J.P. Morgan - Coal India (COAL IN)

Coal India (COAL IN) Analyst meet takeaways: 150mt prod increase over FY15-17 dependent on 30K ha land acquisiton and Railway line const		Neutral Price Target: Rs320.00 PT End Date: 31 Mar 2015

What would COAL need to do to achieve 150MT prod growth over the next 3 years: The Chairman (as per media reports in the ET, he is expected to leave COAL soon and join the administrative section in the new state of Telangana) in the analyst meet highlighted that for production to increase by ~50mt per year for the next 3 years, COAL needs to acquire ~10,000 hectares of land every year (8k non forest and rest forest) vs average of 4,000 hectares acquired in each of the last 2 years. Forest and Environment clearances need to be received for all the projects, and lastly the 3 railway lines need to come up in the next 2 years.

Acquiring such large quantities of land and expecting the Railways to complete the much delayed lines in the next 2 years looks difficult, in our view

FY15 prod target of ~50mt increase- what it is dependent on: As per COAL, 20Mt has to come from MCL, 10MT from SECL and the rest from other subs. Railway rakes per day need to increase to 220 per day vs 196 in FY14 (FY13 stood at 190). Interestingly management highlighted that the entire increase in coal production needs to go to the power sector unless they are unable to pick up the coal. ~20-25mt of the prod increase would come from the Jan14 directive by the MOEF on allowing higher prod from existing mines.

FY14 highlights: Surprisingly e-auction volumes went up sharply in FY14 (58mt), which management attributed mainly to evacuation constraints. This should come off in FY15. FSA coal prices, adjusted for incentives increased in Q4 and the impact from grade slippages is behind us.

Wage cost increase expected to moderate in FY15, no comments on potential price increases, dividend policy:COAL expects wage cost increase of 2-3% as employee cost reductions should offset most of the inflation related wage cost spike. FY14 had a Rs5bn benefit from higher interest rates in the actuarial valuations. COAL did not comment on the potential price hikes or dividend policy going forward.

 

Investment Thesis

We like CIL’s long-term story of volume growth and improving realizations, and the scarcity premium means the company is likely to trade at a significant premium to sector valuations. However, we believe that further re-rating will depend on FSA pricing trend, ability to take price hikes, and import requirements. In addition, COAL has a very large FCF, a strong cash-rich balance sheet and minimal capital spend requirements. While dividends have been high in the last two years, in our view: a) they could go higher, and b) a stated payout policy could be put into place, thus allowing investors to view COAL as a yield play.

Valuation

Our Mar-15 price target of Rs320 is based on 6.5x FY16E EV/EBITDA, a 5% discount to global peers given lower volumes for market priced coals. Our target multiple of 6.5x is based on improved visibility on production growth.

Risks to Rating and Price Target

Key upside risks include: a) larger than ~5% price increase in power coal sales; b) special dividend and/or higher than 45% payout; and c) large volume increase.

Key downside risks include: a) no price increase on power coal sales; b) sharp reduction in e-auction coal sales to supply to new FSA; and c) usage of cash in non-productive use.

J.P. Morgan - Phoenix Mills

Phoenix Mills (PHNX IN) Annuity income build-out has been impressive		Neutral Price Target: Rs245.00 PT End Date: 31 Mar 2015

PML’s consolidated EBITDA (Rs6.8B) and earnings (Rs1.3B) were up by 160%/53% Y/Y, aided by strong growth in rental income from market city projects, steady HSP performance and higher contribution from “for sale” projects. Overall rental income for the company has increased to ~Rs4B (PML stake) in FY14. We expect this to increase further going into FY15, primarily driven by occupancy increases in market city projects and impending renewals at HSP (Lower Parel). This coupled with new residential/ office launches in the pipeline should drive strong earnings growth over FY15/16. Debt levels for the co. (attributable Rs20.7B) also seem to have peaked and should trend down as cash flows from “for sale” residential/ office launches kick in.

· HSP mall continues to register healthy growth. Upcoming renewals to provide further upside – HSP mall (Lower Parel) generated EBITDA of Rs1.9B, +8% Y/Y despite one-time rent reversals (Rs20-30MM) and high property tax on a retroactive basis. Adjusted for these one-offs, average rentals for HSP are at ~Rs230psf (up 15%+ Y/Y) with marginal rentals at Rs400psf+. Going into FY15, the company has 0.3msf of area coming up for renewals, which should provide further 10% upside to the HSP rentals.

· Strong annuity income growth from market city projects – Overall market city malls generated rental income of Rs3.4B in FY14 (PML stake ~60%), which is up 60% from last year levels. This was primarily driven by increase in occupancy levels (currently at 80-87% levels) across malls. Going into FY15, rental income from these malls should see a further 15%+ increase as occupancies further catch up to the pre-lease commitments (90%+ levels) and also given increasing footfall/ consumption trends (+20-30% Y/Y). Newly opened market city malls have now stabilized and are generating cash surplus.

