1 Edelweiss Securities Limited CONTENTS Latest Research • Adani Power - In line performance; Reduce • Cummins - Market leader feels the heat; Buy • DLF - Debt pangs; Hold • GMR Infrastructure - ‘Extraordinaries’ galore; Buy • IRB Infrastructure - Firmly on track; Buy • LIC Housing Finance - Provisioning dents earnings; NIMs dip further; Hold • Mahindra Satyam - Getting back on track; Not Rated • Mundra Port & SEZ - Delivering on promises; Buy • Pantaloon Retail - Deteriorating fundamentals; downgrade to Hold • REC - Commendable liability management; Buy • Reliance Capital - High interest cost offsets capital gain benefit; Buy • Shree Renuka Sugars - Huge forex loss rubs it in; downgrade to Reduce • Tata Steel - European business surprises positively; Buy • Voltas - Volt to uncertainty; Hold • Banking - Tête-à-tête with Moody’s: Adverse scenario to aggravate GNPAs; sector update • IIP - Weakness intensifies • Corporate Action Tracker Regular Features • Sales Trader’s Commentary • Insider Trades & Bulk Deals • Technical Updates • Eye Catchers FIRST CALL DAILY India Equity Research November 14, 2011 Open Interest (INR mn) Volume 11- N o v - 11 9-Nov-11 % Change Futures 509,523 509,286 0.0 Call 347,072 335,132 3.6 Put 411,803 417,949 (1.5) Total 1,268,397 1,262,367 0.5 Put Call Ratios Volume 11- N o v - 11 9-Nov-11 % Change PCR 0.93 0.94 (1.6) WPCR 1.22 1.05 16.2 OI PCR 1.17 1.24 (5.1) Total OI/ Vol 1.09 1.16 (6.4) Nifty IVs at 22 - 25% levels. FII Activity* (INR M n) (9-Nov) Sectoral Movements % Change Ticker 11‐Nov‐11 1D 1M 3M 1Y Banking 10,687 (3.0) (3.4) (8.2) (24.6) IT 6,169 (1.0) 0.8 13.9 (7.4) Pharmaceuticals 6,047 0.2 2.5 (0.0) (8.2) Oil 8,911 0.8 0.6 5.9 (17.0) Power 2,175 (1.0) 0.3 (4.9) (30.3) Auto 9,138 0.6 3.3 7.1 (9.8) Metals 11,270 (2.3) (0.5) (8.4) (33.8) Real Estate 1,810 (2.2) (0.9) 0.1 (48.3) FMCG 4,235 0.1 6.1 8.3 15.7 Capital Goods 10,611 (2.3) (3.9) (12.8) (33.9) India Change in % 11‐Nov‐11 1‐d 1‐mo 3‐mo Nifty 5,169 (1.0) 0.7 1.9 Sensex 17,193 (1.0) 0.6 2.1 CNX 500 4,101 (1.1) 0.2 (0.5) Global Indices 11‐Nov‐11 1‐d 1‐mo 3‐mo DJIA 12,154 2.2 4.4 7.9 NASDAQ 2,679 2.0 0.4 6.8 Hang Seng 19,577 2.3 5.8 (0.2) Nikkei 225 8,617 1.2 (1.5) (3.9) Net Inv (INR Bn) 8‐Nov‐11 Buy Sell Net FII Cash 20.8 16.6 4.2 FII F&O 163.7 175.5 (11.7) MF Cash 3.9 5.7 (1.8) Value Traded ‐ India (INR Bn) Change in % 11‐Nov‐11 1‐d 1‐mo 3‐mo BSE Cash 26.2 1.8 (3.3) 10.4 NSE Cash 114.6 4.0 0.0 12.0 NSE F&O 1,165.6 (30.5) Forex/Money Market Change in % 11‐Nov‐11 1‐d 1‐mo 3‐mo INR/USD 50.1 0.1 (1.6) (9.4) USD/EUR 1.4 0.1 (0.9) (4.7) USD/YEN 0.0 0.1 (0.0) 0.4 10 Yr G-Sec 9.0 0.5 2.2 8.2 Commodities (USD/Mt ton) Change in % 11‐Nov‐11 1‐d 1‐mo 3‐mo Copper 7,620.5 2.2 4.8 (14.0) Aluminium 2,144.4 1.0 (2.3) (9.9) *Gold 1,792.1 0.2 6.6 2.6 *Silver 34.7 0.1 7.9 (11.2) **NYMEX 99 1.2 15.4 15.5 *USD/Troy Ounce **USD/bbl Agri Commodities (INR/QT) Change in % 11‐Nov‐11 1‐d 1‐mo 3‐mo Sugar 3,195.0 (0.3) 6.3 7.7 ^INR/Maund ^^INR/KG
Transcript
1 Edelweiss Securities Limited
CONTENTS
Latest Research
