>STERLITE INDUSTRIES: Acquisition in Vedanta Aluminium

Sterlite Industries’ annual report analysis highlights fresh investment in other group companies. With INR depreciation, large unhedged forex payables may lead to further MTM losses. While borrowing cost has gone up significantly, other income is likely to be subdued.


VAL an overhang; consol. debt, interest cost to swell post merger
At FY12 end, Sterlite Industries (SIIL) owned 29.5% stake in Vedanta Aluminium (VAL) (associate and fellow subsidiary) for INR5.6bn. However, a significant portion of the latter’s balance sheet was funded by SIIL by way of loans and advances (including preference share) of INR100.5bn (refer table 4). During FY12, Sesa‐Sterlite (SS) approved acquisition of balance 70.5% stake in VAL from Vedanta Resources. Our calculation suggests an enterprise value (EV) of INR320bn for VAL (refer table 6).


During FY12, VAL incurred loss of INR26.2bn (FY11: INR9.6bn) with SIIL’s share in it at INR7.7bn (FY11: INR2.8bn), 16.0% of FY12 PAT (FY11: 5.7%; refer table 7). With acquisition of balance stake in VAL:


• SIIL’s INR100.5bn loan to VAL will be eliminated.


• SS’ interest income will be lower as interest income from VAL will be eliminated. During FY12, SIIL earned interest of INR8.9bn from VAL (9.0 % of PBT).


• Additional loan in VAL of INR197.0bn will be part of the consolidated entity, leading to higher interest cost.


Fresh investments in other group companies jumped from INR7.8bn in FY11 to INR19.7bn in FY12; 4.3% of FY12 networth (FY11: 1.9%) (refer table 3).


Forex movement likely to be a major dampener
SIIL’s unhedged foreign currency net payable stood at INR113.0bn in FY12 (FY11: INR91.4bn). During the year, the INR has depreciated 14.6% versus USD, which has led to forex loss of INR7.2bn (7.3% of FY12 PBT) in FY12. With the INR depreciating ~10% in Q1FY13, the company is likely to suffer significant forex loss/finance cost.


Higher finance cost, damages provision drag down margin
Finance cost (including interest capitalised) jumped from INR6.5bn in FY11 to INR15.9bn in FY12, 16.1% of FY12 PBT (FY11: 7.1%), with average borrowing cost surging from 5.7% to 10.5%. During the year, the company provided incidental damages of USD82.8mn (INR4.2bn; net of deposit of USD50mn; 4.3% of FY12 PBT) for Asarco, US, as per US Bankruptcy Court judgement.


Other income comprising ~11% of PBT unlikely to sustain
Other income includes fair valuation of conversion option on convertibles of INR2.4bn and interest from VAL of INR8.9bn which is unlikely to sustain.


To read report in detail: STERLITE INDUSTRIES
RISH TRADER

>INDIA STRATEGY: Sensex@20,500 by FY13 end (CENTRUM)

We estimate Sensex to post an EPS of Rs. 1416 for FY14E (15% growth over FY13E)  Applying a target P/E of 14.5x (inline with long term mean) we get Sensex target of 20500 for FY13 end, although this can be achieved earlier (by Dec 2012) if government reforms agenda takes off

The P/E for Sensex has seen high correlation with the Nominal GDP growth. Hence we believe that the target multiple applied for Sensex is appropriate considering the Nominal GDP growth expectations of close to 14%

Composition of incremental index earnings shows that the majority of earnings come from Financials, Materials and Auto sectors; softening interest rate cycle should aid recovery in the Financials and Auto sectors while a low base of FY13 would help sectors like Materials to post a good growth in FY14.c


To read report in detail: INDIA STRATEGY

>INDUSIND BANK: PAT beat on higher other income (Erratum)

Key highlights

IndusInd Bank reported a PAT of INR2.36bn, marginally higher than our estimate of INR2.29bn (Street est. of INR2.31bn) on the back of higher than- expected other income. Key highlights from the quarter include:

 Loan book growth remained strong (up 31% y/y), primarily driven by 48% increase in consumer finance loans, while the corporate book increased at 20% y/y. While NII was below our estimates, strong fee

income of 42% y/y and trading gains of INR0.5bn (vs our estimate of INR 0.27bn) supported the earnings beat.

