>ING Vysya Bank

From our recent interaction with the ING Vysya management, we gather that it remains focused on higher-than-industry credit growth, productivity improvement and maintaining robust asset quality. On an enhanced RoE of ~16.9% by FY15e (14.2% in FY12), we reiterate a Buy.

 Better-than-industry credit growth guidance. Management remains confident of achieving higher-than-industry credit growth. We expect its credit to grow at 22% in FY13, with a positive bias towards retail loans, wherein the bank has recently introduced three new retail products viz. gold loans, new CV finance and personal loans.

 Focus on productivity, leverage existing setup. Cost-income and costassets in FY12 at 59.1% and 2.6%, respectively, are higher than peers with significant scope for improvement. With investments towards, creation of a pan India network and robust systems, almost over, the bank intends to bring down its cost-income to ~50% by FY15 by leveraging its existing infrastructure. We expect asset growth to outpace operating expenses growth, with cost-assets improving to 2.3% by FY15.

 Stable asset quality, adequate capitalization. Asset quality has remained largely stable despite deterioration in the macro economy. This is attributable to better underwriting standards, conscious policy decision of zero exposure to airlines, oil and project finance, and no bilateral restructuring. Management is confident on its telecom exposure, completely backed by guarantees. Additionally, best-in-class NPA coverage (91%) will hold the bank in good stead. Capital adequacy of 13.4% (Tier-1: 10.7%) is sufficient to sustain a 23.3% loan CAGR over FY12-15e.

 Valuation. At our Sep ’13 price target, the stock would trade at a PABV of 1.6x FY13e and 1.4x FY14e. Our target is based on the two-stage DDM (CoE: 15.0%; beta: 0.8; Rf: 8.0%). Risk: Slower-than-expected economic growth could impair loan growth and credit quality.


RISH TRADER

>HEIDELBERG CEMENT

Getting into the big league; new capacity to prune costs; Buy
We recently met the management of Heidelberg Cement to get latest business updates. Doubling of capacity to 6m tons and the resultant operating leverage (up to `300/ ton in cost savings) would enable Heidelberg to deliver a 65% profit CAGR over CY12-14. We raise CY13 profit estimates by 3% and upgrade the stock to a Buy. Our target of `58 is based on 6x CY13e EV/EBITDA.

 Capacity expansion benefit in 2013. Heidelberg’s ongoing 2.9m ton cement expansion at MP and UP will be commissioned by Nov’12; benefits will come from the 26% volume CAGR over CY12-14. Of the `14bn capex for expansion (US$70/ton) and cost rationalisation (conveyor belt), `13bn has been spent till now. Heidelberg sells most of its output in the Central (high-utilization) and West (high-growth) regions. Management expects double-digit demand growth with a stable price regime in the Central region (65% of sales).

 Significant cost savings. The `2bn capex for conveyor belt (it now utilises trucks to transport limestone) would result in savings of `100/ton on entire capacity. We expect another `200/ton cost savings from lesser power and fuel consumption at the new unit and lower fixed-costs-perton (brownfield expansion with no staff or fixed-overheads increases). We expect EBITDA/ton to rise from `460 in CY12 to `740 in CY13.

 Balance sheet to get better. Current net debt of `7.5bn is likely to have peaked. With no major capex plans for CY13, the company will generate positive FCF. This would generate additional returns through dividend payouts. We estimate return ratios over CY12-14 to jump sharply.

 Change in estimates. Our CY12/13 profit estimates are changed -18% / +3% due to revised assumptions of volume and realisations.

 Valuation. At our target price of `58, the stock is trading at 9.2x PE and EV/ton of US$66 on CY13e. Risks: fall in prices, delay in capacity ramp-up.

To read report in detail: HEIDELBERG CEMENT

>PFIZER: Focus on expanding branded generics

Riding the brandwagon; Initiating with a Buy

Continued support from a strong parent and brand equity are Pfizer’s backbone. Focus on expanding branded generics business in emerging markets and higher productivity on account of field force addition in past two years are key growth drivers, going forward. Further, the company’s strong cash position is sure to give it enough leverage to grow the inorganic way. Thus, we initiate coverage on Pfizer with a Buy rating and price target of `1,518.

 Strong parentage and formidable product profile. Pfizer has strong virtues arising from its lasting relationship with parent, Pfizer, Inc. (US) Its product kitty comprises many established brands like Corex, Gelusil, Becosules, Magnex – all ranking among the top-three in their therapeutic areas. Over the years, these products have endowed Pfizer with sustainable revenues growth (14.1% CAGR over FY09-12).

 Branded generics a key growth driver. We expect 13.3% CAGR in revenues over FY12-15 in its domestic pharma segment, in line with the industry growth rate. Revenue growth will be primarily aided by a higher share of branded generics, up from 5% currently to 10% by FY15, in our view. Other products are likely to continue posting steady volumes.

