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India – Weekly wrap-up
„Economy / Political News
Food inflation fell for the second straight week to a nine-week low of 11.05%, as
pulses, wheat and potato prices declined.
To end the standoff on a parliamentary probe into the telecom scam, PM
Manmohan Singh is likely to make a statement in Parliament on Tuesday asking
the Speaker to form a Joint Parliamentary Committee on the subject.
The government is expected to introduce legislation on the goods and service tax
(GST) in the parliament session beginning February 21.
Corporate Highlights
Tata Steel - 3Q profits decline: Adjusted group PAT for Tata Steel declined
33%QoQ, to Rs9.7bn, vs. our Rs10.4bn est. Group EBITDA was in line
(-9%QoQ), but lower other income led to the PAT miss.
Stock market overview
Performance: The BSE Sensex was up by 2.7% last week. Trading volumes
were down 4% and the Advance/Decline ratio was 1.5 at BSE.
Flows: FII bought USD 10mn during the week ended 18
th
Feb’11. YTD, they have
sold USD 1.5bn. Domestic MFs, on the other hand, bought USD 25mn during the
week ended 17
th
Feb’11.
Top performers of the week: United Spirits, Jindal Steel, Kotak Mahindra, GMR
Infra and HDIL.
Worst performers: DLF, Rel Communications, IndiaBull Realestate, ONGC and
Cairn.
Economic Data Watch
Forex reserves fell by USD 1bn, to US$298bn, for the week ended 11
th
Feb’11.
Ratings and estimates changes
Tata Steel — Raised PO to Rs560 from Rs520
Mahanagar Telephone Nigam Ltd. — Cut PO to Rs45 from Rs50
Lanco Infratech Ltd. — Cut PO to Rs65 from Rs74
Coal India Limited — Cut PO to Rs339 from Rs350
Pantaloon — Cut PO to Rs530 from Rs655
GSK India — Raised PO to Rs2,030 from Rs1,765
Reliance Communication Ltd. — Cut PO to Rs115 from Rs140
Firstsource Solutions Ltd. — Cut PO to Rs30 from Rs35.
News This Week
Economics
„ Food inflation fell for the second straight week to a nine-week low of 11.05%,
as pulses, wheat and potato prices declined. - Media
Politics
„ To end the standoff on a parliamentary probe into the telecom scam, Prime
Minister Manmohan Singh is likely to make a statement in Parliament on
Tuesday, a day after it convenes, asking the Speaker to form a Joint
Parliamentary Committee on the subject. – Media
„ The government is expected to introduce a legislation on the goods and
service tax (GST) in the parliament session beginning February 21 - Media
Corporate
„ Mahindra Satyam, formerly known as Satyam Computer Services, today said
it has agreed to pay $125 million to settle a putative class action suit filed
against the company in a United States District Court. - Media
„ State-run oil firms raised jet fuel prices by a massive 4%, the ninth straight
increase in rates since October. -Media
„ Jaiprakash Associates is planning to raise $769 million for Jaiprakash Power
through a follow-on share sale or GDR.-Media
„ The Govt has indicated that SAIL's proposed Rs80bn FPO, which had got
delayed, will now hit the capital markets in March. - Media
„ Tata Group firms- Tata Teleservices and Tata Teleservices Maharastra --
have challenged the hike in spectrum usage charge in the Supreme Court. -
Media
„ BHEL has bagged an $436 million contract for setting up a gas-based power
project in Yemen.–Media
„ Sun TV Network has raised advertising rates for its flagship Telugu channel
Gemini TV by 6-13% and by 9-43% in other Telugu channels.-Media
„ The SEBI may impose penalty of up to Rs1.5bn on Reliance Industries if it
establishes the energy major was involved in insider trading. – Media
„ Marico has acquired 85% stake in Vietnamese company International
Consumer Products Corporation (ICP). -Media
„ Essar Oil is set to buy Royal Dutch Shell’s Stanlow refinery in the United
Kingdom for about $350 million to $400 million. –Media
„ India's GSM subscriber base grew 2.5% in Jan’11 with addition of 13.7mn
mobile phone users, of which Bharti alone signed up over 3.3 million. - Media
„ Adjusted group PAT for Tata Steel declined 33%QoQ to Rs9.7bn vs. our
Rs10.4bn est. Group EBITDA was inline (-9%QoQ) but lower other income
led to PAT miss. – Media
„ Indian Bank today hiked lending rate for its existing customers by 25 basis
points to 13.75 per cent in line with other banks.- Media
Source: Collated from Bloomberg and following news papers - Economic Times, Live Mint,
Business Standard & Financial Express dated Feb 12 - 18, 2011.
Corporate highlights
Educomp Solutions Ltd. — Analyst meet
takeaways
Company Update
Focus on asset light model
Educomp hosted its first analyst meet since listing. Management highlighted that
most key businesses will in asset light mode over next 2-3 years. Smart Class
requires no capex currently and capital intensity in K-12 too would reduce over
next 2-3 years given focus on expanding dry management. Other key takeaways:
„ Management highlighted that market opportunity in Smart Class remains
large given its plan to target over 35000 schools in phase one. Given
presence in 5500 schools currently and 98% market share, it believes a 30%
yoy growth is achievable. Retains guidance of adding 25000-30000 class
rooms in FY11 and over 300000 class rooms over next 5-6 years.
„ Secures leadership position in content through launch of 3D content. It
intends to price 3D offering at a premium to other Smart Class content.
Believe there is scope for margin expansion in Smart Class given economies
of scale and increase in sales productivity.
„ Management reiterated that all new deals would be at 20% corporate
guarantee levels. Recently received funding approval at 15% corporate
guarantee for lower fund amount.
„ K-12: Strong focus on execution. Has 50 operational schools and visibility for
another 30 schools. Has set up teacher training academy to cater to training
and recruitment demand for Educomp K-12 schools. Likely to sign up JV with
another strong brand.
„ We retain Buy rating with PO of Rs760. Addition of second outsourcing
vendor, further reduction in debtors & recent success in securing limited
recourse funding should help re rate the stock. Forecast EPS CAGR of 27%
(FY11-13e).
Shree Renuka Sugars Ltd. — Poor Q1 not a
problem
Earnings Review
Weaker Q1FY11 does not hurt full year outlook; Buy
Renuka Sugar reported net profit of Rs664mn in the quarter ending Dec 2010
(Q1FY11, YE Sep). Company’s profit is 46% below our estimate of Rs1.2bn and
is down 75% y-o-y. Key reason for earnings miss are (1) lesser sugar sales in
India, and (2) higher than estimated interest cost in the Indian unit. Despite the
earnings miss we maintain our estimate as the company’s sales volume is likely
to be substantially better in the remainder of the year and have better margin.
India unit profit to improve on higher export and ethanol
Benefit of higher realization on sugar export at Rs33/kg compared to Rs26/kg in
the domestic market along with doubling of exports is like to boost the profit of
Indian unit substantially from Q2FY11. In addition to higher profit on sugar export
Renuka will benefit from doubling of ethanol sales to oil marketing companies
from Q2FY11 compared to Q1FY11.
Brazil to have stronger volume and price in Apr-Sep 2011
We expect Brazil units to have net profit of US$105mn in Apr2011-Mar2012
period, the first full year Brazil crushing season under Renuka’s management
compared to only US$20mn in Sep2010-Apr2011 period. Higher realization and
rise in capacity utilization along with a reduction in interest cost owing to debt
restructuring should boost profit. Near 60% of Apr2011-Mar2012 Brazil unit profit
is likely to accrue to Renuka in FY11 ending Sep 2011.
Sequential rise in profit for rest of FY11e to drive re-rating
Dec 2010 was a lean quarter owing to adverse regulation in India and lack of
contribution from Brazil. We expect sharp sequential profit expansion owing to a
jump India’s export and ethanol in Q2FY11. Brazil to aid from Q3FY11. Stock at
5.4x FY11e EV/EBITDA is attractive as sugar should remain firm for next two
years.
