>VA TECH WABAG LIMITED: Q4FY12 Result Update

Earnings Highlights
• Strong revenue growth across segments: VATW’s 4QFY12 revenue of Rs6.71bn (31.8% YoY) was well above our estimate of Rs5.85bn, led by strong performance in the standalone and overseas businesses.


• Adjusted Ebitda beat our estimates: Adjusted for prior-period staff cost provisions, Ebitda grew 13.2% YoY, which is commendable considering that VATW has been expanding into new geographies. Ebitda beat was due to overseas staff costs reducing 16% YoY, indicating that the company’s efforts to reduce overheads through measures such as a new ERP system are bearing fruit. PAT was 8% above our estimates due to higher other income and lower tax.


• Order inflow miss due to slippage from 4QFY12 to 1QFY13:
Order inflow in 4QFY12 was below expectation at Rs9.3bn (vs.Rs11bn) due to lower standalone order inflow. This was because of a delay in industrial orders worth ~Rs3bn-4bn in India, which the company was expecting. However, the company is confident of winning these orders in 1QFY13. Order backlog stands at Rs37.3bn.


• Key order highlights: The Rs3.3bn Ulhasnagar WTP BOOT project moved into the order book and there were O&M orders worth Rs33m. The company highlighted a number of overseas order wins below the EUR10m mark. Revenue from Sri Lanka WTP has started kicking in from 4Q with 40% of the EPC work being completed. The company has completed 88% of the EPC work in the Chennai desalination plant and it expects O&M revenue to commence from 3QFY13.


Management commentary
• Higher focus by the government on water projects: The highpowered expert committee on new improved JNNURM envisages overall capex spending of Rs39trn over 20 years of which 20% would be on water, sewage and waste management. The overall O&M spending would be Rs20trn of which 55% would be on these areas.


• Order inflow strong despite trying circumstances: Order intake was strong despite slow decision making in municipalities in India. Orders worth Rs3bn-4bn in oil & gas and steel verticals did not materialise in 4QFY12 but are expected to be closed in 1QFY13. The company also received the first order in Qatar, a sea water reverse osmosis desalination project worth EUR7.5m.


• Strong order pipeline: VATW has set its sights on sewage treatment plants in seven sites in Mumbai. It is also in negotiation with municipalities in Delhi, Karnataka, Tamil Nadu and Orissa (each worth Rs2bn-5bn). There are also overseas orders worth EUR125m expected. The JV with Sumitomo is looking at orders of US$200mn– 1bn and is expected to win a large order this year.


• Business restructuring with increased focus on clients: The company continues with its decentralisation drive with local staff manning its offices in the overseas subsidiaries. This has helped cut down overheads in the overseas business. It is changing its segment classification from geography based to product based (such as municipal water, industrial water and desalination).


• Focus on emerging economies; little presence in troubled European economies: VATW is increasing its focus on emerging economies such as Romania and Turkey in Europe. It receives <20% of overseas revenue from the developed markets. The company expects the Middle East and North Africa (MENA) markets to return to normalcy this year. The EUR90m order from Libya is expected to materialise in 2012.



• Multiple margin drivers: Decentralisation, focus on emerging markets, and BOOT contracts will be the margin levers. There is little balance sheet impact from the BOOT projects as VATW only holds 10% equity in these projects.


• Actively exploring M&A opportunities: VATW has cash of Rs4bn and is looking at prospective M&A targets in Latin America and South East Asia.

RISH TRADER

>NMDC: Q4FY12 Results Update

Muted performance due to lower volumes; maintain buy


NMDC recorded muted performance (as was expected) in Q4FY12 with revenues at Rs25.9bn as sales volume were adversely affected by damage to Essar’s slurry pipeline and stood at ~6.4MT. NMDC had reduced iron ore prices for the quarter and blended realizations stood at ~Rs4054/tonne (~US$80/tonne). EBITDA stood at Rs19.8bn (margin of 76.2%) and PAT was down 11.6% QoQ to Rs16.4bn. NMDC is targeting sales volume of ~30 MT in FY13E and has shifted its pricing mechanism from export parity based to domestic demand-supply linked system. We see the change in pricing mechanism as a positive for the stock and also expect higher volume growth going ahead on expansion and better logistics. Acquisition of strategic stakes in various global mining assets remains a key positive trigger for the stock. We revise our volume estimates lower marginally (by ~3%) for FY13E/14E and maintain buy with a target price of Rs 227.


■ Volumes subdued and pricing lower: Sales volumes stood at ~6.4MT, down ~24% YoY and flat QoQ as e-auction in Karnataka saw lower sales and Chhattisgarh sales were affected by damage to Essar’s slurry pipeline. Realizations dropped by ~8% QoQ as NMDC announced price cuts for both fines and lumps for the quarter in line with global softness in prices. Sales volume for FY12 stood at 27.3 MT and target for FY13E stands at ~30 MT.


■ EBITDA margin falls as expected: As expected margin fell during the quarter and EBITDA stood at ~Rs19.8bn (margin at 76.2% and EBITDA/tonne of Rs3090) as volumes fell and realizations were lower due to price cuts.


