11 January 2014

Supreme Infrastructure Growth to continue; Buy :: Anand Rathi

Supreme Infrastructure
Growth to continue; Buy
Key takeaways
Strong order book drives revenues. We expect Supreme Infrastructure’s
revenue in 3QFY14 to have grown 2.4% yoy (81% qoq), following strong
execution in its road and buildings projects. Its order book in Sep’13
(including L1 projects of `12.5bn) was `65bn (3.3x TTM revenue).
Conversion of L1 orders and fresh order inflows would be positive triggers
for the stock. In 1HFY14, the company bagged orders of `12.2bn.
Healthy margins to continue. For the quarter, we expect the company to
register a 15% EBITDA margin vs 15.8% in the previous quarter and 17.3%
in the year-ago quarter. Given the high interest cost, we expect it to record a
5.5% net profit margin.
Update on BOT road projects. For ten BOT road projects, the company
has an equity commitment over FY12-15 of ~`8.9bn. Of this, it has infused
`5.72bn through investment, advances and debt at the hold-co level; ~`3.1bn
is to be infused by 3i India Infra Fund (of which `2bn has already been
received), the rest will be invested over FY14-15. The last tranche from 3i has
not yet been received and is awaiting certain NHAI clearances. The
proportion of BOT projects, 23% of the order book, is now being reduced.
Our take. Considering the pickup in execution in its road projects, the
company could register 2% yoy revenue growth in 3QFY14. We expect a
15% EBITDA margin and a 5.5% net profit margin. Conversion of its L1
orders to order book, together with reduced debt, would be the key
monitorable during the quarter. Our sum-of-parts target of `360 is based on
4x PE of the FY14e construction business (`304, a 50% discount to midcap
target multiples) and 0.8x Mar’13 P/BV (`56). Risk. Rise in interest rates.

Pratibha Industries Stable performance; Buy :: Anand Rathi

Pratibha Industries
Stable performance; Buy
Key takeaways
Restrained revenue performance. For 3QFY14, Pratibha Industries’
revenue, we expect, would have grown 7.8% yoy (up 6% qoq) following a
pickup in revenue growth in its contracts division. We expect revenue of the
contracts division to have grown 6% yoy following its strong order book and
billing of revenue from the DMRC project. And the pipes division is likely to
have continued its dismal performance as in the previous quarter.
Stable margins. We expect the EBIT margin of the construction division to
come in at 16.5%, vs 15% in the prior quarter and 17% in the year-ago
quarter. However, the manufacturing division is likely to post a minor EBIT
loss as it is almost non-operational. The company is likely to post a 5.6% net
profit margin at the aggregate level.
Robust order book. The order book exceeds `79bn (5.2x TTM revenue),
dominated by water (40%), buildings (30%) and urban infra (30%). During
1HFY14, the company secured orders of `19bn. During the quarter, order
inflows would be the key monitorable.
Pipes to be the laggard. The manufacturing division is likely to post a minor
EBIT loss given that it was non-operational for most of the quarter. Capital
employed in the pipes division was `1.34bn, of the total `6.6bn.
Our take. Execution is likely to pick up on the DMRC project as the
tunnelling work starts from Nov’13. We expect a 16.5% EBITDA margin and
a 5.6% net profit margin. Key monitorables are the company’s orderbook and
the status of its L1 projects. Our target is based on 5x FY14e earnings, a 30%
discount to other midcap construction companies’ target multiples. Risks.
Slowdown in order inflows and margin squeeze.

BofA Merrill Lynch, Cadila Healthcare - Recovery in sight: Upgrading to Buy from U/P

