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India Access Days – New York: 6-7, Jun 2011
The ongoing CLSA India Access Days at New York and London, which will
have a total of 16 companies in attendance between 6-10 June, reveals
that companies still remain positioned for strong growth in the mediumterm,
looking beyond the near-term macro concerns. While companies
like Lupin, Bhushan Steel and Essar Oil are executing plans to move into
the top tier, even behemoths like Infosys remain set for strong hiring to
sustain healthy growth rates. Regulatory approvals and wage pressures
are key challenges and a bottoms-up approach will remain the key to
picking winners on a 12m view.
State Bank of India (SBI IS)
Presenter Mr. Diwakar Gupta (MD & CFO) and Mr. C Ramnath(CGM,
Financial Control)
Loan growth and margins: Management is targeting loan growth of ~18%
over FY12 and expects NIM to expand by 20bps YoY to 3.5%.
Outlook on asset quality: During FY11, SBI witnessed high slippages with
delinquency ratio rising to 2.9% of last year’s loans. Management believes
that asset quality pressures should moderate going forward and the bank has
increased focus on recoveries. For FY12, SBI targets to keep the amount of
gross NPA flat YoY (i.e slippages will be offset by recoveries, upgrades &
write-offs).
NPL provisioning: SBI will follow provisioning norms as required by RBI, but
provisioning is likely to be high in 1HFY12 as SBI makes provision for counter
cyclical buffers (Rs11bn), hike in NPL provision rates (Rs5bn) and provision
on restructured loans (Rs5bn).
Exposure to key sectors: Some sectors that are facing stress are textiles,
commercial real estate (3% of portfolio), engineering and steel.
Capital raising: Management expects that rights issue is likely in 2HFY12.
While tier I CAR is low at 7.8%, SBI can leverage on Tier II capital to deliver
18-20% growth in FY12.
Pension provisions: SBI will provide more proactively for pension liabilities
for the next wage settlement. It plans to charge pension provisions through
P&L over FY13-18 rather than deduct it from reserves in FY18.
Infosys (INFO IS)
Sandeep Mahindroo, (Senior Manager Investor Relations)
Overall Message: Optimism on the longer term but some near term wrinkles
need to be ironed.
Revenue outlook: Decision making at clients’ end is normal, but slower than
9-12 months ago. They have 65-70% visibility for FY12 growth guidance of
18-20%YY. Infosys has signed ten large deals last quarter, which is above
average and should flow through in revenues ahead. The hiring of Basab
Pradhan to head Global sales should further help drive the sales effort. Basab
used to head sales at Infosys during 2003-05.
Business segments: Telecom remains soft as Infosys is exposed to the
wireline business which has been hurt at telecom majors. Have opened new
accounts in the sector but growth if at all will be back-ended in this vertical.
Done better or at least as well as TCS in 3 key verticals last year: Financials,
Manufacturing and Retail. So momentum of business is not bad.
Pricing outlook: Infosys has pushed through price hikes in select client
accounts. Pricing environment is good overall.
Utilisation and hiring: High utilisation in some large clients is a constraint
to growth and could hurt in Jun-11 quarter as well. However, Infosys has
plans for gross hiring of 45,000 for FY12 (higher than the guidance) and
faster growth could translate into higher margins.
China expansion: Infosys is investing $130m in China to set-up a
development centre for 8-10K people.
Wipro
Presenter - Sridhar Ramasubbu (CFO – International Operations)
Pricing outlook: 88% of Wipro's revenues come from IT. Currently they are
not experiencing any downward pressure on pricing and they expect pricing
to remain stable for the near future. Wipro has launched a price realization
strategy to increase per person revenue, which they said has been successful
so far. They are currently hedged against any strengthening in the dollar.
Margins: IT margins are currently at 26%, which management aims to
maintain in the mid 20's region. Margins are 6% below industry leader; of
which around 300bps can be attributed to higher offshore labor costs. Wipro's
employee bulge mix is tilted towards employees with more than 3year
experince, due to which per head labour costs are higher than peers.
Human resources: There was investor concern around talent pool and
attrition, and the management also views attrition and wage inflation as
major headwinds. A fallout of the organizational restructuring is greater
attrition at the more skilled level (such as SAP experts), though this is not so
much at 1-3 year level.
Business challenges: They see mobility and analytics as obstacles rather
than cloud computing and green as most people think. They actually view
cloud computing as an opportunity for the company.
Reorganisation: As a part of their new organization structure, each vertical
has been given their own P&Ls. However, as they see much opportunity in
emerging geographies especially LatAm, these geographies have been given
their own P&Ls.