Tata Consultancy — Cloud SMB offering: An
exciting inflexion
Company Update
Launch of Cloud-based SAAS offering for SMBs a landmark
TCS launches its Cloud SMB offering tomorrow. It is initially aimed at the India
market, which is currently estimated at USD12bn and forecast to grow at over a
40% CAGR over the next 4 years. Globally, it is a USD1.04trn market. As in our
recent theme piece on cloud, cloud solutions are potentially margin accretive
once it acquires scale. It will be marketed through a network of 80 value-added
resellers across 21 cities that will be compensated on commission basis over a
period of time.
Layered cloud-based IT service offering
TCS started investing in Apr08, all of which has been expensed, and has100 pilot
customers. The product offers hardware, connectivity, common office
applications, business applications and core vertical ERP solutions for
manufacturing, retail, wellness and education. It also provides an extranet for
clients to connect to its customers and suppliers, and also enables business
analytics. TCS believes there is no comparable product in the market, given its
comprehensive nature.
Attractive value proposition
Key advantages of the product are: a) TCS takes complete accountability for
hardware, network, software & services, b) it is on demand, c) it is opex-based,
d) it incorporates business process knowledge, e.g., procure to pay, order to
cash, and e) embeds compliance processes. Hence, it enhances productivity,
growth and saves from risk of obsolescence. As per the company, it cuts the total
cost of ownership by 40%.
2011 likely another strong year; One of our top picks
Overall, we believe demand pick-up is broad-based with discretionary IT spending
increasing and an upward bias to pricing. TCS hopes to maintain a 27% EBIT
margin next year as well, barring any significant currency volatility. One of the key
levers going forward is non-linear initiatives, such as the Cloud-Based SMB
offering and investments in solutions/ geographies beginning pay off. We remain
confident of our FY11-13e USD-terms rev growth of ~30% CAGR and Re-terms
rev growth of 25%, and EPS growth of 22%. TCS remains one of our top picks.
Ratings / PO Changes
Tata Steel — 3Q: Profits decline sharply led by
higher costs
Price Objective Change
3Q profits decline as expected, Maintain Underperform
Adj. Grp. PAT declined 33%QoQ to Rs9.7bn vs our Rs10.4bn est. Grp. EBITDA
was inline (-9%QoQ) but lower other income led to PAT miss. Corus EBITDA was
inline at US$88mn, but core profits were lower as EBITDA included gains from
carbon credit (CER) sales. India PAT was flat QoQ. We raised FY11E EPS by 7%
& PO to Rs560 due to higher ASP in 4Q, lower interest costs & dilution from FPO.
We expect margins to jump in 4Q as price hikes lead cost hikes, but this should
reverse in FY12 on higher costs. We remain cautious as non integrated Corus
could face potential margin squeeze post 1QFY12 due to higher costs.
Corus EBITDA down 55%QoQ, underlying profits lower
EBITDA/t declined sharply to US$25/t ($56/t in 2Q) as expected. Excluding CER
gains of US$24mn (net of fire losses of US$31mn), core EBITDA/t was lower at
US$18/t. Volumes declined 2%QoQ due to weaker demand during 3Q. ASP was
flat QoQ, but higher input costs (+US$30/t QoQ) led to margin squeeze. Mgmt
expects Corus utilizations to remain around 80% levels over next few quarters.
Domestic EBITDA up 3%QoQ as expected
Standalone PAT was Rs15.1bn, flat QoQ, vs. our Rs15.3bn forecast. Steel
EBITDA/t was US$355/t, (+US$8/t QoQ). ASP was ahead, up 2.3%QoQ led by
higher long prices and better product mix, but this was offset by higher input costs
(+10%QoQ) due to higher coking coal costs. Volumes grew 2%QoQ to 1.64mt.
Key takeaways from analyst call
1) 2.9mtpa expansion to be completed in 2HFY12; 2) Coal cost hikes are likely to
kick in with a lag due to carry forward inventory (~80days at Corus); 3)
Environmental approval for Canada iron ore project has been obtained. Mgmt
expects production to commence in 1QFY13; 4) Net debt has increased to
US$11.8bn as on 3Q (US$10.7bn in 2QFY11). We estimate net gearing is ~1.6x.
Mahanagar Telephone Nigam Ltd. — Nothing to
cheer
Price Objective Change
3Q results disappoint; PO cut; higher staff costs a key drag
In 3Q FY11, MTNL’s pre-exceptionals’ loss stood at ~Rs4.3bn vs a loss of Rs2bn
in 2Q FY11. EBITDA fell 95% QoQ as wet-lease income from Commonwealth
Games tapered and staff costs rose 24% QoQ. Our conversation with the Co
suggests that staff costs are likely to stay high. Factoring this, we have cut PO to
Rs45/sh (-10% vs earlier). We do not foresee any profit turnaround & there may
be further downside from recent TRAI recommendations. Maintain Underperform.
Core business remains tepid
Recurring revenues fell 7% YoY & 4% QoQ in 3Q FY11 led by erosion in both
basic and cellular segments. ARPU pressure was witnessed across all segments;
ARPU fell 5% QoQ in basic/wireline, 2% QoQ in broadband and 5% QoQ in
GSM-cellular. The Co’s broadband sub base at ~0.9mn represents ~26% of its
fixed-line sub base.
3G roaming arrangements still unclear
Soon after completion of the 3G auctions, MTNL had floated bids for 3G roaming
arrangements in Delhi & Mumbai. The Co is yet to sign deals with any operator
though media reports suggest that Aircel and TataTele could be the shortlisted
partners. We have factored 3G revenues from FY13 onwards.
Stretched bal-sheet; TRAI recos may add further pressure
We estimate MTNL’s net debt at ~Rs45bn by Mar ’11 (vs net cash of Rs70bn in
Mar ’10) and net debt/EBITDA is forecast at ~11x FY11E. MTNL holds 12.4MHz
of spectrum in each of its circles i.e. Delhi & Mumbai and may need to pay as
much as ~Rs9.5bn towards one time buyout of >6.2MHz spectrum if recent TRAI
recommendations are accepted. This should add to balance-sheet stress
Lanco Infratech Ltd. — Concerns priced in, Buy
Price Objective Change
Focus on execution; Reiterate Buy with PO Rs65/sh
Key takeaways from the management meeting include: (a) Capacity expansion
plan is progressing well, barring few months delays, with fully funded capex (b)
Coal supply from Coal India is a constraint, hence procurement through e-auction
and imported coal is imperative and (c) change in depreciation policy – back to
SLM method (earlier WDV) – was to bring in line with peers and avoid book
losses in initial years of operation. We believe Lanco is well poised for 76% power
sales volume CAGR over FY10-13E, amongst the highest vs peers, due to
capacity enhancing from 2.1GW currently to 4.7GW by FY13E. Further, there is a
structural shift towards long-term sales (¾ by FY13E vs ½ today) and about twothirds of capacities have fuel cost inflation recoverable in tariff. We raised our
EPS by 61-147% during FY11E-13E but cut PO to Rs65. Our revised earnings
CAGR is 63% over FY10-13E and ROE of 23-29%.
Dec-Q results: Profit up 50%yoy on chg in dep. policy
While the E&C order book rose by 8%qoq to Rs275bn driven by external orders,
the E&C revenue increased by 54%yoy on execution. EBITDA margins declined
to 14% - amongst the lowest in last two years on higher expenses. While ST tariff
and UI realization declined by 18%qoq and 27%qoq for Kondapalli Phase II and
Amarkantak Unit II respectively, the ST tariff increase 9%qoq for Amarkantak Unit
I at Rs4.1/unit. Change in depreciation policy to SLM (earlier WDV) resulted in the
power plants reporting profits at Rs1.2bn for Amarkantak and Rs792mn for
Kondapalli. The Udupi project reported a loss of Rs156mn owing to lower
realization vs cost plus tariff as per interim order.
SoTP based PO, key risks
Our SoTP gives a PO of Rs65/sh based on a combination of DCF and exit P/BV
and P/E (power Rs46/sh, EPC Rs20/sh). Downside risks are a significant fall in
ST prices, shortfall in fuel supply, regulatory risk, significant delays in capacity
addition & rise in interest rate, aggressive bids and worsening SEB financials.
