Stock Strategy - Build a bear-call spread on DLF; long on MTNL : Business Line

52-WEEK FLOP: MTNL ::Business Line

Kotak Sec:: PDF link: DLF, Essar Oil, Tata Power, IDFC, RCom, Shriram Transport Finance, Reliance Capital, Eros, MTNL, Puravankara, JSW steel, Sun TV, Tata Steel, IndusInd Bank,

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http://www.kotaksecurities.com/pdf/indiadaily/indiadaily13022012.pdf


Daily Alerts
Results
DLF: Right course but still in rough waters
Oil India: Country cousin steals a march
Tata Power: Coal production ramps up, low cost coal gives Mundra hope
IDFC: Growth strong, core in line
Reliance Communications: Weak results but do they matter?
Shriram Transport: A flat quarter
Reliance Capital: A mixed quarter
Eros International: Growing up
MTNL: Operational strife continues
Puravankara Projects: In-line results, poor sales


Results, Change in Reco
JSW Steel: Reports consolidated loss; stock expensive
Sun TV Network: A rainy quarter; Sun hides behind the clouds
Change in Reco
Tata Steel: Negatives out of the way
IndusInd Bank: Limited risks to business; valuations cap returns in the near
term


Sector
Consumer products: Hale and hearty, for now
Economy
Economy: IIP growth likely to be near the bottom

MTNL: Net worth erosion continues :Kotak Sec,

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MTNL (MTNL)
Telecom
Net worth erosion continues. MTNL reported another quarter of substantial EBITDA
loss, its eight consecutive quarter in the red at the operational level. Revenue growth of
2.1% qoq was actually decent for a seasonally weak quarter. However, MTNL’s real
issue is not revenue traction but the mismatch between its revenue base and large and
largely fixed cost structure. Large net debt post 3G/BWA spectrum payouts and interest
payments have also started to hurt meaningfully. Reiterate SELL. Cut TP to Rs30/share.

Reader Query Corner: South Indian Bank, Jet Airways,Dishman Pharma, Engineers India, PFC, CanFin Homes, MTNL, GMR:: Business Line

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Please let me know the short- and medium-term targets for South Indian Bank and Jet Airways.

John

South Indian Bank (Rs 23.6): After retracing 38.2 per cent Fibonacci retracement level of the stock's prior up move from its lifetime high of Rs 29.7 in November 2010, the stock found support at around Rs 19 in February. The price band between Rs 19 and Rs 20 is a significant support band from a long-term perspective.

This support band cushioned the stock from declining further in late August this year. Building a strong base at around Rs 20, the stock resumed its long-term uptrend that has been in place ever since bottoming out in the first quarter of 2009.

The stock is presently testing a key medium-term resistance level around Rs 23.5. Emphatic breakthrough of this level will take the stock northwards to Rs 25.5-26 range in the short-term. Investors with short-term horizon can hold the stock with stop loss at Rs 22. However, a fall below Rs 22 will mar the short-term positive view and pull the stock down to Rs 20.

Strong move beyond Rs 26 will pave the way for a rally to Rs 30 in the medium-term. Investors with a medium-term perspective can consider holding the stock with stop-loss at Rs 20. On the other hand, breach of Rs 20 can drag the stock down to Rs 17 or to Rs 15 in the coming months.

Jet Airways (Rs 251.3): Ever since encountering resistance in the range between Rs 900 and Rs 925 in November 2010, Jet Airways resumed its long-term downtrend. Following a sideways consolidation phase between February and August in the band between Rs 400 and Rs 515, the stock breached southwards.

Subsequently, the stock landed at its long-term significant support at around Rs 220 in early October and is reversing upwards. The stock is currently testing its immediate short-term resistance (late August trough) at Rs 253. Decisive jump above this level will give short-term targets of Rs 285 and Rs 308.

Short-term investors can hold the stock with stop-loss at Rs 230. Medium-term investors can hold the stock with deeper stop-loss at Rs 215. Strong move beyond Rs 308 will take the stock higher to Rs 335, Rs 373 and Rs 400 in the medium-term.