• Adani Power - In line performance; Reduce • Cummins - Market leader feels the heat; Buy • DLF - Debt pangs; Hold • GMR Infrastructure - ‘Extraordinaries’ galore; Buy • IRB Infrastructure - Firmly on track; Buy • LIC Housing Finance - Provisioning dents earnings; NIMs dip further; Hold • Mahindra Satyam - Getting back on track; Not Rated • Mundra Port & SEZ - Delivering on promises; Buy • Pantaloon Retail - Deteriorating fundamentals; downgrade to Hold • REC - Commendable liability management; Buy • Reliance Capital - High interest cost offsets capital gain benefit; Buy • Shree Renuka Sugars - Huge forex loss rubs it in; downgrade to Reduce • Tata Steel - European business surprises positively; Buy • Voltas - Volt to uncertainty; Hold • Banking - Tête-à-tête with Moody’s: Adverse scenario to aggravate GNPAs; sector
Open Interest ( IN R mn)Vo lume 11-N o v-11 9-N o v-11% C hangeFutures 509,523 509,286 0.0Call 347,072 335,132 3.6Put 411,803 417,949 (1.5)Total 1,268,397 1,262,367 0.5
P ut C all R at io sVo lume 11-N o v-11 9-N o v-11% C hangePCR 0.93 0.94 (1.6)WPCR 1.22 1.05 16.2OI PCR 1.17 1.24 (5.1)Total OI/ Vol 1.09 1.16 (6.4)Nifty IVs at 22 - 25% levels.FII Activity* (INR M n) (9-Nov)
Sectoral Movements % ChangeTicker 11‐Nov‐11 1 D 1 M 3 M 1 YBanking 10,687 (3.0) (3.4) (8.2) (24.6) IT 6,169 (1.0) 0.8 13.9 (7.4) Pharmaceuticals 6,047 0.2 2.5 (0.0) (8.2) Oil 8,911 0.8 0.6 5.9 (17.0) Power 2,175 (1.0) 0.3 (4.9) (30.3) Auto 9,138 0.6 3.3 7.1 (9.8) Metals 11,270 (2.3) (0.5) (8.4) (33.8) Real Estate 1,810 (2.2) (0.9) 0.1 (48.3) FMCG 4,235 0.1 6.1 8.3 15.7 Capital Goods 10,611 (2.3) (3.9) (12.8) (33.9)
Agri Commodities (INR/QT) Change in %11‐Nov‐11 1‐d 1‐mo 3‐mo
Sugar 3,195.0 (0.3) 6.3 7.7 ^INR/Maund ^^INR/KG
2 Edelweiss Securities Limited
First Call
RESULTS FOR THE DAY
STOCKS IN NEWS
Kingfisher to sell property to fly out of debt crisis (ET)
Reliance, BP offer to share KG-d6 infrastructure with state-run cos (ET)
Cairn India stops operations in 2 blocks (ET)
Lanco infra lines up INR24k-cr capex despite coal issues (ET)
NMDC, Severstal ink pact for K'taka plant (DNA)
Coal India has been asked by the coal ministry to implement pricing based on gross calorific value, or GCV, from January 2012, (DNA)
Bharti Airtel, along with US giant Honeywell Inc, is set to launch a joint venture for home security systems linked to mobile phones. (DNA)
GAIL India Ltd has decided to shift its planned floating storage regasification unit (FSRU) for the east coast to Dhamra in Orissa from West Bengal due to lack of suitable location. (DNA)
Jindal Steel and Power Ltd eyes 10m Bolivia ore exports in 5 years (DNA)
Hero motorcycle likely to set up two more plants (MINT)
Ranbaxy’s malaria drug awaits international nod (BS)
Name of company Q2FY12E Q2FY11 Y‐o‐Y Q1FY12 Q‐o‐Q
Adani Enterprises 5,359 5,087 5.4 5,698 (5.9)
Ess Dee Aluminum 265 405 (34.6) 205 29.3
Bhushan Steel 1,519 2,590 (41.3) 2,100 (27.6)
Cipla 2,886 2,490 15.9 2,423 19.1
JP Associates 783 1,155 (32.2) 1,072 (27.0)
Zuari Industries 575 814 (29.3) 300 91.7
Tata Motors 19,910 20,954 (5.0) 20,568 (3.2)
India Cements 709 (336) (310.9) 1,020 (30.5)
Mahindra & Mahindra 8,072 7,273 11.0 6,049 33.4
Jindal Steel & Power 5,861 8,942 (34.5) 9,188 (36.2)
