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India Equity Research Reports, IPO and Stock News
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�� Action
Based on what we have seen in the 3Q FY11 (the December quarter), earnings
season so far, we maintain our view that FY12F consensus earnings growth is too
optimistic and downgrades have further to go. We stick to our cautious view on the
market, despite the recent market declines.
Anchor themes
Cost pressures remain a key risk to earnings and market momentum. Although topline
growth has kept pace with inflation in nominal terms, pressure on bottom-lines
from rising raw material prices, wages and interest costs are intensifying across
sectors.
Some 72 out of the 109 companies in our coverage universe have declared 3Q
FY11 results so far. Ex oil & gas and banks, net sales are up 24.3%, EBITDA is up
9.8% and PAT is up 6.8% y-y.
Stocks for action
Our top BUY calls are M&M and Pantaloon Retail as consumption and rural demand plays and TATA Steel and CAIRN for their exposure to global commodity prices. Ambuja Cement and HPCL are our top REDUCE calls.
Margin pressures galore
�� We continue to see downside risk to FY12F consensus earnings
growth for the Sensex
In our outlook report (Under the weather, 15 December, 2011) we had taken the
view that consensus expectations of 20% FY12F earnings growth for the market
was too optimistic given the macro headwinds facing the market and that
consensus numbers needed to be revised downwards. Based on Decemberquarter
earnings that have been reported thus far, we are sticking to our view that
earnings downgrades have further to go.
�� Margin pressures from rising input costs and weak growth
momentum
The overarching takeaway from the 3Q FY11 earnings season so far has been the
widespread margin pressures being witnessed across sectors. Some 11 out of the
16 sectors we cover have seen PAT margins decline on a y-y basis and three of
the remaining sectors have seen only a negligible improvement. Sector-wise, the
laggards so far have been telecom, cement, property, power, autos and metals.
�� 3Q FY11 results have been muted so far
Based on the 72 of the 109 companies in our coverage universe that have reported
results so far, net profit (ex-oil & gas and banks) is up 6.8% y-y, EBITDA is up
9.8% y-y and net sales are up 24.3% y-y. Earnings have missed consensus
expectations for roughly half the sectors led by cement, pharma, mid-caps,
property and autos.
�� We remain cautious on the market
Despite the 12% decline of the Sensex YTD and underperformance relative to
regional peers, we remain cautious on the Indian market. At 14.1x 12-month
forward consensus-based earnings — vs the five-year average P/E multiple of
15.6x — we do not think that the market offers an attractive risk-reward at current
levels in light of the substantial macro headwinds and sub-par earnings cycle.
3Q FY11 earnings — margin pressure
galore
Maintain our bearish stance on earnings growth: In our outlook report (Under the
weather, 15 December, 2011) we had taken the view that consensus expectations of
20% FY12F earnings growth for the market was too optimistic given the macro
headwinds and that consensus numbers needed to be revised downwards.
Triple whammy — higher commodity and employee costs, rising interest rates
and flagging growth momentum: Based on earnings that have been reported thus
far we are sticking to our view that earnings downgrades have further to go. The macro
backdrop for corporate earnings remains adverse, and, in fact, has worsened over the
past month — commodity prices have inched up higher and interest rates have risen
further in line with runaway inflation amidst a tightening monetary policy.
Inflation — positive for top-line; a disruptive rise negative for profits and
margins: It is not surprising that nearly 10 years of data (Exhibit 3 below) suggest a
strong directional relationship between inflation and net sales. After all, inflation is the
overall rate of increase of prices of goods and services and should reflect directionally
in the growth rate of nominal sales of companies.
The read-across of inflation on profit growth and margins is mixed and depends on
how disruptive the rise in inflation is — as measured by the slope of the inflation
curve — and also on the growth backdrop. A controlled and gradual increase in
inflation is usually a product of a rising aggregate demand, and to the extent that the
growth backdrop is healthy and firms enjoy good pricing power, it is usually beneficial
for corporate earnings growth and margins.
