Reliance Power Overhangs remain; downgrading to Sell ::UBS

Reliance Power

Overhangs remain; downgrading to Sell

Reliance Power has been one of the best performing stocks in the last month

Following positive sentiment in the sector driven by the formation of a new Central

Government, Reliance Power has been one of the best performing stocks in our

coverage universe, up around ~50% in the last month. However, we do not think

much has changed fundamentally for the company in such a short span and many

serious overhangs remain. We are downgrading our rating to Sell from Buy while

maintaining our price target of Rs100.

Overhangs remain: Gas availability; low power demand; usage of excess coal

We think the following overhangs remain: 1) no visibility on gas availability for the

2,400MW Samalkot Project; 2) power demand from distribution companies has been

lower (due to their poor financial position), which is a risk for plant utilisation; and 3)

there is still no final clarity on usage of excess coal from Sasan UMPP. The other issues

are a lack of visibility on imported coal-based 4,000MW Krishnapatnam UMPP and slow

hydro project development.

We are still positive on structural reforms in the sector

Direct control by the central government on some core power sector issues is limited

but we are positive regarding the initiation of structural reforms in the sector because:

1) state electricity boards (SEBs) and power distribution companies need financial

support from banks and they are controlled by the central government; 2) the central

government could help SEBs improve performance by offering efficiency-linked

incentives; and 3) the central government controls public sector undertakings (PSUs)

such as NTPC and Power Grid. If large-scale structural reforms are implemented, we

think the impact on distribution (and, therefore, the power sector) would be positive.

Valuation: Downgrading rating to Sell from Buy; maintain PT of Rs100

Our DCF-based PT includes 13,680MW of projects assuming an 8.8% risk-free rate, a

risk premium of 6.5% for the Chitrangi power station and 5.5% for other projects.

J.P. Morgan - Dish TV

Dish TV (DITV IN) Earnings disappoint on content cost inflation. Positive FCF is the main improvement in financials		Overweight Price Target: Rs60.00 PT End Date: 31 Mar 2015

DITV’s earnings (loss of Rs 1.4/Share) disappointed vs. expectations. Earnings had few accounting adjustments (Net Impact reported EBITDA higher by Rs 0.7B). Key positive read through was that through F14 DITV has generated positive FCF of Rs 3.1B (Rs 2.9/Share) thus putting the stock at a 5% FCFE yield. Net addition has improved for the company in Q4 and as digitization moves into tier 3/rural areas DTH will likely perform better. At current market price we believe that risk reward is positive given limited benefit being attributed either to a) The company’s initiatives on margin improvement in F15 or b) Longer term optionality on ARPU improvement in a post digitization scenario.

· Key negatives – 1. DITVs Q4 earnings had a number of accounting adjustments (Net result reported EBITDA higher by Rs 0.7B). New accounting norm of upfront activation revenue may be concerning but seems to be in line with industry practice. 2. EBITDA margin at 25% for F14 (restated basis) has been under pressure due to heavy content cost increase (+19%) through the year vs. ARPU improvement of 7.6%. 3. Capex will likely increase as rollout of phase 4/5 markets start.

· Key positives – 1. Company has turned FCF positive (5% yield on F14 basis) with net debt correspondingly reduced 2. Initiatives on content cost management being put in place. Co expects 150bps reduction on content cost to revenue over F15 thus regaining some part of lost margins. 3. Co has regained lost market share in Q4 in net adds (0.22MM) and 4. Tariff hikes of 10% being taken in June (except entry packs).

· Outlook for F15- Given a low base formed in F14, we think comps will be easier for the company to beat going into F15. Operating initiatives taken in terms of content cost management, tariff hikes, churn containment and volume growth in phase 4/5 provide multiple levers for showing improved growth ahead. Risk remains in terms of high competitive intensity in the industry, which could keep tariff hikes under check.

Table 1: DITV - Q4F14 earnings table

Rs M, year end March	Dec-13	Mar-14	% Q/Q
Net Revenues	6,207	6,348.5	2%
Other Operating Income	30.9	20.6	-33%
Total Income	6,238.1	6,369.1	2%
Expenditure
Purchases of stock in trade	15.3	3.6	-76%
Change in stock	2.4	10.8	350%
License Fees	645.8	669.8	4%
Other operating costs	742.4	823.8	11%
Commission	503.7	506.5	1%
Other expenses	323.4	512.7	59%
Employees cost	215.2	210.2	-2%
Total	4,783.8	5,079.7	6%
EBITDA	1,454.3	1,289.4	-11%
EBITDA Margin (%)	23.3	20.2	(3.1)
Depreciation	1,534.0	1,490.8	-3%
EBIT	(79.7)	(201.4)	153%
Other Income	97.1	200.9	107%
Interest	301.0	326.3	8%
Profit before exceptional	(283.6)	(326.8)	NM
Exceptional	0.0	1,163.7
Profit before tax	(283.6)	(1,490.5)	NM
Profit after tax before minorities	(283.6)	(1,490.5)	NM
Net profit	(283.6)	(1,490.5)	NM

Source: Company reports

 

Investment Thesis

We think shares of Dish TV are attractively valued from a risk-reward perspective at the current market price. Capex rationalization, initiatives on content cost / churn management and increasing share of value added service offerings should result in positive FCF sustaining hereon. Longer term, we believe ARPU increase potential is mostly undiscounted in the price. At FY15E EV/EBITDA of 8.8x (average range 14x over CY10-13), we think the stock discounts most of the risks.