Nevertheless, dive below Rs 215 will pull the stock down to Rs 178 or even further down to its long-term support at around Rs 130.

I got PFC (Power Finance Corporation) through the FPO (Follow-on Public Offer). Please advise if I can buy more shares now.

Srinivasan

PFC (Rs 155.1): In our previous review of this stock in July this year, we had mentioned that inability to move above Rs 250 will mean that the stock can head lower to Rs 150 or Rs 125 over the ensuing months. In line with our view, the stock failed to rally and declined to Rs 150 and then found support just above Rs 125, at Rs 130 in late August 2011.

The support zone between Rs 125 and Rs 130 is an important zone from a long-term perspective. The short-term trend is a sideways consolidation. Investors with higher penchant for risk can consider buying the stock with stop-loss at Rs 125. Strong penetration of resistance at Rs 170 will lift PFC higher to the Rs 215-220 range in the ensuing quarters. The next target is at Rs 250.

However, breach of Rs 125 downwards will reinforce the downtrend that has been in place from its lifetime peak of Rs 383; the stock can roll down to Rs 107 or even to Rs 86 in the long-term.

Kindly let me know the long-term prospects of CanFin Homes and MTNL.

Shantha.D. Pai

CanFin Homes (Rs 103.7): After retracing 61.8 per cent Fibonacci retracement level of the prior up move (from the October 2008 low of Rs 37.5 to August 2010 peak of Rs 172), CanFin Homes took support at its long-term support zone between Rs 85 and Rs 90 during February to August this year, and bounced upwards. Subsequent supports are at Rs 77 and Rs 67.

The stock has been on an intermediate-term downtrend from its August 2010 peak. This trend remains in place as long as the stock trades below Rs 130. Strong weekly close above this level will strengthen the stock's long-term uptrend and take the stock higher to Rs 150 and then to Rs 170. Nonetheless the stock has immediate resistance at Rs 110.

MTNL (Rs 30.9): MTNL has been on a long-term downtrend from its January 2008 peak of Rs 219. Medium- as well as short-term trends are also down for the stock. However, after recording an all-time low at Rs 29.15 on October 24, the stock found support around this level and is on the brink of reversing, triggered by positive divergence in weekly indicators. Only a strong move above Rs 37.5 will signal that the stock has bottomed out, and it can then rally to Rs 41, Rs 48 and 52.

Next significant resistance is at Rs 68. Emphatic breakthrough of long-term key resistance at Rs 90 will reverse the stock's intermediate-term downtrend and lift the stock higher to Rs 110 or Rs 124.

Conversely, inability to rally beyond Rs 37.5 will pull the stock down to Rs 29. On a breach of immediate support level at around Rs 29, will drag the stock to new lows.

I purchased GMR Infrastructure at Rs 70, and Engineers India at Rs 300. I see the prices of both the stocks going down. Could you please let me know the latest supports and resistances?

Pavan

GMR Infrastructure (Rs 27.7): Ever since peaking out in June 2009 at Rs 91, the stock resumed its long-term downtrend. Trends in all time frames are down for the stock, and it is still in the bear's grip. Nevertheless, last week the stock found support just above its long-term support level of Rs 23 (October 2008 trough), and bounced up sharply.

The stock has resistance ahead at Rs 30; a conclusive penetration of this level will take the stock northwards to Rs 34 and Rs 37. Strong rally above its long-term resistance at around Rs 45 is needed to alter its intermediate-term downtrend and take the stock higher to Rs 55-58 range.

Investors can consider switching from the stock in rallies. Tumble below Rs 23 will drag the stock down to Rs 20 and to fresh lows.

Engineers India (Rs 239.8): After peaking out in May 2010 at Rs 538, the stock has been on an intermediate-term downtrend forming lower peaks and lower troughs. In April this year, the stock resumed its downtrend after testing important long-term resistance in the band between Rs 310 and Rs 315.

Since then, it has been on a medium-term downtrend. The stock has retraced 61.8 per cent Fibonacci retracement level of its prior up move from October 2008 low of Rs 50, to its May 2010 peak. Investors with long-term perspective can hold the stock with stop-loss at Rs 215.

