19 August 2013

Outlook: Amtek Auto, Wockhardt, Hindustan Zinc, L T Finance, Everest Industries, EID Parry :: Business Line :: Business Line


Indian Hotels Company - Q1FY14 results :: Team Microsec Research

Indian Hotels Company Ltd announced its Q1FY14 results on 12th August, 2013.

Indian Hotels Company Ltd started off FY13 with a loss of INR19.09 crore. The company arrived at net sales of INR908.7 crore, which was up by 6.58% on YoY basis, but down by 10.61% on QoQ basis. The EBITDA for the quarter was INR106.38 crore, which was up by 4.81% on YoY basis, but down by 43.35% on QoQ basis. The company posted net loss of INR19.09 crore as compared to a net loss of INR389.17 crore in Q1FY13 and net loss of INR33.36 crore in Q4FY13.
The management made a big announcement saying “It is going to spin off its overseas assets and will be seeking approval from RBI soon”. We think this would be a positive step for the company as the overseas assets are running into loss.



Regards,

Team Microsec Research

Hindalco Ltd Q1FY14 results:: Team Microsec Research

Hindalco Ltd announced its standalone Q1FY14 results on 13th August, 2013.

The company misses the consensus estimates by a huge margin. The net sales arrived at INR5766.69 crore, which was down by 3.31% and 16.61% on YoY and QoQ basis. On Yoy basis, the copper sales fell by 8% due to shutdown of Hirakund plant, but aluminium sales were up by 7%. On QoQ basis, the sales of copper and aluminium both fell by 8% and 21%, respectively. The EBITDA for the quarter was INR478.45 crore, which was marginally up by 3.31% on YoY basis, but down by 25.62% on QoQ basis. The company posted net profit (excluding non-recurring item of INR203 crore in current quarter) of INR271.09 crore, which was down by 8.03%on YoY basis and also down by 43.8% on QoQ basis.

Please find below the result analysis for Novelis Inc, which contributes 67% in terms of revenue to the consolidated results.






Novelis Inc, a flagship company of Hindalco Ltd announced its Q1FY14 results on 12th August, 2013.

Novelis’ performance in the first quarter of fiscal 2014 was negatively impacted by lower can shipments in North America due partly to unseasonably cooler and wet weather in the region, continued pricing pressures in North America, Europe, and Asia, and higher employee incentive costs due to a modification of its long term incentive plan, partially offset by an increase in the benefits it received from utilizing scrap metal. The decline in can volumes in North America were partially offset by continued strong demand for its automotive products globally and higher can shipments in Asia.
  
“Net sales” for the three months ended June 30, 2013 was $2.4 billion, a decrease of 6% compared to the $2.6 billion reported in the same period a year ago. "Cost of goods sold (exclusive of depreciation and amortization)" for the three months ended June 30, 2013 was $2.1 billion, a decrease of 4% compared to the $2.2 billion we reported in the same period a year ago. These decreases were primarily the result of lower third party shipments and lower conversion premiums due to competitive market pressures. "Cost of goods sold (exclusive of depreciation and amortization)" was also lower due to higher benefits we received from using scrap metal.

It reported "Net income" of $14 million in the three months ended June 30, 2013, which is down compared to $91 million in the three months ended June 30, 2012, due primarily to the items mentioned above.

Management’s Comments:
·         All of company’s strategic expansion projects are progressing well. It has spent $181 million on capital expenditures globally for the three months ended June 30, 2013, which primarily relates to its strategic expansion projects in Oswego, New York; Yeongju, South Korea; Ulsan, South Korea; Changzhou, China; Pinda, Brazil, and Nachterstedt, Germany, as well as expenditures on implementing a new ERP system.

Novelis is experiencing pricing pressures and increased competition, which are negatively impacting its profitability. The pricing pressures and competition are most notable in North America, Europe, and Asia regions, which resulted in unfavorable reductions in conversion premiums with the renewals of can supply contracts. One factor contributing to the competitive landscape in Asia is the significantly higher local market premium that it must pay for the purchases of aluminum in Asia. It experienced a reduction in demand for its can products in North America partly due to an cooler, wet weather in the region, which has reduced beverage can consumption levels. Benefits from the utilization of scrap increased due to favorable discounts it received on the procurement of scrap and higher usage of scrap, partially offset by the decline in average aluminum prices to $1,834 per metric tonne during the three months ended June 30, 2013 compared to $1,977 per metric tonne during the three months ended June 30, 2012. Demand for its automotive industry products continues to be strong globally, which is driven by an increase in the use of aluminum in vehicles.