Coal India Limited — 3Q: Operating results in
line
Price Objective Change
EBITDA in line, PAT miss due to higher tax, Maintain Neutral
PAT grew 55%QoQ to Rs26.4bn vs. our Rs28.9bn est. EBITDA was Rs33.8bn in
line with our est., but higher tax rate of 37% (our est. 33%) led to lower PAT. We
cut our FY11-12E EPS by ~4% & PO to Rs339 (from Rs350) due to lower vols.
(CEPI impact) & higher tax rate. Recent increase in Govt. focus towards resolving
approval issues is a positive for CIL’s volumes. However, logistics will remain the
key constraint to shipments. Despite pricing flexibility to pass thru cost inflation,
there is risk around Govt. not allowing coal price hikes due to inflation concerns.
CIL trades at 0.9x our NPV estimate (8x FY12E OBR adj. EBITDA) implying 12%
upside potential. Hence Neutral.
Volumes inline, realizations disappoint but costs lower
Coal output of 114mt (+26%QoQ) exceeded shipments of 110.5mt (+12%QoQ)
due to logistics constraints leading to coal stock increase (+3.5mt). ASP rose
3%QoQ, (3% below our est.). Wage costs declined 6%QoQ (2% below our est.)
due to absence of one time charges made in 2Q. Total costs were flat QoQ as 2x
higher overburden removal charges were offset by lower mining costs/
overheads.
Coal supply – a key Govt focus area; logistics issues persist
CIL’s FY11-12 output targets have been hit by 16-39mt due to (CEPI) pollution norm
related moratorium on output. Govt. has recently indicated that ~15 projects could
be cleared soon which could boost output by ~20-25mt. Logistics issues persist -
rake availability is ~170-175 rakes/day vs. target 180-185 rakes/day. We cut
volumes to 428mt (-1%) in FY11E & 444mt (-3%) in FY12E due to CEPI impact.
CIL proposes to hike prices to offset rising cost pressure
CIL has started consultation with Govt. to hike base prices to offset wage cost
hikes due to 1) higher inflation linked wage components; 2) expected wage hike
in June 11. Other ASP levers are 1) higher e-auction premium (~93% in Dec10
vs. 60% in FY10); 2) higher e-auction mix ~12.5% of vols. (11.2% in FY10).
Pantaloon — Profit growth takes a breather;
Maintain Buy
Price Objective Change
Dec Q profit Rs473mn, up 6% yoy; Reiterate Buy
We were disappointed by significantly weaker than expected margins but were
encouraged by the strong sales growth as Same Store Sales growth (SSSG)
remained healthy across all categories. Longer term gross margin outlook now
appears much weaker as contribution from lower margins Foods is rising and
gestation for loss making Home Retail could run longer. We cut our est for FY11-
13E by ¬35% to factor in lower gross margins but still maintain Buy on expected
EPS CAGR of 50%. PO cut to Rs530 on lower DCF valuation for Core Retail biz.
Topline growth remains strong on encouraging SSSG
Pantaloon recorded 32% yoy growth in sales largely in line with our est. Area
addition also picked up to 0.8mn. This gives us confidence of achieving 2mn area
addition target this year. SSS growth remains strong at 12% for Value, 21% in
Lifestyle and 18% in Home. This trend is encouraging as it reinforces our view
that Pantaloon is set to benefit from upswing in urban discretionary spending.
Margin declines on weaker mix and losses in Electronics
Gross margin fell 150bp during the quarter vs our est of 80bp on 1) weaker mix 2)
deeper discounts and 3) much higher losses in electronics. We have structurally
cut gross margin by 100-200bp as we now build higher contribution from lower
margin Foods category and much longer gestation phase for Home Retail given
issues being faced by the electronics segment.
Valuations appear attractive for fundamental growth story
We believe valuation is attractive as at 19xFY12E EPS, the stock is trading at a
discount of 20% to the sector for a higher earnings growth trajectory led by
improving consumer spending, improvement in profitability driven by backend
efficiencies and organizational restructuring and continued deleveraging.
GSK India — 4Q miss; Risk-reward unattractive
Price Objective Change
4Q results disappoint; Retain U/P on expensive valuations
GSK’s 4Q profits at Rs1.2bn grew by 15% YoY (down 23% QoQ) driven by higher
other income, still 15% below BofAMLe. Topline growth of 10.4% YoY (against
~16% industry average) remained a concern, while EBITDA margins declined
133bps YoY. Sales at Rs4.9bn was unexciting, however, weak margins led to
mere 5% YoY EBITDA growth (at Rs1.3bn). We revise forecasts noting 4Q miss,
but raise PO to Rs2030 (at 22x P/E) on roll-over to CY12E EPS.
Topline growth still behind industry average
GSK’s weak topline growth of 10.4% was well behind industry average of 14-
16%. While GSK maintained its market share, we believe 1/4th of growth (~3%)
was attributed to vaccines portfolio (12% of sales). Growth for the rest of portfolio
could be below 8%, given 75%+ concentration in acute therapy segments, with
26% of total portfolio falling under price control (DPCO).
Modest organic growth outlook may face hiccups
Our forecast of 13% revenue CAGR over CY10-12E is ahead of mgmt guidance
of 12%, driven by new launches and power brands. Recent new launches
(including in-licensed products) and strengthening of CVS and derma portfolio
should provide medium term growth drivers. However, we believe patented
products from the parent’s (GSK Plc) stable to account for less than 10% of sales
while risk from a generic competition may dampen growth plans.
Premium valuation factors strong cash position of Rs200/sh
GSK is trading at 28x CY11E & 24x CY12E EPS, implying steep 20-25%
premium to large cap pharma peers & at upper-end of its historical P/E bands.
However, given modest earnings growth of 16% & limited upside triggers, we find
current valuations leave little room for error. Strong cash position of Rs200/sh
(Rs17bn) may be utilized for prospective acquisitions to strengthen existing
portfolio, raising expectations. Reiterate Underperform with PO of Rs2030/sh.
Reliance Communication Ltd. — Tight ropewalk on various fronts
Price Objective Change
Earnings pressure likely to stay; maintain underperform
RCom’s share price has collapsed recently and barring M&A triggers, we think
valuations are still not exciting. The stock is trading close to 7.5x FY12EEV/EBITDA i.e. on par with Bharti for weaker earnings outlook. We think dramatic
earnings turnaround is unlikely given RCom’s current brand position & advertising
intensity. We have cut PO to Rs115/sh (-18%) and foresee pot’l further downside
from recent TRAI recos and non-execution of the tower-sharing deal with Etisalat.
Traffic contracts in 3Q; MNP may aggravate weakness
RCom’s operating performance in 3Q FY11 was a tad below our expectations.
Wireless traffic fell 3% QoQ in 3Q FY11 and wireless revenues contracted 2%
QoQ despite stable tariffs. On its post-results call, RCom’s top mgt. said they are
rebalancing their offerings by withdrawing from less profitable segments like
PCOs. Also, our channel checks suggest that the Co’s advertising and distribution
intensity are low resulting in loss of traffic market share. We worry that RCom’s
traffic share may weaken further owing to mobile number portability.
FCCB refinancing may hurt FY12E; bal-sheet stress remains
As of Dec ’11, RCom’s net debt stood at ~US$7bn and net debt/EBITDA is
forecast at ~5x FY11E. The Co’s average borrowing cost (excluding forex
fluctuations) has been relatively low at ~4.5% due to funding via convertible
bonds. (FCCBs) to the tune of ~US$1.2bn. The FCCBs are due for redemption in
FY12E & a challenging refinancing environment may lift RCom’s borrowing costs.
M&A attractiveness may emerge; low visibility on buyers
RCom is now trading at a Price/book of 0.5x FY11 albeit for a low RoE of ~2-3%,
and assuming full value for the CDMA network. We think the deep discount may
facilitate M&A/asset attractiveness unless regulatory risks surface.