Jaiprakash Associates
Presenter – Suren Jain (MD – JPVL)
Project commissioning: FY12 is a key year of project commissioning for
JPA. The 1000MW Karcham Wangtoo project will open, in phases, by
August'11. The first 250MW unit is already operational. The Yamuna
Expressway may see a spillover of official opening to Apr'12 though entire
road will be motorable much sooner.
Merchant Power: Prices are soft largely on account of budget
deficiencies at the State Electricity Boards (SEBs). Reduction of T&D
losses at the SEB end hasn’t happened as earlier envisaged. Usually
merchant rates tend to fall post elections. Management is looking at
Rs3.50/unit as a sustainable merchant tariff.
Land agitation: The land agitation in Greater Noida is not a part of JPA's
project. Company itself has possession of entire land for the expressway
and recent agitation does not effect it.
Deleveraging focus: Management reiterated its target of deleveraging
over the next 24 months. Company will like to see debt/ebitda come
down to 3x before starting investment in new projects.
Cement: New capacity commissioning in the country has got bunched up.
It will take ~1.5 years (3QFY13) for all the excess supply to get absorbed.
JPA has set up its cement grinding units closer to power projects to
source fly ash cheaply for the same.
GMR
Presenter – Nishit Dave (IR), Jitendra Jain (CFO)
Business verticals: GMR Infra is a diversified construction-neutral
infrastructure company with interest in three business verticals - airports,
power and roads.
Airports: The showcase of GMR is airports. GMR has a 30+30-year
concessions for the development and management of Delhi and
Hyderabad airports. Delhi airport (54% stake) has a capacity to handle
60m passengers annually and is the world's 6th ranked airport overall.
The company also operates Hyderabad airport (63% stake) for which no
incremental capex is required. GMR also has also concession agreements
to operate Sabiha Gokcen International Airport (SGA) in Istanbul (Turkey)
and Male Airport in Maldives. Management highlighted that footraffic
growth at Istanbul airport (40% stake) has been higher than anticipated.
Power: GMR has 823MW of power capacity under operation, while
another 8GW is under execution. In the power sector, shortage of fuel
remains a concern. GMR realizes the issue with coal supply and as a
result has acquired coal mines in Indonesia and South Africa. High coal
costs in Indonesia is also an issue.
Roads: In the Roads sector, six projects (aggregating 421km) are
complete and another three (totaling 309km) are under construction.
Management highlighted that all the projects under execution are running
ahead of scheduled completion. Management sees equity IRRs of 20-25%
very possible for these projects
Balance Sheet: Management sees D/E ratio increasing to 1.8 over next
3 years (an admittedly uncomfortable level but necessary to fund power
plant projects) and then gradually coming down. It does not see any
equity dilution over the next two years.
Indiabulls Financial Services (IBULL IS)
Presenter Mr.Gagan Banga (CEO)
Diversified financial with focus on mortgages: Mortgage loans form 70%
of Indiabulls Financial Services’ portfolio and the company has market share
of 5%. It also offers commercial vehicle loans (6% of loans), corporate loans
(21%) and business loans (2%). Commercial vehicle loans in particular also
enjoy strong growth prospects on the back of more investment in
infrastructure.
Turnaround in FY11: During FY11, company reported 147% growth in net
profit driven by 55% YoY growth in income and operating efficiencies. Loans
grew by 80% YoY driven by doubling of property loans and growth in
corporate loans. On the funding side, the company expanded its relationship
to 32 banks and has increased the share of longer-term borrowings to match
the duration of the assets. CAR is strong at 20% and net NPA is a low 0.38%
in Mar-11.
Broad-basing the liability profile: The management highlighted that
nearly 70% of the funding comes from long term bank loans. The
dependence on short term money is only 11%. Company has also diversified
its funding sources and establish good relationships with many banks.
Focus on stable growth and higher profitability: Management is
targeting ~30% growth in assets and intends to maintain ROA +300bps and
improve ROE to ~20%. While NIMs may be the under pressure of rise in cost
of wholesale borrowings, the improvement in ROE will be function of
improvement in leverage as well as some operating efficiencies.
Sobha Developers
Presenter – Baaskaran Subramanian (CFO)
In expansion mode: Sobha traditionally has been a higher end residential
property developer with projects mainly in Bangalore. Currently, Sobha has
proposed future launches in Gurgaon, Chennai & Mysore.