However, a disruptive rise in inflation above a threshold level adversely affects profit
growth and margins. In our analysis of the effect of inflation on market momentum and
earnings performance, we find 8% as that cut-off threshold level of inflation. A steep
inflation curve rising above the 8% level is symptomatic of sharply rising commodity
prices — the Indian WPI basket is dominated by commodities — and eats away into
corporate profits and, with sales growth holding up, feeds through into margins.
What if high inflation coincides with falling growth momentum? A rhetorical
question really, but one worth examining to make sure that the current onslaught of
stubbornly high inflation and waning growth momentum does indeed spell trouble for
corporate margins. Exhibit 6 below shows the relationship between industrial
production, the only high-frequency monthly series available that the market tracks as
a proxy for growth. The data strongly suggests that corporate profitability does indeed
suffer in periods of flagging growth.
3Q FY11 earnings scorecard: Based on the 72 of the 109 companies in our coverage
universe that have reported results so far, net profit (ex-oil & gas and banks) is up
6.8% y-y, EBITDA is up 9.8% y-y and Net sales are up 24.3% y-y. Exhibit 7 below
provides sector-wise details.
Margin pressures across sectors: The overarching takeaway from the 3Q FY11
earnings season so far has been the widespread margin pressures being witnessed
across sectors. Exhibit 8 below shows this in greater detail. So far, 11 out of the 16
sectors we cover have seen PAT margins decline on a y-y basis and three of the
remaining sectors have seen only a negligible improvement.
The laggards so far have been telecom, cement, property, power, autos and metals.
We note that the significant spike in pharma sector margins on a y-y basis is primarily
on account of Dr Reddy’s moving from loss in 3Q FY10 to profit in 3Q FY11.
Results vs. expectations: Earnings have missed consensus expectations for roughly
half the sectors led by cement, pharma, mid-caps, property, media and autos.
Earnings of banks, FMCG and IT services have been largely in line so far. Meanwhile,
oil & gas (excluding oil PSUs), power, telecom and electrical equipment have surprised
on the upside.
FY12 consensus earnings downgrades — more to come: The December-quarter
earnings season has indeed triggered consensus earnings downgrades, as we had
expected and discussed in our 2011 Strategy Outlook report. As can be seen in Exhibit
10 below, FY12 consensus earnings for the Sensex have been cut 1.4% since the
beginning of the 3Q FY11 earnings season around mid-January.
We expect earnings downgrades to continue and accelerate in the coming couple of
quarters as analysts further incorporate sharply rising commodity prices and interest
costs into their earnings estimates.
Sector-wise highlights
Autos: Results have been mixed on an overall basis so far, but largely disappointing.
Evidence of rising raw material cost pressures emerged across companies. Adverse
currency movements affected margins at MSIL. Margins pressures were evident even
in Hero Honda, Ashok Leyland and Exide Industries.
Agri inputs: Weak earnings growth on unseasonal rainfall reported by Jain Irrigation
and United Phosphorus. Evidence of high interest costs, unavailability and high cost of
raw materials. Strong food demand translated into strong operational performance by
Ruchi Soya, the largest listed play on edible oil demand in the country.
Banks: Bank results have been strong this quarter, as was expected. Robust profit
growth was underpinned by strong credit off-take in the quarter. Net interest margins
were strong across the board due to stable cost of funds, better lending yields and
further improvement in credit-deposit ratio. Most banks reported an improvement in
asset quality and a fall in slippages.
Cement: December-quarter earnings of cement companies released so far have been
very disappointing and suggest a weaker-than-expected recovery on a sequential
basis. Pricing was lower than expected and costs have surprised negatively almost
across the board. We note that cost pressures should continue to rise led by fuel costs.
FMCG: Consumer companies have, by and large, witnessed healthy volume growth in
the quarter so far. However, the overriding factor has been the hit to margins because
of a sharp rise in input costs and advertising spends amid a tough competitive
landscape. Most companies administered aggressive price hikes in the quarter; the
impact on volumes remains to be seen in the coming quarters. We note that raw
material pressures as well as competitive intensity should remain high.
Infra & construction: Results so far have been disappointing and suggest that
although execution has picked up in certain cases, new order inflows in the quarter
stagnated for companies in the sector. Further, sharply rising interest rates are putting
pressure on interest expense. Another worry for the sector is a lengthening payment
cycle that is putting significant pressure on working capital needs. In an environment of
rising interest rates, this is a double-whammy for the profitability of the sector.
