Prabhudas Lilladher:: Diwali Muharat Top Picks - 2019

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Britannia Industries Volumes impacted by slowdown; Margin expands:: Prabhudas Lilladher

BRIT’s Q4 results are in line with Adj. PAT of Rs1.1bn (PLe: Rs1bn), even as sales

growth of 10% was lower then our estimates. Volume growth of 3% has been

disappointing, although wheat prices were up 8.8% YoY and Palmoil prices are up

23.3% YoY, neutralise to some extent by 8% lower sugar prices YoY,  BRIT continued

to gain from strict cost control in a tough operating environment. Q4FY14 margin

expansion continued despite Q4FY13 being a high base quarter. We expect margins

expansion to moderate from the current levels, going forward. We estimate PAT

CAGR of 23% for FY14‐16.We value the stock at 23xMar 16 EPS and assign a value

of Rs50 per share to subsidiaries (0.6xEV/Sales) and arrive at target price of

Rs1,148. Maintain ‘BUY’.        

 EBITDA margin at 10%; Adj. PAT up 27%: BRIT reported 10% increase in sales to

Rs16.5bn; we estimate 3% (4.5% in Q3) volume growth, showing impact of

demand slowdown. Gross margins expanded 110bps to 38.5%. EBITDA margin

expanded by 120bps to 10% aided by 140bps decline in advertising expenses

even as staff cost and other expenses were up by 50bps each. EBITDA increased

25%; PBT increased by 25% to Rs1.59bn as gain of 96% decline in interest cost

was neutralised by 46% decline in other income. Adj. PAT was up by 27% to Rs

1.1bn as Tax rate declined by 120bps while PAT is up by 4% to Rs915m.  

 Demand slowdown impacts volume; selective price increase to cost pressure:

Volumes for BRIT remains impacted by demand slowdown, BRIT has effected

selective price increase in Milk Bikis, Nutrichoice Ragi and Oats as wheat and

milk prices were at an all‐time high in Q4, also palmoil prices and sugar prices

touched year high levels putting pressure on costs, however in Q1FY15 we have

seen prices of Wheat and palm oil correcting sharply, while milk and sugar have

retraced from their highs. While we expect competitive environment to sustain

due to pressure from players like Parle, ITC and UNIBIC to gain market share,

sustained margin expansion in standalone operations will continue led by gains

from improved sales mix, benefits of new manufacturing units, cost‐cutting in

distribution and marketing and help from correcting raw material prices.

NIIT Technologies Order book to drive CY14 performance, Retain “BUY” :: PL Research

NIIT Technologies (NIIT Tech) reported revenues softer than expected, whereas
margin was ahead of expectation. The company reported order intake of $377m,
against average of ~$100m. We retain our ‘BUY’ rating with a revised TP of Rs470.
 Revenue growth muted, margins ahead: NIIT Tech reported a muted revenue
growth (-0.8% in USD terms) QoQ to Rs5,873m (PLe: Rs5,991m, Cons:
Rs5,962m). EBITDA margins expanded by 121bps to 16.2% (PLe: 16.2%, Cons.:
15.1%), driven by lower hardware pass-thru revenue. PAT decline by 14.9% QoQ
to Rs531m (PLe: Rs595m, Cons.: Rs595m), due to lower other income.
 Order book strongest ever, 3x higher than average: Order book for NIIT Tech
swelled to $377m, compared to average of ~$100m, driven by one large deal of
in BFSI/US of $300m (New Scope: $30m). The management said that the deal
could further add to the order book in subsequent quarters.
 Strategic focus to accelerate growth: NIIT Tech is aspiring for $1bn revenue
opportunity by FY17. Three prong strategy involves 1) Positioning for expanding
its presence in the US 2) Increased focus on strong verticals like TTL and BFSI 3)
Investing for opportunities in IMS.
 Margin expansion likely to continue: The management expects steady
improvement in margin driven by lower hardware revenue and higher US/UK
revenue. We factored in 40bp improvementin marginsfor FY15.
 Isit a time forre‐rating? The company has been on the steady path of recovery
in terms of operating margin, cash conversion and deal wins in FY14. We expect
strong order book would improve the revenue visibility in FY15 and demonstrate
the ability of the company to consummate the large deals. A new beginning. We
will waitforfew more silverlinesto push forward an argumentforre‐rating.
 Valuation & Recommendation – Reiterate “BUY” with revise target price of
Rs470: Positive IATA commentary, improved deal pipeline and AAI project rampup would give steady revenue growth with steady margin improvement. It is
currently trading at 7.5x FY16E earnings with an EPS CAGR of 14% (FY14-16E).