 Strong balance sheet and return ratios. Pfizer has net cash of ~`13bn on its books (~35% of market cap), which gives it adequate leverage to grow inorganically. With no major capex plans in the immediate future,
we expect its core business RoE and RoCE (excl. cash) to improve to over 30% from 25% currently, led by steady net profit growth.

 Valuation. The stock is trading at attractive valuations of 17.8x FY13e and 15.6x FY14e earnings. We value it at `1,518, based on 20x Dec’13e core earnings and `428 for the cash balance (considering 15% discount). Risks: Proposed new pricing policy and keener competition in generics.

To read report in detail: PFIZER
RISH TRADER

>SUPREME INFRASTRUCTURE: Focus on execution & ‘cash contract’ orders to drive growth

We recently met the senior management of Supreme Infrastructure to get an insight on latest developments in various business verticals and overall industry scenario. With strong order inflow in 1QFY13, management is now focused entirely on execution. We retain Buy on the stock.

 Order book swelling. Supreme’s order book (incl. L1 projects of `10bn) has grown 29% yoy to`43.8bn (2.7x TTM revenues). This is scheduled for completion in the next 24-30 months and gives good revenue visibility over FY13-14. It bagged orders of `11.5bn during 1QFY13 and
aims at orders of `26bn during FY13. Further, the company plans to bag more EPC orders (especially in the water and power segments) and is also exploring opportunities in foreign markets, mainly Oman & Qatar.

 Robust outlook. Management is targeting a 20-25% revenue growth in FY13 and aims to maintain OPM. However, NPM is likely to be under slight pressure due to the rising debt (net debt/equity at 1.7x). Having bagged significant orders in 1QFY13, the company plans to focus on execution to achieve the desired topline growth and lower gearing.

 BOT project funding in place. For ten road projects, it has an equity commitment of ~`7.5bn over FY12-15.Of this, `3.1bn will come from 3i India Infra Fund; Supreme already received `2bn in 1QFY13 and is likely to get the remaining in another month (awaiting NHAI approval for
change in holding structure). Of the balance `4.4bn, Supreme has already deployed `3.2bn through investment, advances and debt at the hold-co level; the balance will come over FY13-15.

 Valuation. Our sum-of-parts-based price target of `350 (earlier `333) is based on 5x FY13e PE construction business (`313, a 45% discount to midcap target multiples) and 1x P/BV Sep’11 (`44). Risk: rise in interest rates, drop in operating margins.

RISH TRADER

>CITY UNION BANK

Healthy business growth, robust fees, stable asset quality; Buy 

City Union Bank’s 1QFY13 profits were driven by modest net interest income, healthy fees and lower provisions. We retain a Buy as prudent loan growth, stable productivity and robust asset quality are likely to drive profitability and sustain an RoA of 1.7% over FY12-14. The high tier-1 capital and low proportion of stressed assets provide considerable
balance -sheet comfort.


 Healthy business growth, strong savings-deposit growth. Advances grew 33.2% yoy, faster than deposits at 25.2% yoy, increasing credit deposit by 447bps yoy to 74.9%. NIM fell 41bps yoy to 3.2%, led by a larger share of priority-sector loan disbursements (where yields are lower) and a 101-bp yoy fall in share of CASA to 17.5%. While current deposits grew slower (8.8% yoy), a sector-wide trend in 1QFY13, savings deposits grew a robust 25.6% yoy and comprise 61% of CASA (57% in 1QFY12).


 Robust fee-income, investments in branches continue. Fee income grew 26.1% yoy and improved 8bps yoy to 1.42% of assets. Cost-to assets rose 26bps yoy to 2% as the number of branches rose 10% yoy to 303. Investment in distribution is likely to persist, albeit in low-cost semi urban/ rural areas, since the bank has 79 branch licenses and aims to reach 500 branches by FY15. We expect the bank’s branches to see better operating leverage with cost-to-assets estimated at 1.7% over FY13-14.


 High proportion of secured loans, capital-raising plans. With fresh slippage of `450m (1.4% of loans), gross NPA rose 11% qoq. NPA coverage (excl. technical write-offs) fell 463bps qoq to 53.6%. Yet a high proportion of secured loans (97%) and a strong track record of asset quality are reassuring. Likely capital-raising in FY13 via a `2.5bn rights issue would improve the bank’s capital adequacy (tier-1 of 11.3%).


 Valuation. At our Sep’13 target, the stock would trade at 1.9x FY13e and 1.5x FY14e ABV. Our target is based on the two-stage DDM (CoE: 15.6%; beta: 0.8; Rf: 8%). Risk: higher-than-estimated increase in NPA.

RISH TRADER

>SYMPHONY

4QFY12 results exceed expectations; we maintain a Buy


Symphony’s standalone 4QFY12 net profit rose 28% yoy to `197m (our estimate: `144m) on revenue that climbed 51.9% to `871m (`573m in 4QFY11) due to a 78% rise in domestic sales. The average realization in air-coolers (export + domestic) swelled to `5,776 a unit, up 46% yoy. We expect demand for air-coolers to be high in FY13 and retain a Buy, with a target of `308.


