>DHANUKA AGRITECH: Aims to launch 7 products over next 4 years

Q3FY12 results miss estimates; disappointing operational performance dents earnings growth
■ Topline for Q3FY12 de-grew by 3.7% YoY to ` 1.1bn, mainly on account of 6% decline in volume off-take due to poor northeast monsoons.
■ Rainfall in key regions of Andhra Pradesh, Karnataka and Maharashtra recorded 40% decline, impacting the revenue contribution from these markets.
■ For 9MFY12, herbicides and fungicides portfolio has shown a muted growth of 5% YoY while the insecticides and PGR portfolio grew by 14% YoY.
■ Top five products for 9MFY12 contributed 31% to the topline. The company's flagship brand Targa Super contributed 14.6% (YTD) to the topline and witnessed a decline of 61% during the quarter.
■ EBITDA margins have declined by 530bps YoY to 11.5% led by higher raw material cost at 52.6% of sales (up 750bps YoY). Lower employee cost (down 40bps YoY) and other expenses (down 190bps YoY) restricted margin contraction to some extent.
■ Lower acreages, increasing fertilizer prices and falling produce prices have reduced average farmer’s propensity to spend on specialty products. The resulting shift in focus towards generic products has dented EBITDA margin.
■ Interest expense fell by 3.4% YoY to ` 19mn. Gross debt as of December 2011 stood at ` 400mn. Depreciation too declined by 36.5% YoY to ` 12mn.
■ Tax rate stood lower at 19.5% (Q3FY11: 20.7%). PAT declined by 37% YoY to ` 78mn.




Financial highlights
■ Revenue for the quarter declined by 3.7% YoY led by a 6% decline in volume offtake. This was primarily on account of poor northeastern monsoons. The management indicated of a slowdown in herbicide and fungicide product segment during the quarter.


■ For 9MFY12, insecticides, herbicides, fungicides and PGRs/others contributed 48%, 30%, 12% and 10% to the topline respectively. This implies that herbicides and fungicides portfolio has shown a muted growth of 5% YoY while the insecticides and PGR portfolio grew by 14% YoY.


■ EBITDA margins have declined by 530bps YoY to 11.5% led by higher raw material cost at 52.6% of sales (up 750bps YoY). Employee cost and other expenses declined by 40bps YoY and 190bps YoY and stood at 9.3% and 26.6% of sales respectively. Lower revenue contribution from specialty products
impacted profitability.


■ Interest expense fell by 3.4% YoY to ` 19mn. Gross debt as December 2011 stood at  400mn.


■ Depreciation too declined by 36.5% YoY to ` 12mn. The company incurred ` 400mn of capex during 9MFY12.


■ Tax rate stood at 19.5% (Q3FY11 – 20.7%). PAT de-grew 37% YoY to ` 78mn.


Key takeaways from the conference call
■ All India rainfall data showed 48% drop during the quarter. Rainfall in key regions of Andhra Pradesh, Karnataka and Maharashtra recorded 40% decline.
■ Unfavourable weather conditions have led to lower crop acreage and pest incidence, impacting demand for pesticides. Further, increase in fertilizer cost and decline in produce prices has reduced the farmers’ propensity to invest in specialty products. The resulting shift towards to generic products has dented Dhanuka’s operating margins.
■ Sales in Andhra Pradesh contribute 22% to the topline. With increasing revenue contribution from eastern zone, this figure is expected to decline in future.
■ Top five products for 9MFY12 contributed 31% to the topline. The company's flagship brand Targa Super contributed 14.6% (YTD) to the topline and witnessed a decline of 61% during this quarter.
■ Slowdown in operations has led to inventory pile-up which the management expects to ease out by Q1FY13E. The management does not foresee any decline in industry prices for pesticide due to excess inventory in the system.
■ No new products were introduced for the quarter. However, the management has indicated of seven new product launches over CY12E-15E (one insecticide in CY12 and two each in CY13E-15E).
■ Gross debt on books as of December 2011 stands at ` 400mn, of which `298mn is secured and the balance is unsecured in nature.
■ The management has guided for a topline growth of 6-7% for FY12E.
■ Capex guidance for FY13E is ` 50-60mn.
■ Tax rate is guided to be 22%-23% for FY12E and FY13E. The Udhampur facility enjoys 100% tax benefit which will reduce to 30% FY14E onwards.
■ The management has guided for an improvement in operations after the Kharif season.