Real estate business strong: In FY11 Sobha reported income from Real
Estate operations of Rs.10.5bn, up by 29% YoY. It also achieved a PBT of
Rs2.4bn, up by 52% YoY. Sobha sold 2.78m sf of space during FY11, +34%
YoY. Average realization improved to Rs.4,082/sf (+30% YoY) due to
improved product mix
Diversifying contractual project stream: With strong hiring trends being
witnessed, income from contractual operations was Rs4.1bn in FY11, up 34%
YoY. Sobha derives 80%+ of contractual business from Infosys. Though it is
now diversifying with new contractual orders received during last two
quarters from other than Infosys including corporates like ITC, Biocon and
GMR
Focus on cash generation / debt reduction: Management expressed
confidence in continued FCF generation from core operations. Management
has seen higher positive cash flow every year for the past 3 years. Sobha also
repaid loan of Rs6.4bn in FY11. Its debt/equity ratio fell to an all time low of
0.64. Management is looking at 0.5-0.6x by March ‘12.
Approval delays main challenge: Company thinks the main challenges are
approval delays for key projects at Gurgaon (expected Group Housing
approval Aug-11) and Chennai (expected approval in June-11); and achieving
faster monetization of large land banks.
Bhushan Steel Limited
Presenter - Mr.Nittin Johari (Director Finance)
Equity raising in the next 12m: Presenting at CLSA's India Access Day
in New York, Bhushan Steel said that the company is planning to raise
equity via a QIP sometime in the next 12 months. This was in response to
investor questions regarding Bhushan's high gearing and capex.
Tech tie-up with Sumitomo may continue: On the risk of Sumitomo
Metal ending its technical tie-up with Bhushan post merger with Nippon,
the management said they have a written agreement with Sumitomo and
don't expect Sumitomo to renege on a contract. They don't see any
impact on Bhushan.
But steel plant JV might need a fresh look: However, Bhushan has
been in talks with Sumitomo to form a joint venture that will set up a
greenfield steel plant in West Bengal. Discussions for this might have to
start afresh post Sumitomo's merger with Nippon. Bhushan has not yet
heard anything from Sumitomo on this issue.
Phase-III expansion on track: Bhushan said that it is on track to
expand its primary steel making capacity to 4.7mtpa by Oct 2012 from
2.2mtpa currently. It also said that it will have operational captive iron
ore, coking coal and thermal coal mines by end-2012.
Lupin
Presenter - Mary Furlong (EVP of Corp Development)
Fifth largest generics company: Over the past few years, Lupin has
built a business that has made it the 5th largest generic company by the
number of prescriptions dispensed - > 100m prescriptions filled last year
across 30 products, per IMS Health. The company has over 10,000
employees globally, of which there are over 1,000 scientists.
Global footprint: From a branded generics company in India, Lupin now
positions itself as a “transnational company”, leveraging its low-cost
manufacturing base in India to produce both branded and generics
globally. Revenue split is now 59% from the US/Japan/EU, 32% from
India, and 9% from the emerging markets.
Business drivers: Lupin had 148 ANDA filings, 48 approvals in the US,
while in EU it had 91 filings, 44 approvals. Focus on R&D is reflected in
R&D expense rising 100bps YoY to 8.5%. While API manufacture is inhouse,
for biosimilars, Lupin’s strategy remains focused on smaller scale
facilities given that there is no regulatory pathway for biosimilar approval
in the US at the time, whereas the EU has established one. The company
is facing wage pressures, but hopes to mitigate the impact through
healthy topline growth and optimisation of tax burden.
M&A: On the M&A front, Lupin sees itself as a top 10 player in the Indian
market. While consolidation is happening, the market remains highly
fragmented and Lupin sees opportunities in specific brand additions or
unique therapeutic niches. While Lupin clearly seeks to be a global player,
there are no plans for a US listing at this stage.
Sintex
Presenter – Mr. Sunil Kanojia (Group President)
Diversified product portfolio: Sintex’s main areas of operation are
prefab and monolithic construction materials, custom mouldings, storage
products and textiles. It is one of the most integrated plastics processors
in India, wherein its presence in the value chain spans processing as well
as installation services.
Multiple growth drivers: The focus was on the low-cost housing
opportunity and social infrastructure spend on education and healthcare.
Sintex is a strong player in this field through its pre-fab and monolithic
(formwork) construction businesses with structural drivers in place for
growth. The monolithic order book continues to grow and stood at Rs29bn
at the end of FY11, having risen more than 10% in the last quarter of the
year. The pre-fab business will benefit from expansion into new states and
traction in recently introduced product lines. In the custom moulding
business, the key driver is driving synergies from Nief and Bright
Brothers. The overall growth outlook for the year remains strong.
Working capital situation improving: The accounts receivable and
working capital situation was an area of discussion. The fact that the
government is the major customer in pre-fab and monolithic businesses
has led to a longer working capital cycle. The company conceded that the
working capital situation did worsen significantly in FY08-10 but FY11 saw
a major improvement. Looking ahead, the company expects tighter
internal processes on working capital to help keep the working capital
situation stable.