■ Pricing mechanism changed from export parity to domestic linked: NMDC has changed its pricing mechanism from being export parity based to the one linked with domestic demand-supply decided by a committee on a quarterly basis. NMDC revised prices upwards by ~8% QoQ for Q1FY13. Volumes continue to remain affected by damage to the Essar pipeline and company has taken various steps in increasing evacuation from Chhattisgarh mines (uniflow loop line system expected to result in 3MT increase in evacuation). Company has guided for a capex of ~Rs46bn for FY13E with ~Rs30bn to be spent on the 3 mtpa steel plant at Chhattisgarh. NMDC is targeting ~30 MT of production in FY13E and we revise our
FY13E/FY14E volume estimates lower by 3.2%/2.9%. Our realization estimates are lower in US$ terms for FY13E/14E by 3%/2.2%. We estimate 30 MT of iron ore sales in FY13E (Karnataka – 7.5MT and Chhattisgarh – 22.5MT), implying a growth rate of ~10%.


■ Maintain Buy on attractive valuations: We remain positive on the company as we see volumes improving from FY13E onwards with higher e-auction sales volume from Karnataka, better evacuation from Chhattisgarh and expansion at Bailadila 11 B mines. We find the stock trading at attractive valuations with FY13E P/E of 8.8x and FY13E EV/EBITDA of 4.6x. We value the company at 6.5x FY14E EV/EBITDA to arrive at a target price of Rs227. We revise our target price upwards to Rs227 from Rs224. Maintain buy.




RISH TRADER

>INDIAN BANKING: Savings rate deregulation – Early trends

The current macro environment (high interest rate differential between SA and fixed-term deposits) and SB deregulation in Oct 11 have made SA deposit acquisition more challenging and competitive. Post deregulation, smaller new generation private banks that have raised rates have seen higher SA momentum, while large private sector banks are witnessing early weaknesses and PSU banks have seen a deterioration in SB deposits mobilisation. We expect smaller new generation private sector banks to gain market share at the cost of PSU banks in the initial phase. We expect the high SA interest rate environment to last only until small new generation banks reach the inflection point in terms of SA ratio, which also depends on how rate cuts pan out.


Macro environment not conducive for SA deposits growth
We expect the flight of deposits from savings accounts to fixed-term deposits to continue in FY13 as we expect liquidity conditions to remain tight for the rest of the year and interest rates to remain high in spite of an additional forecast 75bps cut for the rest of FY13. Further, we believe it would be reasonable t assume that the three new generation private sector banks that have increased their SA interest rates are likely to continue to offer higher SA interest rates than competitors to maintain their competitive advantage in terms of pricing differential.


SB Deregulation – divergent trends
Small new gen banks - Rate hikes helped initial gains: Since SA deregulation, Yes, Indusind and Kotak (not rated) have increased rates which has helped them to gain significant momentum on SA deposit mobilization (incremental SA deposit market share from 1% in Q1 FY12 to 4% as of Q4 FY12). Large Private banks – Holding the fort for now: Large private banks have managed to hold on to their CASA ratios and market shares over the last couple of quarters. ICICI, HDFC Bank & Axis Bank managed to maintain their SA ratio at 27.9% from Q1 to Q4 FY12.


PSU banks – Losing market share: The top 5 PSU banks have continuously lost market share (their combined SA market share decreased from 26.6% in Q1 FY11 to 25.2% in Q4 FY12 & SA ratio decreased from 26.4% in Q1 FY11 to 24.7% as of Q4 FY12).


How long will the high SA interest rate environment last?
Competitive positioning on key SA drivers...
Most banks have devised their current strategy based on their current positioning on four key SA drivers: (a) Interest rates; (b) rural branch network; (c) service quality; & (d) product portfolio. Three large private sector banks (ICICI, HDFC Bank and Axis) and SBI look better placed to handle higher competition while some of the larger PSU banks like, Union, PNB, BOB & BOI will likely continue to lose market share as the smaller private players gain market
share.


... has determined banks’ current SA strategy
Large private banks (ICICI, HDFC Bank, Axis) are increasing their rural network, SBI is offering incentives (reducing minimum balance to zero) to increase incremental market share. PSU banks excluding SBI are offering Auto Sweep on SA accounts.


High SA rates will last for the next 12-18 months
Higher SA rates are highly dependent on how the rate cycle pans out and how quickly the new generation banks increase their SA Ratios. Based on our analysis, we calculate that a 25% SA ratio would be the tipping point for YES bank while the corresponding number is 35% for Indusind assuming a 75 -100 bps rate cut (see Table 15 &16), at which point the new generation banks may be forced to think long and hard about offering higher interest rates. We believe higher SA rates will last for the next 12-18 months, after which banks will likely be forced to revisit their high SA rate strategy.


To read report in detail: INDIAN BANKS
RISH TRADER

>BHARTI AIRTEL: Acquires 49% interest in Qualcomm's

• Acquires 49% interest in Qualcomm's four circles - Delhi, Mumbai, Haryana and Kerala - US$165mn.
• Bharti to get better ability to segment market using combination of 2G, 3G and 4G in 18 circles (85% of its India wireless revenue)
• No material impact on earnings in near term, maintain Reduce

To read report in detail: BHARTI AIRTEL 
RISH TRADER