Valuation
Long term growth drivers include strengthening its seeds portfolio (scouting for acquisition) and manufacturing selective technicals, leading to backward integration. DAL enjoys high return ratios owing to its asset-light model.


However, given the eminent slowdown in the agrochem industry and slower off-take of high-margin specialty products, we have revised our FY12E/FY13E earnings estimate downwards by 20.5%/19.1%. At CMP, the stock trades at 9x FY12E and 6.9x FY13E earnings. We recommend Accumulate with a revised target price of `100 (8x FY13E earnings).


RISH TRADER

>TATA MOTORS

Standalone in-line; JLR ops exceeds expectations
The overall results for Tata Motors (TAMO) for 3QFY12 reflected the same trend seen in 1HFY12. The standalone operating performance continued to remain under pressure with EBITDA margins at 6.4%, the lowest in the last 10 quarters, impacted by elevated marketing spends and pricing pressure in the PV business. The management expects standalone margins to remain under pressure. JLR performance in turn was significantly ahead of our expectations with EBITDA margins at 18.9% compared to our estimate of 15.3% driven by better than expected ASPs (up 1% QoQ vs. our expectation of 2% drop), largely driven by higher contribution from Evoque at 34% of LR volumes v/s 14% in 2QFY12 and lower contribution from Freelander at 13% of LR volumes v/s 22% in 2QFY12 coupled with favourable F/X impact of £60mn. Also regional mix continued to remain strong with China contributing 17.2% vs. 16% in 2QFY11 and 13% in 2QFY11. Response to Evoque continues to remain strong and management was optimistic on volume traction going forward. Though, we continue to like the JLR story, the recent run in the stock (up 60% over last 45 days) leaves limited absolute upside from current levels. Hence, we are downgrading the stock to “Hold” from “Buy” with a revised target price of Rs.300 (earlier Rs.234).


■ JLR ops surprise; standalone margins in-line: JLR reported revenues £3.75bn, EBITDA of £752mn and PAT of £440mn. Higher ASPs (driven by favourable product mix change), positive F/X impact, coupled with better regional mix helped strong operating performance. Standalone operating margins at 6.4% were in line with our estimate of 6.4%.


■ Con call takeaways — 1) Given high marketing and publicity initiatives for its PV portfolio, the domestic margins are likely to remain under pressure 2) Volume growth in LCV/SCV segment to remain strong, but M&HCV outlook remains challenging 3) JLR management optimistic on volume traction for Evoque. 4) Reaffirms annual capex guidance of £1.5bn 5) Pegs net automotive debt/equity at 0.5x in 3QFY12 compared to 0.7x in 2QFY12 6) Tax shield at JLR UK over £2bn – tax rate likely to remain at similar levels to that of 3QFY12 ~21%.


■ Valuations and Recommendations: At the CMP of Rs286, the stock is currently trading at 5.8x FY12E consolidated EPS of Rs35.5 and 5.1x FY13E consolidated EPS of Rs40. Though, we continue to like the JLR story, the recent run in the stock (up 60% over last 45 days) leaves limited absolute upside from current levels. Hence, we are downgrading the stock to “Hold” from “Buy” with a revised target price of Rs.300 (earlier Rs.234).

RISH TRADER

>CIPLA: Indore SEZ likely to receive US FDA approval

Cipla’s Q3FY12 results were in line with our expectations. The company’s revenue grew by 13%YoY, EBIDTA margin was up 190bps and net profit grew 16%YoY. Domestic formulations reported 18%YoY growth whereas exports grew by 11%YoY. Cipla achieved 18%YoY growth in API exports during the quarter. The company has rationalised its export business to optimise profitability. Cipla’s tax rate increased from 15.6% to 21.2% of PBT due to the expiry of EOU benefits for some facilities. We reiterate Hold rating on the scrip and maintain the target price of Rs334 (based on 21x FY13 EPS).


