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ONGC (Stable production but dry wells dent profits, BUY): ONGC’s standalone EPS grew 6% YoY to Rs25.2 in 2QFY11, falling short of our estimate on account of unexpectedly high dry-well write-offs. We expect write-offs to remain elevated, as ONGC has achieved only 50% of its ultra-deep-water exploratory programme target for FY11. Domestic production has stabilised, thanks to Rajasthan ramp-up, with OVL’s production surprising positively by growing 9.6% YoY over 1HFY11, driven by Block06.1, Vietnam. Average realisation improved to US$62.75/bbl on lower subsidy burden QoQ. ONGC trades at 10.3x FY12ii EPS of Rs127. With a production ramp-up in marginal fields allaying concerns of a decline in domestic production, we retain BUY on the stock.
PNB (2QFY11 results – in-line, BUY): Punjab National Bank’s (PNB) net profit increased by 16% to Rs10.8bn, in-line with market consensus and our estimates. Revenue growth, helped by higher NIM, came ahead of our estimate, but higher expenses and loan loss provisions (LLP) dragged down profit growth. Additional pension obligations drove expenses higher, while deterioration in asset quality drove LLP higher. Going forward, higher expenses and LLP would likely remain an overhang to consensus and our expectation for FY11. However, these concerns would abate in FY12ii and beyond; higher revenue expectation would likely drive earnings higher. We raise our earnings forecast for FY12ii /FY13ii. We retain BUY.
BOB (2QFY11 results – exceptionally strong, ADD): Bank of Baroda’s (BOB) 2QFY11 net profit increased by 61% to Rs10.2 bn, well ahead of market consensus and our estimates. The performance was exceptionally strong across many parameters, including loan growth, NIM, cost and loan loss provisions. The strong show was helped by the absence of any provision for additional pension liabilities that the bank is likely to incur. Still, the growth would have beat consensus and our estimates by a significant margin. Going forward, the bank would likely sustain the strong momentum seen in 2HFY11 as well, even after considering the impact of additional pension liabilities. We raise our earnings forecast and target price. We retain ADD.
Grasim Industries (2QFY11 results below expectation, ADD): Grasim’s (standalone) net sales declined 68% YoY to Rs9.3bn (primarily on account of de-merger of the cement business); PAT declined 59% YoY to Rs2.8bn against our expectation of Rs2.6bn, as higher-than-expected other income boosted profits. EBITDA margin was lower than our expectation as VSF realisation declined QoQ, against our expectation of an increase in realisation. In the post-result call, management said prices of VSF had risen ~3% since the start of the current quarter. VSF prices in international markets have increased sharply in the past 4-5 weeks, as cotton prices has risen, given the likely shortage in production. We upgrade our FY11 EPS estimate for Grasim by 2% to factor in an likely increase in VSF realisation in 4QFY11. However, we downgrade our FY12 EPS estimate by 4%, as we expect earnings of the cement subsidiary to remain under pressure in FY12.
Sun TV (Shines again, ADD): Sun TV’s 2QFY11 result fell marginally short of our estimate, on higher costs. Growth momentum in both advertising and subscription revenues continues unabated. Advertising revenue growth will pick up in 3Q as we get into the festive season. Sun’s focus on subscription revenues has started yielding results, with total subscription revenues growing 60% YoY in 2Q. In 3QFY11, the company released its much-awaited movie Endhiran starring superstar Rajnikanth, which is doing very well at the box office. We raise our earnings estimates for FY11 by 5% and for FY12 by 9% to factor in stronger than expected growth in revenues and also earnings from Endhiran. We Retain ADD and upgrade our target price to Rs553.
GGCL (Good performance in tough times, BUY): Gujarat Gas’s (GGAS) net profit grew 27% YoY in 3QCY10, on 1) 12% volume growth; and 2) 8% YoY increase in gross margin/scm. It is worth noting that GGAS’s spread rose in the face of two adverse factors: 1) it purchased almost 50% of its 3.5mmscmd volumes from spot LNG markets, to offset the disruption in gas supplies from PMT (Panna, Mukta and Tapti fields); and 2) 1.8% depreciation in INR vs USD. This indicates GGAS’s pricing power. We expect spreads to expand further, with normalisation of PMT gas supplies in 4QCY10, and strengthening INR vs USD. We retain BUY.
HT Media (Top-line sustaining investment efforts, BUY): HT Media’s 2QFY11 PAT at Rs388m (up 23.5% YoY) stood ahead of our estimates on higher adrevenues and profit on sale of private treaty investments. The strong growth in the ad-revenue stream was neutralised by higher costs from the circulation push by the company. Going forward- 1) the festive season 2)election spends in Bihar and 3)abatement of the circulation drive in Jharkhand should see EBIDTA and earnings seeing a sharp uptick in 2HFY11. Note that the company’s push on circulation, though has been eating into margins, has resulted in a definite improvement in readership in Mumbai and Uttar Pradesh which augurs well for revenues and earnings going forward.
Dumb Commodities (Reversed Midas touch): Chinese steel mills are being played by the iron-ore oligopolies, but they have only their runaway expansions in the past decade to blame. It seems to us that the iron-ore feast has climaxed. Our advice: reduce steel and iron-ore stocks and move into non-ferrous metals stocks. And, although we weren’t fans of CNOOC (HKSE:883) before (see our China Oil report), we recommend buy, betting the company will pocket Kosmos’s stake in the 1.8bn barrels Jubilee oilfields off the coast of Ghana.
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