 4QFY12 result highlights. Symphony 4QFY12 revenues, at `871m, were 52% higher yoy (9% above expectations). The EBIDTA margin was 28.4% 167bps higher yoy due to lower raw material costs and ‘other expenditure’. Standalone profit came at `197m, 68% higher yoy.


 Robust volume growth. Domestic sales volumes, at 0.11m units, were up 59% yoy while export volumes were down 37% to 34,023 units. Symphony could not fulfil export demand for certain product categories due to higher sales in the home market. Sales in Jul ’12 were more than in all of 1QFY12 on account of the extended summer, though such sales would be difficult to sustain. The average domestic realisation was `6,224/unit (13.8% up yoy) and export realisation was 39.6% higher at `4,284 per unit due to the change in product-mix. The company now has over 750 distributors and 14,000 dealers in 4,100 towns


 Consolidated performance. FY12 revenues were `3.1bn (8% higher yoy) while net profit was 6% higher at `536m. Working capital came down significantly by `438m in FY12 due to lower inventory of coolers (`115m in FY12 vs `417m in FY11). Cash and investments for FY12 were `406m and `620m respectively. Revenues and net profit from IMPCO were `633m and `28m respectively.


 Valuation. At our target of `308, the stock trades at 14x Dec ’13e earnings. Risks. Demand slowdown, delay in arrival of summer.

RISH TRADER

> J KUMAR INFRAPROJECTS

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


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


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


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


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


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

RISH TRADER

>UNICHEM LABS

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


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


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


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

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


To read report in detail: UNICHEM LABS


RISH TRADER

>BF UTILITIES: Nandi Highway Developers Ltd & Nandi infrastructure Corridor Enterprise

The projects so far..
1) Nandi infrastructure Corridor Enterprise (NICE) (74.5% holding) Project – BMIC – Bangalore Mysore Infrastructure Corridor Project.


2) Nandi Highway Developers Ltd (NHDL) (69% holding) Project – Hubli -Dharwad Bypass road. - The Hubli-Dharwar bypass in Karnataka is a 30 km road on NH4 that lets highway traffic bypass the two cities, speeding up traffic. NH4 connects Mumbai/ Pune with Bangalore/ Chennai. Operational since 2000.


3) Project – Wind energy, 18.33MW power over 300 acres in Satara, Maharashtra is 100% owned.


Event – The key asset for the company is the project BMIC (Bangalore Mysore Infrastructure Corridor Project) – A 164km tolled expressway connecting the cities Bangalore and Mysore. It includes a peripheral road in Bangalore, 5 New Townships along the Expressway (the first Section A involves 7,290 acres
land), a Town Planning Authority status, and a Concession period for the toll of 40 years. The BMIC is 75% owned by BF utilities. It has a single planning authority – Bangalore Mysore Infrastructure Corridor Area Planning Authority (BMICAPA) for the entire project.


To read report in detail: BF UTILITIES
RISH TRADER

>AMBUJA CEMENTS

Demand to rise, but delay in start of new projects a concern; Hold


A management meet with Ambuja indicates a positive outlook on company prospects. Cost rationalization and capacity bottlenecks are immediate focus areas. We retain a Hold rating given steep valuations.


 To contest CCI penalty. The CCI, which accused 10 companies of cartelization, has penalized Ambuja `11.6bn. Contesting the allegations, Ambuja will take the case to the Competition Appelate Tribunal; in six months it expects a verdict. The amount will be reflected as a contingent liability. The penalty is 14% of FY12 net worth (10-26% for the others).


 Demand outlook. Ambuja expects cement demand in CY12 to be 9%, led by robust demand from retail/individual housing builders (82% contribution) supported by a strong network of 7,000 dealers and 25,000 retailers. Its strong presence in the growing and high utilization markets of the North, West and East put it in an advantageous position.


 Cost rationalization. Ambuja aims at cost-rationalization via alternative raw materials (synthetic gypsum, fly ash), cost-efficient sea transport (now 14%) and alternative sources of energy (wind-turbines, waste-heatrecovery plants). We expect the resultant benefits to trickle in only from CY14. It expects cost rises in fuel to be lower in CY12 than in CY11.


 Growth plans. Ambuja plans `18bn in CY12-13 on maintenance, logistics, efficiency improvements and remove capacity bottlenecks (to add 0.5m tons clinker, 0.9m-ton grinding). Delay in start of greenfield/brownfield clinker projects is a concern as it may curtail dispatch growth in CY13, affecting market share (now 10%). Clearance for a greenfield site in Rajasthan is under way; equipment orders are likely in Dec ’12, with a 30-month set-up time.


