>HINDUSTAN CONSTRUCTION COMPANY - Losses continue to mount

Result Analysis
 Sales decline by 9%; order inflows dry down: Company’s sales de-grew by 8.4% y-o-y to `9,694mn below our as well as street expectations on the back delay in project executions. The company’s order book stands at `150.0bn (40% hydro, 24% transport, 22% water and 14% nuclear and others), while there were no order inflows for 1QFY13. The outlook remains bleak as industrial capex has slowed down and also many projects are facing execution issues on account of which top-line is likely to be hit badly.


 Operating profit dip by 590bps y-o-y and 40bps q-o-q: During 1QFY13, the company’s operating profit declined by 49.9% y-o-y to `691mn, while the operating margin declined by 590bps y-o-y and 40bps q-o-q to 7.1%. The decline was mainly due to lower top-line and higher raw material expenses.


 Operating profits and interest costs continue to lead to losses: Company reported a net loss of `310mn during 1QFY13 due to lower sales, bad operating performance and interest costs. Interest cost rose by 37.5% y-o-y to `1,282 mn. The management expects the company to be out of red by end FY13.


 Approval of Corporate Debt Restructuring – the only positive surprise: The Corporate Debt Restructuring Empowered Group has approved the restructuring of its debt of ~`32bn which might bring down the interest costs and improve cash flow. The key terms of the CDR package are:-


a) Principal moratorium of 2 years and structured repayment of 8 years of restructured term loans


b) Softening of interest rates and need based additional working capital would be sanctioned by the existing bankers.


Other Key Highlights:
 Karl Steiner AG; another quarter of strong order inflows: The Company has a strong order backlog of CHF.1.5bn (`87.2bn) while the Company reported a turnover of CHF202.6mn (~`11.8bn) and inflows to the tune of ~CHF192 mn(`11.6bn).
 HCC Infrastructure: The Company won a six laning project between Vadodara-Surat junction with and total project cost of ~`14bn with a concession period of 12 years. Execution of West Bengal projects (NH34) underway and is ~30% complete.


Outlook and Valuations:
HCC has been hit across all fronts top-line, operating as well as profitability on account of dip in order inflows, slower execution of the projects and rising costs; Profitability has been hit badly on account of bad operating performance and interest costs. The outlook for order inflows and execution remains bleak and is likely to hit company’s overall performance badly. The CDR package approval is likely to lower the interest burden and improve cash flows; however if the current pace of project execution continues the effects will be negated. Factoring in a) muted order inflows b) continued slower execution performance and increasing levels of debt we revise our top-line estimates downwards ~by 7% and 6% to `39,202mn and `41,959mn for FY13 & FY14 respectively and expect the company to report a net loss of `1,856mn and `1,305mn.(Earlier estimates loss 1345mn and `819mn for FY13 and FY14 respectively.) Infrastructure segment has been marred from all fronts and we do not foresee the situation improving in the near term. HCC has not only seen a dip in its top-line but also on the operating parameter front which coupled with high debt burden is impacting the bottom-line and hence we maintain our “Hold rating” on the stock. At the CMP, the stock trades at 1.1xFY14E P/B and 13.5x FY14E EV/EBITDA.

>THE PAPER PRODUCTS LIMITED: Owned by Finland based Huhtamaki Oyj group

 Stable business model and margin profile lends consistency in cash flow and good earnings visibility: PPL packaging products enjoys consistent demand on account of strong underlying demand from the FMCG business, with a decent average volume growth (8-10% YoY). The company operates on a cost plus margin business model and hence has a stable margin profile with an EBITDA margin in the range of 9-11% (avg of last 4 yrs - 10.2%). We expect PPL’s net sales, EBITDA and Adj PAT to grow at a CAGR of 13.3%, 13.8% and 11.7% over CY11-CY13E respectively. We expect the company to generate OCF of `1446 mn and FCF of `564 mn during the CY11-CY13E period.