A reversal from current levels will face resistance at Rs 260, Rs 290 and Rs 315. Decisive breakthrough of Rs 315 will pave the way for an up move to Rs 350-360 band in the long-term; investors can take partial profits off the table at that juncture. On the other hand, fall below Rs 215 can pull the stock down to Rs 180 and then to Rs 150 levels in the ensuing months.

Please review the long-term prospect of Dishman Pharmaceuticals and Chemicals as earlier stated (May 2011).

Mukesh Kumar

Dishman Pharmaceuticals and Chemicals (Rs 53): In our review of this stock in May this year, we had mentioned that there are no signs of reversal in the stock as yet, and it is likely to breach a low at Rs 87, and decline to the 2004 low of Rs 72 or even Rs 61. Investors should have divested their holding on a decline below Rs 87.

In line with our expectation, the stock breached Rs 87 and continued to decline. It has even declined below Rs 61 to register its lifetime low at Rs 52.3 on October 28. The stock is in a longer-term downtrend. Upward reversal will encounter resistances at Rs 61, Rs 72 and Rs 87.

Dynamic move above Rs 87 will take the stock higher to Rs 110 or Rs 120. Failure to surpass Rs 87 will reinforce the downtrend. Investors can make use of rally to switch out of the stock. Only on a strong close above Rs 250 will reverse the long-term downtrend.

MTNL Upgrade to N: A lot depends on spectrum monetization  HSBC Research

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MTNL
Upgrade to N: A lot depends on spectrum monetization
 While MTNL faces significant operational challenges, spectrum
monetization should provide downside support
 Poor spectrum utilization on GSM suggests that MTNL is better
off monetizing spectrum than a roll-out by itself
 Cut TP to INR39 (from INR59); upgrade to N (remove V-flag)
from UW(V) after the recent stock price correction


MTNL faces significant operation challenges given its fragmented quad play strategies,
debilitating institutional culture of state-owned enterprises (SOE), loss in revenue market
share, and increase in employee costs. While there are no obvious operational catalysts for the
stock, we believe it can benefit from spectrum monetization. The company is pursuing intracircle roaming deals on 3G and may adopt the same strategy for BWA spectrum. On the other
hand, with GSM incumbents looking to offload data card-driven demand and keep 3G
spectrum free, we believe there is a case for MTNL to monetize CDMA spectrum as well
(similar to the recent deal between Vodafone and Sistema Shyam).
However, there are few concerns which would limit upside for the company – namely poor
network coverage, lack of willingness on MTNL’s part to enter into longer-term deals
(as evidenced from its 3G proposal which is based on a three-year format) and the present
regulatory chaos. In spite of these concerns, we believe monetizing spectrum is a better option
for the company than a roll-out by itself, very much evidenced from significant poor spectrum
efficiency on GSM services (refer Figure 1).  From a timing perspective, we believe 3G will be
the first to materialize and should conclude over the next 6-9 months, LTE may take time and
may not happen till the next fiscal year but there should be strong demand, and CDMA
monetization could happen anytime soon. We see robust demand for the LTE spectrum held
by the company as none of the top four operators bagged this spectrum and with balance sheet
pressures faced by the sector, there will be a preference for intra-circle roaming (refer Fig 2).
Upgrade to Neutral from UW(V) – We cut our TP to INR39 (INR59 earlier); however,
on back of the recent stock price correction, we upgrade the stock to N (and remove the
volatility indicator) from UW(V). Our fair value of the business has two parts – the value
of core business in the current form (without considering any restructuring) and value
from spectrum monetization. We value the core operations at INR17 per share and
spectrum monetization at INR22 per share. Our target price of INR39 per share implies a
price to book of 0.32 (vs. one-year average at 0.35). Key upside risk for the stock would
be a reduction in employee costs (its proposal to voluntarily retire 15,000 employee would
raise valuations by INR30 per share, by our estimates) and merger with sister company
BSNL (already being discussed and evaluated by the government).  Key downside risk
would be no progress on spectrum monetization over the next 12-18 months.