 Valuation. At our `165 price target, the stock would trade at 8x CY12e EV/ EBITDA. The price target implies a PE of 15.1x and an EV/ton of US$157. Risks: Coal price hikes, weak cement prices.

RISH TRADER

>FORTIS HEALTHCARE

Stretched balance sheet remains a concern, maintain a Sell


Following a management meet with Fortis Healthcare (FH) we believe that near- to mid-term pain persists due to a stretched balance sheet and lower margins in SRL (Super Religare Laboratories). FH has been affected by uncertainty following its acquisition of Fortis Healthcare International (FHI) and its resulting stretched balance sheet. The India hospitals business should continue strong growth led by huge demand. We maintain a Sell with a target price of `102.


 Momentum continues in the domestic hospitals segment. FH’s Indian hospitals segment continues to do well and expects to add more than 600 operational beds in FY13 on a base of ~2,900 beds at the end of FY12. We expect 22.4% CAGR revenue over FY12-15. We have assumed 10% increase in ARPOB (average revenue per operating bed) and gradual increase in occupancy levels.


 SRL suffering from lower profitability. SRL has been reporting ~7% EBITDA margin from the past two quarters vs. ~15% earlier due to the commencement of three large labs in Kolkata, Bangalore and Delhi and
high rental cost at existing labs. The management expects a double-digit margin in FY13. However, we expect recovery to be gradual, with double-digit margin in FY14.


 Stretched balance sheet. FH has a significantly higher net debt, of US$1.3bn, translating to an FY12 debt-equity of 2.1x. Further, goodwill on the consolidation/acquisition, at `64.8bn, is very high, amounting to
half the company’s assets. The company is taking various steps to improve the situation, such as equity dilution in SRL and potential listing of its Clinical Establishment division on the Singapore Exchange.


 Valuation. We maintain a Sell with a price target of `102, based on 15x FH EBITDA and 12x FHI EBITDA. Risk: Equity raising at premium valuations.

RISH TRADER

>PRATIBHA INDUSTRIES: PPSL merger and rights issue

Going strong in tough environment; we reiterate a Buy


We met the management of Pratibha Industries recently. Its order book is `56bn, up 55% yoy, with a strong L1 position. Management has guided to an order inflow of `40bn during FY13 and is confident of maintaining the OPM at the current level. We retain our estimates and iterate our Buy, with a price target of `73.


 Robust order book. Pratibha’s order book is a sound `56bn (3.9x FY12 revenue). Water (52%), Buildings (36%) and Urban Infra (12%) continue to dominate the order book. L1-stage projects and those being negotiated with private parties amount to `29bn. For future orders, the focus is on the metro-rail, water and real-estate sub-segments in India and overseas (mainly the Middle East and Sri Lanka). The company secured orders worth `34bn during FY12 and aims to bag orders of ~`40bn in FY13.


 Revenue growth intact, margin to be stable. We expect to see good execution in major projects (that of the Delhi Jal Board, DMRC and some in real-estate and water) during FY13. Work on the Bhopal-Sanchi road BOT project has begun. Pratibha is one of the few construction companies to have met FY12 revenue guidance. Given its strong order book, it is bidding for new orders at higher margins. We expect a 22% revenue CAGR over FY13-14 (management is confident of surpassing that) and a 32% PAT CAGR, with a stable EBITDA margin of 14-15%.


 PPSL merger and rights issue. On 5 Jun’12, shareholders approved the amalgamation of the pipe division with Pratibha Pipes & Structurals, likely to be completed by Sep’12. The Board has passed an enabling resolution to a rights issue, though it will tap the market only if required.


 Valuation. Our price target of `73 is based on 7x FY13e earnings, at a 20% discount to other midcap construction companies’ target multiples (`69) and 1x book value for equity invested in BOT projects (`4/share). 


Risks: slowdown in order inflows, margin squeeze.

>PFIZER: Wyeth merger with Pfizer could be potential trigger

■ Brand Equity
Pfizer has a huge portfolio of products with some very strong brands within its product portfolio that are market leaders in their respective therapeutic segments with significant market share.
Besides this the company has 6 brands that feature in the top 100 pharmaceutical drug brands in the country, of which 2 brands viz. ‘Corex’ (Cough Formulation) & ‘Becosules’ (Multivitamin) continue to be ranked among the top 10 pharmaceutical drug brands in the Indian market. These strong brands have been performing very well for the company over the past. Corex and Becosules contribute close to 24% and 17% to the top line respectively. Besides, Pfizer has been consistent in launching new products from its parent’s product basket. We expect these strong brands along with new introductions to help Pfizer improve its performance going forward. Apart from 10-15 drug launches every year, the company is planning to enter into new segments like Anti-Diabetic, Anti- Malarial etc. to widen its offerings. These launches are expected to start contributing significantly in 24 months time.



■  Strong Product Portfolio
Pfizer possesses a strong portfolio of established brands, mainly in Nutraceuticals, Cough Preparations and Gastro-intestinal segments. The company is slowly making inroads in Antiinfective, Cardiovascular and CNS segments.