Shiv-Vani Oil & Gas Exploration 609 326 86.8 683 (10.8)
BHEL 12,105 11,423 6.0 8,155 48.4
BGR Energy 650 778 (16.5) 502 29.5
Simplex Infra 168 269 (37.5) 241 (30.3)
Cox and Kings 282 349 (19.2) 380 (25.8)
Tata Power 6,230 5,674 9.8 5,542 12.4
Phoenix Mills 279 221 26.1 272 2.6
Gujarat State Petronet Ltd 1,228 915 34.2 1,374 (10.6)
PAT
3 Edelweiss Securities Limited
First Call
SALES TRADERS COMMENTARY
The Indian equity market continued to drop for the second day on Friday as industrial production growth fell to two year low of 1.9% in September. The Sensex and Nifty dipped 1% each and the latter closed below 5200. Selling was seen in financials, metal, capital goods, realty and PSU stocks.
The Sensex closed at 17192, down 169 points, while Nifty slipped 52 points to end the day at 5168.
Major gainers were Mahindra & Mahindra (3.12%), Sun Pharmaceutical Industries (2.48%), Reliance Industries (2.23%), Hero Honda Motors (1.85%), Bajaj Auto (1.64%), and Wipro (1.35%).
Major losers were ICICI Bank (4.55%), Hindalco Industries (4.31%), Tata Steel (4.19%), State Bank of India (3.48%), Larsen & Toubro (3.30%), and Jaiprakash Associates (3.00%).
The Oil & Gas index was up 0.79%. Major gainers were Reliance Industries (2.23%), Oil India (0.8%) and Cairn India (0.43%).
The Bankex was down 3.03%. Major losers were I C I C I Bank (4.55%), H D F C Bank (2.83%), Bank of Baroda (1.67%), Federal Bank (1.26%) and Canara Bank (1.01%).
The Metal index slipped 2.33%. Major losers were Hindalco Industries (4.31%), Bhushan Steel (3.08%), National Aluminium Company (2.6%), Hindustan Zinc (2.2%) and Jindal Steel & Power (2.08%).
The Capital Goods index was down 2.32%. Major losers were BGR Energy Systems (4.74%), Alstom Projects India (1.69%), BEML (1.67%), Bharat Heavy Electricals (1.46%) and A B B (0.56%).
Major losers in the mid-cap space were A2Z Maintenance & Engineering Services (5.43%), CORE Education and Technologies (4.21%), A I A Engineering (1.84%), Alstom Projects India (1.69%) and Aban Offshore (1.55%).
Major losers among small caps were Trident (2.16%), Adhunik Metaliks (1.24%), Provogue (India) (0.89%), INEOS ABS (India) (0.64%) and Action Construction Equipment (0.52%).
Globally, Asian indices ended on a higher note while European indices were also trading reflecting similar sentiments.
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Adani Power (APL) reported PAT of INR1.8bn in Q2FY12. Adjusted for forex related fluctuations of INR1.2bn, earnings are in line with our INR3bn estimate. However, considering marginal delay in commissioning of pipeline projects and lower than expected PLF we have recalibrated FY12E and FY13E earnings. Hence, our revised SOTP is INR78/share (INR 90/share earlier). Maintain ‘REDUCE’ as fuel supply issues persist. Adjusted earnings in line APL reported Q2FY12 earnings of INR1.8bn which include MTM loss of INR558mn on derivative instruments and forex fluctuations on creditor dues aggregating INR939mn. Adjusting for these, earnings are in line with our estimate and significantly higher than consensus estimate of INR2.2bn.