■ Good sales growth in domestic business: During the quarter, Cipla achieved 18% YOY growth in domestic formulations from Rs7.34bn to Rs8.69bn against the industry growth of 15%. The company’s exports grew by 11%YoY from Rs7.82bn to Rs8.66bn. Exports of API were up by 18%YoY from Rs1.39bn to Rs1.64bn due to higher exports of ARV APIs.


■ Margin improvement by 190bps: Cipla’s EBIDTA margin improved by 190bps from 20.4% to 22.3% due to the reduction in material cost. The company’s material cost declined by 400bps from 44.7% to 40.7% of total revenues due to the change in product mix and rationalization of exports. Personnel expenses increased by 200bps from 8.7% to 10.7% of total revenues due to the annual increments and increase in manpower. Other expenses were marginally up by 20bps from 26.2% to 26.4% due to the increase in selling expenses, professional fees and factory expenditure. Cipla reported forex gain of Rs45mn against Rs34mn. The company’s net profit grew by 16%YoY from Rs2.33bn to Rs2.70bn.


■ Indore SEZ likely to receive US FDA approval: Cipla’s SEZ at Indore generated sales of Rs1.3bn during the quarter. The facility is likely to be inspected by US FDA in FY13.


■ Leading exporter of ARV: Cipla’s API exports grew by 18%YoY from Rs1.39bn to Rs1.64bn due to the rise in exports of ARV APIs. ARV constituted 25% of the API exports during the quarter. The company manufactures the entire range of ARV APIs for global requirement.


■ Inhalers to drive growth: Cipla has filed 11 ANDAs for inhalers in Europe, of which 4 are approved. The management expects good export potential from this business.


■ Increase in tax rate: Cipla’s tax rate increased from 15.6% to 21.2% of PBT due to the expiry of EOU benefits. The company has invested over Rs9.0bn on its Indore SEZ facility for which it has to pay tax at MAT rate.


■ Reiterate Hold: We have maintained our EPS estimates for FY12 and for FY13 at Rs13.8 and Rs15.9 respectively. We expect the company to benefit from additional revenues from Indore SEZ and good growth in the domestic formulation business. At the CMP of Rs342, the stock trades at 24.8x FY12E EPS of Rs13.8 and 21.5x FY13E EPS of Rs15.9. We reiterate Hold rating with a target price of Rs334 (based on 21x FY13E EPS).


RISH TRADER

>NTPC: While the RBI guarantee for recovery of dues under a payment security mechanism is in place up to 2016

ON THE ROAD
We hosted NTPC’s top mgmt for a NDR in the UK during last week. Appreciating their initiative to reiterate NTPC’s robust business model and low risk profile amidst persistent concerns in the power space, most investors still appeared to be in the ‘watch’ mode on the stock/sector. Key comments – [1] Payments within 60 days of billing cycle; APTEL’s order on tariff revisions is a potential watershed for SEBs, [2] Capacity addition, captive mining plans on track; bulk tender awards to begin in Dec-11, [3] Averse to buyback; open to crossholdings if it entails a strategic advantage. Maintain BUY.




Takeaways from Non-deal Roadshow in UK
We hosted the top management of NTPC – Mr. Arup Roy Choudhury (Chairman & MD) and Mr. A.K. Singhal (Director, Finance), together with Ms. Renu Narang (AGM, Finance-ISD/Bonds & PDS) – for a non-deal roadshow (NDR) in the UK last week (Nov 23-25). NTPC’s first NDR in Europe/UK seemed to be well received – clients appreciated the top brass’ initiative to be in front of investors to field queries / allay concerns and present their case on why NTPC is well positioned relative to private IPPs amidst the persistent concerns over the power sector in India.