Within pharmaceuticals, the company is present in both acute & chronic segments, across therapeutic areas like Anti-Infective, Respiratory, Cardiovascular (CVS), Central Nervous System (CNS), Dermatology, Gastrointestinal, Neurology, & Ophthalmology among others.


■ Increasing Penetration
Pfizer is also revamping its acute portfolio through new launches. During Q1FY12, the company launched 3 products ( Getex, Cefixime, Getex Suspension) in the Anti-Infective segment. The company also plans to enter into hospitals segment in the Anti- Infective space.


Pfizer-Wyeth combine, which is ranked eighth in terms of domestic sales by AIOCD AWACS, plans to introduce about 30 products in the branded generics segment in the country this year. Globally, the bulk of Pfizer revenues come from exclusive sale of patent protected
medicines — and not branded generics.


To read report in detail: PFIZER
RISH TRADER

>CORPORATE DEBT RESTRUCTURING

What and Why ??
The reorganization of a company's outstanding obligations is done by reducing the burden of debt on the company by lowering the rate paid and lengthening the time the company has to re-pay the obligation. This allows a company to increase its ability to meet the obligation. Also, some of the debt may be forgiven by creditors in exchange for equity.


The need for corporate debt restructuring arises when a company is going through financial hardship and is having difficulty meeting obligations. If the troubles pose a high risk bankruptcy, a company can negotiate with creditors to reduce such burdens and increase chances of avoiding bankruptcy. Even if creditors do not agree to the terms of the plan put forth, a court may determine that it is fair and impose such a plan on creditors.


The reorganization of outstanding obligations can be made in any one or more of the following ways:
~ Increasing the tenure of the loan
~ Reducing the rate of interest
~ One-time settlement
~ Conversion of debt into equity
~ Converting the unserviced portion of interest into a term loan

Borrowers’ and Lenders’ Perspectives

Borrowers’ Perspective
When a company has outstanding debts which cannot be serviced under its existing operations it can resort to any of the following courses of action:


■ Enhance its quantum of debt. expecting to increase profitability and thus pay off its original debt; However, the company may not be able sustain such a higher level of debt
■ Cease current operations and wind up. This would ultimately lead to the death of the company
■ “To consider a structured plan to re-negotiate the terms of its current debt with the lenders”


Lenders’ Perspective
CDR provides lenders with the opportunity to avoid being encumbered with non-performing assets.
■ The primary interest of lenders always lies in recovering the principal lent to a company along with returns on that investment – not to liquidate assets
■ Apart from this, liquidation proceedings are notorious for yielding low returns to creditors Therefore, CDR becomes an instrument for lenders, i.e. banks, to aid the transformation of otherwise non-performing assets into productive ones

CDR Analysis

Whether a case should be referred for restructuring or not is based upon a thorough examination of facts and the viability of a case. However, when the demand for restructuring is legitimate, and there is a good reason to believe that a company may be revived, it must be considered for restructuring.


A Corporate Debt Restructuring mechanism was first introduced in 2001. CDR is a voluntary, nonstatutory system that allows a financially troubled company with multiple lenders and loans of more than Rs.20 crore to restructure those loans to a plan approved by 75% or more of its lenders.


On December 31, 2011, of the 364 cases worth Rs.1.84 lakh crore referred to the CDR Cell, 230 have been approved or resolved. That's over Rs.1.42 lakh crore of debt restructured under the CDR mechanism.


Sectors more prone to CDR
Iron & Steel, Textiles, Telecoms, Fertilizers, Sugar, Cement, Petrochemicals & Refineries
New Sectors emerging for CDR
Infrastructure and NBFCs



Instances of CDR
Subhiksha Retail Bharti Shipyard
Vishal Retail ICSA
GTL Infra SuzlonEnergy
Air India GTL Ltd.
Wockhardt Kopran
India cements Koutons Retail
Jindal Steel Kingfisher Airlines
Essar Steel Nicco Corporation
HPL Rajasthan State Electricity Board
Maytas Infra Basix
Spandana Sphoorty ARSS INFRA
HCC Surya Pharma
Jindal Stainless Essar Steel



Companies struggling with high debt
Everyone agrees that India needs infrastructure such as roads and utilities and such companies are better positioned because of their experience. But the debt they have accumulated over the years is an albatross around their necks.


When the infrastructure fad was running its course, companies more than tripled their debt, bidding for projects much bigger than what their equity could support. Indiscriminate lending by banks, prodded by the government, is back to haunt these companies as most lenders have hit their limits and are staring at defaults.


A few recent reports highlighted more than two dozen highly-leveraged large borrowers, including Adani Power, Essar Oil, Tata Communications, Electrotherm India and Jai Balaji, many of which may require future debt-restructuring.