Firstsource Solutions Ltd. — Strong cash
generation this qtr
Price Objective Change
Strong cash generation this qtr; Retain Buy but lower PO
Q3 operating performance similar to our expectations with revs from Barclaycard
deal helping a 5% qoq rev growth (constant currency). Improved cash generation
this qtr on back of normalized DSO’s reinforce our view that FSOL should be able
to pay-off over 50% of Dec ’12 FCCB amount from internal accruals. Industry
wide sales cycles are still long which lead us to a 5-6% cut to FY12/13 EBITDA
estmts and 9-10% cut at EPS level. Lower PO to Rs30 (vs. Rs35 earlier) at
~10xFY12 adj. EPS (adjusted for imputed interest on FCCB) but retain a Buy on
undemanding valuation (6xFY12 adj. EPS) and 17% 2-yr adj. EPS CAGR.
A reasonably strong Q3
Revs were up 2%qoq (5%qoq in constant currency terms, 1% below our estmts)
as revs from Barclaycard deal (>USD100m. 5yr) started to flow from Nov 2010.
EBIT margins declined 47bps qoq (in-line with our estimates) on impact from
lower working days in Q3, higher depreciation costs and lower gains from
hedges.
Improving cash position
We believe company should be able to pay-off over 50% of the FCCB amount
(USD296m incl. accrued interest, due Dec2012) from internal accruals. Q3 saw
strong cash generation of ~USD19m on back of normalization of DSO days while
Q4 should again be strong on strength in collections business and cash from sale
of subsidiary - Pipal (~USD5m). As of end-Q3, cash on books was ~USD80m.
Sales cycle still long
Deal conversions continue to take longer than expected time in BPO industry as
clients defer projects with large upfront costs and unemployment rates remain
high in US. For Firstsource, conversion delays continue to especially impact the
telecom segment (~37% of revs)
Price objective basis & risk
Coal India Limited (XOXCF)
Our PO of Rs339 is set at our NPV estimate. Our NPV analysis assumes a
WACC of 13% and a terminal growth of 2%. At our PO Coal India would trade at
10.5x FY12E EBIDTA and 9.3x FY12E adjusted EBITDA (adjusted for OBR). We
have assumed coal volumes of 423mn tons in FY10, 438mn tons in FY12E. We
forecast volumes to grow at 4% CAGR over FY13-18E.
Stronger volume growth, higher realisations and lower costs pose upside risks to
our valuations. Downside risks to our valuations are slower pace of environmental
approvals, prohibition of coal mining in areas where CIL reserves are located,
sharper than expected increase in wage costs and inability to raise prices to pass
thru wage cost hikes.
Educomp Solu (EUSOF)
Our PO of Rs760 is based on a 2-year PEG of 0.8x and implies a target multiple
of 18x FY12e. Our PO reflects potential de-rating given that the Smart Class
revenue stream is now likely to be volatile. We retain our Buy given the strong
27% CAGR in earnings FY11-13E, and the turnaround in FCF on shift to new
business model. Besides Educomp remains the only listed education service
provider with offerings in K-12 and is a emerging player in vocational/
supplemental education.
Risks to our valuation are higher losses in new initiatives, higher-than-anticipated
cut in Smart Class pricing, acquisition-related risks and managing multiple growth
initiatives.
Firstsource (FSSOF)
Our PO of Rs30 is based on 0.5x EV/EBITDA to 2-yr growth, implying 10xFY12
adj. EPS, Our adjusted EPS imputes interest on FCCB, given we treat FCCB as
debt. The multiple is fair given our forecast 21% 3-yr CAGR in adj. EPS.
Downside risks: Sharp macro detrioration and higher than expected employee
attrition.
GSK India (GXOLF)
Our PO for GSK is Rs2030 which is based on 22x CY12E EPS, at 10% premium
to the large cap Indian pharmaceutical peers and at upper end of its historical P/E
bands. We believe a premium valuation is justified given its defensive nature and
strong balance sheet. However, current valuations are at a significant premium to
sector and to its historical averages, which are not justified given earnings growth
of 16pc. The company's 16pc EPS CAGR (CY10-12E) is lower than the sector's
24pc+ earnings growth and we find incremental growth drivers missing. Further,
overhang on DPCO coverage on price control and patent challenges by copycat
participants may provide negative triggers.
Risks: (a) possible growth slowdown in the domestic market due to drug policy
revisions (b) fully owned subsidiary concerns.
Upside risks may emerge from higher-than-expected pick up from new patented
launches.
Lanco Infratech Ltd. (LNIFF)
We have used sum-of-the-parts (SOTP) to arrive at the PO of Rs65/sh is primarily
based on DCF, mutiples and conglomerate discount of 10%. It comprises:
1) Power assets - operating as well as construction - Rs46/sh (71%) valued using
DCF with varying CoE 12.5-15% and exit P/BV of 1.5x FY12 for regulated assets.
2) EPC business - Rs20/sh (31%) valued using exit P/E of 12x FY12E - in line
with other mid-cap construction companies
3) Balance Rs3/sh consists of road BOT projects, power trading, realty and liquid
investments + cash at book value
Downside risks: significant delay in execution, sharp decline in short-term tariff,
regulatory risk, higher interest rate and worsening SEB financials.
MTNL (XMTNF)
We have a price objective of Rs45 (ADR of US$1.97) for MTNL. The Co is lossmaking at PAT level. Our DCF based FY12 PO values the company's core
telecom business using 13% WACC and 5% terminal growth. Possible
government initiative to privatise MTNL or significantly cut its current large
employee base would present strong upside. Similarly, any dramatic
improvement in MTNL's broadband penetration could offer upside. Downside risk
stems from possible further wage increases or unforeseen operating expenses for
3G rollout. Pending TRAI recommendation on spectrum valuation also poses
downside risk.
Pantaloon (PFIAF)
Our PO of Rs530 is based on a SOTP valuation comprising stand-alone retail at
Rs483, the Future Capital stake at Rs24 and the stake in Future Generali at
Rs23. Retail is based on DCF using a WACC of 11.1pct, a steady-state EBITDA
margin of 9pct from FY15E onwards and a terminal growth rate of 5pct. Future
Capital is based on a 20pct discount to its market price. Future Generali stake is
valued 12xFY12E NBAP.
Downside risks: Stiffer competition, slow down in consumer spending and store
cannibalization in retail.
Upside risks: Stronger-than-expected consumer demand.
RCVL (RLCMF)
We have a price objective of Rs115/sh for RCom. Our PO is based on sum-ofparts and DCF. Reliance Infratel (towerCo) is valued at the top-end of EV implied
by deals in the towerCo space. We value RCom's non-wireless businesses at 5x
FY12-EV/EBITDA while RCom's wireless business is rough-stab valued at around
4.5x FY12-EV/EBITDA (post-towers) implying 15-20% discount versus GEM
wireless majors. Upside surprise could be led by asset sales at strong premiums.
Downside risk to our outlook could stem from continued failure to monetize the
tower-business and unforeseen margin pressures post MNP and 3G.
Renuka Sugars (SRNKF)
Our PO of Renuka Sugar at Rs114/sh is based on 6x FY11E EV/EBITDA.
Renuka has traded in a EV/EBITDA range of 4.5x to 10x in last four years. At 6x
EV/EBITDA Renuka will trade in line with Brazil peers and the median multiple of
Indian sugar mills. At our PO the stock would trade at PB of 2.5x FY11e, which
we believe is justified as we expect Renuka to earn at least 26% ROE in next two
years. Risks to our price objective are (1) a lower than estimated price for sugar,
(2) delays in commissioning of new 3000TPD raw sugar refining capacity in
Kandla, Gujarat, and (3) lower exports from India owing govt restriction.
Tata Consultancy (TACSF)
Our Price Objective of Rs1,400 is based on a target FY12 EV/EBITDA-to-2-year
EBITDA growth of 0.85x, in line with Infosys. This implies a target FY13e PE of
22x, in line with the current 1-year forward (FY12e) PE. Downside risks to our
estimates stem from macro-led delays in IT spending or a sharp appreciation of
the Rupee.
Tata Steel (TAELF)
Our PO of Rs560 is based on our NPV valuation. Our NPV assumes a WACC of
12.5% and perpetuity growth rate of 0%. Upside risks to our valuation are higher
steel prices and volumes, lower input costs, and higher domestic import duty.