MTNL: Operational strife likely to continue ::Kotak Sec,

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MTNL (MTNL)
Telecom
Operational strife likely to continue. MTNL reported another quarter of substantial
EBITDA losses, even as the same came down qoq to Rs3.3 bn from Rs4.9 bn in 4QFY12.
EBITDA performance continues to be a function of pension/retirement benefits accrual –
overall employee expenses remain a high 100%+ of revenues. Operationally, revenue
quality continues to deteriorate with a sustained fall in ARPU in all the businesses –
fixed-line, wireless, and BB. We retain our SELL rating with a TP of Rs35/share


1QFY12 – EBITDA loss declines qoq but still high
MTNL reported another quarter of high EBITDA loss – reported loss of Rs3.3 bn at the EBITDA level
was lower than 4QFY12’s Rs4.9 bn led by an absolute decline in employee and admin expenses.
Provision for retirals form a bulk of the company’s employee costs and this line item remains
volatile qoq. Nonetheless, employee expenses have remained higher than 100% of revenues for
the past three quarters and a reduction in the high employee base (43,000+ at end-March 2011,
2X+ of the much larger Bharti) is the only means to a return to profitability. MTNL’s employee base
has been coming down over the past several years, but it remains high and a sharp reduction
would encounter union challenges among others.
Revenues for the quarter came in at Rs8.43 bn, down 1.4% qoq, and 0.8% lower than our
estimate. A sharp increase in interest expenses also impacted net income – MTNL reported a net
loss of Rs8.5 bn for the quarter.
Earnings-based or DCF based valuation meaningless. Reiterate SELL
A massive 3G/BWA payout, non-increasing revenue base, a cost structure which is out of control,
weak competitive positioning, subscale operations (presence in only two circles), and sustained
tariff pressure continue to dent the earnings power of MTNL. A lack of earnings visibility, even in
the medium term, renders earnings or DCF-based valuation for MTNL meaningless, in our view.
In addition, potential spectrum-related payouts (one-time for excess and recurring on renewals)
will strain the balance sheet further.
The stock will likely continue to trade at asset-based valuation (real estate assets, 2G/3G/BWA
spectrum in Mumbai/Delhi, and other telecom infrastructure). Our earnings model is under review
– we shall revisit the same post the release of FY2011 annual report. We retain our SELL rating on
the company with a target price of Rs35/share.

Goldman Sachs:: SELL Mahanagar Telephone Nigam (MTNL) Below expectations due to higher staff costs, interest expenses

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EARNINGS REVIEW
Mahanagar Telephone Nigam (MTNL.BO)
Sell  Equity Research
Below expectations due to higher staff costs, interest expenses; Sell
What surprised us
We maintain Sell on MTNL after the company reported in-line 1QFY12
revenues but higher than estimated EBITDA loss of Rs3.6 bn vs.
our/Bloomberg consensus estimate of Rs3 bn/Rs2.6bn. Even net loss of
Rs8.5 bn was higher than our/consensus estimates of Rs7.7 bn/Rs8.2 bn
mainly due to EBITDA miss and higher net interest expenses. Results
highlights: 1) Total revenues increased 0.7% qoq led by 1.6% increase in
revenues from basic services, partially offset by a 2.6% qoq decline in
cellular revenues (due to 3.5% qoq decline in implied ARPU). 2) Although
EBITDA loss decreased sequentially to Rs3.6 bn (from Rs5.3 bn in 4Q), it
was higher than our estimate of Rs3 bn mainly due to higher than
estimated staff costs at Rs8.5 bn vs. our estimate of Rs7.4 bn (and Rs9.3 bn
in 4Q). Admin expenses declined 30.6% qoq and were -14.1% vs. our
estimates while network charges and revenue share decreased 7.4% qoq
and were -8.2% vs. our estimates. 3)  Net interest expenses increased
28.9% qoq and were 43.2% higher than our estimates leading to a higher
than expected net loss.
What to do with the stock
Although we keep our revenue estimates largely unchanged after the
company reported in-line revenues, we increase our FY12E/FY13E/FY14E
loss per share estimates by 5.3%/7.8%/11.1% to Rs46.51/Rs44.17/Rs40.96
on the back of higher staff cost than our estimates. Accordingly, we lower
our 12-month SOTP-based target price by 1% to Rs38 (ADR: US$1.56) as
we also roll forward our valuation timeframe by one quarter. Risks: Lower
than expected staff costs.