IT services: Volume growth was slightly lower than expected at most companies;
however, the outlook remains positive — with discretionary spending increasing, client
budgets looking flat to marginally up and steady growth continuing in lagging segments
like Europe and manufacturing. Margins at most tier-1 IT companies were slightly
above our expectations, helped by pricing increases and one-offs.
Metals: In the steel space, results so far indicate flat sequential volumes and subdued
pricing in the quarter. Meanwhile, raw material, power and fuel costs remain high.
There has been a sharp increase in steel prices in the current quarter and this bodes
well for sector profitability in 4Q FY11. In the non-ferrous space, pricing was stronger
in the December-quarter but rising raw material prices has been a common theme.
Oil & gas: RIL profits were in line with our estimates with record petchem operating
earnings and improving refining margins offset by lower production and increased
costs in the E&P division. In the gas space, GAIL’s operating performance came in
much below our estimates on lower petchem sales volumes and the retrospective hike
in non-APM gas prices. On the other hand, PLNG results were strong, driven by higher
volumes and marketing gains.
Pharma: Results in the sector have been disappointing on an overall basis so far,
primarily because of higher overhead costs.
Power: We are about mid-way through the 3Q FY11 reporting season for the sector.
So far earnings have exhibited: 1) a relatively subdued pick-up in electricity demand
post the monsoon season; 2) mixed trends in merchant tariff realisation, and; 3) IPPs
with high dependence on imported coal as a feedstock have seen lower margins.
Going ahead, a pick-up in generation (demand) and uptick in merchant tariffs
(approaching the summer period) augur well. However, we note that spot thermal
seaborne coal prices have witnessed a steep rise (25-30%) in the past 8-10 weeks. Its
impact will largely be reflected in the earnings of the current quarter (4Q FY11).
Real estate: Property results have been mixed to disappointing. While revenues have
come in above estimates, margins have been largely disappointing on higher
construction costs. Residential volumes were mixed depending on new launches but
commercial (office space and mall) leasing remained strong. A common thread has
been the rising levels of debt, which is concerning given weak cash flow generation.
Telecom: Results so far have been mixed — domestic KPIs have been strong,
underpinned by robust traffic growth but churn hit all-time highs on MNP (mobile
number portability) and margin erosion continues.
Valuation methodologies and risks
Mahindra & Mahindra (MM IN)
Valuation methodology: Mahindra and Mahindra is our top pick in the India Auto sector.
We value Mahindra and Mahindra at Rs892/share. We value the standalone business
at 13x Average EPS of FY12F and FY13F (Rs51.2) at Rs666/share and subsidiaries at
Rs226/share.
Key risks: 1) Ssangyong Motors acquisition: MM is planning to acquire Ssangyong
Motors in Korea (announced in August 2010); 2) Below-normal rainfall in 2011. We
have assumed a scenario of normal rainfall in 2011. If rainfall is significantly different
from normal, it could have a material impact on our volume estimates; 3) Excise duty
increase: We have assumed that the excise duty will not be increased from the current
10%. If it is increased further, it could have a material negative impact on our margin
estimates as the company may not be able to pass through increases in excise duty
on tractor components.
Tata Steel (TATA IN)
Valuation methodology: We value TATA Steel at Rs846, with its domestic business
contributing Rs753/share at 10x FY12F standalone EPS of Rs75.3. We have valued
Corus South East Asia business at 5x FY12F EV/EBITDA. TATA Steel’s stake in
Riversdale contributes Rs44/share to our target price based on current market cap of
the company.
Key risks: 1) Weak steel prices; 2) further deterioration in European economies, and; 3)
significant raw material price rise.
Pantaloon RETAIL INDIA (PF IN)
Valuation methodology: We value the core business at Rs610/share. We value all the
subsidiaries and support businesses at 1x capital employed. The combined value for
all the other businesses stands at Rs74/share. After deducting net debt of
Rs131/share, our price target comes to Rs553.
Key risks: Retail sector is a leveraged play on the macro fundamentals in the country.
Any downward trend on the macro front presents downside risk to our numbers.
