. Consequently, World GDP is expected to grow at a slower pace of 3.3%/3.2% in 2012e/2013e. In concurrence with lower economic growth, global oil demand is estimated to grow by 1.0%/0.9% in 2012e/2013e which is significantly lower than the average annual growth of 1.9% witnessed during 2002 - 2007.

We believe that the increased uncertainty on global economic growth would put downward pressure on crude oil prices. In the short run though, we expect crude oil prices to react to global geopolitical situations. Major upside risk to oil prices comes from the fragile political environment in the Middle East. With over 17mnbpd of oil (20% of global oil supplies) flowing through the Strait of Hormuz, any disruption to this flow would have serious repercussions on global economy and oil prices.

Refining facing headwinds on account of global capacity additions
Around 6.4mnbpd of incremental capacity is expected to come by 2015e, with over 50% of the incremental capacity expected in the Asia Pacific region. This, we believe, would put pressure on refining margins in the near future. The light-heavy differential has come off its highs witnessed during 2004-08 due to a) rise in demand for heavy crude oil from complex refiners and b) decline in Iran’s heavy crude oil production due to US’s economic sanctions. We do not expect any increase in light-heavy differential and expect it to stay at around $3/bbl for the next two years. We expect gasoil spreads to remain strong in the near future on account of higher demand for gasoil, while gasoline spreads would witness weakness on account of lower demand from key consuming centres - China and India. To our mind, naphtha spreads are in structural decline on account of lower demand from petrochemical sector which is witnessing increasing capacities of low-cost gas based plants. We expect FO spreads to remain strong in the near future as we expect production of FO to decline due to increase in capacity of secondary units (convert FO to lighter distillates).

OMCs – Uncertainty continues
We do not see diesel price deregulation happening anytime in the near future. At best, we expect the government to resort to ad hoc increases in diesel prices, but refrain from complete deregulation. With high crude oil price and increasing consumption of diesel in the economy, we believe that any real solution for the under recovery issue for OMCs needs to address the diesel subsidy burden in totality. Otherwise, as it is happening today, we see OMCs increasingly depending on ad hoc government policies to stay in the black. We expect lack of clarity on sharing mechanism to result in high earnings volatility for OMCs which would weigh down on their valuations.

Increasing importance of LNG on account of fall in domestic gas supplies
India’s domestic gas supplies failed to get the much needed boost from the KG D6 fields resulting in increasing imports of high priced LNG. As against this, demand for gas from India’s energy deficient economy is on the rise leading to a situation where India’s insatiable demand for gas continues to outpace supply. By 2015, we estimate gas demand to increase to 317mmscmd while supply is expected to grow to 202mmscmd, thus leading to a huge deficit of 115mmscmd. Post 2015, we estimate the gas deficit situation to ease on account of gas production ramp up from new gas fields and increasing LNG imports. Consequently, we estimate the gas deficit to come down to 78mmscmd in FY16e and to 40mmscmd by FY20e.



In a Sweet spot; initiate with Buy

Balrampur Chini Mills (BCML) is one of India’s largest integrated sugar manufacturing companies with a crushing capacity 76,500 tonnes/day. Considering higher production in UP compared to Maharashtra and Karnataka (affected by lower planting and deficient rainfall), we believe BCML will be the key beneficiary due to its locational advantage as we expect sugar production in UP (due to better planting and stable climatic condition) to grow by 12.1% in SY13E compared to drop of 7.6% in SY13E for pan India. Higher production coupled with our expectation of better pricing (Rs32/kg in FY13E and Rs34/kg in FY14E) led by expected
decline in the inventory levels for the industry is likely to drive earnings CAGR of 61.7% over FY12-FY14E for the company. Also, we expect gearing for the company to remain comfortable over FY13E-FY14E factoring the increase in working capital requirement due to change in the accounting year. We initiate coverage with a Buy rating and a target price of Rs80.

Sugarcane crushing to increase in line with expected increase in UP: BCML would benefit from higher sugarcane production (sugarcane production in UP is expected to increase by 8-10% in
SY13E). We expect sugarcane crushing for BCML to increase by 10% YoY to 9.3mt in crushing season SY13E and 8% YoY to 10.1mt in crushing season SY14E. In SY12 (current season),
BCML’s sugarcane crushing increased by 22.6% YoY to 8.5mn tonnes against 6.9mt in SY11. Recovery rate was also higher at 9.54% in SY12 against 9.4% in SY11.

Sugar prices to remain firm: We believe that expected decline in inventory level in India would support higher domestic sugar prices. We have assumed BCML’s free market realizations at
Rs32/kg in FY13E and Rs34/kg in FY14E against Rs28.7/kg in FY12. Current ex-mill realization has increased significantly over the last 45 days due to weather-related uncertainties in a few states and we expect the prices to cool-off post Oct ’12 when the crushing season starts. The company will benefit for the next two quarters if prices sustain at current levels (of ~Rs35/kg) as it had higher inventory of 0.47mn tonnes at the end of June ’12.
Gearing comfortable, adjusted for increase in working capital: BCML’s D/E ratio increased to 1.4x in FY11 and 1.6x in FY12 from 0.8x in SY09 due to increase in working capital requirements due to change in its accounting year. Adj. for additional increase in working capital requirements, we believe that D/E of the company is comfortable compared with other
players (D/E of Bajaj Hindustan was at 2.8x at SY11-end; whereas Shree Renuka Sugar’s was at 4.6x as of Mar-12). We expect D/E (adj. for working capital requirements) to be at 0.8x in FY13E and 0.78x in FY14E against 0.87x in FY12.