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Regards,

Team Microsec Research

Auto sales down for sixth consecutive month ::Team Microsec Research

Auto sales down for sixth consecutive month
Auto industry body Society of India Automobile Manufacturers (SIAM),said that it is concerned about overall vehicles sales, which fell for the sixth consecutive month in July.
The fall is not just in passenger cars, whose sales have declined for nine consecutive months now; utility vehicles, two-wheelers and commercial vehicle sales are also down.
category
Jul-13
Jul-13
YOY Change(%)
Passenger Vehicles

Cars
131163
141646
-7.4%
Utility Vehicles
37010
44878
-17.5%
Vans
18066
16595
8.9%
Total PVs
186239
203119
-8.3%
Commercial Vehicles
18611
23229
-19.9%
Light CVs
36690
41779
-12.2%
Total CVs
55301
65008
-14.9%
Two-wheelers



Motorcycles/step -through
809312
821821
-1.5%
Total Two-wheelers
1131992
1132696
-0.1%
Grand Total
1415102
1445112
-2.1%
 Utility vehicles’ sales are down because of the increase in excise duty (30%). Commercial vehicle sales have been declining for the last 17 months because of the slowdown in other industries, such as mining and infrastructure.
SIAM added that this is an appropriate time for the Government to give some relief to the sector by re-starting government purchase of vehicles for different departments, which had stopped in May last year as an austerity measure.
The Government should also re-look at the excise duty, which has substantially risen (12% for cars and 30% for utility and heavy vehicles), road tax, state tax and national calamity contingent duty. The rupee’s depreciation against the Dollar was a major problem.
segment-wise, mini cars (such as Maruti Suzuki’s Alto, A-Star and WagonR and Hyundai Motor India’s Santro and Eon) had done well in July. In the two-wheeler segment, scooters had performed well.
The festival season should bring some cheer as demand should improve from rural areas as well. But, don’t see much of a turnaround to the industry because of that.
Regards,

Team Microsec Research

Indraprastha Gas - Q1FY14 Result Update: LKP Research

Indraprastha Gas - Q1FY14 Result Update
IGL’s net profit of Rs876mn was in line our estimate of Rs884mn. Net revenue for the quarter increased marginally by 2.2% qoq to Rs9bn as both volumes and realizations increased by 1.1%. CNG volumes for the quarter increased by 2.8% qoq to 191mnkg (yoy +4.4%) while realizations were constant during the quarter at Rs39.49/kg. PNG volume for the quarter decreased sequentially by 2.4% while realisations increased by 3.4%. Gas costs for the quarter increased at a slower pace of 0.7% qoq to Rs17.6/scm. Consequently, IGL’s gross margin for the quarter increased by 1.9% qoq to Rs9.04/scm (yoy +8.1%). EBITDA/scm for the quarter stood at Rs5.7 (yoy +2.7% qoq +3.1%) which was in line with our estimate of Rs5.72/scm.
We value IGL on DCF basis and arrive at a fair value of Rs339 per share. We have used WACC of 12.3% and terminal growth rate of 2% for DCF valuation. We maintain our BUY rating on the stock with a target price of Rs339. At the CMP, the stock is trading at 9.1x and 4.4x FY15e EPS and EBITDA respectively.
Actual v/s Estimates
Y/E, Mar (Rs. m)
Q1FY14
Q4FY13
qoq (%)
Q1FY13
yoy (%)
LKP Estimates
Deviation (%/bps)
Revenue
9,015
8,818
2.2%
7,602
18.6%
9,259
-2.6%
EBITDA
1,927
1,848
4.3%
1,793
7.5%
1,923
0.2%
EBITDA (%)
21.4%
21.0%
41 bps
23.6%
-221 bps
20.8%
60 bps
PAT
876
835
4.9%
850
3.0%
884
-1.0%