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.

UPL On the righttrack:: Prabhudas Lilladher,

We met up with the Senior management of UPL to get an update on the business
environment and the outlook, going ahead. Postthe detailed interaction with UPL,
our conviction remains intact, as UPL is treading on the right track, improving
product mix, undertaking cost‐saving initiatives, consolidating supply chain,
reduction in working capital, FCF generation and gradual reduction of debt. For
FY14E, management maintained its organic top‐line growth of 12‐15% YoY, with
margin improvement of 100bps YoY. Net working capital islikely to remain range‐
bound within 90‐100 days. UPL continues to trade at attractive valuations of
7.7x/6.7x FY14E/15E earnings estimates, respectively, which is at a discount of 30‐
40% to its peers. With sustained earnings growth, lower working capital and
gradual reduction in debt, we believe, UPL is likely to get re‐rated. We roll‐over
valuationsto FY15E,resulting into target price of Rs210 (previous Rs185).
 Focus on FCF generation and reduction in debt gradually: UPL repaid Rs4bn of
debt in H1FY14, while in H2, it plans to repay almost Rs2bn. However, due to a
steep Rupee depreciation witnessed in H1, net debt stood at Rs28bn in Sep’13
(compared to Rs25bn in Mar’13). Gross debt stood at Rs38bn (Rs42bn in
Mar’13).
UPL targets to reduce its net D/E to 0.3x (currently 0.6x) over the next two
years. Management acknowledged that their focus clearly is on generating FCFF
and utilizing it to reduce debt gradually. UPL’s optimum cash balance is Rs8-
10bn and any surplus cash will be likely used for reduction in debt.

Infosys On the road lesstravelled :Prabhudas Lilladher,

We interacted with Infosys (Mr. Sandeep Mahindroo – IR Head) to understand the
demand environment and road-map of new strategic initiatives. Infosys is
undertaking cost optimization, improving sales effectiveness and focusing more on
the traditional Business IT. We expect these initiatives to drive earnings momentum
in the near term. We retain our “BUY” rating.

Britannia Industries Tasty Treatin ‘GoodDays’!!: Prabhudas Lilladher

We are increasing FY14 and FY15 EPS estimates of BRIT by 12% and 6.5% and
target price to Rs1050 (Rs885 earlier). Thisfollows 110% PAT growth in Q2FY14 on
the back of sustained margin expansion for third consecutive quarter and 13.7%
sales growth in an environment of slowing consumer demand. BRIT continues to
gain from strong tailwinds like 1) benign input costs of Sugar, Palm oil etc. 2)
improving sales mix in biscuits 3) rising share of non‐biscuits in portfolio and 4)
gains from higher in‐house manufacturing and efficiencies in new units. BRIT is
undertaking product and packing innovations in Bourbon, Nutrichoice Cream
Cracker, 50‐50 etc. which will enable sustain growth momentum in H2. Input cost
environment will prevent further run‐up in gross margins assugar prices are down
2.5% from Q2 average, wheat prices are up 5%, while Palmoil prices are up 8%. We
are increasing gross margin estimatesto 40.1% (40.4% in H1) in FY14 and 40.3% in
FY15. We estimate standalone EPS of Rs30.2 in FY14 and Rs38.1 in FY15 and
increase 12 month target price to Rs1050 (23xSept 2015 EPS and subs at 0.75x
EV/sales), a 20% upside.