Cairn India (CAIR IN)
Valuation methodology: We value Cairn India on a SOTP basis combining NAV and
DCF. We calculate the NAV of its key fields Mangala, Bhagyam and Aishwariya (under
development) and Rageshwari & Saraswati (FDP approved) using a discounted cash
flow (DCF) methodology. Our NAV of MBA and R&S field is Rs276/share. The Ravva
and Cambay blocks are valued at Rs7/share and Rs2/share, respectively. We value
Cairn's 10% share in the 2P reserves in KG-DWN-98/2 block at a conservative
US$6/boe. We value recoverable resources (140mmboe now) in other 20 fields at
US$6/boe and prospective resources of 1.76bboe (net of recoverable resources) at
US$1/boe. We also assign a value of US$6/boe to exploration upsides (prospective
recoverable resources of 250mmboe — Cairn’s share of 175mmboe). Our SOTP
based NAV for Cairn is Rs369/share. Our PT for Cairn India is Rs370.
Key risks: Delays in ramp-up of production; lower oil prices and higher discounts and
higher cess than our assumptions.
HPCL (HPCL IN)
Valuation methodology: Our 12-month price target of Rs270 is based on 0.8x the
stock’s P/BV per share for FY12F.
Key risks: Key upside valuation risk is a significant change in the government policy on
fixing retail prices. Complete deregulation would be a big positive in the long term and
could lead to a rerating of the stock. Even partial deregulation, but with a clear policy
on sharing of any under-recoveries, would also be positive for HPCL. A significant and
sustained decline in global oil prices would also be a positive, since losses on retail
fuels decline sharply at low oil prices. Also, refining margins that are higher than our
estimates would be positive for HPCL.
Ambuja Cement (ACEM IN)
Valuation methodology: We value Ambuja Cement on an EV/IC multiple based
valuation technique using our average ROCE forecasts for the next three years.
Key risks: 1) Better-than-expected volume growth in CY11E on an overall pick-up in
demand in the sector would put our earnings estimates at risk; 2) Stronger-thanexpected
realisations in the company’s core markets (north India) would result in better
profitability for Ambuja Cement.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
�� Action
Based on what we have seen in the 3Q FY11 (the December quarter), earnings
season so far, we maintain our view that FY12F consensus earnings growth is too
optimistic and downgrades have further to go. We stick to our cautious view on the
market, despite the recent market declines.
Anchor themes
Cost pressures remain a key risk to earnings and market momentum. Although topline
growth has kept pace with inflation in nominal terms, pressure on bottom-lines
from rising raw material prices, wages and interest costs are intensifying across
sectors.
Some 72 out of the 109 companies in our coverage universe have declared 3Q
FY11 results so far. Ex oil & gas and banks, net sales are up 24.3%, EBITDA is up
9.8% and PAT is up 6.8% y-y.
Stocks for action
Our top BUY calls are M&M and Pantaloon Retail as consumption and rural demand plays and TATA Steel and CAIRN for their exposure to global commodity prices. Ambuja Cement and HPCL are our top REDUCE calls.
Margin pressures galore
�� We continue to see downside risk to FY12F consensus earnings
growth for the Sensex
In our outlook report (Under the weather, 15 December, 2011) we had taken the
view that consensus expectations of 20% FY12F earnings growth for the market
was too optimistic given the macro headwinds facing the market and that
consensus numbers needed to be revised downwards. Based on Decemberquarter
earnings that have been reported thus far, we are sticking to our view that
earnings downgrades have further to go.
�� Margin pressures from rising input costs and weak growth
momentum
The overarching takeaway from the 3Q FY11 earnings season so far has been the
widespread margin pressures being witnessed across sectors. Some 11 out of the
16 sectors we cover have seen PAT margins decline on a y-y basis and three of
the remaining sectors have seen only a negligible improvement. Sector-wise, the
laggards so far have been telecom, cement, property, power, autos and metals.
�� 3Q FY11 results have been muted so far
Based on the 72 of the 109 companies in our coverage universe that have reported
results so far, net profit (ex-oil & gas and banks) is up 6.8% y-y, EBITDA is up
9.8% y-y and net sales are up 24.3% y-y. Earnings have missed consensus
expectations for roughly half the sectors led by cement, pharma, mid-caps,
property and autos.