· New residential projects in the pipeline should aid cash flows and earnings over FY15/16 – Company has recently launched a residential project in Pune (0.35msf, 10% sold) and has additional new launches in Bangalore / Mumbai in the pipeline over the next two quarters. Pricing across its “for sale” residential/ office projects have seen significant appreciation and contribution from new phase launches should yield better margins ahead. Pricing for its Bangalore project has increased to Rs10K+ psf (vs. Rs6-7K at launch) and Kurla (Mumbai) has increased to Rs12K psf (vs. 7-8K psf at initial launch).

· Palladium hotel tie up expected in next few months – Occupancy / ARRs for the Palladium hotel at 46%/ Rs8100 remain fairly muted. The hotel generated a cash loss in FY14 (Rs0.7B, JPMe). Co expects tie up with global hospitality player to be announced over the next two months. This should help improve the hotel performance. Co is targeting a cash breakeven for the hotel in FY15.

Table 1: PHNX – Standalone earnings

Rs MM	4Q FY13	3Q FY14	4Q FY14	% ch Q/Q	% ch Y/Y	FY13	FY14	% ch Y/Y
Sales	722	756	787	4%	9%	2,706	2,948	9%
EBITDA	479	497	480	-3%	0%	1,786	1,931	8%
EBITDA margin	66%	66%	61%	-5%	-5%	66%	66%	0%
Depreciation	(71)	(59)	(65)	11%	-8%	(275)	(254)	-8%
Other Income	140	197	216	10%	53%	565	800	41%
Interest	(66)	(146)	(129)	-12%	97%	(265)	(445)	68%
PBT	483	489	501	2%	4%	1,810	2,032	12%
Tax	(122)	(111)	(137)	24%	13%	(472)	(507)	8%
Tax rate	25%	23%	27%	21%	9%	26%	25%	-1%
PAT	361	378	364	-4%	1%	1,339	1,525	14%

Source: Company

Table 2: Phoenix – FY14 consolidated financials

Rs MM	FY13	FY14	% ch Y/Y
Sales	4,699	14,485	208%
EBITDA	2,632	6,784	158%
EBITDA Margin	56%	47%
Depreciation	(474)	(1,055)	122%
EBIT	2,157	5,729	166%
EBIT Margin	46%	40%
Financial expenses	(1,430)	(3,451)	141%
Other income	521	391	-25%
PBT	1,247	2,669	114%
Total Tax	(428)	(909)	112%
Tax Rate	34%	34%
Share of profit/loss in associates	11	(28.8)
Minority interest	17.0	(531)
Profit after tax post minority	842	1,285	53%

Source: Company

Investment Thesis

Phoenix is the only listed retail real estate play in India. Execution and leasing risks in case of Phoenix have largely been taken out as the new malls are now operational and footfalls /consumption trends have been reasonably good. Debt levels have peaked with capex now behind and should come down from next year on the back of cash flows from the “for sale” projects. Response to the initial "for sale” projects has been good. We expect earnings growth to be strong over the next 1-2 years on contribution from "for sale" projects, stabilization of new malls and upcoming rent renewals at HSP.

 

Valuation

Maintain Neutral with SOTP-based Mar-15 price target of Rs245. We use a 14% WACC and 11% cap rate to value the company’s retail portfolio. We factor in a delay in cash breakeven for Palladium.

Phoenix SOTP

	Rs in MM	Per share
High Street Phoenix	24,224	168
Palladium Hotel	2,532	18
Market cities Rental portfolio	21,568	150
Sale Portfolio	8,851	61
Attributable Debt (for PML stake)	(21,900)	(152)
Net Present Value	35,276	245
Target Price	245

Source: J.P. Morgan estimates

Risks to Rating and Price Target

Key downside risk in our view pertains to PML’s minority stakes in SPV’s developing market city projects. This could raise concerns on exits required by private investor once assets become operational (though still some time away).

Key upside risks - a) Better-than-expected progress on debt reduction on the back of cash flows from project sales; b) Higher-than-expected rentals on renewals of Palladium (HSP, Lower Parel).

J.P. Morgan - Jyothy Laboratories

Jyothy Laboratories (JYL IN; NC) Analyst meet takeaways

Jyothy Laboratories (JYL IN, Not Covered) hosted its annual analyst meet in Mumbai. Mr. S Raghunandan, CEO and his team (including Mr. Rajnikanth – Head Sales & Marketing) discussed the company’s growth outlook and various initiatives that are underway to drive growth across the six power brands: The company has come a long way consolidating the categories, strengthening sales & distribution network to now focus more on brand innovation (focus on the core and extend into adjacent segments) and improve margin profile (as most of the initiatives are margin accretive in nature). There is greater portfolio clarity and sharper brand communication with lot of innovation on cards (most to hit the market over next 4-8 weeks).