Outlook and Valuation: The company is highly sensitive to increase in sugar prices and as per our calculation every Re1 increase in sugar realization would boost the bottom-line by Rs546mn in FY13E (EPS increase of Rs2.23) and hence, higher sugar prices than our estimates would result in much higher than- estimated profit for the company. The stock is currently trading at 8.7x FY13E and 8.6x FY14E EPS of Rs7.5 and Rs7.6, respectively. On a P/BV basis, it trades at 1.18x FY13E and 1.07x FY14E. We initiate coverage with a Buy rating and a target price of Rs80 (based on 10.5x FY14E EPS).


>India's Monetary Conditions Index

While bond markets cheer the new finance minister’s comments regarding interest rates being too high, we thought it appropriate to highlight one more dimension to the debate. Even though for the purposes of general debate it is the RBI’s repo rate that gets focused on, the fact is that overall financial conditions are determined by many other variables including market interest rates and the currency exchange rate. Thus, for instance, it is well documented that INR depreciation is beneficial for net exports and hence stimulates aggregate demand. It is for this reason that economists also look at an overall monetary conditions index that gives weight not only to policy rates but market rates, exchange rate and general liquidity conditions as well.

Below we have drawn our own calculation of MCI for India. The blue line below represents the MCI. A rise in the line denotes easier monetary conditions and vice-versa. The red line is the repo rate.

As can be seen, the MCI currently is more representative of the overall financial conditions that existed towards late 2010. The repo rate at that time was below 7%. The easing in the MCI is attributable to a sharp rupee depreciation as well as the 50 bps repo rate cut in April. Also, what may not be fully captured in the MCI is the effect that RBI’s OMOs have had on term spreads of interest rates. Thus for instance while the effective overnight interest rates have risen by almost 500 bps since early 2009, 10 year bond yields are up only about 225 bps since government started revising up its borrowing numbers in 2009. The above only re-iterates the point that the RBI has been making for some time: that while higher interest rates may be partly responsible for growth slowdown; the bulk of the reason lies elsewhere. This also underscores why room for any significant monetary easing remains limited in the current context: not only would aggressive easing in a supply constrained economy be dangerous for demand side inflation but overall monetary conditions are really not as tight as the repo rate alone may indicate.



Strong business growth on the back of lower base
While on a sequential basis business growth remained muted, on a YoY basis loans and deposits grew 26% and 23% respectively. CD ratio improved marginally by 60bp QoQ to 62.6%, and there still remains ample of scope to improve CD ratio from hereon which would cushion margins. CASA deposits grew 18% YoY but declined 5% QoQ to INR205.6b led by moderation in CA deposits (+7% YoY but down 22% QoQ). As a consequence CASA ratio declined 200bp QoQ to 38.7%. SA deposits growth was healthy at 22% YoY (largely flat QoQ).

Margin decline just 6bp QoQ; strong fee income growth
Reported margins declined 6bp QoQ to 3.8%. While cost of deposits increased 52bp QoQ to 6.9%, higher yield on loans (+22bp QoQ) and investments (+27bp QoQ) partially negated the impact and led to healthy margin performance. Non-interest income growth was strong at 39% YoY led by fee income growth of +28% YoY and higher treasury income (INR202m v/s INR100m in 1QFY12 and INR227m in 4QFY12). Income from insurance commission was flat YoY at INR75m. As a result overall core income grew 3% QoQ and 23% YoY to ~INR5.9b.

Healthy asset quality performance; PCR at 90%+ one of the best in the industry
During the quarter bank shifted its portfolio in between INR1m and INR5m to system based NPA recognition. However, despite that there was no surprise on the asset quality front as bank contained its slippages to INR857m (annualized slippage ratio of 1.3% as compared to 1.2% in FY12). Remaining portfolio of INR82.9b (25% of overall loans; ~0.5m accounts) is expected to be transited to system based recognition by end of Sept-12. However management clarified that of the remaining portfolio that is to be transited INR47.5b (14.3% of overall loans) is to state government employees (personal finance) where the loan is guaranteed by their salary. Thereby asset quality is expected to remain healthy.

Bank continued to maintain high PCR of 94% (one of the highest in the industry), thereby NNPA was contained. While GNPA in percentage terms stood at 1.6%, NNPA% was at just 14bp (flat QoQ). During the quarter, the bank restructured loans of INR400m, taking the outstanding restructured loan portfolio to INR13.7b, 4.1% of overall loans.

Other highlights
 Given the current environment bank has made a contingent provision of INR239m taking the cumulative number to INR800m, which bank expects to utilize in case asset quality comes under pressure.

 Bank has entered into an agreement to sell 52m shares of Metlife India at a price of INR36.5 per share (totalling to INR1.9b), however the process is pending approval of IRDA. Further 66m shares are expected to be sold to PNB, however the price is yet not determined. Bank currently hold 220m shares of MetLife India and post completion of both the transaction, it would be still have 102m shares left.

 Break-up of loans with J&K (40% of overall loans): Agriculture segment - 15%; Trade - 16%; Personal Segment - 35%; SME - 16%; Corporate - 18%

 Break-up of loans outside J&K (60% of overall loans): Agriculture segment - 7%; Trade - 12%; Personal Segment - 4%; SME - 3%; Corporate - 81%

 Major portion of corporate loans is towards term loans, however bank would target to increase the share of working capital financing from here-on as it would also provide impetus to fee income.