 Tremendous growth opportunity due to a hugely under-penetrated packaging market and multiple growth drivers in end user industry: The flexible packaging market (20% of the overall packaging market) is valued at $3.5 bn, with only 35%-40% of it being organised. With an expanding middle class population, rising incomes and growth in organised retailing, FMCG and Pharmaceuticals are expected to post robust volume growth leading to a corresponding strong growth in flexible-packaging. Lower packaging penetration (per capita consumption of consumer packaging in India at $2.5 against that of $51.6 in US) will also lead to a huge structural shift from unpacked to packaged products over the next decade (currently only 15-20% of the total goods consumed in India are in packaged form). We expect flexible packaging growth at 1.2x – 1.4x the volume growth of the underlying demand.


 Strong promoter group and solid management team helps to bring in best practices, attract marquee clients, adapt newer technologies and processes based on shift in consumer trends: PPL is owned by Finland based Huhtamaki Oyj group, which is one of the top 10 consumer packaging companies in the world and has operations spread across 31 countries. The promoter group brings in best practices in terms of technology expertise, operating efficiencies and corporate governance. Moreover, Mr Suresh Gupta, MD of PPL, also heads the global flexible packaging business of Huhtamaki, which is strategically a big positive. The sales geography is increasing for PPL with exports picking up in New Zealand, Australia and South America.


 Debt-free status, high dividend yield, and reasonably good return ratios: The company has strong dividend payout policy of ~35% leading to a very good yield of ~4-5%. In addition, the company has reasonable return ratios, with expected RoAE of 16.2% and 16.4% and RoACE of 20.2% and 20.6% in CY12E and CY13E respectively.


Valuations and Outlook: At the CMP of `65.3/share, PPL is valued at a P/E of 7.3x and 6.5x CY12E and CY13E respectively. PPL is a quality MNC and a niche play on the packaging front, with consistent earning growth and a healthy B/S and OCF. Given the strong business and financial profile, strong growth prospects and that rare thing in our equity markets -- good corporate governance -- at the CMP, PPL, valued at a P/BV of 1.0x CY13E, is an attractive opportunity. We initiate coverage on the company with BUY rating and Jun13 target of `95.0/share (based on P/E multiple of 9.0x CY13E earning).


To read report in detail: THE PAPER PRODUCTS

>HDFC BANK: Q4FY12 Results

Asset quality continued to remain healthy, Retain Buy


HDFC Bank announced its results for Q4FY12. The bank reported higher than expected bottom line driven by robust NII and other income growth coupled with lower provisioning during the quarter.


Key Highlights
■ Net Profit after tax for the current quarter increased 30.4% YoY (1.6% QoQ) to Rs 14530.8 mn from Rs 11147.1 mn for Q4 FY11. The growth in PAT on YoY basis, despite higher operating expenses (driven by aggressive branch addition), was mainly driven by 19.3% YoY (32.0% QoQ) increase in the NII at Rs 33883.1 mn (led by robust growth in advances 22.2% YoY and 0.6% QoQ) and 18.8% YoY (5.1% QoQ) increase in other income. The main contributor to other income for the quarter was fees & commissions of Rs 12373 mn, which was up by 23.7% YoY. Besides this lower provisioning (decline of 30.8% YoY and 9.4% QoQ) during the quarter led by lower slippage further aided growth in net profit. Cost / Income ratio during the quarter increased by 175 bps YoY (298 bps QoQ) to 50.6% driven by aggressive branch and ATM expansions during the quarter.


■ Net Interest Margins during the quarter registered an increase of 10 bps sequentially to 4.2% on the back of higher average CASA balance during the quarter (the bank was the collecting banker for issuance of tax-free bonds for some of the issuers in Q4 FY12). Added to this the bank’s continued focus on retail lending due to attractive yields and run down of low yielding corporate loans has further aided in margin expansion.