�� We remain cautious on the market
Despite the 12% decline of the Sensex YTD and underperformance relative to
regional peers, we remain cautious on the Indian market. At 14.1x 12-month
forward consensus-based earnings — vs the five-year average P/E multiple of
15.6x — we do not think that the market offers an attractive risk-reward at current
levels in light of the substantial macro headwinds and sub-par earnings cycle.
3Q FY11 earnings — margin pressure
galore
Maintain our bearish stance on earnings growth: In our outlook report (Under the
weather, 15 December, 2011) we had taken the view that consensus expectations of
20% FY12F earnings growth for the market was too optimistic given the macro
headwinds and that consensus numbers needed to be revised downwards.
Triple whammy — higher commodity and employee costs, rising interest rates
and flagging growth momentum: Based on earnings that have been reported thus
far we are sticking to our view that earnings downgrades have further to go. The macro
backdrop for corporate earnings remains adverse, and, in fact, has worsened over the
past month — commodity prices have inched up higher and interest rates have risen
further in line with runaway inflation amidst a tightening monetary policy.
Inflation — positive for top-line; a disruptive rise negative for profits and
margins: It is not surprising that nearly 10 years of data (Exhibit 3 below) suggest a
strong directional relationship between inflation and net sales. After all, inflation is the
overall rate of increase of prices of goods and services and should reflect directionally
in the growth rate of nominal sales of companies.
The read-across of inflation on profit growth and margins is mixed and depends on
how disruptive the rise in inflation is — as measured by the slope of the inflation
curve — and also on the growth backdrop. A controlled and gradual increase in
inflation is usually a product of a rising aggregate demand, and to the extent that the
growth backdrop is healthy and firms enjoy good pricing power, it is usually beneficial
for corporate earnings growth and margins.
However, a disruptive rise in inflation above a threshold level adversely affects profit
growth and margins. In our analysis of the effect of inflation on market momentum and
earnings performance, we find 8% as that cut-off threshold level of inflation. A steep
inflation curve rising above the 8% level is symptomatic of sharply rising commodity
prices — the Indian WPI basket is dominated by commodities — and eats away into
corporate profits and, with sales growth holding up, feeds through into margins.
What if high inflation coincides with falling growth momentum? A rhetorical
question really, but one worth examining to make sure that the current onslaught of
stubbornly high inflation and waning growth momentum does indeed spell trouble for
corporate margins. Exhibit 6 below shows the relationship between industrial
production, the only high-frequency monthly series available that the market tracks as
a proxy for growth. The data strongly suggests that corporate profitability does indeed
suffer in periods of flagging growth.
3Q FY11 earnings scorecard: Based on the 72 of the 109 companies in our coverage
universe that have reported results so far, net profit (ex-oil & gas and banks) is up
6.8% y-y, EBITDA is up 9.8% y-y and Net sales are up 24.3% y-y. Exhibit 7 below
provides sector-wise details.
Margin pressures across sectors: The overarching takeaway from the 3Q FY11
earnings season so far has been the widespread margin pressures being witnessed
across sectors. Exhibit 8 below shows this in greater detail. So far, 11 out of the 16
sectors we cover have seen PAT margins decline on a y-y basis and three of the
remaining sectors have seen only a negligible improvement.
The laggards so far have been telecom, cement, property, power, autos and metals.
We note that the significant spike in pharma sector margins on a y-y basis is primarily
on account of Dr Reddy’s moving from loss in 3Q FY10 to profit in 3Q FY11.
Results vs. expectations: Earnings have missed consensus expectations for roughly
half the sectors led by cement, pharma, mid-caps, property, media and autos.
Earnings of banks, FMCG and IT services have been largely in line so far. Meanwhile,
oil & gas (excluding oil PSUs), power, telecom and electrical equipment have surprised
on the upside.
FY12 consensus earnings downgrades — more to come: The December-quarter
earnings season has indeed triggered consensus earnings downgrades, as we had
expected and discussed in our 2011 Strategy Outlook report. As can be seen in Exhibit
10 below, FY12 consensus earnings for the Sensex have been cut 1.4% since the
beginning of the 3Q FY11 earnings season around mid-January.