Shopper’s Stop
Presenter - Govind Shrikhande (Customer Care Associate &
Managing Director)
Beyond the department store: Shopper's Stop is one of India's leading
retailers with more than 2m sf of store space. The company's loyalty
programme (First Citizens) has more than 2m members, who account for
73% of sales. It also has a 100% stake in Crosswords‚ a leading books
retailer, and a 51% stake in Hypercity Retail, the fast growing
hypermarket business.
Two focus formats: The Shopper’s Stop department store format
remains the mainstay of the business and the primary profit driver at this
stage. However, the Hypercity business is growing faster and presents a
larger opportunity.
Same store growth to moderate: FY11 saw a sharp rebound in
consumer spend and the core Shopper’s Stop format delivered same store
sales growth of 17%, delivering the Ebitda margin target of 8%. Looking
ahead, the company expects some moderation in same store sales growth
to given the high base. However, margins should remain healthy.
Space growth to continue: Space growth remains an area of focus for
FY12 with 24 store openings planned for the year including 10 Shoppers
Stop department stores, 6 Crossword stores and 3-4 Hypercity stores.
This will need an investment of Rs1.25bn, which the company expects to
be able to fund from internal cash generation.
Hypercity a major driver now: Hypercity is a relatively nascent
business but is scaling up fast with ~1m sq ft of operating retail space.
The format is already operating at store level break even despite the
aggressive scale up. The company expects some margin expansion at the
store level from an improving product mix while an expanding store base
should boost overall Ebitda margins as central costs get amortised over a
larger store base. However, profitability in the business remains two years
away.
Background on Hypercity holding structure: Dwelling on the
Hypercity ownership structure, Shoppers Stop highlighted the fact that
the standalone business did not initially have the cash to fund the new
business. This is why it was initially seeded by the promoter group with
Shoppers Stop holding an option to increase its stake at a pre-agreed
pricing formula which gave a 10% ROI to the promoters. The company
exercised this option last year and increased its holding in Hypercity to a
majority 51% stake.
Essar Group
Presenter – Madhu Vuppuluri (CEO – Essar Americas)
Large conglomerate structure: Representatives from the Essar Group, one
of India's largest industrial conglomerates, described each of their seven
business divisions: oil & gas, power, steel, ports & shipping, projects,
communications and services. While interesting, several of these divisions do
not yet have publicly listed companies and they are therefore unaccessible to
investors at the present time. One wonders why they don't list the entire
group or each of the business segments; perhaps this is something to look
forward to in the future.
Major expansion in its listed energy businesses : Essar Energy Plc is
listed in London and includes the Essar group's oil and gas and power
divisions. The oil and gas business is integrated and includes 2,132mboe of
reserves, a 14mtpa oil refinery in Jamnagar, and over 1,300 retail outlets. On
the power side, they plan to grow their operational capacity from 1,600 MW
to 11,470 MW by 2014 (this includes 8,070 MW under construction and 1,800
MW under development).
Power expansion driven by coal based plants: The IPO of Essar Energy
provided equity for the 8,070 MW under construction; this then allowed the
company to secure debt financing to fully fund these projects. The fuel
sources will be gas 14%, coal 75% and others (captive fuel) 11%. 51% of the
off-take will be sold to State Electricity Boards, 23% captive and 26% for
merchant demand. The source of the coal supply is still unclear. Essar has
450m tons of coal reserves including 350m tons in India and 100m tons in
Indonesia and Mozambique. None of these assets are currently operating due
to delays at the Environment Ministry. The company intends to build the coal
plants without a confirmed source of coal and will look to purchase temporary
supplies of coal on the spot market. They expect to complete 2,900 GW in
2011 so this is probably bullish for Indonesian coal miners.
Planned expansions could make the refinery amongst the top 5
largest ones in the world: The refining side contributes the majority of
turnover for Essar Energy. This is a new facility built in 2008; it is highly
efficient and low cost. Essar used their in-house EPC division to build the
refinery, along with low-cost land and low-cost labor. This means that their
new capacity is 50% cheaper than competitors in the Middle East. The Phase
I expansion that is currently underway will lift capacity from 14mtpa to
18mtpa, while an optimization process will increase capacity further to
20mtpa. A Phase 2 expansion is planned which would double capacity to
38mtpa, but the timing of this is subject to market conditions and attainment
of financial closure. The refinery is currently one of India's largest refineries;
if the full expansion to 38mtpa is completed it would become one of the top
five refineries globally.