Raising PO to Rs1,000; lifting FY15/16E EPS by 3%/7%
We upgrade Cadila (CDH) from U/P to Buy and lift our PO from Rs705 to Rs1,000
(24% upside) as we believe that the worst is behind for CDH (26% underperformance
over the past 12 months) and earnings will accelerate from FY15. While FY14 would
be a washout year, we expect earnings momentum to accelerate from FY15, driven
by 1) a pick-up in US approvals, 2) recovery in domestic growth and 3) base effect
of Hospira JV. We cut our FY14E EPS by 6% and raise FY15/16E EPS by 3%/7%.
US approval cycle to accelerate
After the receipt of the FDA’s complete response letter, CDH is confident of getting
20+ approvals from the regulator in FY15, including some of the limited competition
products. We highlight that CDH has among the highest pending ANDAs compared
to Indian peers with the FDA, and is further ramping its filings in differentiated/niche
segments. We forecast 25% CAGR over FY14-16 vs 10% CAGR over FY12-14.
Domestic sales to recover from FY15
While the implementation of drug pricing policy and termination of marketing rights
of BI’s two products will impact FY14 performance (11% of FY14E PBT), we expect
growth to go back to 14-15% starting FY15.
Hospira JV margin has bottomed out
We highlight that Hospira JV’s profit contribution, which was 23% in FY13, has
come down to 11% in 2QFY14 as one of its flagship products, “gTaxotere”, has
witnessed severe price erosion. We expect this JV to stabilize at current levels.
Valuation re-rating aided by 30% earnings CAGR (FY14-16E)
With an increase in growth visibility (30% CAGR), launch of transdermal products
and improvement in return ratios, we believe valuations can go back to historical
levels (19-20x). We value CDH at 18x FY16E as we see full benefits of turnaround
visible by FY16. Delay in US approvals, including transdermal, is a risk.

J. Kumar Infraprojects Execution pace to pick up; Buy :: Anand Rathi

J. Kumar Infraprojects
Execution pace to pick up; Buy
Key takeaways
Clear revenue visibility. Consequent on the strong order inflows in FY13,
we expect execution to pick up in the following 2-3 quarters in some of J.
Kumar Infraprojects’ major projects (Sion-Panvel and DMRC). Moreover, the
Delhi Metro Rail Corp. (DMRC) project picked up speed during the quarter.
For 3QFY14, we expect the company to post 19% yoy revenue growth
(29.3% qoq).
Strong operating margins. Its present order book factors in healthy margins
of over 16% in all projects. For the quarter, we expect a 17.5% EBITDA
margin, vs 16.9% in the Dec’12 quarter and 18.2% in Sep’13 quarter. In the
next 3-4 quarters, the margin is likely to be healthy because of the larger
contribution from the DMRC project. As debt on the company’s books is
low (net-debt-to-equity: 0.2x), we expect a 7.3% net profit margin.
Smart pickup in order book. In 1HFY14, the company bagged orders of
`1.7bn, taking its order book to `34bn (3.3x TTM revenue). Further, at the
L1 stage, it has orders of ~`9bn in the Mumbai Water Transport project. A
bid pipeline of over `60bn and the company’s focus on cash contracts in
urban infra are likely to increase inflows in FY14-15.
Our take. We expect J. Kumar’s 3QFY14 revenue to grow 19% yoy (29%
qoq), following strong execution in its Sion-Panvel and DMRC projects. We
expect a 17.5% EBITDA margin and a 7.3% net profit margin. Key
monitorables are the company’s orderbook and the status of its L1 projects.
Our price target of `295 is based on a PE of 8x FY15e and an EV/ EBITDA
of 4.5x. Risk. Delay in project execution.

NCC Asset sale to be the key trigger; Buy: :: Anand Rathi

NCC
Asset sale to be the key trigger; Buy
Key takeaways
Revenue performance stable. Following its strong order book, we expect
NCC’s 3QFY14 revenue to grow 13.7% yoy (1% qoq). We estimate its
EBITDA and PAT margins at 8% and 0.5% respectively. Management has
guided to 10-15% FY14 revenue growth. This appears reasonable given its
present order book of `180bn and the pickup in execution at its power
project. The EBITDA margin of the present order book is only ~8% (25%
from the low-margin captive power project). Projects in the pipeline (mostly
in buildings, water and the international segment) are, however, being bid at
8-10% margins.
High profit sensitivity to interest rate. Interest charges constitute ~90% of
the company’s EBITDA. This percentage is expected to fall during FY14-15
with a high probability of a rise in OPM and a drop in interest charges. After
some debt repayment in FY13, we expect savings in interest charges during
the 3QFY14.
Update on fund raising. The company is seeking to shift out of its three
BOT projects (Himachal Sorang, Bangalore Elevated, Western UP) and some
of its real-estate ones. So far, it has successfully sold real estate of `1bn. The
NCC power project has been working to schedule and the first phase will be
completed by Mar’15.
Our take. We estimate NCC’s 3QFY14 revenue to grow 13.7% yoy (1%
qoq), its EBITDA margin to come at 8%, with only a small net profit margin
due to the high interest burden. We believe its fund-raising measures, strong
profit growth over FY14-15 and lower interest charges to be key stock price
triggers. We maintain a Buy, with a price target of `41, based on 6x PE of the
FY14e construction business (`16) and 0.5x P/BV for its road BOT (`8),
power (`10) and real-estate businesses (`7). Risks. Rise in interest rates,
slowdown in order inflows.