Downside risks are lower-than-expected steel prices, volumes, delays in
commissioning of new expansion and sharper than expected increase in costs
India Equity Research Reports, IPO and Stock News
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India – Weekly wrap-up
„Economy / Political News
Food inflation fell for the second straight week to a nine-week low of 11.05%, as
pulses, wheat and potato prices declined.
To end the standoff on a parliamentary probe into the telecom scam, PM
Manmohan Singh is likely to make a statement in Parliament on Tuesday asking
the Speaker to form a Joint Parliamentary Committee on the subject.
The government is expected to introduce legislation on the goods and service tax
(GST) in the parliament session beginning February 21.
Corporate Highlights
Tata Steel - 3Q profits decline: Adjusted group PAT for Tata Steel declined
33%QoQ, to Rs9.7bn, vs. our Rs10.4bn est. Group EBITDA was in line
(-9%QoQ), but lower other income led to the PAT miss.
Stock market overview
Performance: The BSE Sensex was up by 2.7% last week. Trading volumes
were down 4% and the Advance/Decline ratio was 1.5 at BSE.
Flows: FII bought USD 10mn during the week ended 18
th
Feb’11. YTD, they have
sold USD 1.5bn. Domestic MFs, on the other hand, bought USD 25mn during the
week ended 17
th
Feb’11.
Top performers of the week: United Spirits, Jindal Steel, Kotak Mahindra, GMR
Infra and HDIL.
Worst performers: DLF, Rel Communications, IndiaBull Realestate, ONGC and
Cairn.
Economic Data Watch
Forex reserves fell by USD 1bn, to US$298bn, for the week ended 11
th
Feb’11.
Ratings and estimates changes
Tata Steel — Raised PO to Rs560 from Rs520
Mahanagar Telephone Nigam Ltd. — Cut PO to Rs45 from Rs50
Lanco Infratech Ltd. — Cut PO to Rs65 from Rs74
Coal India Limited — Cut PO to Rs339 from Rs350
Pantaloon — Cut PO to Rs530 from Rs655
GSK India — Raised PO to Rs2,030 from Rs1,765
Reliance Communication Ltd. — Cut PO to Rs115 from Rs140
Firstsource Solutions Ltd. — Cut PO to Rs30 from Rs35.
News This Week
Economics
„ Food inflation fell for the second straight week to a nine-week low of 11.05%,
as pulses, wheat and potato prices declined. - Media
Politics
„ To end the standoff on a parliamentary probe into the telecom scam, Prime
Minister Manmohan Singh is likely to make a statement in Parliament on
Tuesday, a day after it convenes, asking the Speaker to form a Joint
Parliamentary Committee on the subject. – Media
„ The government is expected to introduce a legislation on the goods and
service tax (GST) in the parliament session beginning February 21 - Media
Corporate
„ Mahindra Satyam, formerly known as Satyam Computer Services, today said
it has agreed to pay $125 million to settle a putative class action suit filed
against the company in a United States District Court. - Media
„ State-run oil firms raised jet fuel prices by a massive 4%, the ninth straight
increase in rates since October. -Media
„ Jaiprakash Associates is planning to raise $769 million for Jaiprakash Power
through a follow-on share sale or GDR.-Media
„ The Govt has indicated that SAIL's proposed Rs80bn FPO, which had got
delayed, will now hit the capital markets in March. - Media
„ Tata Group firms- Tata Teleservices and Tata Teleservices Maharastra --
have challenged the hike in spectrum usage charge in the Supreme Court. -
Media
„ BHEL has bagged an $436 million contract for setting up a gas-based power
project in Yemen.–Media
„ Sun TV Network has raised advertising rates for its flagship Telugu channel
Gemini TV by 6-13% and by 9-43% in other Telugu channels.-Media
„ The SEBI may impose penalty of up to Rs1.5bn on Reliance Industries if it
establishes the energy major was involved in insider trading. – Media
„ Marico has acquired 85% stake in Vietnamese company International
Consumer Products Corporation (ICP). -Media
„ Essar Oil is set to buy Royal Dutch Shell’s Stanlow refinery in the United
Kingdom for about $350 million to $400 million. –Media
„ India's GSM subscriber base grew 2.5% in Jan’11 with addition of 13.7mn
mobile phone users, of which Bharti alone signed up over 3.3 million. - Media
„ Adjusted group PAT for Tata Steel declined 33%QoQ to Rs9.7bn vs. our
Rs10.4bn est. Group EBITDA was inline (-9%QoQ) but lower other income
led to PAT miss. – Media
„ Indian Bank today hiked lending rate for its existing customers by 25 basis
points to 13.75 per cent in line with other banks.- Media
Source: Collated from Bloomberg and following news papers - Economic Times, Live Mint,
Business Standard & Financial Express dated Feb 12 - 18, 2011.
Corporate highlights
Educomp Solutions Ltd. — Analyst meet
takeaways
Company Update
Focus on asset light model
Educomp hosted its first analyst meet since listing. Management highlighted that
most key businesses will in asset light mode over next 2-3 years. Smart Class
requires no capex currently and capital intensity in K-12 too would reduce over
next 2-3 years given focus on expanding dry management. Other key takeaways:
„ Management highlighted that market opportunity in Smart Class remains
large given its plan to target over 35000 schools in phase one. Given
presence in 5500 schools currently and 98% market share, it believes a 30%
yoy growth is achievable. Retains guidance of adding 25000-30000 class
rooms in FY11 and over 300000 class rooms over next 5-6 years.
„ Secures leadership position in content through launch of 3D content. It
intends to price 3D offering at a premium to other Smart Class content.
Believe there is scope for margin expansion in Smart Class given economies
of scale and increase in sales productivity.
„ Management reiterated that all new deals would be at 20% corporate
guarantee levels. Recently received funding approval at 15% corporate
guarantee for lower fund amount.
„ K-12: Strong focus on execution. Has 50 operational schools and visibility for
another 30 schools. Has set up teacher training academy to cater to training
and recruitment demand for Educomp K-12 schools. Likely to sign up JV with
another strong brand.
„ We retain Buy rating with PO of Rs760. Addition of second outsourcing
vendor, further reduction in debtors & recent success in securing limited
recourse funding should help re rate the stock. Forecast EPS CAGR of 27%
(FY11-13e).
Shree Renuka Sugars Ltd. — Poor Q1 not a
problem
Earnings Review
Weaker Q1FY11 does not hurt full year outlook; Buy
Renuka Sugar reported net profit of Rs664mn in the quarter ending Dec 2010
(Q1FY11, YE Sep). Company’s profit is 46% below our estimate of Rs1.2bn and
is down 75% y-o-y. Key reason for earnings miss are (1) lesser sugar sales in
India, and (2) higher than estimated interest cost in the Indian unit. Despite the
earnings miss we maintain our estimate as the company’s sales volume is likely
to be substantially better in the remainder of the year and have better margin.
India unit profit to improve on higher export and ethanol
Benefit of higher realization on sugar export at Rs33/kg compared to Rs26/kg in
the domestic market along with doubling of exports is like to boost the profit of
Indian unit substantially from Q2FY11. In addition to higher profit on sugar export
Renuka will benefit from doubling of ethanol sales to oil marketing companies
from Q2FY11 compared to Q1FY11.
Brazil to have stronger volume and price in Apr-Sep 2011
We expect Brazil units to have net profit of US$105mn in Apr2011-Mar2012
period, the first full year Brazil crushing season under Renuka’s management
compared to only US$20mn in Sep2010-Apr2011 period. Higher realization and
rise in capacity utilization along with a reduction in interest cost owing to debt
restructuring should boost profit. Near 60% of Apr2011-Mar2012 Brazil unit profit
is likely to accrue to Renuka in FY11 ending Sep 2011.
Sequential rise in profit for rest of FY11e to drive re-rating
Dec 2010 was a lean quarter owing to adverse regulation in India and lack of
contribution from Brazil. We expect sharp sequential profit expansion owing to a
jump India’s export and ethanol in Q2FY11. Brazil to aid from Q3FY11. Stock at
5.4x FY11e EV/EBITDA is attractive as sugar should remain firm for next two
years.