Upstream presence is dominated by gas: On the E&P side, Essar has total
resources of 2,132mboe. 2P & 2C contingent resources are 150mboe and
Essar expects to see continued conversion of prospective resources into
contingent resources. They have 17 blocks under development (mostly gas)
and are also the largest holder of coal-bed methane blocks in India.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Access Days – New York: 6-7, Jun 2011
The ongoing CLSA India Access Days at New York and London, which will
have a total of 16 companies in attendance between 6-10 June, reveals
that companies still remain positioned for strong growth in the mediumterm,
looking beyond the near-term macro concerns. While companies
like Lupin, Bhushan Steel and Essar Oil are executing plans to move into
the top tier, even behemoths like Infosys remain set for strong hiring to
sustain healthy growth rates. Regulatory approvals and wage pressures
are key challenges and a bottoms-up approach will remain the key to
picking winners on a 12m view.
State Bank of India (SBI IS)
Presenter Mr. Diwakar Gupta (MD & CFO) and Mr. C Ramnath(CGM,
Financial Control)
Loan growth and margins: Management is targeting loan growth of ~18%
over FY12 and expects NIM to expand by 20bps YoY to 3.5%.
Outlook on asset quality: During FY11, SBI witnessed high slippages with
delinquency ratio rising to 2.9% of last year’s loans. Management believes
that asset quality pressures should moderate going forward and the bank has
increased focus on recoveries. For FY12, SBI targets to keep the amount of
gross NPA flat YoY (i.e slippages will be offset by recoveries, upgrades &
write-offs).
NPL provisioning: SBI will follow provisioning norms as required by RBI, but
provisioning is likely to be high in 1HFY12 as SBI makes provision for counter
cyclical buffers (Rs11bn), hike in NPL provision rates (Rs5bn) and provision
on restructured loans (Rs5bn).
Exposure to key sectors: Some sectors that are facing stress are textiles,
commercial real estate (3% of portfolio), engineering and steel.
Capital raising: Management expects that rights issue is likely in 2HFY12.
While tier I CAR is low at 7.8%, SBI can leverage on Tier II capital to deliver
18-20% growth in FY12.
Pension provisions: SBI will provide more proactively for pension liabilities
for the next wage settlement. It plans to charge pension provisions through
P&L over FY13-18 rather than deduct it from reserves in FY18.
Infosys (INFO IS)
Sandeep Mahindroo, (Senior Manager Investor Relations)
Overall Message: Optimism on the longer term but some near term wrinkles
need to be ironed.
Revenue outlook: Decision making at clients’ end is normal, but slower than
9-12 months ago. They have 65-70% visibility for FY12 growth guidance of
18-20%YY. Infosys has signed ten large deals last quarter, which is above
average and should flow through in revenues ahead. The hiring of Basab
Pradhan to head Global sales should further help drive the sales effort. Basab
used to head sales at Infosys during 2003-05.
Business segments: Telecom remains soft as Infosys is exposed to the
wireline business which has been hurt at telecom majors. Have opened new
accounts in the sector but growth if at all will be back-ended in this vertical.
Done better or at least as well as TCS in 3 key verticals last year: Financials,
Manufacturing and Retail. So momentum of business is not bad.
Pricing outlook: Infosys has pushed through price hikes in select client
accounts. Pricing environment is good overall.
Utilisation and hiring: High utilisation in some large clients is a constraint
to growth and could hurt in Jun-11 quarter as well. However, Infosys has
plans for gross hiring of 45,000 for FY12 (higher than the guidance) and
faster growth could translate into higher margins.
China expansion: Infosys is investing $130m in China to set-up a
development centre for 8-10K people.
Wipro
Presenter - Sridhar Ramasubbu (CFO – International Operations)
Pricing outlook: 88% of Wipro's revenues come from IT. Currently they are
not experiencing any downward pressure on pricing and they expect pricing
to remain stable for the near future. Wipro has launched a price realization
strategy to increase per person revenue, which they said has been successful
so far. They are currently hedged against any strengthening in the dollar.
Margins: IT margins are currently at 26%, which management aims to
maintain in the mid 20's region. Margins are 6% below industry leader; of
which around 300bps can be attributed to higher offshore labor costs. Wipro's
employee bulge mix is tilted towards employees with more than 3year
experince, due to which per head labour costs are higher than peers.
Human resources: There was investor concern around talent pool and
attrition, and the management also views attrition and wage inflation as
major headwinds. A fallout of the organizational restructuring is greater
attrition at the more skilled level (such as SAP experts), though this is not so
much at 1-3 year level.
Business challenges: They see mobility and analytics as obstacles rather
than cloud computing and green as most people think. They actually view
cloud computing as an opportunity for the company.
Reorganisation: As a part of their new organization structure, each vertical
has been given their own P&Ls. However, as they see much opportunity in
emerging geographies especially LatAm, these geographies have been given
their own P&Ls.