Valuation and view
JKBK continues to deliver healthy performance on business growth, margins and asset quality. While shifting to system based recognition of NPA and strong growth in corporate segment outside J&K remains a risk to asset quality, strong margins of 3.7- 3.8% and PCR of 94% would provide cushion. J&K Bank is expected to maintain RoA of 1.3%+ and RoE of ~20%.The stock trades at of 0.9x FY13 BV of INR986 and 0.8x FY14 BV of INR1,144. Maintain Buy with a target price of INR1,145 (1x FY14E BV).


􀂄 Policy actions impacting; though not significantly: Government policy actions (customs duty, PAN card restriction) have started impacting TTAN, though not significantly. However, it is moderating the pace of shift from unorganised to organized segment, of which, Titan has been a key beneficiary so far. According to the management, absence of consumer demand in grammage terms, particularly in the last six months, has been slightly surprising despite the
prevailing weak consumer sentiment.

􀂄 Various plans to induce demand: On its part, in order to induce consumer jewellery demand, TTAN is experimenting with an exchange scheme in some states and intends to roll it out on a bigger scale soon. Currently, exchange forms just 15% of the business and in the new scheme, it will accept even Jewellery from other retailers with some carratage correction. As per management, it will help achieve twin objectives: a) restrict cash outflow for consumer and b) reduce overall Gold imports for the country. It may also contemplate a cut in labour charge to drive jewellery demand.

􀂄 Watches – expanding selectively: TTAN will concentrate its efforts around Fastrack and Helios and will go easy on World of Titan expansion as it already has a geographically strong 350 store presence.

􀂄 Confident of achieving medium‐term target (US$3bn turnover by FY15e): Focus for FY13e has shifted to bottom-line growth by cost containment (wherever possible) and margin enhancement (direct Gold import will save 70bps). We maintain ‘BUY’ with TP of Rs255.



Fertiliser sales hit by lower production 
Key points
  • Lower production of non-urea fertilisers weighed on total fertiliser sales: In July 2012, the aggregate sales of fertilisers (by 15 leading manufacturers) declined by 24% year on year (YoY) led by a steep decline in the sales of the non-urea fertilisers. In July 2012 the production and import of non-urea fertilisers, mainly di-ammonium phosphate (DAP), and complex fertilisers declined drastically on account of the non-availability of phosphoric acid and price negotiation by the Indian importers for DAP (imported). The imports of DAP and complex fertilisers decreased by 59% and 43% respectively during July 2012 mainly on account of lower production and lower imports by Coromandel International, India Potash and IFFCO. The imports of MOP and urea were higher by 69% and 48% respectively in the same month.
  • YTD sales of fertilisers decline: The year-till-date (YTD) sales of fertilisers declined by 17% as compared with the sales in the same period of the previous year. The decline in the fertiliser sales volume was largely driven by the lower both production and import of non-urea fertilisers on account of a tight supply of phosphoric acid and the expiry of the contracts for the import of DAP. The sales of DAP, urea and complex fertilisers were lower by 59%, 1% and 43% respectively whereas the sales of MOP increased by 69% mainly due to higher imports by the Indian importers (potash plays an important role in a drought-type scenario). The imports of urea on a YTD basis declined by 50% to 2.71 lakh tonne as compared with that in the same period of FY2012. 
  • Outlook: We maintain our cautious outlook on non-urea fertiliser manufacturers mainly due the lacklustre demand for these fertilisers on account of price hikes, margin pressure due to higher raw material cost and a demand shift towards cheaper fertilisers like urea and SSP. We prefer a pure urea manufacturer like Chambal Fertiliser as well as SSP manufacturers like Rama Phosphates and Liberty Phosphate in view of the existing demand-supply scenario.


Recommendation: Hold (SHAREKHAN)
Price target: Rs665
Current market price: Rs631
Downgraded to Hold; price target revised to Rs665
Result highlights
  • Q1FY2013 results-strong growth momentum sustained: The Q1FY2013 results of Godrej Consumer Products Ltd (GCPL) are in line with our expectations largely on account of a higher than expected revenue growth during the quarter. The strong growth momentum of the previous quarters was sustained with the revenues growing by 39.2% year on year (YoY) and the adjusted profit after tax (PAT) growing by 47.9% YoY during the quarter. Q1FY2013 is the fourth consecutive quarter of a strong double-digit volume growth in the company's domestic soap segment, an above 20% growth in its domestic household insecticide (HI) business, and a more than 25% year-on-year (Y-o-Y) revenue growth in its Indonesian business. The strong growth could be attributed to adequate media spends as well as innovations and renovation in the respective portfolios.
  • Results snapshot: In Q1FY2013 the consolidated net sales of GCPL grew by 39.2% YoY to Rs1,388.6 crore. The robust revenue growth was largely driven by a 24.3% Y-o-Y growth in the domestic business and a 67.5% Y-o-Y growth in the international business (an organic growth of 31% YoY). The consolidated gross profit margin (GPM) improved by 64 basis points YoY to 52.2% while the operating profit margin (OPM) stood flat at 14.7%, largely on account of it being a weak quarter for the HI business in India and seasonally the weakest quarter for the Latin American business. Thus, the operating profit grew by 38.2% YoY to Rs202.3 crore (the growth is in line with the revenue growth). This along with a lower incidence of tax resulted in a 48% Y-o-Y growth in the adjusted PAT (before the minority Interest) to Rs151.8 crore. The foreign exchange (forex) loss stood at Rs17.6 crore in Q1FY2013 as against a forex gain Rs2.4 crore recorded in Q1FY2012.
  • Upward revision in earnings estimates: We have revised upwards our earnings estimates for FY2013 and FY2014 by 5.5% and 7.9% respectively to factor in the higher than expected revenue growth in Q1FY2013 and the lower tax rate indicated by GCPL's management in its commentary. 
  • Outlook and valuation: Q1FY2013 was yet another quarter of a strong operating performance and a strong start to the fiscal year 2013. According to the management, there are no signs of a slowdown in the categories in which GCPL has a strong presence in the domestic market. It has maintained its thrust on innovation-led and distribution-led growth in the domestic and international markets. We expect GCPL's top line and bottom line to grow at compounded annual growth rate (CAGR) of 22.8% and 32.1% over FY2012-14.
    We have revised our price target for the stock upwards to Rs665 (based on 23x its FY2014 earnings of Rs28.9 per share). However, due a limited upside (of 5.3%) from the current level we have downgraded our recommendation on the stock from Buy to Hold. At the current market price the stock trades at 26.7x its FY2013E earnings per share (EPS) of Rs23.7 and 21.8x its FY2014E EPS of Rs28.9.