Tata Consultancy — Cloud SMB offering: An
exciting inflexion
Company Update
Launch of Cloud-based SAAS offering for SMBs a landmark
TCS launches its Cloud SMB offering tomorrow. It is initially aimed at the India
market, which is currently estimated at USD12bn and forecast to grow at over a
40% CAGR over the next 4 years. Globally, it is a USD1.04trn market. As in our
recent theme piece on cloud, cloud solutions are potentially margin accretive
once it acquires scale. It will be marketed through a network of 80 value-added
resellers across 21 cities that will be compensated on commission basis over a
period of time.
Layered cloud-based IT service offering
TCS started investing in Apr08, all of which has been expensed, and has100 pilot
customers. The product offers hardware, connectivity, common office
applications, business applications and core vertical ERP solutions for
manufacturing, retail, wellness and education. It also provides an extranet for
clients to connect to its customers and suppliers, and also enables business
analytics. TCS believes there is no comparable product in the market, given its
comprehensive nature.
Attractive value proposition
Key advantages of the product are: a) TCS takes complete accountability for
hardware, network, software & services, b) it is on demand, c) it is opex-based,
d) it incorporates business process knowledge, e.g., procure to pay, order to
cash, and e) embeds compliance processes. Hence, it enhances productivity,
growth and saves from risk of obsolescence. As per the company, it cuts the total
cost of ownership by 40%.
2011 likely another strong year; One of our top picks
Overall, we believe demand pick-up is broad-based with discretionary IT spending
increasing and an upward bias to pricing. TCS hopes to maintain a 27% EBIT
margin next year as well, barring any significant currency volatility. One of the key
levers going forward is non-linear initiatives, such as the Cloud-Based SMB
offering and investments in solutions/ geographies beginning pay off. We remain
confident of our FY11-13e USD-terms rev growth of ~30% CAGR and Re-terms
rev growth of 25%, and EPS growth of 22%. TCS remains one of our top picks.
Ratings / PO Changes
Tata Steel — 3Q: Profits decline sharply led by
higher costs
Price Objective Change
3Q profits decline as expected, Maintain Underperform
Adj. Grp. PAT declined 33%QoQ to Rs9.7bn vs our Rs10.4bn est. Grp. EBITDA
was inline (-9%QoQ) but lower other income led to PAT miss. Corus EBITDA was
inline at US$88mn, but core profits were lower as EBITDA included gains from
carbon credit (CER) sales. India PAT was flat QoQ. We raised FY11E EPS by 7%
& PO to Rs560 due to higher ASP in 4Q, lower interest costs & dilution from FPO.
We expect margins to jump in 4Q as price hikes lead cost hikes, but this should
reverse in FY12 on higher costs. We remain cautious as non integrated Corus
could face potential margin squeeze post 1QFY12 due to higher costs.
Corus EBITDA down 55%QoQ, underlying profits lower
EBITDA/t declined sharply to US$25/t ($56/t in 2Q) as expected. Excluding CER
gains of US$24mn (net of fire losses of US$31mn), core EBITDA/t was lower at
US$18/t. Volumes declined 2%QoQ due to weaker demand during 3Q. ASP was
flat QoQ, but higher input costs (+US$30/t QoQ) led to margin squeeze. Mgmt
expects Corus utilizations to remain around 80% levels over next few quarters.
Domestic EBITDA up 3%QoQ as expected
Standalone PAT was Rs15.1bn, flat QoQ, vs. our Rs15.3bn forecast. Steel
EBITDA/t was US$355/t, (+US$8/t QoQ). ASP was ahead, up 2.3%QoQ led by
higher long prices and better product mix, but this was offset by higher input costs
(+10%QoQ) due to higher coking coal costs. Volumes grew 2%QoQ to 1.64mt.
Key takeaways from analyst call
1) 2.9mtpa expansion to be completed in 2HFY12; 2) Coal cost hikes are likely to
kick in with a lag due to carry forward inventory (~80days at Corus); 3)
Environmental approval for Canada iron ore project has been obtained. Mgmt
expects production to commence in 1QFY13; 4) Net debt has increased to
US$11.8bn as on 3Q (US$10.7bn in 2QFY11). We estimate net gearing is ~1.6x.
Mahanagar Telephone Nigam Ltd. — Nothing to
cheer
Price Objective Change
3Q results disappoint; PO cut; higher staff costs a key drag
In 3Q FY11, MTNL’s pre-exceptionals’ loss stood at ~Rs4.3bn vs a loss of Rs2bn
in 2Q FY11. EBITDA fell 95% QoQ as wet-lease income from Commonwealth
Games tapered and staff costs rose 24% QoQ. Our conversation with the Co
suggests that staff costs are likely to stay high. Factoring this, we have cut PO to
Rs45/sh (-10% vs earlier). We do not foresee any profit turnaround & there may
be further downside from recent TRAI recommendations. Maintain Underperform.
Core business remains tepid
Recurring revenues fell 7% YoY & 4% QoQ in 3Q FY11 led by erosion in both
basic and cellular segments. ARPU pressure was witnessed across all segments;
ARPU fell 5% QoQ in basic/wireline, 2% QoQ in broadband and 5% QoQ in
GSM-cellular. The Co’s broadband sub base at ~0.9mn represents ~26% of its
fixed-line sub base.
3G roaming arrangements still unclear
Soon after completion of the 3G auctions, MTNL had floated bids for 3G roaming
arrangements in Delhi & Mumbai. The Co is yet to sign deals with any operator
though media reports suggest that Aircel and TataTele could be the shortlisted
partners. We have factored 3G revenues from FY13 onwards.
Stretched bal-sheet; TRAI recos may add further pressure
We estimate MTNL’s net debt at ~Rs45bn by Mar ’11 (vs net cash of Rs70bn in
Mar ’10) and net debt/EBITDA is forecast at ~11x FY11E. MTNL holds 12.4MHz
of spectrum in each of its circles i.e. Delhi & Mumbai and may need to pay as
much as ~Rs9.5bn towards one time buyout of >6.2MHz spectrum if recent TRAI
recommendations are accepted. This should add to balance-sheet stress
Lanco Infratech Ltd. — Concerns priced in, Buy
Price Objective Change
Focus on execution; Reiterate Buy with PO Rs65/sh
Key takeaways from the management meeting include: (a) Capacity expansion
plan is progressing well, barring few months delays, with fully funded capex (b)
Coal supply from Coal India is a constraint, hence procurement through e-auction
and imported coal is imperative and (c) change in depreciation policy – back to
SLM method (earlier WDV) – was to bring in line with peers and avoid book
losses in initial years of operation. We believe Lanco is well poised for 76% power
sales volume CAGR over FY10-13E, amongst the highest vs peers, due to
capacity enhancing from 2.1GW currently to 4.7GW by FY13E. Further, there is a
structural shift towards long-term sales (¾ by FY13E vs ½ today) and about twothirds of capacities have fuel cost inflation recoverable in tariff. We raised our
EPS by 61-147% during FY11E-13E but cut PO to Rs65. Our revised earnings
CAGR is 63% over FY10-13E and ROE of 23-29%.
Dec-Q results: Profit up 50%yoy on chg in dep. policy
While the E&C order book rose by 8%qoq to Rs275bn driven by external orders,
the E&C revenue increased by 54%yoy on execution. EBITDA margins declined
to 14% - amongst the lowest in last two years on higher expenses. While ST tariff
and UI realization declined by 18%qoq and 27%qoq for Kondapalli Phase II and
Amarkantak Unit II respectively, the ST tariff increase 9%qoq for Amarkantak Unit
I at Rs4.1/unit. Change in depreciation policy to SLM (earlier WDV) resulted in the
power plants reporting profits at Rs1.2bn for Amarkantak and Rs792mn for
Kondapalli. The Udupi project reported a loss of Rs156mn owing to lower
realization vs cost plus tariff as per interim order.
SoTP based PO, key risks
Our SoTP gives a PO of Rs65/sh based on a combination of DCF and exit P/BV
and P/E (power Rs46/sh, EPC Rs20/sh). Downside risks are a significant fall in
ST prices, shortfall in fuel supply, regulatory risk, significant delays in capacity
addition & rise in interest rate, aggressive bids and worsening SEB financials.