Gross merchant realisation high at INR4.7/kwh The key reason behind the robust earnings was high gross merchant realisation of INR4.7/kwh (open access and transmission related cost of INR0.3/kwh booked in other expenses) and maintaining costs at the same level. PLFs were at 75%, but auxillary consumption was high at ~9% against the normalised 7-8%.
Capacity addition behind schedule; revising down FY12‐13 earnings APL is slightly behind schedule with respect to its capacity addition plans and is likely to end FY12 with 3,300 MW, of which 1x660 MW may contribute marginally to earnings. However, in terms of installed capacity, we could see ~ 5GW as most of these units will be in the testing/synchronisation stage. PLF during H1 has been lower than our expectation of 91% for FY12. Hence, we have revised our earnings estimates down for FY12 and FY13 by 49% and 28%.
Outlook and valuations: Fuel issues persist; maintain ‘REDUCE’ In addition to the fuel linkage issue (domestic coal supplies), the recent coal pricing regulation in Indonesia could likely impact fuel costs going ahead. This, along with delay in capacity addition, has impacted our SOTP by INR12 to INR78/share. We maintain ‘REDUCE/SU’ recommendation/rating on the stock.
Note: Quarterly nos. are standalone, FY11 – FY13E are consolidated
Adani Power
3 Edelweiss Securities Limited
Company Description APL commercialised its first unit of 330 MW at Mundra, Gujarat, in 2009 and scaled up plans to build India’s largest and one of the world’s top 5 single location thermal power plants with a capacity of 4,620 MW. The company has also made inroads into power generation in Maharashtra, Rajasthan and Madhya Pradesh with an ambitious vision of being a 20,000 MW company by 2020. It commissioned the first supercritical 660 MW unit in the country and also the world’s first supercritical technology project to have received ‘clean development mechanism (CDM) project’ certification from United Nations Framework Convention on Climate Change (UNFCCC).
Investment theme The company has operational capacity of 1.98 GW (at Mundra, Gujarat) and another 7.2 GW to be commissioned by FY14. APL envisages achieving total commercial capacity of 20 GW by FY20. The company has a good blend of projects in terms of diverse locations, imported and domestic coal, long-term PPAs and merchant sales. Out of the expected 9.24 GW capacity by FY14, APL plans to sell ~80% (7.14 GW) under long-term PPAs and the balance in merchant market which imparts earnings visibility. APL’s entire capacity (9.24 GW) is thermal with a blend of imported (AEL) and domestic (CIL) coal procured through linkages. Though linkages are in place (except 1.3 GW Kawai where linkage is applied for) we anticipate risk to domestic coal supply because of the likely production shortage from CIL in the medium term. The Bunyu mines (reserves of 140 MT) owned by AEL can scale up to ~10 MTPA, which will be sufficient to fuel only ~2.5 GW capacity, but supplies from other overseas mines acquired by AEL are expected only post FY15. Hence during FY13-15 coal for additional capacities will have to be procured on spot basis until domestic supply improves, impacting earnings.
Key Risks CIL honouring its coal contracts
The company expects domestic linkages from CIL to meet coal requirements for much of the 9,240 MW capacity. Our hypothesis is that CIL will not be able to honour its existing contracts in totality (we have factored in 30% of the coal requirement of Mundra IV i.e. 3x660 and Tirora I i.e. 3x660 to be met by CIL till 2015) due to current problems in scaling up and logistics (rake availability). CIL honouring its existing contracts (pooling, imported, etc) at the current price level is a risk to our call. Commissioning of plants ahead of CEA dates
We have assumed the timeline of commissioning of power units based on the recent status updated by the CEA. However, faster execution and commissioning of plants ahead of the expected schedule (gives them time to generated power and sell on merchant basis) is a risk to our assumptions which is in line with the CEA schedule report.