Recommendation: Buy (SHAREKHAN)
Price target: Rs110
Current market price: Rs85
Operating performance in line with estimates
Result highlights
  • Operating performance in line with estimates; adjusted net profit below estimates: In Q1FY2013 India Cements posted an adjusted net profit of Rs82 crore (a decrease of 21.9% year on year [YoY]). The same is below our estimate on account of a higher than expected interest cost of Rs95 crore (an increase of 63% YoY) and a foreign exchange (forex) loss of Rs25 crore. However, the operating profit of the company is much in line with our estimate at Rs277.7 crore (higher by 14.9% YoY). 
  • Revenue growth driven by healthy realisation and IPL income; in line with estimates: The net sales of the company grew by 13.7% YoY to Rs1,201.4 crore (largely in line with our estimate), which also includes revenues from the Indian Premier League (IPL), wind power and shipping businesses. The revenues from the cement division (cement is its core business) improved by 10.8% YoY to Rs1,062.9 crore largely driven by a 7.6% growth in the average cement realisation. However, on the volume front, the southern region continues to witness a lacklustre demand environment. Hence, the volume grew by just 2.9% YoY to 2.38 million tonne (mt). On the other hand, the revenues from the IPL division jumped to Rs122 crore as against Rs84.8 crore in the corresponding quarter of the previous year. The shipping division booked Rs12.5 crore of revenues during the quarter. 
  • Cost pressure largely offset the benefit of improvement in cement realisation: On the margin front, in spite of a 7.6% improvement in the cement realisation YoY, the continued cost pressure-in terms of (a) a higher power & fuel cost (up 16.8% on per tonne basis); (b) higher freight charges (up 21% YoY); and (c) higher employee cost (up 23.6% YoY to Rs78.7 crore)-largely offset the benefit of the increased realisation. Hence, the operating profit margin (OPM) could expand marginally by 25 basis points YoY to 23.1%. The overall cost of production on a per-tonne basis increased by 8.4% YoY and the EBITDA per tonne increased by 5% YoY to Rs1,033. Consequently, the operating profit of the company increased by 14.9% YoY to Rs277.7 crore.  
  • Surge in interest cost due to forex loss: The interest cost increased by 63% YoY to Rs94.9 crore on account of an increase in the borrowings at a higher rate to redeem the outstanding foreign currency convertible bonds and a forex loss of Rs25 crore. The total borrowings of the company stood at Rs2,880 crore as compared with Rs2,700 crore at the end of FY2012. Further, a one-time expense of Rs20 crore was incurred on account of the operations of the IPL franchise. Hence, the reported net profit declined by 39.2% YoY to Rs62 crore whereas the adjusted net profit works out to Rs82 crore (a decline of 21.9% YoY). 
  • CCI has imposed a penalty of Rs187.5 crore; the company will appeal against the CCI order: The Competition Commission of India (CCI) has imposed a penalty on around 11 cement companies for making a cartel and managing cement prices at higher levels. As per the CCI order, India Cements will have to pay Rs187.5 crore as a penalty. However, based on the legal opinion the company will appeal against the order before the Tribunal. Accordingly, the company has not made any provision for the CCI penalty. 
  • Fine-tuned earnings estimates for FY2013 and FY2014: We have fined-tuned our earnings estimates for FY2013 and FY2014 mainly to incorporate the higher than expected cost pressure (a higher freight cost) and a lower than expected volume growth. We have also factored in the higher than expected cement realisation in our estimates. Consequently, the revised earnings per share (EPS) estimates for FY2013 and FY2014 are Rs9.6 and Rs11 respectively. 
  • Maintain Buy with price target of Rs110: The demand for cement in the key market (southern region) of India Cements is likely to witness a partial recovery driven by the private sector housing industry and a pick-up in the rural demand. Further, in order to get better volumes and realisations the company is trying to change its market mix in favour of the non-Andhra Pradesh states and the western region. On the realisation front, the cement price in the southern region stands at a healthy level and we expect the average realisation in FY2013 to remain higher compared with that in FY2012. Moreover, with the commissioning of its captive power plant (CPP) the company will benefit by saving cost and gaining a regular supply of power. However, in order to deliver higher volumes the realisation could come under pressure. Cost pressure in terms of any adverse movement in the price of imported coal and a higher freight cost would partially offset the positive impact of the increased realisation and the savings from the CPP. We maintain our Buy recommendation on the stock with a price target of Rs110. At the current market price the stock trades at a PE of 7.7x discounting its EPS for FY2014 and EV/EBITDA of 4.4x its FY2014E earnings.