We expect earnings downgrades to continue and accelerate in the coming couple of
quarters as analysts further incorporate sharply rising commodity prices and interest
costs into their earnings estimates.
Sector-wise highlights
Autos: Results have been mixed on an overall basis so far, but largely disappointing.
Evidence of rising raw material cost pressures emerged across companies. Adverse
currency movements affected margins at MSIL. Margins pressures were evident even
in Hero Honda, Ashok Leyland and Exide Industries.
Agri inputs: Weak earnings growth on unseasonal rainfall reported by Jain Irrigation
and United Phosphorus. Evidence of high interest costs, unavailability and high cost of
raw materials. Strong food demand translated into strong operational performance by
Ruchi Soya, the largest listed play on edible oil demand in the country.
Banks: Bank results have been strong this quarter, as was expected. Robust profit
growth was underpinned by strong credit off-take in the quarter. Net interest margins
were strong across the board due to stable cost of funds, better lending yields and
further improvement in credit-deposit ratio. Most banks reported an improvement in
asset quality and a fall in slippages.
Cement: December-quarter earnings of cement companies released so far have been
very disappointing and suggest a weaker-than-expected recovery on a sequential
basis. Pricing was lower than expected and costs have surprised negatively almost
across the board. We note that cost pressures should continue to rise led by fuel costs.
FMCG: Consumer companies have, by and large, witnessed healthy volume growth in
the quarter so far. However, the overriding factor has been the hit to margins because
of a sharp rise in input costs and advertising spends amid a tough competitive
landscape. Most companies administered aggressive price hikes in the quarter; the
impact on volumes remains to be seen in the coming quarters. We note that raw
material pressures as well as competitive intensity should remain high.
Infra & construction: Results so far have been disappointing and suggest that
although execution has picked up in certain cases, new order inflows in the quarter
stagnated for companies in the sector. Further, sharply rising interest rates are putting
pressure on interest expense. Another worry for the sector is a lengthening payment
cycle that is putting significant pressure on working capital needs. In an environment of
rising interest rates, this is a double-whammy for the profitability of the sector.
IT services: Volume growth was slightly lower than expected at most companies;
however, the outlook remains positive — with discretionary spending increasing, client
budgets looking flat to marginally up and steady growth continuing in lagging segments
like Europe and manufacturing. Margins at most tier-1 IT companies were slightly
above our expectations, helped by pricing increases and one-offs.
Metals: In the steel space, results so far indicate flat sequential volumes and subdued
pricing in the quarter. Meanwhile, raw material, power and fuel costs remain high.
There has been a sharp increase in steel prices in the current quarter and this bodes
well for sector profitability in 4Q FY11. In the non-ferrous space, pricing was stronger
in the December-quarter but rising raw material prices has been a common theme.
Oil & gas: RIL profits were in line with our estimates with record petchem operating
earnings and improving refining margins offset by lower production and increased
costs in the E&P division. In the gas space, GAIL’s operating performance came in
much below our estimates on lower petchem sales volumes and the retrospective hike
in non-APM gas prices. On the other hand, PLNG results were strong, driven by higher
volumes and marketing gains.
Pharma: Results in the sector have been disappointing on an overall basis so far,
primarily because of higher overhead costs.
Power: We are about mid-way through the 3Q FY11 reporting season for the sector.
So far earnings have exhibited: 1) a relatively subdued pick-up in electricity demand
post the monsoon season; 2) mixed trends in merchant tariff realisation, and; 3) IPPs
with high dependence on imported coal as a feedstock have seen lower margins.
Going ahead, a pick-up in generation (demand) and uptick in merchant tariffs
(approaching the summer period) augur well. However, we note that spot thermal
seaborne coal prices have witnessed a steep rise (25-30%) in the past 8-10 weeks. Its
impact will largely be reflected in the earnings of the current quarter (4Q FY11).
Real estate: Property results have been mixed to disappointing. While revenues have
come in above estimates, margins have been largely disappointing on higher
construction costs. Residential volumes were mixed depending on new launches but
commercial (office space and mall) leasing remained strong. A common thread has
been the rising levels of debt, which is concerning given weak cash flow generation.