Lanco, a power producer and contractor, recently defaulted on a Rs.90-crore payment to banks. In the five years between 2007 and 2011, the debt of GMR Infra, which operates the New Delhi airport, jumped 6.7 times. BGR Energy and IVRCL, a contractor for road and water projects, had a 5.4-fold jump in its debt. GVK Power, which runs the Mumbai airport, saw its debt climb 3.59 times in the same period. Jaypee Infratech, which built India's only Formula 1 race track in a New Delhi suburb, had its debt soar 31 times in three years from Rs.200 crore in fiscal 2008. Hotel Leela Venture increased its debt almost four times from 2007.
Many are headed for debt restructuring where lenders may impose strict conditions and dilute equity. That could hurt stockholders' interests.



Ultimately, the lender is the worst affected
A report from Standard & Poor’s talked about Indian bank’s weaker asset quality and earnings across the sector in 2012, with credit growth predicted to fall to 16%, from 23% the year before.


India’s banks weakening asset quality is also clear from the marked rise in debt restructuring agreements, a halfway house between payment and default used by the banks for struggling businesses such as Kingfisher Airlines. Taken together, HCC’s mix of bad and restructured loans rose to 4.3% of overall lending in the third quarter, up from 25 in the same period last year.


Corporate debt has spiked by over 300% this fiscal, already touching Rs.76,251 Crores, against Rs.25,054 crore in the previous fiscal. This brings the overall CDR assets in the system to over Rs.1.9 lakh crore. This is alarming.


Credit rating agency Standard & Poor’s, in a recent conference call with the media, said that restructured loans were expected to increase to around 4% of advances (of the banking system) at this financial year-end, from 2.6% a year ago. In 2012-13, restructured loans are expected to be 4-5% of advances. The S&P analyst also said that 25-50% of restructured loans may slip into NPAs.


In the April-June quarter of 2011-12, the cell received 16 corporate restructuring cases with debt of Rs.4,682 crore. In the July-September quarter, it received 19 cases (with debt of Rs.23,071 crore); in the October-December quarter, 25 cases (Rs 22,497 crore); and in the January-March quarter, 23 cases (Rs 26,001 crore). Corporate sickness seems to be spreading. Earlier, an average bank would have not more than 3-4 corporate
debt restructuring cases at a time. But now an average bank deals with about 30 cases.


Current Trend

Surprisingly, the SBI and the HDFC Bank, two of the country’s largest lenders, have undertaken relatively little restructuring this financial year, than other banks. But private lenders are better off than PSUs in terms of NPAs as well as regarding debt restructuring.

>DISH TV: Consistent market leader with highest absolute share

■ Consistent market leader with highest absolute share
The only listed Indian DTH company, it has the largest subscriber base of 12.5 m (gross for Q3FY12) with a market share of 29.4% amidst strong competition. Dish TV continues to maintain its lead in a six-player market.


■ Stabilizing ARPU (average rate per user)
The DTH segment saw ARPU pressure during FY08-09 due to intensifying competition. Since FY10, the focus has shifted toward profitable growth. Further, Dish TV has the largest number of highdefinition channels, which would further increase ARPU ahead.


This will leverage its HD advantage. The main drivers for ARPU improvement would be value-added services, movies on demand, high-definition TV and the broadcasters’ pricing power. Mandatory digitization is likely to push HD activations. Also, subscriber acquisition cost (SAC) has been under control due to the entry level price hike.

■ Capitalizing on the industry growth and regulatory approvals (digitization mandate) – Opportunity for DTH to enter cable strongholds
Six big players with deep pockets dominate the DTH market. With its maiden launch in mid 2005, Dish TV has the first-mover advantage, and has increased its net subscriber base from 2.2 million in 2007 to 9.5 million by end-Q3 FY12. It has secured FIBP approval to raise up to Rs9.8 billion, having taken this step to build its war chest as digitization momentum gathers steam.


The DTH segment has seen a robust increase in its subscriber base, a 95% CAGR over 2006-2011.


In order to digitize 88 million subscribers, the segment needs capex of Rs 132 billion. 11 organized players have a reach of almost 58% of TV distribution. We believe that only the organized sector players would have the financial muscle to take advantage of this opportunity and hence would be the biggest beneficiaries.




■ Management guidance revised to “Cautious, with a positive bias”
Dish TV’s subscriber additions rose from 0.6 million in Q2FY11 to 0.7 million in Q3FY11. Management has revised its guidance for subscriber additions in FY12, from ~3 million to ~2.6 million. It has attributed the slowdown in subscribers added to the slowing economy and recent price hikes.


Churning would certainly decline because of the actions that have been taken not only by the company (by various promotional offers and good service) but by the entire industry.


■ Turnaround on the cards, though with a delay
Current debt on the books is almost Rs.12,000 million. Of this, Rs.7,500 million is dollar-denominated, Rs.4,500 million is Indian debt. The company has secured approval to raise US$200 million as digitization opens up the opportunity of 70 million analog homes to be converted to digital.