Valuation

Our Mar-15 price target of Rs60 implies a 9.2x forward EV/EBITDA as against last 3 year average range of 14x and at a 10-15% discount to regional peers. While the stock is currently trading at a discount to the peers, we believe valuations should catch up as progress on debt reduction comes though given improving cash flow position.

Risks to Rating and Price Target

Key near term risks will be industry discipline, longer than anticipated (2 year) delay in digitization implementation, higher than expected capex resulting in negative FCF and risk on pledged shares.

J.P. Morgan - Aurobindo Pharma

Aurobindo Pharma Key takeaways from conference call

Aurobindo Pharma (ARBP IN, Not Covered, Rs638.55) reported 4QFY14 results ahead of consensus estimates, driven by limited supply of gCymbalta sales during the exclusivity period in the US. Revenue in the quarter was Rs23.3bn (+48% YoY; +9% QoQ) vs Bloomberg consensus estimates at Rs21.7bn. EBITDA of Rs7.4bn was 20% higher than consensus. While the company did not give specific guidance, it indicated that ARBP would maintain growth momentum seen in the past 2-3 years, with continued growth in the base business in the US, strong trends in injectable, AuroLife, and additions to the European business (EUR330-340mn). On margins, the company highlighted that it would maintain or better EBITDA margins from base quarter (pre-Cymbalta quarter of 2QFY14) levels of 23%, excluding Cymbalta and any impact from the European acquisition.

· Outlook on Actavis’ European assets acquired. Management indicated that operations were in line with expectations and maintained guidance of turning around the loss-making operations to achieve breakeven by the second year-end (PAT neutral or positive). The key driver for this would be: 1) switching ARBP products with Actavis and vice versa depending on profitability; 2) operational optimization without impacting revenue and 3) over the next 18-24 months bringing some products in-house to take advantage of ARBP’s low cost API. Overall for its European business, revenue growth (ARBP + acquired assets) is expected at 10% in FY15, as per management. On potential restructuring, ARBP indicated that it would take at least two quarters to get a complete picture on this.

J.P. Morgan - State Bank of India

State Bank of India (SBIN IN) 4Q14: asset quality improves		Neutral Price Target: Rs1,800.00 PT End Date: 30 Sep 2014

SBI reported PAT of Rs30.4bn (down 8% y/y, 3%< JPMe & 8%>consensus). Asset quality improved with significant decline in gross delinquencies. Domestic margins remained resilient with liability franchisee remaining strong. Domestic loan growth remained muted at 13.3%, lower than the industry average.

Table 1: 4Q14 results table

(Rs m)	4Q13	3Q14	4Q14	YoY	QoQ
NII	110,784	126,405	129,028	16.5%	2.1%
Non-int inc	55,467	41,903	65,857	18.7%	57.2%
Opex	88,645	92,124	88,606	0.0%	-3.8%
PPOP	77,606	76,185	106,278	36.9%	39.5%
Provisions	41,810	41,496	58,911	40.9%	42.0%
PBT	35,797	34,689	47,367	32.3%	36.5%
Tax	2,804	12,345	16,960	504.8%	37.4%
PAT	32,992	22,343	30,407	-7.8%	36.1%
Cost - Income	53.3%	54.7%	45.5%	-7.9%	-9.3%
NIMs - (cumulative)	3.34%	3.19%	3.17%	-0.2%	-0.02%
NIMs - Qtrly	3.16%	3.21%	3.11%	-0.05%	-0.10%
ROA	0.94%	0.57%	0.73%	-0.21%	0.17%
Tax rate	7.8%	35.6%	35.8%	28.0%	0.2%
Balance sheet data (Rsbn)
Advances	10,456	11,489	12,098	15.7%	5.3%
Deposits	12,027	13,499	13,944	15.9%	3.3%
C/D ratio	86.9%	85.1%	86.8%	-0.2%	1.7%
Asset quality
Gross NPL	511,894	677,993	616,050	20.3%	-9.1%
Net NPL	219,565	371,674	310,960	41.6%	-16.3%
Gross NPL (%)	4.75%	5.73%	4.95%	0.2%	-0.8%
Net NPL (%)	2.10%	3.24%	2.57%	0.47%	-0.67%
Credit cost	1.67%	1.25%	2.20%	0.53%	0.95%
Coverage	57.1%	45.2%	49.5%	-7.6%	4.3%
ROA	0.94%	0.57%	0.73%	-0.21%	0.17%
Other income (Rs mn)
Core fees	43,480	36,145	51,146	17.6%	41.5%
Others	9,700	3,376	10,700	10.3%	216.9%
Treasury	2,290	2,382	4,011	75.1%	68.4%
Consolidated	4Q13	3Q14	4Q14	YoY	QoQ
Net interest income	155,340	171,968	176,455	13.6%	2.6%
Non-int inc	98,332	102,747	132,422	34.7%	28.9%
Operating expenses	149,014	175,926	176,173	18.2%	0.1%
Pre prov profit	104,658	98,789	132,703	26.8%	34.3%
Provisions	60,821	52,430	70,515	15.9%	34.5%
Profit before tax	43,837	46,358	62,188	41.9%	34.1%
Provision for tax	4,355	17,537	21,967	404.4%	25.3%
Profit after tax	39,482	28,822	40,221	1.9%	39.6%
Advances (Rsbn)	13,926	15,062	15,783	13.3%	4.8%
Deposits (Rsbn)	16,274	17,931	18,389	13.0%	2.5%