Jaiprakash Associates
Presenter – Suren Jain (MD – JPVL)
Project commissioning: FY12 is a key year of project commissioning for
JPA. The 1000MW Karcham Wangtoo project will open, in phases, by
August'11. The first 250MW unit is already operational. The Yamuna
Expressway may see a spillover of official opening to Apr'12 though entire
road will be motorable much sooner.
Merchant Power: Prices are soft largely on account of budget
deficiencies at the State Electricity Boards (SEBs). Reduction of T&D
losses at the SEB end hasn’t happened as earlier envisaged. Usually
merchant rates tend to fall post elections. Management is looking at
Rs3.50/unit as a sustainable merchant tariff.
Land agitation: The land agitation in Greater Noida is not a part of JPA's
project. Company itself has possession of entire land for the expressway
and recent agitation does not effect it.
Deleveraging focus: Management reiterated its target of deleveraging
over the next 24 months. Company will like to see debt/ebitda come
down to 3x before starting investment in new projects.
Cement: New capacity commissioning in the country has got bunched up.
It will take ~1.5 years (3QFY13) for all the excess supply to get absorbed.
JPA has set up its cement grinding units closer to power projects to
source fly ash cheaply for the same.
GMR
Presenter – Nishit Dave (IR), Jitendra Jain (CFO)
Business verticals: GMR Infra is a diversified construction-neutral
infrastructure company with interest in three business verticals - airports,
power and roads.
Airports: The showcase of GMR is airports. GMR has a 30+30-year
concessions for the development and management of Delhi and
Hyderabad airports. Delhi airport (54% stake) has a capacity to handle
60m passengers annually and is the world's 6th ranked airport overall.
The company also operates Hyderabad airport (63% stake) for which no
incremental capex is required. GMR also has also concession agreements
to operate Sabiha Gokcen International Airport (SGA) in Istanbul (Turkey)
and Male Airport in Maldives. Management highlighted that footraffic
growth at Istanbul airport (40% stake) has been higher than anticipated.
Power: GMR has 823MW of power capacity under operation, while
another 8GW is under execution. In the power sector, shortage of fuel
remains a concern. GMR realizes the issue with coal supply and as a
result has acquired coal mines in Indonesia and South Africa. High coal
costs in Indonesia is also an issue.
Roads: In the Roads sector, six projects (aggregating 421km) are
complete and another three (totaling 309km) are under construction.
Management highlighted that all the projects under execution are running
ahead of scheduled completion. Management sees equity IRRs of 20-25%
very possible for these projects
Balance Sheet: Management sees D/E ratio increasing to 1.8 over next
3 years (an admittedly uncomfortable level but necessary to fund power
plant projects) and then gradually coming down. It does not see any
equity dilution over the next two years.
Indiabulls Financial Services (IBULL IS)
Presenter Mr.Gagan Banga (CEO)
Diversified financial with focus on mortgages: Mortgage loans form 70%
of Indiabulls Financial Services’ portfolio and the company has market share
of 5%. It also offers commercial vehicle loans (6% of loans), corporate loans
(21%) and business loans (2%). Commercial vehicle loans in particular also
enjoy strong growth prospects on the back of more investment in
infrastructure.
Turnaround in FY11: During FY11, company reported 147% growth in net
profit driven by 55% YoY growth in income and operating efficiencies. Loans
grew by 80% YoY driven by doubling of property loans and growth in
corporate loans. On the funding side, the company expanded its relationship
to 32 banks and has increased the share of longer-term borrowings to match
the duration of the assets. CAR is strong at 20% and net NPA is a low 0.38%
in Mar-11.
Broad-basing the liability profile: The management highlighted that
nearly 70% of the funding comes from long term bank loans. The
dependence on short term money is only 11%. Company has also diversified
its funding sources and establish good relationships with many banks.
Focus on stable growth and higher profitability: Management is
targeting ~30% growth in assets and intends to maintain ROA +300bps and
improve ROE to ~20%. While NIMs may be the under pressure of rise in cost
of wholesale borrowings, the improvement in ROE will be function of
improvement in leverage as well as some operating efficiencies.
Sobha Developers
Presenter – Baaskaran Subramanian (CFO)
In expansion mode: Sobha traditionally has been a higher end residential
property developer with projects mainly in Bangalore. Currently, Sobha has
proposed future launches in Gurgaon, Chennai & Mysore.