India Construction Long-term outlook intact :: Anand Rathi

India Construction
Long-term outlook intact
Key takeaways
Revenue growth due to robust orders. Companies we cover are likely to
register 11.7% yoy revenue growth (25.8% qoq). Some such as Supreme
Infrastructure, J Kumar Infraprojects and KNR had secured a vast chunk of
orders in FY13 and are expected to record strong revenue growth yoy.
Growth for Pratibha and Simplex could, however, be lower due to piled-up
unbilled revenue, and delays in payments/clearances in certain projects,
causing execution slippages.
EBITDA, profit-growth trend declines. We expect the EBITDA margin to
decline ~50bps yoy, and improve ~20bps qoq, on average. Yoy margins of
NCC, J Kumar and Simplex are likely to improve, while those of Supreme,
Pratibha and KNR could dip. Aggregate net profit could decline an average
20.3% yoy (up 57% qoq). With an increase in working capital days, we expect
debt of most of the companies would have risen, increasing interest costs.
Thus, despite strong revenue growth, net profit growth of some companies
could be restrained.
Our take. The sector is likely to gain some attention from policy makers,
given the upcoming elections. From a medium- to long-term perspective it is
still attractive. The government’s continuous efforts to improve the funding
situation in infrastructure and the clearance of many infrastructure projects
would provide a further fillip to the liquidity-starved construction sector. Key
monitorables: Execution, order-book growth, debt profile and the workingcapital cycle.
Top picks. NCC, J Kumar Infraprojects and Simplex Infrastructure.

Apollo Tyres - Cooper deal called off; Stock likely to play catch up :: Prabhudas Lilladher

As we had mentioned in our update dated 14th Nov’13 in case the deal with
Cooper Tires does not go through, it would be a big positive for the stock. Cooper
Tires called off the deal in the last week of Dec’13. Cooper was unable to file its
financials for the September quarter due to unavailability of financials of the
Chinese venture. We believe thatthe termination ofthe deal is a positive for Apollo
tyres as the deal would have put significant pressure on the consolidated balance
sheet(acquisition cost of $2.5bn mainly funded through debt).Now thatthe deal is
called off, we revert back to our earlierthesis of Apollo being better placed among
the tyre companies in terms of balance sheet and strong Free Cash Flow. Now, in
our view, it will play a catch up game with other tyre stockslike JK, MRF and CEAT
which have run‐ up by 50‐70%. With valuations attractive at 6.5x FY14E and 6.2x
FY15E EPS, we recommend BUY rating on the stock with a Target price of Rs138
(@8x FY15E P/E ‐  in line with its average P/E).
 Termination of the deal a big positive: We believe that the termination of the
deal is a positive for Apollo tyres as the deal would have put significant pressure
on the consolidated balance sheet. Moreover, there was a high risk of Cooper
not being able to service the huge debt asmargins were under pressure. With an
annual interest outgo of USD 180‐200m, it would have put pressure on servicing
the debt. Now that the deal is called off, we revert back to our earlier thesis that
Apollo is better placed among tyre companies in terms of balance sheet and
strong Free cash generation. We do not take into account any termination fee /
damages that may arise to either of the entities. We are of the view that Apollo
Tyres would not have to pay any termination fee as the earlier two rulings by
the Delaware court were in Apollo’s favor.

IRFC TF Bonds and Muthoot Finance/SREI Infrastructure Finance/Manappuram Finance Ltd - NCD public issue collection figures at 14.00 p.m. as on 10-01-2014








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