Reiterate Sell on TCOM/MTNL as outlook remains lackluster : Goldman Sachs

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Reiterate Sell on TCOM/MTNL as outlook remains lackluster
Reiterate Sell ratings on TCOM and MTNL
We revise down our 12-month SOTP-based target price on TCOM 10% to
Rs220 (8% downside potential) and our 12-month DCF-based target price
on MTNL 17% to Rs40 (13% downside potential) as we adjust our models
to factor in their weaker-than-expected 3Q results. Retain Sell ratings.
Near-term resolution of TCOM’s surplus-land issue still less likely
As per CNBC (Mar 21), the India telcos minister has ordered a probe into
the delay in the demerger of TCOM’s surplus land — with findings in the
next 2-3 weeks. Subsequently, TCOM stated on March 24 that reports
about a demerger of surplus-land are speculative and TCOM has not
received any recent communication from the government on this issue.
Acting against a swift resolution to the issue are: 1) TCOM would have to
pay the capital gains taxes and stamp duties, which would likely
discourage TCOM from monetizing these assets, in our view; and 2) The
time needed to get the requisite approvals (already pending for the last 9
years). Note that the land bank makes up 46% of our valuation on TCOM.
TCOM: Lower our estimates to factor in weaker operations
We cut EBITDA estimates 7%-8% over FY11-13E as: 1) 3Q results missed
our estimates 6%; 2) higher-than-expected contribution from low-margin
international business (margins of 4% vs. 24% for domestic business). Our
EPS estimates also fall by a proportionate amount. TCOM is currently
trading at 2.4X FY12E P/B (ROE: -24.6%) and 11.5X FY12E EV/EBITDA,
which are at premium to the Asian telcos' average of 1.9X/5.7X. Risks: 1)
Lower-than-expected tariff decline, 2) Value unlocking due to resolution of
surplus land issue.
MTNL: Downside to EPS due to MNP and higher costs
To factor in the higher than estimated negative impact from MNP we
reduce our FY11-13E revenue estimates by 1-3%. Combined with higher
staff cost, we increase our FY11E/FY12E/FY13E EBITDA loss estimates by
37%/14%/4% to Rs8.5 bn/Rs8.5 bn/Rs7.4 bn —and note these are well
below Bloomberg consensus in FY12/FY13 of -Rs780mn/+Rs262mn. Our
EPS estimates also fall by a proportionate amount. Risks: 1) Faster-thanexpected
uptake in the broadband business; 2) Lower-than-expected
decline in subscriber market share.

52-WEEK FLOP: MTNL: Business Line

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In the nine months of the current fiscal, revenues registered a mild growth of 4.4 per cent, but due to 

The stock of PSU telecom player — MTNL, has been marked down quite severely as competitive pressures, staff costs pertaining to retirement and heavy payouts for 3G and BWA auction have curtailed margins.

In FY-10, revenues for the company fell 18 per cent over the previous fiscal to Rs 3,656.1 crore, while from being profitable, the company slipped deep into losses.

heavy payouts mentioned earlier, the losses have increased over the previous year.

MTNL, which operates in the lucrative circles of Mumbai and Delhi, has seen ARPU (average revenue per user) slipping in its wireless, landline as well as broadband segments. Landline ARPUs have steadily declined 2-3 per cent over the past several quarters to Rs 509. The wireless segment has seen ARPU (Rs 255) erosion of 5-8 per cent for the past 3-4 quarters. This, as competitive intensity reached its heights with the existence of as many as 14-15 operators in each circle coming about over the past year.