LKP Research

FMPs may see higher inflows as bond yields surge :: Business Line

The mutual fund industry is likely to see more inflows into fixed maturity plans (FMPs) in the near-term on the back of higher yield in government securities, driven by the recent liquidity tightening.
Also, volatility in the short-term rates of money market instruments, which has prompted redemption pressures in liquid fund category, has added to the trend as investors seek higher return in FMP schemes, say industry players.
Since July 16, when RBI unveiled some drastic measures to stem the rupee slide, the bond yields have surged by around 70 bps to 8.12 per cent on the benchmark 10-year paper last Thursday. The yields had touched a peak of 8.50 per cent on July 24.
“Inflows have improved in FMPs because of the higher yields that are a result of the policy actions in the recent weeks. By locking at the currently attractive yields, investors can earn better risk-adjusted returns in otherwise volatile times. Specifically, the yields are much better than in the under-three-year instruments,” ICICI Prudential MF senior vice-president and head of products & communication Himanshu Pandya told PTI.
FMPs are close-ended schemes with maturity periods primarily ranging between 90 days and under three years.
Last month, the Reserve Bank had taken several liquidity tightening measures like capping of overnight borrowing limit for banks, additional sale of government securities, and tightening of hedging rules for FIIs among others to stem the rupee fall, which has been losing since May 22 on FII outflows.

ONGC - Q1FY14 Result Update :: LKP Research

ONGC - Q1FY14 Result Update
Pension provision affects Q1 performance
ONGC’s Q1FY14 net profit of Rs40.2bn was lower than our estimate of Rs47.5bn on account of employee pension provision during the quarter. Adjusting for employee pension provision (Rs12bn effect in P&L) and Rs2.4bn accounting gains due to revised ICAI norms, adjusted PAT of Rs47.6bn was in line with our estimate. Net revenues for the quarter stood at Rs192bn (yoy -4.3% qoq -10.1%). ONGC’s subsidy burden for the quarter was Rs126.2bn resulting in fall in its net realization to $40.17/bbl (yoy -13.8% qoq -21%). Crude oil sales volume grew sequentially by 0.9% while on an annual basis the growth was 0.4%. Gas sales witnessed annual decline of 3.6% as against a decline of 0.5% on a sequential basis. Operating profit for the quarter of Rs84bn was lower than our estimate of Rs90.8bn while operating profit margin was 43.7%. DDA cost decreased by 45.3% sequentially to Rs39bn (yoy +22%) on account of higher exploration cost write off during the preceding quarter.
For FY15e, we have increased our domestic gas price assumption from $4.2/mmbtu to $8.4/mmbtu and the share of upstream oil PSUs in the overall under recoveries to 65%. We have valued ONGC’s core business at 9.5x its FY15e earnings. We have given higher P/E multiple to ONGC on account of higher growth visibility on account of OVL’s direct correlation to crude price and production from marginal fields at higher crude prices and relatively lower vulnerability of ONGC to falling crude oil prices (lower subsidy burden). We value ONGC’s investments at 25% discount to CMP. We maintain our BUY rating on ONGC with a revised price target of R372. At the CMP, the stock is trading at 7.1x and 3.0x FY15e EPS and EBITDA respectively.
Actual v/s Estimates
Y/E, Mar (Rs. m)
Q1FY14
Q4FY13
qoq (%)
Q1FY13
yoy (%)
LKP Estimates
Deviation (%/bps)
Revenue
192,183
213,887
-10.1%
200,843
-4.3%
189,220
1.6%
EBITDA
83,978
102,927
-18.4%
110,370
-23.9%
90,880
-7.6%
EBITDA (%)
43.7%
48.1%
-443 bps
55.0%
-1126 bps
48.0%
-433 bps
PAT
40,160
33,887
18.5%
60,777
-33.9%
47,500
-15.5%