Overall, management’s commentary on key issues (payment security, fuel security, capacity addition, funding /capex and cash deployment) was largely along expected lines. However, amidst the persistent negativity surrounding investment in Indian power utilities, management’s summary of its low-risk business model and the potential implications of APTEL’s recent court order to address the financial health of SEBs did come across as a positive surprise for a few clients. NTPC remains our preferred IPP on relative fuel/payment security; we expect FY12F-17F EPS CAGR at ~11%. Stock trades at 1.7x FY13F P/Book; maintain BUY.


Management commentary on five key issues/concerns –


[1] Financial health of SEBs and payment security
NTPC’s management reiterated that, although only a handful of SEBs were paying up within the first few days of the billing cycle, none of the SEBs had dues outstanding for more than 60 days for current billings. While the RBI guarantee for recovery of dues under a payment security mechanism is in place up to 2016, the NTPC management emphasized that recent order by the Appellate Tribunal (APTEL) ensuring annual tariff revisions by State Regulators (SERCs) is the potential inflexion point from where SEB losses will begin to get curtailed.


[2] Coal demand/supply balance for XIIth Plan project pipeline
With the backdrop of growing concern over a ramp-up of production by Coal India (CIL) and delay in restoration of captive coal blocks to NTPC by the Ministry of Coal (MoC), NTPC's coal demand/supply balance was a ubiquitous topic of discussion.


As per the NTPC management –
· Materialization of coal supply under the FSAs (for 125mtpa) and linkage (LoAs) stood at nearly 100% for NTPC; advance payment to CIL for the coal dispatches together with focused personnel on logistical issues are likely to ensure its ‘effective’ preferred customer status


· Boilers at its existing units can typically accommodate 15-20% of coal blending. However, management would strive to keep the blending at ~10% in order to minimize the rise in variable cost. As regards securing imported coal, preferred option is to enter into long-term supply agreements with mine owners.


· Although the official communiqué on restoration of the five de-allocated coal blocks is awaited, physical work on the captive coal blocks is underway. Coal production from Pakri Barwadih coal mine is on schedule to begin in 3QFY12.


· Mineable reserves in its five captive coal blocks aggregate ~2bn tons. Five additional coal blocks, which MoC has in-principle agreed to allot to NTPC would fuel ~7.7GW of upcoming capacity.


· For its FY2017 target generation capacity of 66GW (~35GW currently), NTPC would require 260-270mt of coal; supply build-up would be 125mt under FSA, ~50mt captive coal (~20% of requirement), 30-35mt equivalent imported coal (implying12-15% blending) and ~60mt incremental supply (~23% of requirement) from CIL.




In our assessment, investors remained circumspect on the ramp-up of coal production from both captive coal blocks as well as CIL’s ability to provide the additional 60mt coal supply by FY2017,


[3] Capacity addition on track; bulk tender awards expected by March 2012
Management remains confident of commissioning 4.3GW of capacity in FY12 (1.2GW commissioned so far) and maintaining a similar average annual run-rate thereafter in the XIIth Plan. On bulk tendering – 3x800MW is expected to be awarded by December 2011, remaining 6x800MW by March 2012; although the 660MW tendering is under litigation, management remains hopeful of completing the awards by March 2012 itself.


[4] Funding status, cash flows and leverage
Ruling out the need for fresh equity issuance, management emphasized that its recurring cash flows, existing cash chest and low leverage ensures that funding its target capex of ~US$40bn in the XIIth Plan Period (FY2013-17) is not a constraint. The management mentioned that it expects leverage would rise from 0.64x as of September 2011 to ~1.9x by March 2017, but comfortably below the default ceiling of 2.33x (implied by the 70:30 D/E funding mix for its projects). Highlighting its financial strength, the NTPC management reminded that its recent US$500mn Eurobond issue was oversubscribed by six-times; it has ~US$5bn of undrawn debt at this time.


[5] Crossholdings / buybacks / special dividends
As regards recent commentary by the Government on utilization of ‘surplus’ cash with public sector enterprises towards crossholding / buybacks / special dividends, the management stated – (1) Crossholdings may be considered by the Board independently, if it results in any strategic advantage for NTPC, (2) Buybacks is not a favored option, (3) Current dividend policy (payout ratio of ~40%) adequately balances growth & payout requirements.




RISH TRADER