IndiaHydro Power Capacity addition‐ Abale ofturtles: Prabhudas Lilladher

With an operating capacity of 40GWs and plagued by a relatively slower pace of
capacity addition and cost/time overruns therein, the hydro power (HEP) scenario
in India has not altered much since the first 5‐year plan. Below are the brief
highlights ofthe currentscenario in terms of capacity addition in the sector:
 Only 7.3% capacity addition has been achieved in the first 18 months of the
12th Plan: The 12th Plan had envisaged 10.8GWs capacity addition, of which, only
798MWs has come on stream to which the Central sector contributed 66%,
Private sector 21% and State sector contributed 13%. The total capacity under
construction (CWIP) stands at 10GWs under the 12th plan, of which, 54%
pertains to the Central sector, 31% to Private and balance to the State. Within
the CWIP, in PSUs, NHPC’s share - 3GWs, NTPC - 1GW and NEEPCO - 0.8GWs;
State-wise, HP and AP each have a share of close to 500MWs of CWIP, while in
the private sector, it is scattered amongst players like NCC, NSL, GVK, L&T and
others.
 Cost/time overrun substantial: A total of 10GWs of projects have been
currently delayed, thus, leading to time and cost overruns. A total of 6.9GWs
pertain to Central, 1.5GWs to State Sector and 3GWs to Private which are
reeling under both, time and cost over runs. In terms of time, the projects
currently under CWIP are delayed by over 30-40 months and in some cases,
beyond six years. Poor geology, delays from contractors, local resistance (Land
acquisition/forest clearance) and adverse weather conditions affecting logistics
and operations were the main reasons for the delays. In terms of cost, the
projects currently under CWIP have crossed over 30% on an average of their
original cost (average PC being Rs8-10bn) approved in the DPR. Out of the total
projects in CWIP, 5247MWs has been awarded to BHEL, 100MWs to Chinese
players and balance 4752MWs to Indian (VA Tech), French (Alstom), European
(Litostroj Slovenia) and Chinese (Dongfang) TG suppliers. Major EPC contractors
for these projects are SNC, Patel Engineering, Jaiprakash, HCC, DSC Engineering,
Om Metals, Gammon India etc.
 Overall progress to remain slow, target may be missed by 30%: With geopolitical hindrances within India and outside likely to remain the same, the
progress of HEPs continue to remain dismal. Around 265MWs is expected to
come up in H2FY14 and another 2500-3000MWs in FY15-16. Looking at the
progress of CWIP, we expect the capacity addition target to be missed by 30% in
the 12th Plan. In the listed space, while SJVN has the least risk of capacity
addition as Rampur 412MWs is expected to come on stream by FY14, NHPC’s
Kishanganga, Parbati St. II and Subansiri Lower may slip into the 13th Plan.
However, on account of a regulated model of earnings and healthy dividend
yields within the power sector, NHPC and SJVN are relatively safer bets and
hence, we maintain ‘Accumulate’ on both.

‘Markets will continue to see huge volatility’ :Prabhudas Lilladher, : Business Line

Investors must seek complete clarity on products offering returns higher than similar products in the market. — Dilip Bhat, Joint Managing Director, Prabhudas Lilladher

The stock market has turned wildly volatile of late, buffeted by the rupee and hapless economic data. The NSEL issue has also taken its toll on investor morale. We catch up with Dilip Bhat, Joint Managing Director, Prabhudas Lilladher, to gauge the market mood.

What is the mood among retail investors now, are they buying stocks?

Retail investors have been passive spectators for some time now and rightly so. The heavy redemption that we saw in mutual funds in the last one year proved that they were right in their decision as they kept on withdrawing money at every rise, not withstanding the record FII inflows, as the subsequent turmoil that rocked the markets would have eroded the value of their investments considerably. Markets have not enjoyed the confidence of retail investors for the past couple of years and the recent volatility of unimaginable proportions has dented their confidence significantly

Were your investors also caught in the NSEL imbroglio?

We took a conscious decision not to participate in this particular product despite our traditional expertise on arbitrage and yield products as we were never convinced that it would be in the interest of our investors. While we did give up on substantial income over the years, I think we did the right thing by resisting the temptation of earning quick money. There were, of course, repeated discussions with our partners and large clients and every time we pointed out the risks. At times we did lose a few clients to competition but we were firm about our decision not to participate in this product.

What are the lessons for investors from this episode?

Few important lessons emerging from the NSEL crisis are: Investors must seek complete clarity on products offering returns higher than similar products in the market, whether it is because of some loophole or gap in the framework of laws under which the product is regulated.

Investors must seek clear details of the trade guarantee fund (TGF) lying with the exchange as TGF acts as a safeguard for investors from any counter-party default risks.

Investors who would be primarily acting as money lenders should inquire as to who is going to use the funds invested by them, what is their background, credentials, networth and so on. There should be clarity on end use of funds and how the borrower would be able to complete the pay-in obligation in case the contract had to be closed.

What is the mood among the foreign institutional investors in the market?

