Hindalco Industries (HNDL) Earnings to remain under pressure in Q2: Kim

Hindalco Industries (HNDL)
Earnings to remain under pressure in Q2


Q1 EBITDA declined 9% QoQ to Rs19bn. Last quarter, HNDL’s domestic
business suffered due to falling metal EBITDA (aluminum -33% QoQ,
copper -56% QoQ). We think Q2 performance may not be different because:
1) aluminum prices have reduced 6% since July and, 2) the local Pollution
Control Board (PCB) asked HNDL to shut down its power plants at the
Hirakud aluminum plant. We forecast profit to decline 10% QoQ in Q2 and
15% for full-year FY13. We maintain SELL on HNDL given risks to the
domestic earnings that accounts for 70% of total profit. The share price may
fall below our TP if HNDL’s power plants are shut for a longer period.

Hathway Cable :: Disappointment over slow growth priced in, BUY :Kim Eng

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Y‐T‐D the stock is down 51% as investors fear that delay in cable
digitisation bill and loss of market share to ’DTH’ service providers is
slowing growth for HATH. After the recent fall HATH is an attractive
BUY because 1) I&B and Telecom ministry have confirmed that the
bill would be passed in parliament by Dec, 2) HATH has continued
voluntary digitization in Q1 and added 90K pay TV subscribers and
3) HATH is trading at an EV/EBIDTA of 8x which is less than half of
peer Dish TV. Our TP of Rs150 on HATH is based on discounted CF.
Subsidized pricing supports subs addition in cable, broadband
Untill the digitization bill forces conversion of analog cable homes
into digital, HATH would add subs thru voluntary digitization. For
FY12, we expect 26% increase in pay TV subs to 2.4m (Subs at Q1 end
is 1.9m) HATH’s new broadband services have got good response due
to its offer of 12GB downloads at a price of Rs1500.
Cost savings, increased placement fee to support FY12F GM of 27%
We forecast FY12F GM to rise 250 bp. This is driven by new channels
which is helping increasing placement fee (+25%) and savings in
admin cost (Rs20m in FY12). HATH repaid high cost debt which would
cut interest cost by Rs120m for FY12.
Net cash of Rs1.1bn to support digitization of 1.5m subs in 2 yrs
HATH spends Rs700/subscriber for distributing set top boxes to carry
out voluntary digitisation. Its subs acquisition cost of Rs750 is lower
than Rs1500 for DTH.
Approval for mandatory cable digitization would be a trigger
HATH’s underlying fundamentals remain strong despite the delay in
legislation. We like HATH because it has lesser subs acquisition cost
compared to DTH and a better B/S. We expect the gap between
HATH’s valuation of Rs1.5k/sub vs Rs8k/sub of Dish TV to narrow.

Hindalco - Debt eating up earnings, Downgrade to SELL ::Kin Eng

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Hindalco (HNDL)
Company update
Debt eating up earnings, Downgrade to SELL


Above‐expectation interest cost following a 25% rise in debt caused
HNDL’s FY11 profit to be 20% below our estimate. We cut our FY12F EPS
by 20% as interest cost will remain high, offsetting the gains from high
aluminum price and rising GM at Novelis. This makes the stock expensive
at PER of 10.9x FY12F (30% above peers). We downgrade to SELL from
BUY. Our new TP is Rs137/sh (‐30%) based on PER of 9x FY12F.
FY12 revenue of Rs746bn, +3%
Lack of revenue growth despite healthy sales price is due to absence of
capacity increase. Next round of capacity increase will come in March
2012 (2 aluminum plants in India with capacity of 411k ton) and in March
2013 (a recycling plant in South America with capacity of 300k ton).  
Aluminum and copper prices assumed to rise 5%
In FY11, sales price increased 30% for copper and 25% for aluminum. For
FY12, we assume avg price increase of 5%; avg price during Apr‐Jun is 10%
above FY11 avg. Our sales price assumptions for FY12 are US$2.9k/ton for
aluminum and US$11k/ton for copper.
Internal CF and surplus cash insufficient to fund CAPEX
In FY11, HNDL borrowed Rs40n in new debt to fund CAPEX of Rs83bn. It
plans further investment of Rs160bn in new capacities through FY13 for
which it would borrow an additional Rs39bn.
FY12F earnings downgraded 20% due to high interest cost
Interest expense rose a hefty 70% to Rs18.5bn in FY11 and will rise further
in FY12 to Rs20.5bn (65% of debt is in foreign currency).
Downgrade to SELL on mild EPS growth and high PER
The HNDL stock is trading at PER of 10.9x FY12F, which is considerably
expensive, given ROE of 9.5% and EPS growth of just 6%. We cut our TP by
30% to Rs137/sh based on PER of 9x FY12F.