Coal India Limited — 3Q: Operating results in
line
Price Objective Change
EBITDA in line, PAT miss due to higher tax, Maintain Neutral
PAT grew 55%QoQ to Rs26.4bn vs. our Rs28.9bn est. EBITDA was Rs33.8bn in
line with our est., but higher tax rate of 37% (our est. 33%) led to lower PAT. We
cut our FY11-12E EPS by ~4% & PO to Rs339 (from Rs350) due to lower vols.
(CEPI impact) & higher tax rate. Recent increase in Govt. focus towards resolving
approval issues is a positive for CIL’s volumes. However, logistics will remain the
key constraint to shipments. Despite pricing flexibility to pass thru cost inflation,
there is risk around Govt. not allowing coal price hikes due to inflation concerns.
CIL trades at 0.9x our NPV estimate (8x FY12E OBR adj. EBITDA) implying 12%
upside potential. Hence Neutral.
Volumes inline, realizations disappoint but costs lower
Coal output of 114mt (+26%QoQ) exceeded shipments of 110.5mt (+12%QoQ)
due to logistics constraints leading to coal stock increase (+3.5mt). ASP rose
3%QoQ, (3% below our est.). Wage costs declined 6%QoQ (2% below our est.)
due to absence of one time charges made in 2Q. Total costs were flat QoQ as 2x
higher overburden removal charges were offset by lower mining costs/
overheads.
Coal supply – a key Govt focus area; logistics issues persist
CIL’s FY11-12 output targets have been hit by 16-39mt due to (CEPI) pollution norm
related moratorium on output. Govt. has recently indicated that ~15 projects could
be cleared soon which could boost output by ~20-25mt. Logistics issues persist -
rake availability is ~170-175 rakes/day vs. target 180-185 rakes/day. We cut
volumes to 428mt (-1%) in FY11E & 444mt (-3%) in FY12E due to CEPI impact.
CIL proposes to hike prices to offset rising cost pressure
CIL has started consultation with Govt. to hike base prices to offset wage cost
hikes due to 1) higher inflation linked wage components; 2) expected wage hike
in June 11. Other ASP levers are 1) higher e-auction premium (~93% in Dec10
vs. 60% in FY10); 2) higher e-auction mix ~12.5% of vols. (11.2% in FY10).
Pantaloon — Profit growth takes a breather;
Maintain Buy
Price Objective Change
Dec Q profit Rs473mn, up 6% yoy; Reiterate Buy
We were disappointed by significantly weaker than expected margins but were
encouraged by the strong sales growth as Same Store Sales growth (SSSG)
remained healthy across all categories. Longer term gross margin outlook now
appears much weaker as contribution from lower margins Foods is rising and
gestation for loss making Home Retail could run longer. We cut our est for FY11-
13E by ¬35% to factor in lower gross margins but still maintain Buy on expected
EPS CAGR of 50%. PO cut to Rs530 on lower DCF valuation for Core Retail biz.
Topline growth remains strong on encouraging SSSG
Pantaloon recorded 32% yoy growth in sales largely in line with our est. Area
addition also picked up to 0.8mn. This gives us confidence of achieving 2mn area
addition target this year. SSS growth remains strong at 12% for Value, 21% in
Lifestyle and 18% in Home. This trend is encouraging as it reinforces our view
that Pantaloon is set to benefit from upswing in urban discretionary spending.
Margin declines on weaker mix and losses in Electronics
Gross margin fell 150bp during the quarter vs our est of 80bp on 1) weaker mix 2)
deeper discounts and 3) much higher losses in electronics. We have structurally
cut gross margin by 100-200bp as we now build higher contribution from lower
margin Foods category and much longer gestation phase for Home Retail given
issues being faced by the electronics segment.
Valuations appear attractive for fundamental growth story
We believe valuation is attractive as at 19xFY12E EPS, the stock is trading at a
discount of 20% to the sector for a higher earnings growth trajectory led by
improving consumer spending, improvement in profitability driven by backend
efficiencies and organizational restructuring and continued deleveraging.
GSK India — 4Q miss; Risk-reward unattractive
Price Objective Change
4Q results disappoint; Retain U/P on expensive valuations
GSK’s 4Q profits at Rs1.2bn grew by 15% YoY (down 23% QoQ) driven by higher
other income, still 15% below BofAMLe. Topline growth of 10.4% YoY (against
~16% industry average) remained a concern, while EBITDA margins declined
133bps YoY. Sales at Rs4.9bn was unexciting, however, weak margins led to
mere 5% YoY EBITDA growth (at Rs1.3bn). We revise forecasts noting 4Q miss,
but raise PO to Rs2030 (at 22x P/E) on roll-over to CY12E EPS.
Topline growth still behind industry average
GSK’s weak topline growth of 10.4% was well behind industry average of 14-
16%. While GSK maintained its market share, we believe 1/4th of growth (~3%)
was attributed to vaccines portfolio (12% of sales). Growth for the rest of portfolio
could be below 8%, given 75%+ concentration in acute therapy segments, with
26% of total portfolio falling under price control (DPCO).
Modest organic growth outlook may face hiccups
Our forecast of 13% revenue CAGR over CY10-12E is ahead of mgmt guidance
of 12%, driven by new launches and power brands. Recent new launches
(including in-licensed products) and strengthening of CVS and derma portfolio
should provide medium term growth drivers. However, we believe patented
products from the parent’s (GSK Plc) stable to account for less than 10% of sales
while risk from a generic competition may dampen growth plans.
Premium valuation factors strong cash position of Rs200/sh
GSK is trading at 28x CY11E & 24x CY12E EPS, implying steep 20-25%
premium to large cap pharma peers & at upper-end of its historical P/E bands.
However, given modest earnings growth of 16% & limited upside triggers, we find
current valuations leave little room for error. Strong cash position of Rs200/sh
(Rs17bn) may be utilized for prospective acquisitions to strengthen existing
portfolio, raising expectations. Reiterate Underperform with PO of Rs2030/sh.
Reliance Communication Ltd. — Tight ropewalk on various fronts
Price Objective Change
Earnings pressure likely to stay; maintain underperform
RCom’s share price has collapsed recently and barring M&A triggers, we think
valuations are still not exciting. The stock is trading close to 7.5x FY12EEV/EBITDA i.e. on par with Bharti for weaker earnings outlook. We think dramatic
earnings turnaround is unlikely given RCom’s current brand position & advertising
intensity. We have cut PO to Rs115/sh (-18%) and foresee pot’l further downside
from recent TRAI recos and non-execution of the tower-sharing deal with Etisalat.
Traffic contracts in 3Q; MNP may aggravate weakness
RCom’s operating performance in 3Q FY11 was a tad below our expectations.
Wireless traffic fell 3% QoQ in 3Q FY11 and wireless revenues contracted 2%
QoQ despite stable tariffs. On its post-results call, RCom’s top mgt. said they are
rebalancing their offerings by withdrawing from less profitable segments like
PCOs. Also, our channel checks suggest that the Co’s advertising and distribution
intensity are low resulting in loss of traffic market share. We worry that RCom’s
traffic share may weaken further owing to mobile number portability.
FCCB refinancing may hurt FY12E; bal-sheet stress remains
As of Dec ’11, RCom’s net debt stood at ~US$7bn and net debt/EBITDA is
forecast at ~5x FY11E. The Co’s average borrowing cost (excluding forex
fluctuations) has been relatively low at ~4.5% due to funding via convertible
bonds. (FCCBs) to the tune of ~US$1.2bn. The FCCBs are due for redemption in
FY12E & a challenging refinancing environment may lift RCom’s borrowing costs.
M&A attractiveness may emerge; low visibility on buyers
RCom is now trading at a Price/book of 0.5x FY11 albeit for a low RoE of ~2-3%,
and assuming full value for the CDMA network. We think the deep discount may
facilitate M&A/asset attractiveness unless regulatory risks surface.