Large FII inflows have been the bulwark holding up the markets and keeping them buoyant despite the economic sluggishness and political logjam. They have pumped in record funds in the last two years. As we saw recently, small sell-off from them caused a disproportionate upheaval in the Indian stock markets. I think they are always looking for an opportunity to buy further, despite the steep rupee depreciation of over 20 per cent over the last one year pegging back their returns.

However, the current depreciated value of the rupee provides them an opportunity to acquire stocks cheap. Any FII putting fresh money is buying 20 per cent cheaper in dollar terms which means you are buying at Nifty levels of around 4,600!

Following the RBI’s move to tighten liquidity in the system, is there a liquidity crunch in equity markets as well?

Not necessarily linked to the RBI’s move, but most domestic funds have had redemptions and inflows with private insurance companies too. As a result when FIIs are absent or sellers stock markets tend to get rocked as no domestic funds can step in to buy anything significant (as they do not have inflows), the only saviour is always LIC.

Are investors more wary about commodity trading now following losses in NSEL?

I think so. The huge losses are fresh in their minds and in the absence of any clarity on NSEL the collateral damage to confidence on investments in the commodity market is to be expected.

Do you think the worst is over for stocks as far as decline in prices goes or is there more pain in the offing?

I think markets will continue to see huge volatility. I will not be surprised if once again in the near future we see the Nifty touching levels of both 5,000 and 6,000 and I am not talking about the range- bound markets. I feel the upheavals will be something to watch out for. But a sluggish GDP growth of around 5 per cent will cap any runaway rise in the markets and the markets will remain vulnerable if FIIs take the backseat.

South Indian Bank- Risks wellrecognised;Upgrade to BUY! - Prabhudas Lilladher,

We upgrade South Indian Bank (SIB) to ëBUYí after remaining cautiousfor the last
nine months as (1) Some of the structural issues we have been highlighting have
played out with the impactrunning through the P&L now (2) We do notseeNBFCs‐
like risk to SIBís gold book and Infra book risks also seem limited (3) Moderation of
return ratios and possible asset quality risks have been more than factored in with
~30% drop in P/B multiples. Upgrade to ëBUYí with a PT of Rs28/share implying
1.1x Sep‐14 book (~30% upside).

Britannia Industries Growth visibility improves; valuations attractive : Prabhudas Lilladher

We are revising FY14 and FY15 EPS estimates for Britannia Industries (BRIT) by 12%
and target price to Rs812 (SOTP). This follows 280bps margin expansion to 8.8% in
Q4FY13, a 4-year high margin in any quarter. Although BRIT’s margins have
remained volatile in the past, we believe that favourable input costs, focus on
higher margin segments and more rational competition will enable 130bps margin
expansion over FY13-15 and provide 28% PAT CAGR. 45-50% P/E discount (FY15
Consol EPS) to Nestle (NEST) and GSK Consumer (GSK), despite 55% ROCE and
39.4% ROE, limits downside in the stock. Maintain ‘BUY’,

Reliance Power Sasan restructuring ‐ More technical less material ::Prabhudas Lilladher

! Preface: Reliance Power’s (RPower’s) Sasan UMPP loan of Rs145bn has been
restructured by the lenders. We believe that it is a technical factor which now
takes into the account a realistic Commercial Operation Date (COD) referred to
as the Date of Commencement of Commercial Operations (DCCO). The original
DCCO of Sasan at initial bidding was from May 2013-April 2016. However, it was
revised to December 2011-March 2013 as MOP wanted two units to come up in
the 11th Plan itself. This condition was accepted by the company on the
assurance of required assistance given for securing timely inputs and a revised
PPA was signed which necessitated a change in loan documents too. On account
of a delay in land acquisition (which allowed RPower to start land acquisition
only in January 2011), COD of the 1st unit by December 2011 was not possible.
Ultimately, COD of 1st Unit of Sasan took place in March 2013.
! More of a technical factor: Since the DCCO of Sasan is now shifted to March
2013 - June 2014, the same will also have to be incorporated in the loan
documents. As per RBI, if any change occurs in DCCO, it will lead to a
restructuring. Thus, this restructuring is not on account of any payment default
but purely for technical adjustment. Also, out of the total Rs145bn domestic
loan sanctioned till date for Sasan, Rs25bn has been used from domestic banks,
Rs60bn from US and Chinese EXIM banks. The company is currently funding the
construction activities from buyer’s credit, which in future, will get replaced by
non-domestic loans.