The company also won 3G and broadband wireless spectrum auctions for Mumbai and Delhi which collectively involved an outgo of over Rs 11,000 crore. These apart, significant outflow and provisions on employee retirement benefits too dented margins.

In recent times, a proposal to levy one-time charges on excess spectrum too has acted as a deterrent and dragged the stock down.

Mahanagar Telephone Nigam- Topline losses continue: BofA ML

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Mahanagar Telephone Nigam Ltd.
Topline losses continue
􀂄 2Q results disappoint; Maintain Underperform
In 2Q FY11, MTNL reported loss of Rs6bn vs loss of Rs4.5bn in 1Q FY11 & profit
of Rs206mn in 2Q last year. Losses were higher than our expectation as topline
fell QoQ after adjusting for non-recurring revenue from wet-lease of infrastructure
for the Commonwealth Games. Operating costs and interest outgo rose due to 3G
related spend but lack of any 3G revenue uplift. Re-iterate Underperform.

JM Financial: telecom: Buy Bharti, hold Idea, Sell MTNL

Buy the leader before growth gets priced in
􀂄 Africa to catalyse double-digit growth: We expect double-digit growth to
return in FY12E as companies digest significantly lower tariffs and growth
related charges in FY11E to deliver FY11-13E revenue, EBITDA and EPS CAGR
of 15%, 17% and 23% respectively. Bharti will become the fastest growing
telecom company across Asia and EMEA, as Africa delivers 45% revenue and
53% EBITDA CAGR during FY11-13E providing material uplift to both Bharti
and the India average (Exhibit 2).
􀂄 Meanwhile, domestic market regains stability: The sector lost a third of its
market capitalisation between Sept’09 and Mar’10 as growth came to a
grinding halt in FY10 (flat vs 20-30% earlier). Fierce competition cut tariff 2.3x
faster than previous years while usage elasticity and cost efficiencies failed to
keep pace, leading to declining profitability and return metrics even as a debt
overhang from funding 3G and BWA spectrum costs and additional downsides
from TRAI’s spectrum recommendations loomed large. Significantly reduced
tariff competition (high cash losses for new operators, 3G funding led to
stretched balance sheets), a return of usage elasticity over the past 2 quarters
are lead indicators of a recovery, in our view.
􀂄 BUY Bharti; traits of a global leader - new growth frontiers in place: We
expect domestic revenue growth to slow to 12% in FY10-13E with limited
room for tariff cuts or increased MOUs, but supported by a scope for rural
penetration and improved 3G based ARPUs over a slightly longer term. Africa
on the other hand is an opportunity which is perhaps larger than what India
was in 2003 with: 1) Near-perfect perfect blend of high population, low
penetration, high tarrifs and low minutes of use, and 2) Unique set of markets
which ensure sustained growth in the near, medium and long-term. With new
growth frontiers in place we recommend a BUY on Bharti, our top pick in the
sector, with a 12-month TP of `422.
􀂄 HOLD Idea; a strong player - primed to grow fitter, exploit opportunities
and deliver growth: Idea is a quality operator in a resilient wireless space
where incumbents will continue to dominate markets and remain favourably
positioned to capture mind-share and market-share as and when new market
opportunities (3G and wireless internet access) arise. We expect 3G and
mobile number portability to polarise markets further with resultant gains
accruing to incumbents. Importantly, we see immense opportunity for Idea to
deliver high EBITDA growth on the back of strong margin improvements in
both established and new circles. We recommend a HOLD on Idea with a 12-
month TP of `72 as we keep a close watch for surprises.
􀂄 SELL MTNL; poor business visibility – but government will ensure
survival: We are structurally negative on the wireline business which accounts
for c.64% of MTNL’s revenues and are unable to contemplate a scenario where
it usurps wireless market share in heavily competitive metro circles. Despite
an improved consumer appetite for both wireline and wireless broadband,
where MTNL could experience strong business salience, we expect MTNL’s
losses to grow exponentially and see a risk of networth erosion by FY14E
unless staff costs are controlled and/or the government infuses equity. We
recommend a SELL on MTNL with a 12-month TP `38.