Source: J.P. Morgan estimates, Company data.

· Asset quality. Asset quality improved with reduction in gross delinquencies at 2.7% vs. 4% in the previous quarter. However, this was partially offset by higher restructured assets accretion at 2.6% vs. 1.4% in Q3. Credit costs inched up and stood at 2.2% vs. 1.3% in Q3, which led to improvement in PCR at 49.5%, up 430bp sequentially.

· Initiatives on asset quality. Management is undertaking various initiatives on asset quality, which should pay off in the longer term: 1) Agri loans - reworking overall product to ensure better collectability, 2) SME- Management has stepped up monitoring. This has already started yielding results. The NPLs in the SME book stood at 7.16% in Q4 v/s 9.09% in Q3. 3)Mid corporate- This segment continues to be challenging, however, incremental stress is being slowly arrested.

· Loan growth. The overall loan book grew 15.4%; however, the domestic loan growth was muted at 13.3%. Management is cautious on the mid corporate and SME segment, given the weak macro. Mid corporate segment grew 12% y/y, whereas SME loans declined 2% y/y. The overall retail book grew 13% driven by strong growth in home loans at 18% y/y.

· Margins. Domestic margins remained resilient at 3.49%, flat q/q as YOA improved by 7bp q/q. This was, however, offset by an increase in COD, which was up 2bp q/q. Overall margins stood at 3.17%, down only 2bp q/q. The liability franchisee continues to remain strong, with the share of Retail TD at 45.5% vs. 41.9% last year. The overall CASA ratio stood at 44.4%, up 54bp q/q, driven by strong growth in CA balances whereas SA balances were flat q/q.

Table 2: DuPont table

	3Q12	4Q12	1Q13	2Q13	3Q13	4Q13	1Q14	2Q14	3Q14	4Q14
NIM	4.05%	3.89%	3.57%	3.33%	3.30%	3.16%	3.16%	3.20%	3.21%	3.11%
Fees/Assets	1.14%	1.76%	1.05%	0.95%	0.96%	1.52%	0.90%	0.79%	1.00%	1.49%
Operating Expense/Assets	-2.24%	-2.45%	-2.07%	-2.11%	-2.07%	-2.53%	-2.32%	-2.41%	-2.34%	-2.14%
Provisions/Assets	-0.85%	-1.04%	-0.79%	-0.55%	-0.79%	-1.19%	-0.79%	-0.79%	-1.05%	-1.42%
ROA	1.15%	1.35%	1.20%	1.11%	1.00%	0.94%	0.89%	0.62%	0.57%	0.73%

Source: J.P. Morgan estimates, Company data.

Figure 1: Domestic margins remained resilient during the quarter

Source: Company data.

Figure 2: Higher CA balances resulted in improvement in CASA; though SA accretion remained muted

Source: Company data.

Figure 3: Lower delinquencies led to improvement in asset quality

Source: J.P. Morgan estimates, Company data.

Investment Thesis

We maintain our Neutral rating on the stock as:

1. We expect margins to remain stable in the medium term despite higher rates driven by strong liability franchisee and benefit of cap raise.

2. SBI does have valuation support but the near-term trajectory looks quite challenged. The pressure on asset quality continues to concern us.

Valuation

Our Sept-14 PT for SBI is Rs 1800 based on a Gordon growth model with a normalised ROE of ~15% and 2nd stage growth of ~12% and Rs274/share for the insurance & subsidiaries business.

Risks to Rating and Price Target

Key risks to our Neutral rating include: 1) Slower economic growth leading to higher delinquencies, 2) Rising restructuring leading to higher NPAs, 3) Higher loan growth can impact revenue positively.