Aban Offshore Strong fleet status :: Prabhudas Lilladher

! Results in‐line: Aban’s Q4FY13 results were in line with expectations, with
revenues at Rs9.6bn, 19.5% YoY and 5.6% sequential growth. Margins stood at
52.4% as against 53.63% in Q3FY13 and 52.4% in Q4FY12. On account of lower
ETR, PAT grew by 91.6% QoQ and declined 24.3% YoY. During the quarter, all
vessels, with the exception of Tahara, were working.
! Fleet Status: In March 2013, Aban Ice and DDI went off-contract. Of these, DDI
has already been re-contracted and will commence operations from July 2013
onwards. Aban Ice is currently being marketed. Further, Aban 7 completed its
contract in the month of May 2013 and is also being marketed.
! New Contracts: DDII, IV & V, which were contracted in the Middle East and
whose contracts were to expire in September 2012, have all been re-contracted
with the same parties. DDVII, whose contract ended in December 2012, got into
another contract immediately in Mexico for a period of 1005 days at a healthy
operating day rate of US$151K. DDI was also contracted at a healthy rate of
US$158K for a period of 1115 days.
! Valuations: Aban currently trades at a PER of 6.9x FY14 and 5.2x FY14. Given
the strong fleet status, whereby, the risk over the next couple of years is
mitigated, we maintain our positive stance on the company and value it at 6x
FY15 which translates to Rs378.

Crompton Greaves Expect gradual recovery :: Prabhudas Lilladher

! High quality improvement cost led to miss in PAT: Crompton Greaves (CRG)
reported consolidated profits of Rs247m for Q4FY13, lower than our and street
estimates (PLe: Rs774m). International subsidiaries reported loss of Rs845m in
Q4FY13, higher than our estimate of Rs450m. Higher-than-expected stabilization
costs like quality improvement cost (high un tanking rate issue) and LDs led to
losses in subsidiaries. The company incurred cost of Rs770m in the quarter
related to stabilization cost (Rs3bn for FY13). CRG highlighted that stabilization
cost was high in the quarter due to quality improvement related cost but most
issues related to design and processes have been sorted and cost should trend
downward significantly in the next two quarters. Belgium-related restructuring
is completely over and most employees have parted in Q4FY13. Hence, full
impact of savings in employee cost (~Rs200m/quarter) should be visible from
Q1FY14. Operations in Hungary have stabilised faster-than-expected and the
plant has already delivered 18 power transformers in Q4FY13 and also has been
EBIT positive. Most of the incremental losses are from the Belgium and Canada
plant which is expected to reduce (as benefits of restructuring and quality
improvement exercise fortify and LDs reduces over the next two quarters). CRG
also highlighted that various initiatives planned by the company like improved
offering, global sourcing, manufacturing foot print and continuous improvement
initiatives programmes have delivered cost saving/margin improvement of
225bps for FY13.

NHPC Capacity addition fails to aid earnings :: Prabhudas Lilladher

! Q4FY13 Adjusted PAT down 40.3% YoY, FY13 PAT flat YoY: NHPC’s reported
revenue in Q4FY13 de-grew by 23.8% YoY, mainly on account of flat generation
growth (despite capacity addition from Chutak and Chamera 3rd Unit) and lower
incentives. The company has booked Rs3.6bn in OI and extraordinary heads on
account of cash received from DESU. Thus, adjusting to all these items, APAT
stood at Rs3.5bn, which is a de-growth of 40.3% YoY. PAF for FY13 is at around
85%.
! Targets 400MWs addition in FY14E: NHPC aims to commission Nimoo Bazgo
(45MWs), 2 units of TLDP 3 (66MWs) and Uri 2 (1 unit) Parbati III (260MWs) by
the end of FY14E. With the commission date of Uri 2 anticipated in June 2013,
the project has seen unforeseen slip-ups in the electro mechanical works.
Similarly for TLDP 4, since March 20, 2013, HEP is on a standstill on account of
stoppage of construction by HCC.
! Debtors – some respite: NHPC has realised close to Rs2.4bn from DESU and
interest thereon in Q4FY13. However, debtor position of Rs20bn is flat QoQ.
! Valuation and Recommendation: The stock is trading at a P/BV of 0.8x FY15E.
Further, pass-through of water cess in the tariff and receivables from various
SEBs continue to nullify the increase in ROE impact. However, capacity addition
and improvement in operational performance in a seasonally strong Q1-
Q2FY14E would be the key things to look forward to. We have downgraded our
numbers and TP based on lower capacity addition and incentives. We maintain
‘Accumulate’ on the stock.