>Sun Pharmaceutical Industries

Recommendation: Buy
Price target: Rs743
Current market price: Rs682
Price target revised to Rs743
Result highlights
  • Better than expected performance: For Q1FY2013 Sun Pharmaceuticals (Sun Pharma) reported a 62.5% year-on-year (Y-o-Y) rise in its net sales to Rs2,658.1 crore, which is 12% higher than our estimate. The operating profit margin (OPM) jumped by 1,231 basis points to 45.8%, which is substantially higher than our estimate of 38.6%. The quarter's OPM is better than the margin achieved in the previous 14 quarters. Despite a foreign exchange (forex) loss (netted off in the other income) and a higher effective tax rate (17.3% in Q1FY2013 vs 2.5% in Q1FY2012), the net profit jumped by 58.8% year on year (YoY) to Rs796 crore during the quarter. The net profit exceeds our estimate by 19%. 
  • Strong results of Taro and exclusive supplies of Lipodox help: The better than expected performance was driven by three main factors: (1) stronger revenues (up 42% YoY to $159 million) and higher profit (up 110% YoY to $62.9 million) from Taro Pharmaceuticals (Taro); (2) better revenue and profitability from the supplies of Lipodox (through Caraco Pharmaceuticals [Caraco]; opportunity arose out of a drug shortage in the USA); and (3) a strong growth in the emerging markets (ex Taro the growth stood at 45% YoY). Besides, Sun Pharma's base business also seems to have grown impressively during the quarter. 
  • Business restructuring and full control of Taro to help sustain the strong growth: Sun Pharma is in the process of restructuring its business. It has announced a plan to spin off its domestic formulation business (which contributes about 22% of its revenues) to its wholly owned subsidiary called Sun Resins and Polymers Pvt Ltd with effect from March 31, 2012. This is being done with a view to enhance the focus on the business and to allow for quicker responses to the competitive market conditions. Besides, the company has announced a plan to acquire the entire stake in Taro which will give it a stronger foothold in the USA and Europe.
  • We revise our earnings estimates and price target; maintain Buy: Despite an impressive performance in Q1FY2013, the management has maintained its guidance of an 18-20% revenue growth for the base business in FY2013. We have revised our earnings estimates upward by 14% each for FY2013 and FY2014, in view of Sun Pharma's plan to gain full control of Taro (which will result in a lower minority interest) and the operational synergies that would result from such a move. Accordingly, our price target stands revised by 14% to Rs743. We maintain our Buy rating on the stock. 


Recommendation: Buy (SHAREKHAN)
Price target: Rs400
Current market price: Rs265
Spreading its network
Key points 
  • Spreading wings to reap large industry opportunity: AGC Networks (AGC; formerly known as Avaya Global Connect) has transformed its business from a single-partner (Avaya) relationship into a diversified business with multi-level global partners (Cisco, Juniper, HP, IBM, Dell, Polycom etc) to significantly multiply the addressable market and growth opportunities in its focus area of IT network infrastructure and related services. Currently, it gets around 80% of its business from India, where the addressable product & services target market was close to Rs30,000 crore in FY2011 and is growing at 20% per annum. However, with its renewed strategy (named as 10^3) the company is spreading its wings through a multi-solution, multi-alliance and multi-geography strategy, which augurs well as it will provide much more diversified revenue traction in the coming years. 
  • Parent Aegis adds muscle to AGC's growth prospects: AGC's parent Aegis is ranked among the top Indian BPO companies with presence in 13 countries, 55 locations and over 300 clients across verticals, such as BFSI, telecom, healthcare, travel and hospitality, consumer goods, retail and technology. AGC would be leveraging the strong presence of Aegis and get access to the parent's elite client base across geographies. After being acquired by Aegis in May 2010, AGC has significantly grown its product portfolio, geographical markets and partners. Over the last two years after coming to the fold of Aegis, AGC has transformed from a single-product (unified communications[UC]) and single-partner (Avaya) entity into a diversified integrated player with multiple partners and businesses spread across geographies. 
  • Solid financials, healthy prospects ahead: In the last two years AGC has reported a strong growth in the top line and the bottom line. Going forward, with diversified product offerings and a wider client base, the company is well poised to raise its growth trajectory. We estimate an over 40% CAGR in its earnings over FY2012-14 with a 33% revenue CAGR over the same period. We expect the OPM to remain stable at 10% over the next two years with a judicious mix of products (70%) and services (30%) in the revenues. Further, with an increase in the addressable market opportunities and the successful implementation of the 10^3 strategy, the management aspires to reach $1 billion in revenues (Rs5,500 crore) by 2015 through both organic and inorganic initiatives. 
  • Undemanding valuation, rich dividend play: AGC is a distinguished player in the enterprise communications space in India and its pertinent focus on delivering industry-specific solutions with customised services proves to be a key differentiator from the others. With increasing clients and an expanding geographical network through the Aegis legacy and own sales and marketing initiatives, the company is well poised to witness significant traction in profitability in the coming years. At Rs265 the stock is currently available at undemanding valuations of 3.9x and 3x FY2013E and FY2014E earnings respectively. Further, the company is a strong dividend play in FY2012 150% dividend, 33.5% pay-out). Going forward, with the company all set to receive a windfall of Rs97 crore through the sale of the Aegis stake (5.7 million shares at Rs170 per share) by December 2012, its per-share value works out to Rs68. Thus, there is a higher prospect of a special dividend pay-out in FY2013 over and above the usual dividend. We initiate coverage on AGC with a Buy rating and a 12-month price target of Rs400. At our price target the stock would be valued at modest 4.5x FY2014E earnings. 