LKP Research

Clariant Chemicals (India): Buy :: Business Line


What moved the market? :: Business Line

The media attributes reason to explain the stock market movements every day. Recently, for instance, it was the ‘strong Asian cues’ that sent the market up one day only to have the ‘weak Asian cues’ bring the market down the next day.
If you are statistically inclined, you would be wary of attributing reasons to the market movement. Logically, you have to break the relationship to see if FIIs pulling out money, for instance, brings the market down. Here are the questions you should ask. How many times has the market declined when the FIIs pulled out of India? How many times has the market declined without the FIIs pulling out of India? How many times has the market not declined when the FIIs pulled out of India? How many times has the market not declined when the FIIs did not pull out of India?
So, why are we instead so quick to attribute reasons? We witness the event first and then look for factors that could have caused the event.
So, if you see the market crash, and also happen to catch FIIs outflows, you are more likely to conclude that FIIs caused the market to decline.
Psychologists attribute this behaviour to confirmation bias. This refers to our behaviour to seek information that is consistent with our preconception rather than look for evidence that can challenge the belief. In this case, we want to believe that FIIs pulling out money or ‘weak Asian cues’ are the reason for the decline. So, we are unlikely to look for evidence to disapprove the belief.
But why do we seek evidence consistent with our preconception?
Our brain actively seeks to rationalise events. Logically then, we need others to provide reasons to explain events that we do not understand yourselves. And we tend to accept any reason, as a classic experiment conducted by a Harvard psychologist years ago demonstrates.
In the experiment, individuals were standing in a queue to photocopy papers. Some were instructed to jump the queue; the researchers wanted to observe how others in the line would react to people jumping ahead of them. Interestingly, in most cases, individuals were permitted to jump the queue if they offered any reason to the people in front of them.
For instance, a reason such as ‘I want to use the copier as I am in a hurry’ was enough to jump the line! It is, perhaps, with the same fairness that we accept reasons given to us to explain the daily stock market movements.

Playing on crude price spread :: Business Line

During times of uncertainty as are now, it becomes difficult to invest in any market. Several events, economic data and ever-increasing uncertainty along with reduced risk appetite of investors have kept a lid on money inflows and long-term investments in the market.
However, during such times there are different forms of investments which provide investors with a safe tool to invest. One of these tools which reduce the risk of the investors during the time of uncertainty is ‘Spread Trading’.

SAFE BET

Spread could be a trade in between any two instruments with a positive correlation between them. Few of the most liquid and famous Spreads in commodities markets are Gold-Silver, Zinc-Lead and Brent Crude-WTI Crude Oil. The Spread trade is safer as it does not consider the market direction of the asset, but considers the volatility between the two instruments.
When both the instruments are positively correlated they move in same direction, but the volatility or the speed of the movement differs. It is this difference which enables an investor to trade and make his investment safer.
In the last few weeks, commodities market has displayed high volatility and similar is the case with the spread between Brent and WTI Crude. Both WTI and Brent crude were normally trading at par till 2011. After 2011, London crude or Brent Crude traded at premium over US Crude, better known as WTI Crude. This difference in both the products is due to various reasons, such as transportation cost, different quality, demand and supply but most importantly, both these products come from different parts of the world.

VARYING FUNDAMENTALS

Though they are traded in international market, due to different areas and quality, their fundamentals vary vastly. The biggest example of this would be WTI crude inventories which come every week. After the inventories announcement, WTI Crude prices moves much more rapidly then Brent Crude. If inventories are lower, WTI crude moves up and reduces the spread between WTI-Brent Crude Oil. Usually Brent Crude is more volatile than WTI crude, due to the size of the market and volume traded in it. So, whenever there is any supply disruption due to maintenance work in North Sea, Brent Crude moves higher increasing the spread between the two.
In the past few days, this spread reached par value and there was no difference between the prices of WTI and Brent Oil. In 2008, the spread touched an all-time low of -$22.89, i.e. WTI traded at a premium over Brent Crude whereas it touched its all-time high recently in 2011 at $27.88. The spread between Brent and WTI began averaging this year at $18 a barrel in January, close to its average 2012 level. Currently the Spread is near $2.5, well below its previous year’s average price.

UNCERTAINTY TO IMPACT

We expect the spread between Brent & WTI Crude Oil to move lower initially to reach near -$1 as uncertainty in West Asia can push WTI crude higher. At the same time, lower demand from Russia — the biggest Brent Oil consumer can keep the Brent Oil Crude less volatile. Bottleneck at Cushing, one of the major delivery points for WTI Crude can also help WTI move higher.
When the spread reaches par value or -$1, we expect this spread to move higher till $4-6, the major reason being that increasing demand for Shale products in the US has resulted in ragged demand for crude oil. Also, the current unrest in West Asia is expected to settle soon which again can prove bearish for WTI Crude. Overall, for safer investment, it would be good to Buy Brent Crude and Sell WTI Crude when the spread between them decreases till -$1 to reach near $4 and later to $6.