■ Total business of the bank registered a robust growth of ~20.0% YoY (3.6% QoQ) as at Q4FY12. Deposits grew by 18.3% YoY (6.1% QoQ), whereas Net Advances grew by 22.2% YoY (0.6% QoQ). The advance book grew on the back of healthy 34% YoY (7% QoQ) growth in the retail book, while corporate advances book grew 11% YoY (decline of 6% QoQ). The share of retail book in the total advances improved to 54.8% against 50.1% YoY. Going forward, management expects corporate loan book to pick up pace and has guided for a credit growth of 19-22% for FY13.


■ Asset quality continued to remain stable with gross NPA at 1.01% (1.05% YoY, 1.03% QoQ) and net NPA at 0.18% (0.19% YoY, 0.20% QoQ). The bank’s slippage ratio for FY2012 was low at 0.98% (1.13% in FY11 and 2.66% in FY10). Restructured assets were also stable at 0.4% of gross advances in Q4FY12. Provision coverage based on specific provisions was at 82.4% higher by 207 bps sequentially despite lower provisioning during the quarter mainly led by lower slippages. Going forward, the management expects credit costs to rise from the current levels.


■ The bank had opened 343 new branches in this quarter taking the total number of branches to 2544. The bank plans to add ~250 branches each year going forward.


Outlook and Valuations
The banks consistent strong performance despite challenging times reflects its strong and dynamic business model. We estimate HDFC Bank to report an EPS CAGR of 28.5% over FY11-FY14E. ABV is estimated to grow at 19.3% CAGR during the same period. The bank’s strong asset quality, superior return ratios, strong asset growth and adequate capitalization bodes well for its future growth. HDFC Bank has always commanded a premium valuations visà- vis its peers due to its track record of consistent growth in earnings and assets. The stock currently trades at 3.7x FY13E ABV and 3.0x FY14E ABV. Over the last five years, the bank has traded at a mean multiple of 3.5x its one year forward ABV. We believe the bank to continue to command premium valuations going forward. We retain our BUY rating with a March 13 target price of Rs 635.9 implying an upside of 15.4% from current levels.


RISH TRADER

>MPHASIS: Direct Channel and HP Channel (Q1FY12 Results - Key Highlights)

■ Mphasis posted a topline growth of 4.1% to ` 13.67 bn from ` 13.13 bn on sequential basis and an increase of 10.8% from ` 12.33 bn on YoY basis on account of the rupee depreciation of 7.3%. In dollar terms, revenue declined by ~3%. Strong Direct Channel (DC) growth (14.4% QoQ) helped them to change the composition (HP:DC) significantly to 58:42 in Q112 vs 62:38 in Q411. On industry basis, the strong growth was led by insurance (7.4%) & Information Technology, Communication & Entertainment (ITCE 8.3%) and Banking & Capital Market (BCM 4.5%). On service wise, Infrastructure management services (IMS) grew by 8.7%, owing to strong demand seen in DC side of IMS. On geographical mix, Asia Pacific and Japan (APJ) increased by 15.6% on QoQ basis.


■ EBITDA improved by 7.4% to `2.52 bn from `2.35 bn on QoQ basis. Notably, the margin bunked the declined trend with an improvement of 57 bps to 18.5% from 17.9%.


■ PAT remained flat with a slight positive bias of 1.1% to `1.85 bn from ` 1.83 bn (QoQ).

■ Direct Channel and HP Channel: Direct Channel continued its strong momentum by growing 14.4% on QoQ, taking the current revenue proposition to 42% vs 38% in Q4FY11 and 32% in Q1FY11. In particular, DC’s emerging market jumped by 27.2% and DC’s mature market increased by 11.2% on QoQ basis. During the quarter, Mphasis added 28 new clients, in that 17 clients in DC and rest 11 in HP Channel. Since Q1FY11 (strategic changes), Mphasis added 128 clients, in that 82 clients in DC channel and rest 46 clients in HP Channel. HP remained sluggish (-4% growth in $ terms QoQ) due to HP annual shutdown and certain project related impact. The management trimmed its Non-ES guidance to $75-80 mn vs $100 mn for FY12E.