Slower sales growth affects results

Pfizer results for Q1FY13 were lower than our expectations. The company reported 7%YoY decline in revenues, 270bps decline in EBIDTA margin and 41%YoY decline in net profit due to lower growth of pharma business and the divestment of animal healthcare (AHC) business. The sales growth of the pharma segment was 4%YoY due to slower growth of three key brands. The introduction of new products in the domestic market is likely to drive growth. Pfizer is a debt free company with cash per share of Rs300. We have revised the rating from Buy to Neutral with a target price of Rs1,325 (based on 17x FY14E EPS of Rs77.9) with an upside of 4.9%.
■ Slow domestic growth: Pfizer reported 7%YoY decline in total revenues from Rs2.61bn to Rs2.43bn due to the slower growth of pharma business and divestment of AHC business to a 100% subsidiary. The pharma business (90% of revenues) grew by 4%YoY from Rs2.10bn to Rs2.18bn. AHC revenues were ‘nil’ against Rs315mn.

 ■ Margin under pressure: Pfizer’s EBIDTA margin declined by 270bpsYoY from 16.0% to 13.3% due to the rise in personnel cost and other expenses. Material cost declined by 280bps from 32.6% to 29.8% of revenues due to the change in product mix and the absence of AHC products. Personnel cost increased by 100bps YoY from 22.3% to 23.3% due to lower sales growth. Other expenses were up by 450bps from 29.1% to 33.6% due to the additional expenses of Rs15mn related to the contract field force and brokerage of Rs20mn related to the new office.

■ Sale of AHC business: Pfizer sold its AHC business to a 100% subsidiary Pfizer Animal Pharma Pvt. Ltd for Rs4.24mn. The company reported a gain of Rs3.83bn from the sales. After providing for capital gains tax of 20%, the balance amount of Rs3.06bn appears as EO item. The sales proceeds are likely to generate more interest than the EBIDTA generated by AHC business.

■ Leading brands have slower growth: As per IMS MAT-June’12, three major brands have lower growth rates. These are: Becosules (2.2)%, Gelusil-MPS 5.6% and Magnex (2.8)%. The slowdown in Becosules is attributed to the trade scheme in Q4FY12 and that for Gelusil due to slowdown of the category.
■ Valuations: We expect Pfizer to benefit from good growth in the domestic market and from the introduction of new products. We have lowered our EPS estimates by 4% for FY13 and 3% for FY14. At the CMP of Rs1,263, the stock trades at 18.6x FY13E EPS of Rs68.1 and 16.2x FY14E EPS of Rs77.9. We have revised the rating from Buy to Neutral with a target price of Rs1,325 (based on 17x FY14E EPS of Rs77.9) with an upside of 4.9%



Tough times ahead, maintain sell

Tata Steel reported consolidated PAT of ~Rs5.98bn (our est. Rs5.4bn) on account of better than expected operational performance in Europe with EBITDA/tonne of ~US$36. Consolidated EBITDA stood at Rs34bn (margin of 10.1%, up by 70 bps QoQ) as European operations saw higher EBITDA on sequential increase in realizations but domestic operations continued to see higher operational costs resulting in standalone EBITDA margin of 31.5%. We expect sequential fall in realizations and expect overall profitability to remain under pressure going forward. We revise our estimates lower marginally and remain well below consensus with our continued negative stance on the European operations, lower margin profile in domestic operations on reduced backward integration post expansion and high interest costs on account of the large debt pile. We maintain sell with a revised lower target price of Rs366.
■ Standalone results remain subdued due to higher costs: Domestic sales volume stood at ~1.6MT (affected by power outages at plant) and higher wage and power costs resulted in EBITDA margin of 31.5%, a decline of 40bps sequentially despite improvement in realizations. Long product sales saw a drop of ~11% QoQ due to shutdown in May following power outages and flat product sales also remained subdued.

■ Corus reports higher EBITDA, but pressure seen ahead: Corus reported higher-than expected EBITDA/tonne of ~US$36 (our exp of US$15) as realizations improved by ~5% QoQ. This came as a surprise in a tough market and was mainly due to volume sacrifice (lower by 9% QoQ at 3.2MT), better product mix and lag effect of fall in realizations on contract sales. We see a sharp fall in blended realizations going forward for European operations along with continued pressure on volumes and expect lower profitability ahead. South-East Asian subsidiaries delivered stable operational performance QoQ and reported EBITDA of ~US$24/tonne on account of stable volumes and realizations. As a result of better operational performance in subsidiaries, cons. EBITDA stood at ~Rs34bn with a margin of 10.1%.

