Research Update with Emkay; 25 November, 2010

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n        Research Update Included

Q2FY11 Results Review: Superior performance

Executive Summary

The Q2FY11 results were above expectation with a combination of a few positive while a few negative surprises. PAT growth for Emkay Universe* (ex- Metals & Mining, Oil & Gas and Banking) was  at  11.1% as against expectation of flat growth.

We expected 19.3% and 8.9% growth in Net Sales and EBITDA from Emkay Universe*; the actual turned out to be a growth of 22.5% and 14.1% respectively. The PAT growth for Emkay Universe stood at 11.1% as against expectation of flat growth.  We expected EBITDA margin to decline by 195 bps, the actual turned out to be a decline of 142 bps.

Emkay Large Cap, Emkay Mid Cap and Emkay Small Cap showed a PAT growth of 15.3%, -11.8% and -36.5% respectively.

EBITDA margins of Emkay Universe Companies declined by 142 bps YoY as against 39 bps decline in BSE 500. EBITDA margins improved amongst Emkay Universe Companies, for Offshore Oil Field Services (548 bps), Automobiles (206 bps) and Engineering & Capital Goods (71 bps). EBITDA margins declined for Cement (2028 bps), Telecommunications (530 bps), Power (395 bps),  Auto Ancillaries (310 bps) and Paper (210 bps).

EBITDA of Emkay Universe Companies improved by 14.1% against 18% of BSE 500. EBITDA increased for Emkay Universe in sectors like Automobiles (56.6%), Agri Input & Chemicals (30.5%), Construction (28.3%), Engineering & Capital Goods (23.8%) and Offshore Oil Field Services (18.7%).

Interest cost decline by 1% YoY for Emkay Universe as compared to 10.6% increase in BSE 500. Interest cost increased for Emkay Universe Companies in Auto Ancillaries (58%), Engineering & Capital Goods (39%), Construction (29%), Paper (25%) and FMCG (25%).

Other Income grew by 17.8% YoY for Emkay Universe as compared to 33.7% decline in BSE 500. Other income increased for Emkay Universe Companies in IT Services (155%), Automobiles (49%), Construction (48%), FMCG (48%)  and Print Media (35%).

PAT growth for Emkay Universe Companies was 11.1% YoY as against 22.7% of BSE 500*. Top sectors with significant PAT growth in Emkay Universe Companies are Automobiles (108.9%), Agri Input & Chemicals (35.7%), Engineering & Capital Goods (19.6%), Paper (18.4%) and IT Services (17.4%). PAT declined for Cement (83.1%), Auto Ancillaries (42.6%),  Telecommunications (27.9%) and Power (1.8%).

25% of Emkay Universe Companies have shown 0-15% EBITDA growth with 31% showing negative EBITDA growth. 17% of Emkay Universe Companies have shown EBITDA growth of 15-30% while 14% of  Emkay Universe Companies have shown EBITDA growth of 30-50%. 17% of Emkay Universe Companies have shown EBITDA growth of >50%.

20% of Emkay Universe Companies have shown 0-15% PAT growth with 32% showing negative PAT growth. 16% of Emkay Universe Companies have shown PAT growth of 15-30% while 13% of  Emkay Universe Companies have shown PAT growth of 30-50%. 19% of Emkay Universe Companies have shown PAT growth of >50%.

Post Q2 results; we have revised earnings of 65 companies (33 upwards, 32 downwards). We have also changed recommendation for 33 companies (10 upwards, 23 downwards) and changed target prices of 73 companies (56 upwards, 17 downwards).

Emkay Universe companies are estimated to show 20%, 17% and 10% growth in sales, EBITDA and PAT respectively for FY11.

Emkay Universe is currently trading at 16.7X FY11E and 14xFY12E earnings which is at a discount of 10% and 9% respectively to consensus Sensex PE.

MOIL Ltd IPO Note; Attractive valuation; ‘SUBSCRIBE’

n    MOIL is the largest manganese ore producer in India, contributing 50% of the total domestic production. Globally it ranks fifth among all the manganese producers

n    The company is among the lowest cost manganese ore producers with an EBITDA margin of ~70% during H1FY11. It has ~22 mt of good quality manganese ore reserves

n    MOIL is a debt free company with net cash of Rs 105 per share during H1FY11. The company has a planned capex of Rs 7680 million to ramp up its capacity to 1.5 mtpa by FY16

n    At the upper band of Rs 375, the stock looks attractively valued with potential upside of 40% on 6x FY12E EV/ EBITDA basis - Recommend SUBSCRIBE