Mahindra & Mahindra - Proxy on growing rural consumption, BUY : target Rs845: Kim Eng

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Mahindra & Mahindra Ltd (MM)
Initiating Coverage
Proxy on growing rural consumption, BUY


MM, is a leading maker of tractors and utility vehicles (UVs). Growing
rural income (rising agri price) would support EPS growth of 17–20%
over FY11‐FY13. MM’s sales are far less sensitive to crude prices unlike
those of passenger car makers because tractors (38% of MM’s revenue)
are business equipment for farmers. We derive our ‘sum‐of‐the‐parts’
valuation of Rs845/sh by valuing the auto business at PER of 12x FY12F
(Rs614/sh) and investments at market price (Rs232/sh).

Eros International Media (EROS) Pre‐sales reduce risk; PER of 8x FY12F: Kim Eng

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Eros International Media (EROS) :Pre‐sales reduce risk; PER of 8x FY12F

EROS, a recently‐listed entertainment company, produces/ acquires,
and distributes Indian movies. In an industry marked by high risk,
EROS reduces risk significantly through pre‐sales of up to 70% of a
movie. Our FY12F EPS growth of 41% is underpinned by revenue
growth of 20% and GM expansion of 300bp to 34%. We like EROS for
its leading market share, risk‐mitigated business model, and net
cash B/S. Our TP of Rs192/sh is based on P/BV of 2x FY12F and ROE
of 21%, similar to its peer UTV Software Communications (UTV).

Buy Titagarh Wagons -Backlog, new orders to support strong EPS:: Kim Eng

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Disappointed with unchanged budget for wagons by the Indian Railways (IR),
investors sold TWL shares last week. We think a 20% sell off is unwarranted
as unchanged budget of 18k wagons is big enough to increase TWL’s backlog
by 40% and secure our FY12/13F earnings. Note that IR is yet to release
orders for 6k wagons from last year's budget. TWL is now trading at low PER
of 6.2x FY12F ‐ very cheap given FY12 earnings growth of 35% and strong B/S.

Buy Cairn India -Expect a re‐rating soon; target Rs448 : KIM Eng

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CAIR’s Q3 earnings beat our estimate due to rising crude price and reduction
in cost of production. We now forecast EPS of Rs33.3 for FY11 (61% achieved
in M9) and Rs49.7 for FY12. On its Q3 earnings call, CAIR stated that its
production plan for FY12 is unchanged and it would not pay any royalty to
facilitate its takeover by Vedanta. A decision on the takeover bid, possibly
within the next 6 weeks, will remove uncertainty, prompting investors to
take notice of the cheap valuation of the stock. We maintain our TP of
Rs448/sh based on PER of 9x FY12F.

NIFTY View : Kim ENG : Feb 18, 2011

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ƒ In Focus
HEXW FY10 EPS of Rs5.7 was 25% above estimate, Upgrade to BUY from HOLD
Hexaware’s (HEXW) Q4FY10 earnings of Rs396m were above estimate as quarterly
net margin increased 730bp to 13.6% on low employee cost and absence of FX loss in
Q4. We upgrade our FY11F EPS by 15% on the back of new contracts (Rs9bn) secured
last year. We now expect revenue growth of 30% and EPS growth of 80%. For FY11,
we expect net margin will to by 150bp to 11.5% given absence of FX loss from old FX
contracts (HEXW has new hedges worth US$130m at Rs48/US$). We increase our
target PER to 12x FY12F (from 10x earlier) and upgrade our TP by 35% to Rs130/sh.
Our new PER is in line with mid‐cap software peers. We are positive on software
sector this year as we believe FY12F earnings growth would exceed investor
expectations on strong volume growth from the US and increased market share of
Indian companies in Europe. HEXW is a preferred mid‐cap pick.

NIFTY View India | 13 January 2011: KIM eng

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ƒ In Focus
 
Auto sector: FY11/12 EPS cut by 5‐10%, Share TP cut by 12‐25%, SELL
We cut earnings forecasts and TP on Auto stocks under our coverage. We anticipate
companies would scale down their sales targets in Q4 and for FY12 following worse‐
than‐expected Nov industrial growth of 2.7%. This is because 1) the sharp fall in Nov
industrial growth is mainly due to slowing demand of vehicles and other consumer
durables, 2) weakness in Nov could extend further because consumer affordability is
reduced by avg increase of Rs10k‐25k in vehicle prices and Rs300 increase in monthly
installment due interest rate increase of 150‐200bp (11.5% to 13.5%) in the past 6
months. An expected hardening of interest rates by 25‐50bp in the central bank
meeting of this month could further pressurize affordability.  We believe high PER of
15x‐20x FY11F for the auto sector could moderate to 10x‐15x unless evidence of high
and sustainable growth is visible.

BUY Tecpro Systems- Backlog up 90% in 1 month, PER of 10x FY12F: Kim Eng

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BUY Tecpro Systems Ltd (TPRO)
Company update Backlog up 90% in 1 month, PER of 10x FY12F



Recently, TPRO secured new orders of Rs22bn from power sector
customers, which increased backlog to Rs39bn. During our meeting,
the company told us that it would raise new debt to fund working
capital over the next 2 years. We fine‐tune our earnings forecast for
FY11/12 on increased interest expense. We maintain BUY given 35%
FY12F EPS growth and 20% ROE. Currently, TPRO trades at 20%
below avg. sector PER due to lack of coverage.