■ Conference call highlights and outlook: The 2.9mtpa steel expansion has achieved stabilization of the blast furnace but would contribute to incremental volume of ~1MT only in H2FY13 post commissioning of the coke oven and the company targets to exit FY13E near full capacity. Volumes in Europe will remain under pressure due to low demand and holiday season ahead but management expects to maintain flat volumes for FY13E. Steel prices are under pressure in all markets and are expected to be lower sequentially going ahead. Outstanding gross debt increased to ~US$11.7bn due to incremental debt funding.

■ Capex guidance for FY13E was maintained at US$2.2-2.3bn. We revise our volume estimates lower for European operations to 13 MT of sales volume with EBITDA/tonne of US$25 in FY13E. We expect EBITDA margin of 30.9%/31.3% in FY13E/14E on a standalone basis as integration on the coking coal front would drop post expansion and product mix will get skewed towards flats, keeping overall realizations in check. We revise our consolidated EBITDA estimates lower by 3.3%/2.2% for FY13E/14E.

■ Maintain sell: We value the company on SOTP basis with domestic operations at 5.5x FY14E EV/EBITDA and Corus & South-east Asian subsidiaries at 4x FY14E EV/EBITDA to arrive at a target price of Rs366. Maintain sell.



Recommendation: Buy (SHAREKHAN)
Price target: Rs71
Current market price: Rs60

Price target revised to Rs71
Result highlights
  • Q1FY2013 results affected by lower rebate income: PTC India's Q1FY2013 results were significantly below expectations led by a fall in the rebate and treasury incomes. The company started selling power under power tolling agreements during this quarter and made an operating profit of Rs12.5 crore (approximately Re1/unit). Its management indicated that the sustainability of the profit of the power tolling business could be determined only after some time as the business is currently at a very nascent stage. The payment from the Tamil Nadu State Electricity Board (SEB) has started coming in. The company has already received over Rs175 crore from the SEB and expects to receive the balance (Rs450 crore) by the end of CY2012. However, the company is yet to receive the timeline for the payment due (over Rs450 crore) from the Uttar Pradesh SEB. 
  • Top line fell by 20%: The top line of the company fell by 20% year on year (YoY) driven by a 18% year-on-year (Y-o-Y) fall in the realisation/unit while the trading volumes were in line with our expectation. The number of power units sold under the long-term contracts was stable at around 1 billion units on a yearly basis. The company started selling power under power tolling agreements (for the Simhapuri power project of 200MW) in this quarter and sold ~121.7
    million units. 
  • Fall in rebate and treasury incomes mars profitability: The operating profit margin (OPM) fell to 1.6% from 1.9% in Q1FY2012. This was mainly due to a drop in the rebate income, which declined to Rs2.2 crore in the quarter from Rs23.4 crore in Q1FY2012. The overall operating profit fell by 33% on a yearly basis. The core trading margin (excluding the surcharges and rebates) dropped to 4 paise/unit from 4.7 paise/unit in Q4FY2012 owing to increased competition in the short-term trading market. The company is estimated to have earned a profit of Re1/unit on the power sold under the tolling agreements. It charges a 2% rebate on the payment in case of early payment while it charges a surcharge @ 15% per annum on delayed payments. 
  • Net profit dropped by 49%: The other income decreased by 88% YoY led by a fall in the investments-the treasury income declined to Rs1.6 crore in Q1FY2013 as against Rs17.3 crore in the corresponding quarter of the last year. The positive surprise was the fall in the interest cost (became almost nil) as the debt level was maintained at zero throughout the quarter. Further, led by a higher tax rate, the profit after tax (PAT) fell by 49% to Rs22.9 crore, which is lower than our expectation of Rs40 crore. 
  • Receivables remain high at Rs2,700 crore: For the quarter, the net cumulative receivables from the Tamil Nadu and Uttar Pradesh SEBs remained high at Rs930 crore with only Rs100 crore of payment received. The total receivables further increased from Rs2,581 crore in Q4FY2012. However, the company is sitting on a surcharge of over Rs150 crore on account a delay in receiving payments from the SEBs; this would boost the future profitability as and when the dues are received.
  • Estimates downgraded by 10%: We have further downgraded our estimates for FY2013 and FY2014 by 10% each in view of the impending competitive margin pressure, the falling short-term trading volumes and the other income assumption. We expect the profit from the core trading business to post a compounded annual growth rate of 14.1% over FY2012-14. PTC India Financial Services (PFS) has reported a strong performance for the quarter (with its PAT up 124% on a yearly basis) led by a rise in its interest income from loan financing during the quarter. One of its power tolling projects aggregating 200MW was commissioned in early FY2013 and boosted its revenue and profitability during the quarter. 
  • Price target revised to Rs71: We expect the overall power traded volumes to significantly increase on the back of the long-term power purchase agreements (PPAs) in the next two years when the undersigned power projects would start commercial operation. However, the recovery of payments from the SEBs and an improvement in the execution of power projects have become essential for keeping PTC India's growth story intact. We have increased our target valuation multiple of PTC Energy to 2x its FY2012 book value (from 1 x earlier) as the revenue from it's first power tolling projects started flowing in from Q1FY2013. However, on account of our downgraded estimates for the core power trading business, our sum-of-the-parts (SOTP) based price target has been revised downwards to Rs71. As the stock's current valuation still looks attractive at 0.7x FY2014 estimated book value, we maintain our Buy rating on PTC India.