Punjab National Bank ROAs of 1% inspite of operational slowdown; BUY :: Prabhudas Lilladher

PNB's PPOP performance continues to get weaker (7% YoY contraction). However,
B/S consolidation and recovery efforts is aiding asset quality though delinquencies
continue to remain high. Despite just 4% PPOP growth and elevated credit costs
expectations, we expect ~1% ROAs (higher than peers) and with undemanding
valuations of 0.8x Sep‐14 book, we maintain ‘BUY’ with PT of Rs900/share.
However, re‐rating will be restricted, given lower ROEs v/s history + PPOP risks.
! Core PPOP performance gets weaker: PNB's core PPOP contracted 7% YoY, with
just 3% loan growth and ~15% contraction in core fees. Key metrics: (1) NIM at
3.5% was flat QoQ but management expressed near-term concerns and guided
to 3.35% margins v/s 3.5% in FY13 considering falling rate environment (2) In its
effort to consolidate, domestic loan growth was just 3%; positive for credit but
our FY14 NII is down 5% (3) Non-interest income was aided by treasury income
of Rs1.9bn adjusted for which core fees contracted 3% YoY. With weak guidance
on NIMs and risks to B/S and fee income growth, we expect PPOP challenges to
continue and expect just 4% PPOP growth in FY14.
! Asset quality‐Strong momentum in Recoveries/upgrades continue: PNB
reported better-than-expected Gross NPAs, with Rs26bn of upgrades/recoveries
in line with management guidance and they expect strong momentum to
continue. Incremental slippages continued to remain high at 3.8% and
restructuring of ~Rs35bn (excl. SEBs) indicates that stress continues in the
system. Slow B/S growth will help and thus, we factor in credit to remain
elevated at ~115bps v/s 140bps.
! ROAs of ~1% despite PPOP challenges, Maintain ‘BUY’: Despite slow PPOP
growth and ~115bps of credit costs, we expect ROAs of ~1% in FY14 (better than
peers) and hence, maintain ‘BUY’ as current valuations are undemanding at 0.8x
Sep-14 book. However, lower ROEs at ~15.5% v/s +20% historically + operational
challenges will limit significant multiple expansion. PT of Rs900/share (0.93x
Sep-14 book).

Apr’13 ‐ Complex fertiliser sales decline by 50%; urea up by 6% YoY :: Prabhudas Lilladher

Preliminary data from the Ministry of Fertilisers indicates that sales volumes of
overall complex fertilisers (incl. manufactured & traded) declined by 50% YoY for
the industry during Apr’13. On the contrary, urea sales increased by 6% YoY during
the same period. Imported complex fertilisers witnessed decline of 56% YoY during
Apr’13 as companies refrained from importing due to delay in subsidy fixation as
well as huge inventory in system. Similarly, manufactured complex fertiliser
volumes declined by 47% YoY during Apr’13. While we expect urea demand to
remain steady, complex fertiliser sales continues to remain under pressure due to
wide differential in urea v/s complex fertiliser prices and huge inventory in system.
Though few companies have already announced reduction in farm gate prices of
complex fertilisers, the bigger challenge is the existing inventory in system which
will be sold at reduced prices. Our channel checks/interactions with industry
suggest that major portion of the loss will have to be borne by the companies.
However, companies have already passed significant part of the reduction in the
form of dealers discounts, promotional offers etc. We maintain ‘BUY’ on Chambal
Fertilisers and ‘Accumulate’ on Coromandel, GSFC, Tata Chemicals, and Deepak
Fertilisers.
! Complex fertiliser sales continue to face demand headwinds: Preliminary
volumes data for Apr’13 indicates that sales volumes of overall complex
fertilisers (incl. manufactured & traded) declined by 50% YoY for the industry.
On the contrary, urea sales increased by 6% YoY during the same period.
Complex fertiliser sales continue to face demand headwinds due to windfall
increase in their prices over the last two years. Our channel checks suggest that
farmer is reluctant to purchase complex fertiliser at such high prices despite his
crop economics remaining favourable.
! Reduction of farm gate prices on existing inventory has emerged as a new
problem for industry: Complex fertiliser industry, which was already grappling
with the slide in demand and consequent build-up of inventory, is now facing
another challenge. Though few companies have already announced reduction in
farm gate prices of complex fertilisers, the bigger challenge is the existing
inventory in the system which will be sold at reduced prices. Our channel
checks/interactions with industry suggest that major portion of the loss will
have to be borne by the companies. However, companies have already passed
significant part of the reduction in the form of dealer discounts, promotional
offers etc. during the last few quarters.