Management had earlier indicated that the company would be free-cashflow positive by Q4 FY12. However, due to the dollar movements and sluggish top-line growth on the fewer activations, this might be delayed to H1 FY13.


■ Valuations
At present, the company is suffering losses at the net level though it has a positive cashflow from operations. Management had guided to positive free cash flow from Q4 FY12. Fewer subscriber additions due to keener competition and a higher churn rate might delay this to H1FY13.


Its competitive edge and mandatory digitization policy by the government would prove catalysts for the company. At present, the stock is close to its 52W low; we see a price target of Rs 80 in next 24 months.


■ Concerns
- The promoters’ stake was 64.75% in December 2011. They have pledged 24.17%.


To read full report: DISH TV
RISH TRADER

>ZYDUS WELLNESS: Concentrating on niche segments i.e. Nutralite, Ever Yuth,

■ Concentrating on niche segments & attaining competitive position
Sugar Free – India’s largest selling low calorie sweetener 
Sugar Free has consolidated its position in the low calorie sugar substitute market at the top with a market share of more than 86%. Both, Sugar Free Gold – the aspartame based sweetener and Sugar Free Natura – the Sucralose based sweetener have maintained the top two slots. With this dominant market share, Sugar Free continues to be one of the driving forces behind the overall category growth in the market place. 


Nutralite – ‘Health First, Taste Always’ Nutralite – 75% market share
Maintaining its strong position in the market, Nutralite consolidated its business in terms of distribution and capacity expansion. Nutralite continues to enjoy a premium image and in spite of several me-too products being introduced in the market, remains virtually unaffected. Looking at the current as well as future
potential, the production capacity has been enhanced with investments in superior technology to offer best quality products.


EverYuth – Celebrating Youth!
EverYuth range of skin-care products maintained their leadership positions in the scrubs and peel-offs category, in spite of the stiff competition from big ticket launches by MNCs and other Indian players.


■ Sub-segmentation strategy for major brands an advantage
Zydus’ sub-segmentation strategy helps it create niche brands and grow without too much competition. A steady flow of variants, extensions and new SKUs aids consumer addition and helps expand the present brand loyal consumers to other categories. This results in creating a range of brands around the mother brand as also becomes a moat around the brand.


■ Various launches within the branded segments -
• Sugar Free Herbvia - the first herbal sweetener under the brand Sugar Free.
• Sugar Free Natura Sweet Drops, making it extremely convenient to be used in beverages and for extended
table top applications apart from cooking and baking.
• EverYuth Golden Glow Peel-Off highlighted a shift in the product’s usage.
• Its foray in neutraceuticals space by launching ActiLife, a nutritional milk additive for adults.



■ Momentum in product launches
Zydus has rolled out three variants of ActiLife, a health food drink that offers cholesterol lowering properties. The drink is targeted at consumers above 30 years of age. Zydus has also rolled out SugarFree Herbal and Nutralite Mayonnaise. The company is test marketing Purify hand sanitizers, which is differentiated with herbal properties.


■ Expansion on Distribution front going forward to boost revenue
Zydus has considerable potential to expand its distribution network to 1.5m retail outlets from 0.5m currently. Going forward, Zydus will leverage on the distribution network of its parent company i.e. Cadila Helathcare to utilize the prescription route for promoting its products.


■ Debt free company with good amount of cash and cash equivalents on books
The company is a zero debt company and has cash and cash equivalents of Rs. 864.5mn for FY11. This gives it an opportunity to leverage and expand its activities without stretching its balance sheet much. The cash could also be used for synergetic acquisitions.


To read full report: ZYDUS WELLNESS
RISH TRADER

>PIRAMAL GLASSES: global leader in delivering packaging solutions for the perfumery and pharmaceuticals businesses

■ Glass Packaging Industry – Ample Scope to Scale up the Business
The global market size of the glass packaging industry is currently valued at US $30 bn dominated by the moulded glass packaging industry to the extent of US $28 bn while the balance is being contributed by the tubular glass packaging industry.


Further, of the moulded glass packaging industry, food and beverage (F&B) glass constitute majority of the market (more than 85%), while the balance is contributed equally by the pharma, and cosmetics and perfumery (C&P) segments. On the other hand, the SF&B market size is pegged at US $1.3 bn (5% of the F&B market). The addressable market for PGL (which has presence in C&P, pharma, and SF&B segments) is thus ~20% of the moulded glass packaging market.


■ Cost Advantage and US Subsidiary Given Competitive edge
Flacconage is a labour and skill intensive industry. Though the manufacturing of glass itself is highly automated, critical functions such as quality control need large teams of skilled professionals. Not surprisingly, the total cost of production in India, where manpower is among the cheapest in the world, is less than 50% of that in France and almost half of that in the US (Source: Mckinsey). With manufacturing facilities in India and Sri Lanka, Piramal Glass is able to produce glass at significantly lower costs than its competitors in other parts of the world and deliver a sustainable cost advantage to customers.