Recommendation: Buy (SHAREKHAN)
Price target: Rs360
Current market price: Rs265

Price target revised to Rs360
Result highlights
  • Performance remains flattish in absence of regulatory approvals: Selan Exploration (Selan) reported another quarter of a flattish growth in oil production in the absence of the regulatory approvals that are essential to take forward exploration and drilling activity and monetise the oil & gas assets (oil fields). The revenue growth of 15.2% year on year (YoY) was largely driven by the benefits of depreciation in the rupee and a marginal decline in the production volumes as part of the natural depletion of the resources in the existing wells. 
  • Lower interest burden due to repayment of debt: At the profit after tax (PAT) level, the growth was marginally down YoY and grew by 11.4% sequentially due to the rupee's depreciation and a lower interest cost. The company utilised part of the cash on hand to repay its foreign currency debt and consequently it is practically debt-free now. 
  • Looking at alternative means of utilising cash on hand: The upstream oil & gas companies in India have suffered due to the lack of regulatory approvals after the issues raised by the Comptroller and Auditor General of India (CAG) and the subsequent investigations by the law agencies. In the absence the approvals, the management indicated that it is actively looking at some proposals to acquire participatory interest in oil assets abroad. This would result in productive utilisation of the over Rs100 crore of cash left on the books after the repayment of its debt. We believe the management could also look at a buy-back in case it is not successful in carrying out an overseas acquisition. 
  • Lack of regulatory approvals raises risk of de-rating of valuation multiples: The company had commenced drilling operations in Q1FY2012 and had brought in a seasoned professional team to speed up the process of monetising of its oil fields in the Cambay Basin, Gujarat. However, the policy inertia in government departments has resulted in unexpected delays in the regulatory approvals, which are essential to take forward the exploration and drilling programme. Though the management remains hopeful of receiving the approvals (at least partially in some fields) and is contemplating alternative means to productively utililise the cash on hand (it generates Rs35-40 crore of free cash annually at the current production level), the continued delay in the approvals could result in the de-rating of the valuation multiples. We are reducing our production volume estimates for FY2013 and FY2014 to factor in the concerns. Accordingly we revise down our target multiple of 4x EV/EBITDA (FY2014E) and hence downgrade our price target to Rs360. 



Recommendation: Buy
Price target: Rs95
Current market price: Rs45
Price target revised to Rs95
Result highlights
  • Muted revenue growth; margins maintained though: In Q1FY2013 the net sales of Unity Infraprojects (Unity) grew by just 5% year on year (YoY) and dropped by 45% quarter on quarter (QoQ) to Rs395 crore, which is below our expectation. The sales were affected by the delays in obtaining approvals/clearances for certain government projects (government projects form 85% of Unity's order book) which led to the slow execution of these projects. However, on the operational front the operating profit margin (OPM) was in line with our expectation at 13.6%, which shows an expansion of 60 basis points on a yearly basis. The OPM is also better than the Q4FY2012 margin of 12.5% mainly because raw material prices were stable during Q1FY2013. The operating profit thus rose by 9.5% YoY.
  • Higher interest charge resulted in a decline in PAT: However, the moderate top line performance and the margin expansion were nullified by the escalating interest charge, which rose by 33% YoY, resulting in an 8% drop in the profit after growth (PAT) to Rs18 crore (which is below our expectation). The depreciation charge, however, reduced sequentially as the capital expenditure done in the machinery lying idle has not been accounted for.
  • However, healthy order book provides revenue visibility: Unity has bagged fresh orders worth Rs470 crore in FY2013 so far. This along with the orders worth Rs2,850 crore secured in FY2012 takes the total order book to a respectable position of Rs4,180 crore, which is 2.1x its FY2012 revenues. Thus, there is good revenue visibility for the company over the next two years. Of the present order book, 48% is from buildings, 23% is from the water segment and the remaining is from the transportation segment.
  • One of three road BOT projects starts execution; while real estate portfolio still moving slow: Unity currently has three road build-operate-transfer (BOT) projects in its portfolio. Out of these, financial closure has been achieved for the two-laning of the Chomu-to-Mahla project in Rajasthan (after a delay) and work has started on the project. In addition, the concession agreement has been signed for one project out of the two recently won road BOT projects; the agreement for the other one will be signed soon. The two projects will achieve financial closure four to six months after the signing of the concession agreement. On the other hand, the real estate project in Nagpur has finally signed the management agreement with Hyatt and will start execution work post-monsoon. All the necessary approvals for the project are in place. However, the project in Bangalore maintains the status quo and expects the final approval in one to two months, as the new government settles down. 
  • Estimates revised downwards: We have revised our revenue estimates downwards by 4% each for FY2013 and FY2014 to factor in the slower project approval, which will hamper the execution of the order book. Further, in light of this we expect the working capital need to rise which would result in higher borrowings. Thus, we have also increased our interest expense estimates. As a result, the earnings estimates stand revised by 10% and 13% for FY2013 and FY2014 respectively. 
  • Maintain Buy with a revised price target of Rs95: We continue to like the company due to its strong order inflow momentum and healthy order book position in an adverse macro-environment. We also like its diversification into the road BOT space with prudent caution. The successful mobilisation of funds from a private equity would remove some overhang on account of the real estate projects. We have not given any value to Unity's road BOT and real estate projects which would add to the valuation whenever they gain some momentum. We maintain our Buy recommendation on the stock with a revised price target of Rs95. At the current market price the stock is trading at a price/earnings multiple of 2.8x FY2013E and 2.3x FY2014E earnings respectively.