JYL met most of the goals set for FY14 (shared a year ago) barring marginally lower margins (given weak markets which was not anticipated a year ago) and below par performance of the detergent business. For FY14 Net sales grew 23% (led by vol growth of 15%). For FY15 it has set targets of – Sales growth of 20-25% and EBITDA margin of 14%.

Key takeaways from the meeting:

Product innovation – a key focus area for FY15. JYL has planned many new launches/re-launches over 1HFY15 to step up the growth rates across the six power brands. It is optimistic of healthy 20-25% growth rates despite slowing growth for the overall FMCG market.

Brand investments to be significantly higher. In a market that is subdued, mgmt believes product innovation would be critical and marketing initiatives for core brands would be necessary. This would imply higher brand investments and A&P/Sales for the company is likely to rise to 12-13% in FY15 (from ~11% in FY14) as per mgmt. The spends will be on a national basis to grow ahead of the industry.

Non-south business growing faster. JYL has been consistently focusing on Non-south markets where its brand shares are lower and brands are underinvested. As a result of these efforts, the share of Non-south business has grown to 56% in FY14 (vs 52% in FY13). Mgmt aims to take the share of South region down to 25-28% (from 44% currently) over the next five years as it focuses on making its brands national.

Fabric care – Expanding usage, sachet launch, focus on post wash and grow laundry share in South. Ujala brand sales grew 43% in FY14: in a category which is stagnant. The strong growth was aided by share gains (from counterfeits) owing to new packaging and marketing communication and price hike. The Non-south business for Ujala grew 47%. This brand growth is critical to generate healthy cash flows which may be utilized for investing in other brands.

For FY15 there are strong plans to grow this brand further. Three key focus areas for this brand: a) Expand usage via getting new consumers, take share from unorganized players (low cost competition), and offering low cost Re1 sachet to tap into bottom of the pyramid, b) Tap into adjacent categories post wash via Stiff & Shine brand where a re-launch is likely over Nov’14, c) Invest and scale up the Ujala detergent powder in Kerala with a re-launch planned in July’14.

Dish wash – Play the full portfolio. JYL has two brands in the dish wash segment. Aim is to grow share in the bar segment by converting proxies (alternatives, local players etc) and to convert more users to liquids. Focus on product innovation remains high – A Pril re-launch is planned for July’14 which would focus on superior and faster de-greasing solution and a fresh campaign forExo is planned for June’14 highlighting the relevance of anti bacterial efficacy of the brand. Plans are also underway to tap more into the scrubber sub-segment (estimated market size Rs2.7bn growing at ~15%) with launch of first anti bacterial scrubber in July’14.

Exo brand registered growth of 29% with Non-south business growing 74%. Exo which has been a regional brand so far (South share of ~22% vs national share of ~4-5%) and various initiatives are being taken to enhance its penetration beyond South. Prilbrand grew 26% with Non-South business growing 29%.

Household Insecticide – Innovation led growth strategy. The biggest challenge is profitability in this segment and hence the focus is on driving growth for liquids. Liquids now contribute 25% of brand (vs 10% share two years ago). The liquid vaporizer product registered 95% growth in FY14 led by the new product – fits all machines which has worked well supported by aggressive marketing communication. Though Maxo is No.4 in liquids category, it is the fastest growing brand (off a small base) and mgmt is aiming to grow its contribution to ~40% of brand revenue over the medium term.

JYL is looking to introduce Maxo Genius Next Generation Liquid Vaporiser in July’14 which would help to grow in premium segment as per mgmt – this comes with differentiated positioning. Within coils, low smoke coils (launch in JQ’14) should aid growth.

Personal wash – Building on the differentiated positioning. Margo brand grew 28% in FY14 (vs de-growth in overall soaps category). The growth drivers would be expanding geographical reach (making it more pan India), product innovation (recent successful launch of Glycerin variant) and leveraging beyond core into adjacent segments like face washes (in JQ’14).

Laundry – Re-launch should help growth. This is one category where JYL did not do much in FY14. The re-launch of Henkogot delayed and is now expected to happen over the next month. This brand still grew 17% (Non-south at 28%). Mgmt hopes to revive this brand in a significant manner in FY15.

Fa brand removed from power brand list. JYL has decided not to put many resources behind the Fa brand owing to various competitive reasons, though this brand has grown well. As a result it has been removed from power brand list and now it is focused on six power brands – Henko, Ujala, Maxo, Margo, Exo and Pril.

Debt levels come down. As of FY14 Net debt stood at Rs4bn vs Rs6bn in FY13.

ESOP scheme – to lead to ~3% dilution (maximum) over next three years.