SJVN- A miss on the generation front :: Prabhudas Lilladher

! Q4FY13 generation down by 4.6% YoY: SJVN’s reported revenue in FY13 degrew
by 12.7% YoY, as the generation dipped by 10.9% on the back of a 19.5%
YoY dip in water discharge. Units generated in Q4FY13 stood at 605m, down by
4.6% YoY. PAT came in at Rs10.5bn which was flat YoY on account of lower
interest charges. PAF for FY13 was at 105%. Incentives for FY13E were Rs2.5bn,
mainly on account of higher-than-expected UI charges.
! Updates: 1) SJVN has Rs3.5bn outstanding from Delhi, UP and HP SEBs. 2) The
company has chalked out a plan for adding 47.6MWs of wind power for which
the orders are being placed and COD is expected in Q2FY14E. 3) Capital
expenditure outlay for FY14E is Rs9.8bn and CWI is at Rs29bn. 4) Additional ROE
of 1% is not applicable to NJHEP. 5) Cash stands at Rs24bn. 6) Capex on Rampur
till March 2013 stands at Rs24bn out of the envisaged Rs33.5bn. 7) COD of
Rampur 1st Unit is Q3FY14E. 8) MOU target for FY14E stands at 6.8bn units.
! Valuation and Recommendation: Rampur HEP in FY14E and 45MW of wind will
start contributing to FY15E earnings. The generation this year was disappointing.
However, the impact on the stock price would not be material as it provides a
steady state dividend yield play. The stock is trading at 0.9x FY15E. We maintain
‘Accumulate’ on the stock.

Gujarat State Fertilisers & Chemicals Weak quarter; maintain ‘Accumulate’ on attractive valuations :: Prabhudas Lilladher

GSFC’s Q4FY13 result disappointed on the margin front. Adjusted EBITDA margins
stood at 9.9% (‐930bps YoY/‐50bps QoQ) primarily due to pressure in the chemicals
segment. However, capro‐benzene spreads have bottomed out and we expect
subsequent quarters to witness gradual improvement in chemicals margins.
Commencement of TIFERT is likely to boost manufactured fertiliser volumes and
margins in FY14E. We have downgraded estimates by 7%/2% to Rs 13.9/15.7 in
FY14E/15E due to lower fertiliser prices and volumes combined with slow recovery
in capro‐benzene spreads. However, we maintain ‘Accumulate’ (revised target
price Rs 66) due to attractive valuations. Union Ministry’s directive to recover
subsidy on ammonium sulphate is likely to remain a major overhang on the stock
(though management clarified that they have approached the Delhi High Court and
are confident of the outcome in GSFC’s favour).
! Q4FY13 results disappointed due to lower margins: GSFC reported PAT of
Rs584m, -75% YoY which included employee provisioning of Rs520m related to
wage revision of employees at its polymer and fibre units. This employee
provisioning included Rs400m of one-off items related to gratuity, pension
liabilities and was non-recurring in nature. After adjusting for the one-offs of
Rs400m, adjusted PAT stood at Rs984m, -47% YoY and significantly below est. of
Rs1.4bn. Though revenues at Rs 17.0bn, 11% YoY were slightly lower than est. of
Rs17.7bn, the primary disappointment was at the margins front. Adjusted
EBITDA margins stood at 9.9% (est. of 13.3%) due to lower margins in the
chemicals segment.
! Adjusted chemicals margins stood at 11.5% (est. of 16.0%); fertiliser margins
stood at 8.6% (est. of 10.0%): Adjusted chemicals margins stood at 11.5% (est.
of 16.0%) due to pressure on caprolactam-benzene spreads. Spreads remained
weak due to lower caprolactam prices (US$2400/mt), while benzene
(US$1400/mt) remained at elevated levels. Fertiliser margins also witnessed
pressure due to huge inventory in the system.