Telecom: Results so far have been mixed — domestic KPIs have been strong,
underpinned by robust traffic growth but churn hit all-time highs on MNP (mobile
number portability) and margin erosion continues.
Valuation methodologies and risks
Mahindra & Mahindra (MM IN)
Valuation methodology: Mahindra and Mahindra is our top pick in the India Auto sector.
We value Mahindra and Mahindra at Rs892/share. We value the standalone business
at 13x Average EPS of FY12F and FY13F (Rs51.2) at Rs666/share and subsidiaries at
Rs226/share.
Key risks: 1) Ssangyong Motors acquisition: MM is planning to acquire Ssangyong
Motors in Korea (announced in August 2010); 2) Below-normal rainfall in 2011. We
have assumed a scenario of normal rainfall in 2011. If rainfall is significantly different
from normal, it could have a material impact on our volume estimates; 3) Excise duty
increase: We have assumed that the excise duty will not be increased from the current
10%. If it is increased further, it could have a material negative impact on our margin
estimates as the company may not be able to pass through increases in excise duty
on tractor components.
Tata Steel (TATA IN)
Valuation methodology: We value TATA Steel at Rs846, with its domestic business
contributing Rs753/share at 10x FY12F standalone EPS of Rs75.3. We have valued
Corus South East Asia business at 5x FY12F EV/EBITDA. TATA Steel’s stake in
Riversdale contributes Rs44/share to our target price based on current market cap of
the company.
Key risks: 1) Weak steel prices; 2) further deterioration in European economies, and; 3)
significant raw material price rise.
Pantaloon RETAIL INDIA (PF IN)
Valuation methodology: We value the core business at Rs610/share. We value all the
subsidiaries and support businesses at 1x capital employed. The combined value for
all the other businesses stands at Rs74/share. After deducting net debt of
Rs131/share, our price target comes to Rs553.
Key risks: Retail sector is a leveraged play on the macro fundamentals in the country.
Any downward trend on the macro front presents downside risk to our numbers.
Cairn India (CAIR IN)
Valuation methodology: We value Cairn India on a SOTP basis combining NAV and
DCF. We calculate the NAV of its key fields Mangala, Bhagyam and Aishwariya (under
development) and Rageshwari & Saraswati (FDP approved) using a discounted cash
flow (DCF) methodology. Our NAV of MBA and R&S field is Rs276/share. The Ravva
and Cambay blocks are valued at Rs7/share and Rs2/share, respectively. We value
Cairn's 10% share in the 2P reserves in KG-DWN-98/2 block at a conservative
US$6/boe. We value recoverable resources (140mmboe now) in other 20 fields at
US$6/boe and prospective resources of 1.76bboe (net of recoverable resources) at
US$1/boe. We also assign a value of US$6/boe to exploration upsides (prospective
recoverable resources of 250mmboe — Cairn’s share of 175mmboe). Our SOTP
based NAV for Cairn is Rs369/share. Our PT for Cairn India is Rs370.
Key risks: Delays in ramp-up of production; lower oil prices and higher discounts and
higher cess than our assumptions.
HPCL (HPCL IN)
Valuation methodology: Our 12-month price target of Rs270 is based on 0.8x the
stock’s P/BV per share for FY12F.
Key risks: Key upside valuation risk is a significant change in the government policy on
fixing retail prices. Complete deregulation would be a big positive in the long term and
could lead to a rerating of the stock. Even partial deregulation, but with a clear policy
on sharing of any under-recoveries, would also be positive for HPCL. A significant and
sustained decline in global oil prices would also be a positive, since losses on retail
fuels decline sharply at low oil prices. Also, refining margins that are higher than our
estimates would be positive for HPCL.
Ambuja Cement (ACEM IN)
Valuation methodology: We value Ambuja Cement on an EV/IC multiple based
valuation technique using our average ROCE forecasts for the next three years.
Key risks: 1) Better-than-expected volume growth in CY11E on an overall pick-up in
demand in the sector would put our earnings estimates at risk; 2) Stronger-thanexpected
realisations in the company’s core markets (north India) would result in better
profitability for Ambuja Cement.
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