Real estate business strong: In FY11 Sobha reported income from Real
Estate operations of Rs.10.5bn, up by 29% YoY. It also achieved a PBT of
Rs2.4bn, up by 52% YoY. Sobha sold 2.78m sf of space during FY11, +34%
YoY. Average realization improved to Rs.4,082/sf (+30% YoY) due to
improved product mix
Diversifying contractual project stream: With strong hiring trends being
witnessed, income from contractual operations was Rs4.1bn in FY11, up 34%
YoY. Sobha derives 80%+ of contractual business from Infosys. Though it is
now diversifying with new contractual orders received during last two
quarters from other than Infosys including corporates like ITC, Biocon and
GMR
Focus on cash generation / debt reduction: Management expressed
confidence in continued FCF generation from core operations. Management
has seen higher positive cash flow every year for the past 3 years. Sobha also
repaid loan of Rs6.4bn in FY11. Its debt/equity ratio fell to an all time low of
0.64. Management is looking at 0.5-0.6x by March ‘12.
Approval delays main challenge: Company thinks the main challenges are
approval delays for key projects at Gurgaon (expected Group Housing
approval Aug-11) and Chennai (expected approval in June-11); and achieving
faster monetization of large land banks.
Bhushan Steel Limited
Presenter - Mr.Nittin Johari (Director Finance)
Equity raising in the next 12m: Presenting at CLSA's India Access Day
in New York, Bhushan Steel said that the company is planning to raise
equity via a QIP sometime in the next 12 months. This was in response to
investor questions regarding Bhushan's high gearing and capex.
Tech tie-up with Sumitomo may continue: On the risk of Sumitomo
Metal ending its technical tie-up with Bhushan post merger with Nippon,
the management said they have a written agreement with Sumitomo and
don't expect Sumitomo to renege on a contract. They don't see any
impact on Bhushan.
But steel plant JV might need a fresh look: However, Bhushan has
been in talks with Sumitomo to form a joint venture that will set up a
greenfield steel plant in West Bengal. Discussions for this might have to
start afresh post Sumitomo's merger with Nippon. Bhushan has not yet
heard anything from Sumitomo on this issue.
Phase-III expansion on track: Bhushan said that it is on track to
expand its primary steel making capacity to 4.7mtpa by Oct 2012 from
2.2mtpa currently. It also said that it will have operational captive iron
ore, coking coal and thermal coal mines by end-2012.
Lupin
Presenter - Mary Furlong (EVP of Corp Development)
Fifth largest generics company: Over the past few years, Lupin has
built a business that has made it the 5th largest generic company by the
number of prescriptions dispensed - > 100m prescriptions filled last year
across 30 products, per IMS Health. The company has over 10,000
employees globally, of which there are over 1,000 scientists.
Global footprint: From a branded generics company in India, Lupin now
positions itself as a “transnational company”, leveraging its low-cost
manufacturing base in India to produce both branded and generics
globally. Revenue split is now 59% from the US/Japan/EU, 32% from
India, and 9% from the emerging markets.
Business drivers: Lupin had 148 ANDA filings, 48 approvals in the US,
while in EU it had 91 filings, 44 approvals. Focus on R&D is reflected in
R&D expense rising 100bps YoY to 8.5%. While API manufacture is inhouse,
for biosimilars, Lupin’s strategy remains focused on smaller scale
facilities given that there is no regulatory pathway for biosimilar approval
in the US at the time, whereas the EU has established one. The company
is facing wage pressures, but hopes to mitigate the impact through
healthy topline growth and optimisation of tax burden.
M&A: On the M&A front, Lupin sees itself as a top 10 player in the Indian
market. While consolidation is happening, the market remains highly
fragmented and Lupin sees opportunities in specific brand additions or
unique therapeutic niches. While Lupin clearly seeks to be a global player,
there are no plans for a US listing at this stage.
Sintex
Presenter – Mr. Sunil Kanojia (Group President)
Diversified product portfolio: Sintex’s main areas of operation are
prefab and monolithic construction materials, custom mouldings, storage
products and textiles. It is one of the most integrated plastics processors
in India, wherein its presence in the value chain spans processing as well
as installation services.
Multiple growth drivers: The focus was on the low-cost housing
opportunity and social infrastructure spend on education and healthcare.
Sintex is a strong player in this field through its pre-fab and monolithic
(formwork) construction businesses with structural drivers in place for
growth. The monolithic order book continues to grow and stood at Rs29bn
at the end of FY11, having risen more than 10% in the last quarter of the
year. The pre-fab business will benefit from expansion into new states and
traction in recently introduced product lines. In the custom moulding
business, the key driver is driving synergies from Nief and Bright
Brothers. The overall growth outlook for the year remains strong.
Working capital situation improving: The accounts receivable and
working capital situation was an area of discussion. The fact that the
government is the major customer in pre-fab and monolithic businesses
has led to a longer working capital cycle. The company conceded that the
working capital situation did worsen significantly in FY08-10 but FY11 saw
a major improvement. Looking ahead, the company expects tighter
internal processes on working capital to help keep the working capital
situation stable.