■ Operating Metrics – In application business, Mphasis gained 5% in offshore pricing on QoQ ($21 vs $20), on account of optimal deployment of resources leading to efficient project execution Whereas they lost 3% in onsite pricing to $67 vs $69 in Q411 on account of current fluctuation adjustments. Even though, the management attributed no pricing discussions with HP in this quarter, but hinted that if anything, it would be inline with industry standard. On headcount basis, Mphasis has witnessed a decline for the third consecutive quarter to 38798 in Q112 vs 41739 in Q211. We believe there is little room for further margin improvement on utilisation front (ITO: 81% in Q112 vs 73% in Q211; App: 77% in Q112). However, management is quite confident of maintaining the EBITDA margin in the 18-21% range.


Outlook & Valuation: The management’s strategy of transforming the company into more direct business-oriented has started to show positive results, which is a good sign for Mphasis from medium to long-term perspective. We trimmed our earnings modestly by 1.5% and 3% for FY12E and FY13E to factor in the slightly below results. On the back of the attractive valuation during Q411, sizeable cash on the BS, market expectations of buyback & improving DC sentiments made the stock rally ~35% in YTD. However, overhang on HP business and increasing risk of price cuts from HP would keep the upside capped. Currently, Mphasis trades at a consolidated P/E of 10.9x and 9.2x on its FY12E and FY13E earnings of `37.2 and `43.9 respectively. We think that it might take couple of quarters of stable performance to restore investor’s confidence in the management and growth prospects. We continue to value Mphasis at 9x on its FY13E to arrive at a price target of Rs.395.2 and maintain our Neutral rating.


RISH TRADER

>SHOPPERS STOP LIMITED: Near term pain, Long term growth story intact

SSL has posted 3QFY12 results and the numbers were below expectation. Key highlights of result are as follow:


Key Highlights
■ Standalone net sales for SSL increased by 9.2% YoY to ` 5418.3 mn. The moderation in
topline growth was mainly due to decline in LTL sales growth of 1%. This was mainly led
by 9% decline in LTL volume partially offset by increase in ASP by 8%. Apparel sales
(contributes 57.2% to the topline) were impacted due to ~18% YoY increase in prices.
Apparel prices are likely to soften in 1HFY13E and management expect healthy volume
growth in 3QFY13E. On the positive side, gross margin improved marginally by 10 bps
YoY to 35.4% and contribution of Bought out/Concession sales declined to 50.3% as
compared to 55.2% in 3QFY11, implying declining inventory risk.
■ EBITDA declined by 19.7% YoY to ` 413.5 mn mainly due to increase in employee cost,
rental expense and other operating expense by 31.4%, 20.4% and 18.5% YoY to ` 331.3
mn, ` 471.6 mn and ` 701.5 mn respectively. This increase in operating expenses were
due to opening of 6 SS stores in the qtr, which leads to front loading of employee, rental
and operating cost. Overall, EBITDA margin declined by 275 bps YoY to 7.6%.
■ Interest cost increased by 204.8% YoY to ` 75.5 mn due to increase in debt led by new
store capex and increase in working capital requirement. Standalone debt as of 31st Dec
2011 stood at ` 2875.2 mn as compared to that of ` 1487.2 mn on 31st March 2011.
Overall, PAT declined by 30.8% YoY to ` 192.9 mn.
■ Hypercity: For 3QFY12, Hypercity posted net sales of ` 1976.2 mn (up 29.3% YoY),
EBITDA of ` -111.3 mn (down 26.8% YoY) and PAT of -245.1 mn (down 34.1% YoY).
The LTL sales growth was 12%, with LTL volume growth of 18% and decline in ASP of
6%. Out of total 12 stores, 5 stores were EBITDA positive in 3QFY12 with store EBITDA
of ` 7.9 mn as compared to loss of ` 13.4 mn in 3QFY11.


