>NTPC (TATA SECURITIES)

Losing Steam

NTPC, India’s largest power producer is facing huge delays in most of the plants under construction. Delays in capacity addition resulting in lower rate of return on core business, coupled with rich valuations of 3.1xFY10E BV and 25X FY10E EPS makes the stock richly valued. In addition, the free-float adjustment in Nifty is expected to bring down the stock weightage in the index by around 550 bps is a key negative for NTPC. We believe that the above market valuations and slow earnings growth do not justify the current price. We initiate coverage on NTPC with a SELL rating.

Key Highlights

■ Delayed execution: Of the 22,430 MW (inc. JVs) power generation capacity targeted to be added during 11th five year plan ending 2012, only 3,740 MW has been commercialized. Of the 17,430 MW under construction, we expect NTPC to commission only 9,560 MW by FY12. Poor execution resulting in idle CWIP earning zero returns and inefficient utilization of cash generated through operations is expected to suppress NTPC’s ROE.

■ Rich valuations overweigh tariff regulations gains: Though, the new tariff regulations are positive for NTPC, the current valuations more than overweigh the gains from new tariff regulations.

■ Reduced weightage in Nifty: From June 26th 2009, NSE is expected to move to free-float market capitalization basis from the current method of full market capitalization basis for the index constituents. NTPC, with free float of only 10.5%, will be severely impacted with a 550bps fall in weightage in the Nifty.

■ Valuation: We ascribe 1-year forward value of Rs161 per share to NTPC‘s generation business based on DCF approach and Rs16 per share for equity investments and cash & cash equivalents to arrive at our 1-year forward target price of Rs177 per share. At current market prices Rs229, NTPC is trading at 3.1xFY10E BV of Rs74.3 and 25XFY10E EPS of Rs9.1, a steep premium to the market valuations. We initiate coverage with a SELL.

To see full report: NTPC

>IPCA LABS (ICICI DIRECT)

Forex loss spoils the show…
Ipca Lab ’s results for Q4FY09 were in line with our expectations. The topline grew ~25% YoY to Rs 317 crore. Net profit de-grew 65% YoY to Rs 7.9 crore. Ipca’s EBITDA margin in Q4FY09 expanded by over 243 bps YoY on account of higher revenue from promotional markets and efficient cost control. Lower realisation from the sterling pound had a negative impact on operating profitability. For FY09, the topline grew 22% YoY to Rs 1284 crore. The EBIDTA margin expanded 259 bps but net profit margin declined by 551 bps on account of Rs 76 crore of forex loss. Overall, we are confident about Ipca’s growth momentum and rate the stock as PERFORMER.

Highlight of the quarter
On account of robust growth in the high margin promotional business, the overall EBITDA margin expanded 243 bps. A forex loss of Rs 76 crore, largely translational in nature, dented the bottomline by 65% YoY in Q4FY09. Input cost as a percentage of sales declined by 243 bps but increase in employee cost by 140 bps restricted further expansion in the operating margin.

Valuations
Given the strong traction in the branded business, Ipca is looking to log higher growth in the promotional market. In the domestic market, the company already has a good portfolio of offerings. For FY09, exports witnessed a robust growth of 27% YoY led by 49% YoY growth in the branded business. We expect Ipca’s revenue and profits to grow at a CAGR of 15% and 14.6%, respectively, through FY11E. Due to the recent rally in mid-caps, the stock has run up significantly. Thus, we are revising our rating on the stock to PERFORMER with a target price of Rs 627, 8x FY10E EPS of Rs 78.4.

Result analysis

Topline growth in line with expectations
Ipca’s topline grew at 25% YoY in Q4FY09 to Rs 317 crore buoyed by a robust 31% growth in the exports revenue backed by 38% growth in the export formulation business. During Q4FY09, the domestic business grew strongly by 26% YoY to Rs 124 crore, backed by higher than 14% growth in the fixed dosage business. For the full year, exports grew 27% YoY. Fixed dosage
exports grew 28% YoY to Rs 437 crore on account of entry into the US market in September 2008 and robust growth in promotional markets. API exports logged a robust growth of 25% to Rs 243 crore in FY09.