Shopper’s Stop
Presenter - Govind Shrikhande (Customer Care Associate &
Managing Director)
Beyond the department store: Shopper's Stop is one of India's leading
retailers with more than 2m sf of store space. The company's loyalty
programme (First Citizens) has more than 2m members, who account for
73% of sales. It also has a 100% stake in Crosswords‚ a leading books
retailer, and a 51% stake in Hypercity Retail, the fast growing
hypermarket business.
Two focus formats: The Shopper’s Stop department store format
remains the mainstay of the business and the primary profit driver at this
stage. However, the Hypercity business is growing faster and presents a
larger opportunity.
Same store growth to moderate: FY11 saw a sharp rebound in
consumer spend and the core Shopper’s Stop format delivered same store
sales growth of 17%, delivering the Ebitda margin target of 8%. Looking
ahead, the company expects some moderation in same store sales growth
to given the high base. However, margins should remain healthy.
Space growth to continue: Space growth remains an area of focus for
FY12 with 24 store openings planned for the year including 10 Shoppers
Stop department stores, 6 Crossword stores and 3-4 Hypercity stores.
This will need an investment of Rs1.25bn, which the company expects to
be able to fund from internal cash generation.
Hypercity a major driver now: Hypercity is a relatively nascent
business but is scaling up fast with ~1m sq ft of operating retail space.
The format is already operating at store level break even despite the
aggressive scale up. The company expects some margin expansion at the
store level from an improving product mix while an expanding store base
should boost overall Ebitda margins as central costs get amortised over a
larger store base. However, profitability in the business remains two years
away.
Background on Hypercity holding structure: Dwelling on the
Hypercity ownership structure, Shoppers Stop highlighted the fact that
the standalone business did not initially have the cash to fund the new
business. This is why it was initially seeded by the promoter group with
Shoppers Stop holding an option to increase its stake at a pre-agreed
pricing formula which gave a 10% ROI to the promoters. The company
exercised this option last year and increased its holding in Hypercity to a
majority 51% stake.
Essar Group
Presenter – Madhu Vuppuluri (CEO – Essar Americas)
Large conglomerate structure: Representatives from the Essar Group, one
of India's largest industrial conglomerates, described each of their seven
business divisions: oil & gas, power, steel, ports & shipping, projects,
communications and services. While interesting, several of these divisions do
not yet have publicly listed companies and they are therefore unaccessible to
investors at the present time. One wonders why they don't list the entire
group or each of the business segments; perhaps this is something to look
forward to in the future.
Major expansion in its listed energy businesses : Essar Energy Plc is
listed in London and includes the Essar group's oil and gas and power
divisions. The oil and gas business is integrated and includes 2,132mboe of
reserves, a 14mtpa oil refinery in Jamnagar, and over 1,300 retail outlets. On
the power side, they plan to grow their operational capacity from 1,600 MW
to 11,470 MW by 2014 (this includes 8,070 MW under construction and 1,800
MW under development).
Power expansion driven by coal based plants: The IPO of Essar Energy
provided equity for the 8,070 MW under construction; this then allowed the
company to secure debt financing to fully fund these projects. The fuel
sources will be gas 14%, coal 75% and others (captive fuel) 11%. 51% of the
off-take will be sold to State Electricity Boards, 23% captive and 26% for
merchant demand. The source of the coal supply is still unclear. Essar has
450m tons of coal reserves including 350m tons in India and 100m tons in
Indonesia and Mozambique. None of these assets are currently operating due
to delays at the Environment Ministry. The company intends to build the coal
plants without a confirmed source of coal and will look to purchase temporary
supplies of coal on the spot market. They expect to complete 2,900 GW in
2011 so this is probably bullish for Indonesian coal miners.
Planned expansions could make the refinery amongst the top 5
largest ones in the world: The refining side contributes the majority of
turnover for Essar Energy. This is a new facility built in 2008; it is highly
efficient and low cost. Essar used their in-house EPC division to build the
refinery, along with low-cost land and low-cost labor. This means that their
new capacity is 50% cheaper than competitors in the Middle East. The Phase
I expansion that is currently underway will lift capacity from 14mtpa to
18mtpa, while an optimization process will increase capacity further to
20mtpa. A Phase 2 expansion is planned which would double capacity to
38mtpa, but the timing of this is subject to market conditions and attainment
of financial closure. The refinery is currently one of India's largest refineries;
if the full expansion to 38mtpa is completed it would become one of the top
five refineries globally.
Upstream presence is dominated by gas: On the E&P side, Essar has total
resources of 2,132mboe. 2P & 2C contingent resources are 150mboe and
Essar expects to see continued conversion of prospective resources into
contingent resources. They have 17 blocks under development (mostly gas)
and are also the largest holder of coal-bed methane blocks in India.
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