Outlook: We have revised our estimates based on the existing economic and business
scenario. Going ahead, we expect healthy sales traction in Shoppers Stop, as the new stores gets ramp-up. However, operating overheads will take 15-20 months to get fully absorbed and hence will keep overall EBITDA margin under pressure. We expect sales and EBITDA to grow at CAGR of 23.4% and 22.1% during FY11-FY14E period respectively. We expect the company to post EBITDA margin of 7.0%, 7.5% and 7.9% in FY12E, FY13E and FY14E respectively. Overall, we expect PAT to grow at CAGR of 22.3% during FY11-FY14E. We have assumed 8 store addition each in FY13E and FY14E. Hypercity is progressing well and is expected to be EBITDA positive at company level in next 12-15 months.


Valuations: At CMP, the stock is trading at P/E ratio of 40.4x and 30.7x FY12E and FY13E earnings respectively. Our fair value of the stock based on SOTP methodology comes to` 298/share. We have valued standalone SSL on DCF valuation method, 51% stake in Hypercity on EV/sales multiple of 1.0x and all equity investments as on FY11 balance sheet on book value. We have revised our rating from Accumulate to Neutral. Upside risk to stock price in the near term could be policy change as regards the FDI in multi-brand retail (the favorable change at the centre, i.e probable change in UPA constituents post results of the ongoing state elections could possibly lead to this policy change). The stock will continue to command the perceived acquisition premium in anticipation of the favorable outcome. We will revisit our rating post outcome of this event.

>CAREER POINT INFOSYSTEMS: IPO NOTE, Company Background, Business Model & Key Strengths (ADITYA BIRLA MONEY LIMITED)

Career Point Infosystems Ltd was incorporated as a public company on March 2000 by Pramod Maheswari, who has been in tutoring for competitive entrance exams since 1993 along with other promoters Mr. Om Prakash Maheswari and Mr. Nawal Kishore Maheswari. In FY02, the company started its operations via franchisee centres and from April 2006 onwards, it started to provide tutoring via company operated training centres as well.

CPIL is one of the leading tutorial service providers to high school and post high school students for various competitive entrance exams including All India Engineering Entrance Examination (AIEEE), Indian Institute of Technology – Joint Entrance Examination (IITJEE), All India Pre-Medical Test (AIPMT), Pre-Dental Test (PDT), etc., The company provides these services through four delivery platforms - company & franchisee operated centres, distance learning, synchro school programme and knowledge lab.

■ Under company operated centres, the course fees are based upon the selection of course, duration and geographical location of the centres. Basically, the company gets fees in lumpsum and/or on installments basis depending upon the course opted by the student. On an average, the company charges `31,000/ student/course.

■ In franchisee centres, the company enters into a 3-4 years agreement with franchisees and the company receives upfront fee and subsequently a certain percentage of the gross fees earned from the enrollment of students. Going forward, the franchisee centres are expected to come down as the company is likely to concentrate more on its own centres. As of 31st July, it has presence through 33 training centres, of which, 17 are company owned and the rest 16 are franchisees centres, spread across 13 states. Recently, CPIL forayed into formal education space through Education Consultancy and Management Services (ECAMS) segment. Through this entry, the company will serve K- 12 and higher education segment for private & government schools, colleges and universities. Under this ECAMS, the company will provide necessary management services which includes, laying strategic plans, HR management services, administrative services, advisory services and IT related services.

Key Strengths
■ Qualified and Experienced faculty team – Currently, the company has a team of 231 faculty members, in which, most of them are graduates from Indian Institute of Technology (IIT), National Institute of Technology (NIT) and other colleges in India. So the faculty members are well equipped with subject knowledge to guide and tutor students. Apart from this, the company has an ongoing in-house faculty training facility, where they undergo training on coaching skills & methodologies and subject matter up gradation in relevant courses

■ Brand power and geographical presence – CPIL enjoys the strong brand recognition as the established tutorial player in competitive exams space for engineering and medical stream. Presently, it has presence in 13 states (including franchisee centres) which provides access to major markets in northern and eastern India. Its Kota centre attracts students even from overseas countries like Singapore and Middle East, which reflects the brand image.

To read the full report: CAREER POINT INFOSYSTEMS