The generic business grew 17% YoY to Rs 269 crore in FY09 vis-à-vis Rs 229 crore in FY08. The institutional business is showing good growth momentum. However, growth in the UK market has been disappointing as the region is witnessing lot of price fluctuation in the Amoxy based products. The domestic formulation business also grew at a good rate of 15% registering revenues in excess of Rs 600 crore. The company has filed 11 abbreviated new drug applications (ANDAs) in the US and has received approval for nine. Ipca currently has only five formulations selling in the US garnering market share in excess of 15%.

Operating margin instills confidence
The EBITDA margin of 16.8% in Q4FY09 was way above our expectation of 14%. For the full year, the margin improved by a solid 259 bps on account of higher revenue generation from the promotional export markets of CIS countries, LATAM (Latin America) and African markets, etc. The higher margin branded business, which has been growing at a CAGR of 35% for the last four
years registered a 49% YoY increase in sales. Although sales grew over 20% YoY, lower realisation due to the Sterling pound had a negative impact on operating profitability. The company also suffered losses on rupee-dollar hedging. However, a decline in raw material and other expenses as a percentage of sales supported the margin expansion.

To see full report: IPCA LABS

>KAMAT HOTELS (ICICI DIRECT)

Revised AS-11 guidelines lead PAT growth…
Kamat Hotels came out with its Q4FY09 numbers that were marginally below our expectations. The net sales declined by 35.1% YoY and 2.5% QoQ, respectively. The margin continued to remain under pressure despite a reduction in operating costs. It declined 1690 bps YoY and 560 bps QoQ,
respectively. During the quarter, the company adopted revised AS-11 guidelines and reversed notional forex loss of Rs 14.48 crore. As a result, it reported net profit of Rs 9.7 crore against loss of Rs 1.5 crore in Q3FY09.

Highlight of the quarter
During Q4FY09, the company reported net sales of Rs 28.8 crore as against our expected net sales of Rs 31.0 crore. Net sales dropped 35% YoY. QoQ also, the company was unable to maintain growth due to heavy cut down in travel budgets by Indian companies, as its major clientele comprise Indian companies. Operating profit for the quarter was Rs 7.6 crore. It declined by
60.6% YoY and 10.3% QoQ. During the quarter, the company adopted revised AS-11 guidelines and reversed notional forex loss of Rs 14.48 crore. It also received luxury tax refund of Rs 1.7 crore for FY04-05. As a result, it reported net profit of Rs 9.7 crore against loss of Rs 1.5 crore in Q3FY09.

Valuations
Over a short-term perspective, we may continue to see sluggish performance as majority of the company’s clients are corporate clients which are currently cutting costs steeply. However, on the other hand, with leading macroeconomic data showing some signs of recovery, hotel players having majority ‘corporate clientele’ like Kamat Hotels would tend to benefit faster compared to those having a higher presence in the leisure segment over a longer term. Hence, we are revising our FY10E EPS estimates marginally upward to Rs 9.9 and introducing our FY11E EPS estimates at Rs 13.1. We value the stock at 6x its FY11E EPS estimates to arrive at a target price of Rs
78. We are changing our rating from UNDERPERFORMER to PERFORMER.

Result analysis

Sales continue to decline on cut down in corporate travel budgets
During the current quarter, Kamat Hotels again reported a sharp decline in its sales. Its net sales declined by 35.1% YoY to Rs 28.8 crore. One of the main reasons for such a sharp decline in sales was a heavy cut down in corporate travel budgets by Indian companies on account of the global slowdown. Since Kamat Hotels’ major clientele (i.e. ~80% of its clientele) comprise Indian companies, it has seen a sharp decline in sales on a yearly basis compared to other hotel companies like Viceroy Hotels.

