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COUNTRY FLOWS
COUNTRY ALLOCATION
Foreign fund flows - India
Fund flows - Asia ex-Japan
Fund flows - Global emerging markets (GEM)
Fund flows - All emerging markets (EM)
To read report in detail: FOREIGN FUND FLOW
RISH TRADER
Educomp Solutions’ (Educomp) Q4FY12 EBIT at Rs1.2bn and PAT at Rs0.6bn were in line with our expectations, though lower than the management’s guidance which was sharply cut a quarter ago. The management has guided for 25-30% revenue growth in FY13 and EBITDA margin improvement of 150-250bps YoY. However, it refrained from providing PAT guidance. We expect FY13 recurring PAT to be flat YoY mainly due to expected surge in interest cost by 53% YoY owing to likely refinancing of US$110mn FCCB maturing in July 2012 including premium which was not getting charged off earlier. While the volume growth momentum in the core business of Smart Class remains strong, pricing and hence margins are likely to remain under pressure because of intense competition. Other businesses like K- 12 schools and supplemental education are in nascent stage and in investment mode. Educomp is unlikely to turn FCF positive over the next two years. The stock has corrected 40% since our downgrade last quarter and is down 70% YoY, and with valuations at FY13E P/E of 8.6x and EV/E of 6x, we believe that the downside
is limited. Hence, we upgrade the stock to REDUCE from SELL with a revised target price of Rs148 (6x average FY13-14E EV/E), however, it is still not the time to accumulate the stock. Higher-than-expected Smart Class additions and any stake sale of assets are the key risks to our negative stance.
■ FY13 – a year of consolidation – unlikely to regain investor’s confidence. We cut our FY13E EBITDA by ~8% due to lower than expected margins in Smart Class and PAT by 25% owing to likely higher interest costs. We now factor in revenue and EBITDA CAGR of 20% and recurring PAT CAGR of 10% over FY12-14E.
■ Educomp unlikely to turn FCF positive over next two years: In spite of full securitisation of Smart Class receivables in FY12, DSO days remained high at 252 days and the same is unlikely to reduce significantly in the medium term. While absolute capex in K-12 schools is likely to come down, 43 new schools (21 greenfield schools and 22 schools under asset-light JVs) are likely to be constructed and the existing 69 schools would require upgradation and maintenance.
■ Pricing revives in Smart Class, but margins declined: Smart Class pricing went up 10% QoQ in Q4FY12 to Rs0.37mn per classroom after a 17% QoQ fall in the prior quarter. Average classrooms per school also went up to 6.8 vs 5.3 in Q3FY12. In spite of this, the EBIT margin declined 60bps QoQ to 39% owing to higher marketing expenses. The company added a massive 17,815 classrooms in Q4FY12 and ~40,000 classrooms (guidance of 40,000-45,000) in FY12 vs ~27,000 classrooms in FY11. The company securitised all its FY12 Smart Class receivables amounting to Rs6.9bn under the reduced guarantee model and received Rs6.33bn till March 2012.
To read report in detail: EDUCOMP SOLUTIONS
RISH TRADER
Banking Sector has seen consistent pressure due to series of monetary measures adopted by RBI to curtail sticky inflation since March 2010, in turn transmitted by banking system. This along with global uncertainty resulted in high interest rates environment, slowing credit demand, and weak business sentiments in last one year. The pressure deepened further in last six months on the back of worsening domestic macro-economic factors. Concerns over several key parameters like credit growth, asset quality, profitability etc led many banking stocks to touch their 52-week low.
Bank Nifty has given negative returns in last one and three months i.e. 4.49% and 8.02% respectively.
PSU Banks underperformer as compared to Private Banks: Banks have declared their quarterly results for fourth quarter of FY12 and complete financial year 2011-12. Considering the overall pressure in banking space, performance posted by private banks is much better than PSU banks in terms of credit growth, asset quality, margins, profitability etc. Most of the PSU banks have experienced pressure on asset quality, drop in NIMs, slower growth in deposits and advances, deteriorated returns on equity and assets, etc on the back of downturn witnessed by overall economy. It was the only SBI announcing better than expected results with significant improvement in financial parameters after horrible performance in last few quarters. The prices of PSU Banks are eroded by a good percentage in last one year and many of them are trading at attractive valuations.
After a steep correction, most of the PSU Banks are trading at below their book value and adjusted book value. We are still not convinced that upcoming quarters will throw positive surprises in terms of earnings and asset quality. Now, the question arises what should be the strategy for investors for these PSU Banks?
High Dividend Yield- A Silver Lining: PSU Banks have announced dividend also along with their FY12 results varying in the range of 20% to 350%. Investment at current prices may deliver very attractive dividend yield to investors for the current year as well for the next year as we believe majority of the negative factors are already priced in at current levels and situation is going to be improved by FY13. Hence, Investment at current levels in PSU banks can reward investors in three ways- (1) Dividend Yield of FY12 (2) Dividend Yield of FY13 (3) High Probability of Price Appreciation from hereon and even if we see further downside in PSU stocks, the capital invested will be protected by the dividend amount received. Another interesting part is that dividends are tax free and do not form part of total income for the purpose of tax. Hence, we have found out few PSU Banks with good dividend track record and recommend our clients to consider investments in these stocks as a strategy to insulate their portfolio from capital erosion upto some extent.
To read report in detail: PSU BANKS
RISH TRADER
Sterlite signs bauxite supply agreement with companies holding mining concessions
Sterlite Industries mentioned in its recent 6K filing to the SEC that it has entered into a tripartite agreement with Larsen & Toubro Limited (L&T) and Raykal Aluminium (Raykal). L&T holds certain prospecting licenses for bauxite mines located at Sijmali and Kurumali of Rayagad and Kalahandi districts of Orissa. STLT will acquire 100% of equity share capital of Raykal in a phased manner at a total consideration of INR18bn in a milestone based acquisition. We understand from the Directory of Geology, Government of Odisha, that the mines have c250mt of reserves and parts of land are under 'village forest' category, thereby requiring Forest Clearance under Stage 2 of Ministry of Environment & Forests (MoEF) approvals.
If mine eventually starts functioning after 3-4 years, we look at upsides in various scenarios Since L&T has a Prospecting License only, we understand that it would take significant amount of time for the company to finally sign a Mining Lease, if it manages to get the requisite approvals. Assuming that it takes 3-4 years for the mine to start, and STLT incurs additional exp of INR15b, we calculate potential upsides to our TP on a DCF-to-firm basis, based on these scenarios. Please refer exhibit 1 for a detailed summary of our assumptions
A) Assuming current capacities at Vedanta Aluminium (VAL) alumina (1mtpa) and aluminium (0.5mtpa) are only functional we derive a potential upside of INR1 per share of SESA STERLITE.
B) Assuming that eventual approval from is obtained for operating expanded alumina capacities (alumina expansion currently put on hold), and accounting for the incremental USD1.5bn capex which VAL will have to incur, we derive a potential upside of INR14 per share of SESA STERLITE.
Valuations & risks: We value SESA on an SoTP basis at INR210 per share and rate SESA Neutral.
To read report in detail: SESA GOA
RISH TRADER