■ Healthy ROE and improving ratios
PGL has exhibited a sharp improvement in return ratios. The RoE is clearly improving as it was 3.4% in 2010 and 34% in 2011. High RoE in 2011 was because of leverage effect and going forward we expect 25-27% RoE is manageable.


The debt/equity has also reduced from the peak of 31x in FY09 to 3x in FY11. Going forward, we estimate the D/E of the company to reduce further to a reasonable 2x by FY13E and 1.5x by FY14E thus lightening the balance sheet despite the capex of Rs 260 cr. Moreover, the company has already restructured its debt to a lower interest rate, which is now stands at 7.5% against earlier peak rate of 13%.


To read full report: PRIRAMAL GLASS
RISH TRADER

>ONGC: 5% ONGC stake sale through auction – Again opened GOI divestment programme

The sale of ONGC shares is part of the Indian government's divestment programme and other state-run companies in which it has to reduce its holding includes NFL, Neyveli Lignite, RCF, STC, Coal India, NMDC because of "minimum public shareholding guidelines".


ONGC is one of the faster growing E&P stocks in Asia with impressive 3-year production CAGRs of 7% in oil and 6% in gas. It is also attractive at PE of 10.8 while Asian Peers are quoting at 17.5 PE. ONGC is quoting at deep discount. In EV/BOE multiple stock is less than half of its global peers .We are positive for the stock.


Company Description
It is one of the largest Asia-based oil and gas exploration and production companies, and produces around 77% of India's total crude oil production (and around 30% of total demand) and around 81% of natural gas production. ONGC is one of the largest publicly traded companies by market capitalization in India and the largest India-based company measured by profits. ONGC was founded on 14 August 1956 by the Indian state, which currently holds a 74.14% equity stake. Post auction GOI holding will come down to 69%. It is involved in exploring for and exploiting hydrocarbons in 26 sedimentary basins of India, and owns and operates over 11,000 kilometres of pipelines in the country. In 2010, it was ranked 18th in the Platts Top 250 Global Energy Company Rankings and 413th in the Fortune Global 500.


During the fiscal year ended March 31, 2011 (fiscal 2011), the Company had a crude oil production of 34.04 million metric tons and natural gas production of 28.02 million metric tons. On April 16, 2011, the Company’s subsidiary ONGC Videsh Limited (OVL), added one asset in its portfolio of exploratory assets by signing agreements with KazMunaiGas (KMG), the national oil company of Kazakhstan for acquisition of 25% participating interest in Satpayev exploration block. Its subsidiaries include ONGC Videsh Limited (OVL), Mangalore Refinery & Petrochemicals Ltd., ONGC Nile Ganga BV (ONGBV), ONGC
Nile Ganga (Cyprus) Ltd., Jarpeno Limited, Imperial Energy Corporation Plc, Imperial Energy Limited and Imperial Energy Kostanai Limited 


Subsidy burden 
ONGC has historically shared ~30% of its overall subsidy burden. The highest share it has ever borne a subsidy share of 34.5%, which caps its domestic prices realization to US$60/bbl. CRISIL Research, India’s largest independent integrated research house, expects an upward pressure on crude oil prices due to the ongoing geo-political tensions in Iran. As a result, average crude oil prices will remain firm in the range of $110-120 per barrel during 2012, higher than the earlier estimates of $100 per barrel, despite a weak global economy.


This will compel the government to hike the retail selling prices of regulated fuels at least by 10-15% in 2012-13 in order to rein in the mounting under-recoveries. This will release some burden from ONGC’s shoulder.


Strong production growth ahead
After virtually stagnating for the last five years, ONGC is expected to increase its overall oil & gas production at a CAGR of 6 -7% over F2012-15e, driven by increased production from its joint venture with Cairn, and fields in western offshore. Having spent US$20bn in domestic E&P capex over F2008-11, ONGC is expected to spend another US$18bn over F2012-14. 


5% ONGC stake sale through auction – Again opened GOI divestment programme
The government will sell 5 percent of its holding, or about 428 million shares, in the offering and the floor price for the issue has been set at 290 rupees a share. Only Institutional Investors would be able to participate in the auction in the same way as in the previously used follow-on share offering, the owner of a company would save significant cost and time in the auctioning process. Unlike earlier divestments, retail investors will be kept out of this sale. The auction is open only to institutional investors.


The Union Finance Ministry came out with the "minimum public shareholding guidelines" on June 4, 2010, which was later revised in August 9, 2010 that PSUs are expected to maintain minimum public shareholding of 10 per cent within a period of three years. So companies have time till June 3, 2013 to comply with this requirement. SEBI on 4th Jan 2012 allowed government holding more than 90% in PSUs to reduce their shareholding through an auction to institutional players.
RISH TRADER