New lease of life for SEZs :: Business Line

The legislation governing Special Economic Zones (SEZ), which has been in force since 2005, has been subject to intense debates for economic and political reasons. The SEZ policy intended to create world class infrastructure, boost foreign exchange earnings and create jobs . The response to the policy from the industry in the initial years was overwhelming, especially from sectors such as IT. The economic slowdown in 2009 followed by the indication that the tax policy could shift towards investment-linked incentives under the draft Direct Taxes Code Bill made the SEZ scheme less popular.
The government, backtracking from the initial promise of a complete tax holiday, by withdrawing the Minimum Alternate Tax (MAT) and Dividend Distribution Tax (DDT) for companies located in SEZs, also acted as a negative.
In this context, sensing the need to revive interest in the SEZ policy, the Government announced significant reforms in this year’s Foreign Trade Policy.

WHAT’S NEW?

The revamped rules slash the area requirements for multi-sector SEZs to 50 per cent of the earlier requirement of 1,000 hectares of contiguous and vacant land. Added to the requirement of aggregation of large land tracts, the developers had to deal with spiralling land prices and, in most cases, litigation and local regulatory challenges connected with land acquisition. Since the revised area requirement is only 500 hectares, the multi-product SEZs may now be a relatively more feasible proposition.
The regulations also permit for a graded scaling, under which developers of existing sector-specific SEZs can create additional sector (or sectors) by adding land parcels of 50 acres or more to such SEZs. This would enable developers of sector-specific SEZs to de-risk the overall development by catering to more than one industry without necessarily undertaking the burden of owning and developing 500 hectares of land.
The amendment that is likely to have the greatest impact is the freeing up of minimum land area criterion for IT and ITeS SEZs. IT/ITeS SEZs are now only required to meet the condition of built-up area development of 1,00,000 sq. m. and the condition of the SEZ area being a minimum 10 hectares has been done away with. The norms are further relaxed for Category B and Category C cities (50,000 sq. m. and 25,000 sq. m. respectively).
At a built-up area requirement of 1,00,000 sq. m., the underlying land area, subject to FSI norms, would work out to 8-10 acres, and hence this amendment has the potential to open up the SEZ sector to a whole wider set of developments, particularly in Tier-1 cities where besides the lack of availability of land, the costs are prohibitively high. It is hoped that the relaxation in the requirements in Category B and C cities would act as a catalyst to spur some SEZ development in smaller cities, as currently the development of IT/ITeS SEZs is largely restricted to Tier-1 cities.
With the abundant availability of IT/ITeS office space, one can expect IT companies to start looking at shifting or consolidating their operations from the Domestic Tariff Area or STPI operations into SEZs to leverage on the indirect tax savings that such companies will derive by virtue of being located in SEZs.
Pertinently, SEZ regulations do not prevent existing units from relocating into SEZs, provided the income-tax holiday is foregone by such unit.

DUTY BENEFITS

The other interesting amendment is the extension of duty benefits on the value additions to land added to SEZs. This provision would enable developers that have already commenced construction of buildings or have unoccupied office space to consider notification of such buildings as IT/ITeS SEZs.
The sectoral broad-banding is another move that should be welcomed by the industry. The provision enables compatible and allied sectors, including related R&D activities for the sectors, to be clustered together in a SEZ.
This would provide SEZ developers with greater ability to market the development to businesses in allied sectors.
Further, exit rules for SEZ units have also been introduced to enable the transfer of SEZ units or assets, along with the attached duty obligations, from one entrepreneur to another. Hitherto, there was no mechanism provided for SEZ units to exit from a SEZ on account of sale or shut down of business.
In summary, the amendments are timely and should provide some relief to the SEZ sector. The changes however fall short of expectations on several counts, including providing exit options to developers/co-developers through a sale of completed buildings which would have provided the much-needed liquidity to the developers.
It would also have enabled a more sustainable business model, whereby the risks and rewards related to the development of an SEZ vis-à-vis ownership of a completed asset are segregated. Lastly, the silence on roll back of MAT and DDT will continue to be a sore point with the industry and it is hoped that these changes are not a case of too little too late!
(The author is Partner, BMR Advisors. The views are personal. With inputs from Gautham Lokhande, Associate Director, BMR Advisors.)

NMDC (Rs 114.2): BUY :Business Line