Firstsource Solutions Ltd. — Strong cash
generation this qtr
Price Objective Change
Strong cash generation this qtr; Retain Buy but lower PO
Q3 operating performance similar to our expectations with revs from Barclaycard
deal helping a 5% qoq rev growth (constant currency). Improved cash generation
this qtr on back of normalized DSO’s reinforce our view that FSOL should be able
to pay-off over 50% of Dec ’12 FCCB amount from internal accruals. Industry
wide sales cycles are still long which lead us to a 5-6% cut to FY12/13 EBITDA
estmts and 9-10% cut at EPS level. Lower PO to Rs30 (vs. Rs35 earlier) at
~10xFY12 adj. EPS (adjusted for imputed interest on FCCB) but retain a Buy on
undemanding valuation (6xFY12 adj. EPS) and 17% 2-yr adj. EPS CAGR.
A reasonably strong Q3
Revs were up 2%qoq (5%qoq in constant currency terms, 1% below our estmts)
as revs from Barclaycard deal (>USD100m. 5yr) started to flow from Nov 2010.
EBIT margins declined 47bps qoq (in-line with our estimates) on impact from
lower working days in Q3, higher depreciation costs and lower gains from
hedges.
Improving cash position
We believe company should be able to pay-off over 50% of the FCCB amount
(USD296m incl. accrued interest, due Dec2012) from internal accruals. Q3 saw
strong cash generation of ~USD19m on back of normalization of DSO days while
Q4 should again be strong on strength in collections business and cash from sale
of subsidiary - Pipal (~USD5m). As of end-Q3, cash on books was ~USD80m.
Sales cycle still long
Deal conversions continue to take longer than expected time in BPO industry as
clients defer projects with large upfront costs and unemployment rates remain
high in US. For Firstsource, conversion delays continue to especially impact the
telecom segment (~37% of revs)
Price objective basis & risk
Coal India Limited (XOXCF)
Our PO of Rs339 is set at our NPV estimate. Our NPV analysis assumes a
WACC of 13% and a terminal growth of 2%. At our PO Coal India would trade at
10.5x FY12E EBIDTA and 9.3x FY12E adjusted EBITDA (adjusted for OBR). We
have assumed coal volumes of 423mn tons in FY10, 438mn tons in FY12E. We
forecast volumes to grow at 4% CAGR over FY13-18E.
Stronger volume growth, higher realisations and lower costs pose upside risks to
our valuations. Downside risks to our valuations are slower pace of environmental
approvals, prohibition of coal mining in areas where CIL reserves are located,
sharper than expected increase in wage costs and inability to raise prices to pass
thru wage cost hikes.
Educomp Solu (EUSOF)
Our PO of Rs760 is based on a 2-year PEG of 0.8x and implies a target multiple
of 18x FY12e. Our PO reflects potential de-rating given that the Smart Class
revenue stream is now likely to be volatile. We retain our Buy given the strong
27% CAGR in earnings FY11-13E, and the turnaround in FCF on shift to new
business model. Besides Educomp remains the only listed education service
provider with offerings in K-12 and is a emerging player in vocational/
supplemental education.
Risks to our valuation are higher losses in new initiatives, higher-than-anticipated
cut in Smart Class pricing, acquisition-related risks and managing multiple growth
initiatives.
Firstsource (FSSOF)
Our PO of Rs30 is based on 0.5x EV/EBITDA to 2-yr growth, implying 10xFY12
adj. EPS, Our adjusted EPS imputes interest on FCCB, given we treat FCCB as
debt. The multiple is fair given our forecast 21% 3-yr CAGR in adj. EPS.
Downside risks: Sharp macro detrioration and higher than expected employee
attrition.
GSK India (GXOLF)
Our PO for GSK is Rs2030 which is based on 22x CY12E EPS, at 10% premium
to the large cap Indian pharmaceutical peers and at upper end of its historical P/E
bands. We believe a premium valuation is justified given its defensive nature and
strong balance sheet. However, current valuations are at a significant premium to
sector and to its historical averages, which are not justified given earnings growth
of 16pc. The company's 16pc EPS CAGR (CY10-12E) is lower than the sector's
24pc+ earnings growth and we find incremental growth drivers missing. Further,
overhang on DPCO coverage on price control and patent challenges by copycat
participants may provide negative triggers.
Risks: (a) possible growth slowdown in the domestic market due to drug policy
revisions (b) fully owned subsidiary concerns.
Upside risks may emerge from higher-than-expected pick up from new patented
launches.
Lanco Infratech Ltd. (LNIFF)
We have used sum-of-the-parts (SOTP) to arrive at the PO of Rs65/sh is primarily
based on DCF, mutiples and conglomerate discount of 10%. It comprises:
1) Power assets - operating as well as construction - Rs46/sh (71%) valued using
DCF with varying CoE 12.5-15% and exit P/BV of 1.5x FY12 for regulated assets.
2) EPC business - Rs20/sh (31%) valued using exit P/E of 12x FY12E - in line
with other mid-cap construction companies
3) Balance Rs3/sh consists of road BOT projects, power trading, realty and liquid
investments + cash at book value
Downside risks: significant delay in execution, sharp decline in short-term tariff,
regulatory risk, higher interest rate and worsening SEB financials.
MTNL (XMTNF)
We have a price objective of Rs45 (ADR of US$1.97) for MTNL. The Co is lossmaking at PAT level. Our DCF based FY12 PO values the company's core
telecom business using 13% WACC and 5% terminal growth. Possible
government initiative to privatise MTNL or significantly cut its current large
employee base would present strong upside. Similarly, any dramatic
improvement in MTNL's broadband penetration could offer upside. Downside risk
stems from possible further wage increases or unforeseen operating expenses for
3G rollout. Pending TRAI recommendation on spectrum valuation also poses
downside risk.
Pantaloon (PFIAF)
Our PO of Rs530 is based on a SOTP valuation comprising stand-alone retail at
Rs483, the Future Capital stake at Rs24 and the stake in Future Generali at
Rs23. Retail is based on DCF using a WACC of 11.1pct, a steady-state EBITDA
margin of 9pct from FY15E onwards and a terminal growth rate of 5pct. Future
Capital is based on a 20pct discount to its market price. Future Generali stake is
valued 12xFY12E NBAP.
Downside risks: Stiffer competition, slow down in consumer spending and store
cannibalization in retail.
Upside risks: Stronger-than-expected consumer demand.
RCVL (RLCMF)
We have a price objective of Rs115/sh for RCom. Our PO is based on sum-ofparts and DCF. Reliance Infratel (towerCo) is valued at the top-end of EV implied
by deals in the towerCo space. We value RCom's non-wireless businesses at 5x
FY12-EV/EBITDA while RCom's wireless business is rough-stab valued at around
4.5x FY12-EV/EBITDA (post-towers) implying 15-20% discount versus GEM
wireless majors. Upside surprise could be led by asset sales at strong premiums.
Downside risk to our outlook could stem from continued failure to monetize the
tower-business and unforeseen margin pressures post MNP and 3G.
Renuka Sugars (SRNKF)
Our PO of Renuka Sugar at Rs114/sh is based on 6x FY11E EV/EBITDA.
Renuka has traded in a EV/EBITDA range of 4.5x to 10x in last four years. At 6x
EV/EBITDA Renuka will trade in line with Brazil peers and the median multiple of
Indian sugar mills. At our PO the stock would trade at PB of 2.5x FY11e, which
we believe is justified as we expect Renuka to earn at least 26% ROE in next two
years. Risks to our price objective are (1) a lower than estimated price for sugar,
(2) delays in commissioning of new 3000TPD raw sugar refining capacity in
Kandla, Gujarat, and (3) lower exports from India owing govt restriction.
Tata Consultancy (TACSF)
Our Price Objective of Rs1,400 is based on a target FY12 EV/EBITDA-to-2-year
EBITDA growth of 0.85x, in line with Infosys. This implies a target FY13e PE of
22x, in line with the current 1-year forward (FY12e) PE. Downside risks to our
estimates stem from macro-led delays in IT spending or a sharp appreciation of
the Rupee.
Tata Steel (TAELF)
Our PO of Rs560 is based on our NPV valuation. Our NPV assumes a WACC of
12.5% and perpetuity growth rate of 0%. Upside risks to our valuation are higher
steel prices and volumes, lower input costs, and higher domestic import duty.
Downside risks are lower-than-expected steel prices, volumes, delays in
commissioning of new expansion and sharper than expected increase in costs
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