Adoption of revised AS-11 guidelines results in robust PAT growth
During the quarter, the company adopted revised AS-11 guidelines. Accordingly, a notional forex loss of Rs 14.48 crore on its FCCB of US$18 million got reversed. As a result of this, the company reported net profit of Rs 9.7 crore and Rs 5.7 crore for Q4FY09 and FY09, respectively. A receipt of Rs 1.71 crore towards luxury tax refund for FY05 also aided the growth in net
profit.

Focusing on core business
In order to improve its performance and ease liquidity issues, the company sold its 60% stake in Concept Hospitality (non-core asset) for ~Rs 6 crore. The company is now focusing more on its core business expansions. Currently, it has three major projects underway, which include
commissioning of new hotel property at Nagpur, Bhubaneshwar and expansion of its Mumbai property ‘The Orchid’. These entail total capex of ~Rs 140 crore. A majority of these projects are expected to be complete by 2010 according to the guidance given by the management.

Valuations
Over a short-term perspective, we may continue to see a sluggish performance as majority of company’s clients are corporate clients that are currently cutting costs steeply. However, on the other hand, with leading macroeconomic data showing some signs of recovery, hotel players having a majority ‘corporate clientele’ like Kamat Hotels would tend to benefit faster compared to those having a higher presence in the leisure segment. Though the stock price has rallied sharply in the last one month, it still offers some further upside as liquidity concerns have eased. With the overall macro scenarios improving, we are also expecting an improvement in hotel occupancies and, thereby, rise in room rates by the end of FY10E. Hence, we have revised our FY10E EPS estimates upwards to Rs 9.9. We are introducing our FY11E EPS estimates at Rs 13.1. We value the stock at 6x its FY11E EPS estimates to arrive at a target price of Rs 78. We are changing our rating from UNDERPERFORMER to PERFORMER.

To see full report: KAMAT HOTELS

>BALRAMPUR CHINI MILLS (HDFC SECURITIES)

■ Higher realization to boost profitability
Average sugar realization for SY09E is expected to be around Rs 22.1 per kg against Rs 14.9 per kg in SY08, higher by about 47% YoY. Though we expect sales volume for SY09 to decline by ~23% YoY due to lower sugar production, higher realization will boost overall profitability of the company.

■ Better utilization of plant capacities
The company will also have better plant capacity utlisation as there are a limited number of sugar mills in the region and it has maintained good relations with farmers, ensuring easy availability of sugar cane.

■ Lower Debt burden
The company will have higher profit margins in SY09E and SY10E due to lower fixed costs (including interest and deprecation) than its peers as it chose not to expand at the pace of Bajaj Hindustan. The current debt equity ratio of the company is 1.33x, which is set to improve in SY09E to 0.71 and 0.32x in SY10E.

■ Significant drop in production estimates for SY09E
Domestic production of sugar is expected to be ~14.5 mn tonnes against our previous estimate of ~21 mn tonnes in SY09E mainly on the account of lower recovery rates, shorter crushing period due to lower availability of cane and higher sugar cane prices paid by gur and khandsari producers resulting in steep decline in the drawal rate.

Outlook & Valuation
As cane costs increase going forward, we believe firm sugar prices, higher realizations from distillery products and high inventories will enable the company to improve profit margins in SY09E and SY10E. However, due to a significant drop in sugar cane availability sales volumes will drop of distillery and cogen segments leading to an overall revenue drop in SY09E and SY10E. At the current market price of Rs. 93.8, the stock is trading at 11.6x and 9.5x its SY09E and SY10E earnings of Rs. 8.10 and Rs. 9.90 respectively. We have valued the stock at 6x EV/EBITDA for SY10E. We maintain our Buy rating on the stock with an increased target price of Rs. 103.5 (due to
higher sugar realizations) an upside of 10.3% over the CMP from our earlier target of Rs 90.5 on the stock.

To see full report: BALRAMPUR CHINI