 Margins declined 7bps sequentially to 3.22% due to 35bps q/q increase in cost of funds vs 28bps q/q increase in yield on assets.

 Deposits grew at 28% y/y with savings deposits continuing to be strong, growing 9.5% q/q leading to 56bps improvement in the CASA ratio at 27.9%.

 Asset quality was largely stable with sequentially flat GNPL and NNPL ratios at 0.97% and 0.27%, respectively. The bank did not add any restructured loan during the quarter (the restructured book stands at

0.24% of the loan book). However, higher slippage of INR1.09bn vs our forecast of INR0.83bn led to LLPs of 50bps vs our estimate of 37bps.

 Total CAR was at 13.4% (including full-year profits) with Tier-I CAR at 11.2% (including full-year profits).

Outlook and key takeaways from management call

 Slippage was higher than expected as one mid-sized gems & jewellery account slipped to NPL leading to higher LLPs. Management expects to recover 50-60% of the amount within 3-6 months.

 IIB expects to cross 500 branches by FY13 end and 650 by FY14 end (currently at 421 branches). New branches opened last year average around INR70-80mn SA per branch vs INR220-230mn for matured

branches. Management expects to end FY13 with INR170-180mn of SA per branch. We are budgeting in INR125mn SA per branch by FY13 end.

 Third-party fee income growth was tepid as the bank has stopped recognising commission on non life insurance as a part of their income for the last six months. Management guides for fee income growth to

be higher than balance sheet growth for FY13.

 Management guides towards LLPs of around 50bps for FY13. We are building in LLPs of 56bps for FY13F.

 The bank expects to grow its loan book in the range of 25-30% vs our current estimate of 25%.

To read report in detail: INDUSIND BANK

>MAHINDRA & MAHINDRA: Launched Gio and Maxximo vans

In FY12, top-line performance of M&M was encouraging, in our view, with 25% volume growth and 36% revenue growth. The company also gained market share of around 300bps in the domestic automotive segment driven by new launches. M&M’s new launch pipeline looks solid, and we expect the company to maintain strong volume performance. Investments in new businesses dragged down consolidated EPS by around INR15/sh (~30%) in FY12. Turnaround in some of these businesses could lead to strong earnings growth over the next two to three years, in our view. Core business (ex investments) is trading at 9x FY14 M&M + MVML earnings of INR 58/sh, which is lower than 1-yr forward historical average P/E of ~12x. Reiterate BUY.

Auto segment – Market share improvements led by UVs and MPVs

M&M’s sales volumes in the automotive segment increased by 27% yoy in FY12 led by strong growth in UVs, LCVs and entry into the new MPV segment. Market share in the UVs segment increased to 55.1% in FY12, driven largely by the success of XUV500 launched in Sep-11. M&M launched Gio and Maxximo vans in FY12 and was able to garner 10% of the overall MPV segment. Market share also improved in the Verito segment and 3-wheelers. M&M remains the market leader in 2-3.5 ton LCV segment with a market share of around 67%, as per the company.

Tractor segment – Steady market share

M&M’s volumes in the domestic tractor market increased by 10% yoy in FY12, nearly in-line with industry growth of 11%. M&M’s overall market share remained steady at around 42%, but the company lost some market share in the 31-50 HP segment. The major gainer in this category has been TAFE (Tractors and Farm Equipments Ltd). M&M gained share in the 51HP+ and <30HP segments. The company is planning to launch a new tractor platform in FY13, which we believe should help it gain some market share.

M&M invested around INR10bn in subsidiaries in FY12 – a large part of the investment was towards unlisted subsidiaries. Three key points to note here are:

 M&M invested around INR3.5bn in its two-wheeler venture – the company increased its stake to 88.5% in the business from 80% earlier.

 M&M invested around INR1.6bn in Mahindra Navistar, its commercial business. This is possibly largely towards funding M&M’s share of net loss in the subsidiary in FY12, we believe.

 The company has invested INR2.3bn in Mahindra Engineering & Chemical Products Ltd (MECPL), a wholly owned subsidiary. MECPL is engaged in the business of manufacturing of material handling equipment. Further, Mahindra Retail is an indirect subsidiary of MECPL which has cumulative loss of around INR2.4bn till FY12.

To read report in detail: MAHINDRA & MAHINDRA