Adani Enterprises HOLD SU M Adani Power REDUCE SU L
CESC BUY SU H GMR Infrastructure BUY SO H
GVK Power and Infra HOLD SO H JSW Energy REDUCE SU H
Lanco Infratech BUY SO H Marg BUY None None
Mundra Port & SEZ BUY SO M Navabharat Ventures BUY None None
NTPC HOLD SU L Power Grid Corp of India BUY SP L
PTC India BUY SO L Reliance Infrastructure BUY SO M
Tata Power Co BUY SO M
RATING & INTERPRETATION
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
Buy More than 15%
Hold Between 15% and - 5%
Reduce Less than -5%
RELATIVE RETURNS RATING
Ratings Criteria
Sector Outperformer (SO) Stock return > 1.25 x Sector return
Sector Performer (SP) Stock return > 0.75 x Sector return
Stock return < 1.25 x Sector return
Sector Underperformer (SU) Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe within the sector
RELATIVE RISK RATING
Ratings Criteria
Low (L) Bottom 1/3rd percentile in the sector
Medium (M) Middle 1/3rd percentile in the sector
High (H) Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return
Equalweight (EW) Sector return > 0.75 x Nifty return
Sector return < 1.25 x Nifty return
Underweight (UW) Sector return < 0.75 x Nifty return
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Cummins India (CIL) reported flattish revenues for the quarter on the back of slowdown in power generation business even as higher costs impacted EBIDTA margins which dipped 350 bps+ YoY. The management has further toned down its growth guidance from 15% earlier to a lower number of 5%‐10% with a 100 bps decline in PBT margins over 1HFY12 levels. We trim our earnings for FY12E and FY13E by 16 % and 20 %, building in lower volumes in domestic market and lower margins. Sharp drop in power generation market impacts profitability Cummins reported a 5% YoY decline in domestic business whereas export grew 14% YoY. In the domestic market, power generation declined 20% YoY while industrial business fell 6% YoY with auto reporting a sharp growth of 50% YoY albeit on a lower base. Change in revenue mix with increasing share of low KVA engines coupled with rising input costs impacted CIL’s OPMs which declined severely by 350 bps YoY and 140 bps QoQ.
Management cuts revenue, margin guidance The management has cut revenue guidance from 10%-15% for FY12E to 5%-10% on the back of a slowdown in the domestic business, largely in HHP (high horse power) power generation business. It also expects 2HFY12 PBT margin to be lower from 2QFY12 levels due to continued cost pressures and adverse revenue mix. While a pickup in demand and stabilization of inflationary pressures could provide some comfort to profitability, the management expects near term margins to remain under pressure. However, with respect to pricing (even amid a market growth slowdown), the management has shown confidence to sustain pricing across product range despite intensifying competition.
Outlook and valuations: Near‐term slowdown; maintain ‘BUY’ While the near term outlook for Cummins remains weak, given the slowdown in domestic business, we remain optimistic about its long term business prospects due to the strong demand dynamics in diesel and gas engines market. We maintain our BUY/S0 rating for Cummins with a revised TP of INR 407(+ 15% upside).
Concall highlights • The management cut FY12E revenue guidance for the third time from 20% originally to
5%-10% now, owing to a sustained slowdown in power generation business.
• Domestic sales accounts for 70% of 2QFY12 revenues while export accounts for the rest.
• Within power generation revenues - which declined by 20% YoY - telecom declined by 15% YoY, retail grew by 10% YoY and commercial real estate grew slower by 3-4 %.
• Cummins derives 60%-65% of overall revenues from the standby power segment while base load revenue share is lower at 10%-15% of revenues. The balance comes from distribution business.
• Less than 160 KVA segment contributes 35% of Cummins power generation revenues while 20% from 160-380 KVA, 15% from 400-625 KVA and the balance from 750 KVA or more.
• Cummins currently manufactures 25 engines (HHP) per day. This would go up by 10 engines per day over the next 1-2 years post the Phaltan capex.
• Revenue from Phaltan is likely to be around 10% of CIL’s overall revenues going ahead.
Chart 1: Revenue growth slowed owing to de‐growth in domestic market
Company Description KKC is a subsidiary of Cummins, US, which holds 51% stake in the company. It is a leading manufacturer of medium-high HP range of diesel engines in India with manufacturing facilities in Pune and Daman.
Investment Theme KKC is a play on the multiple segments of power requirement, rising mobile penetration across rural and suburban geographies, strong coal requirement (driving demand in mining), and continued growth in automobile sales on the back of large potential in environment-friendly natural gas fuel-based engines. We expect KKC to benefit from growth in the above segments. Furthermore, KKC will benefit from Phaltan expansion which should cater to KKC’s growing business demands from FY12.
Key Risks Any major slowdown in the domestic market (70% of the total revenues) would pose a significant down side risk to our estimates.
Jaypee Infratech HOLD SP M Mahindra Lifespace Developers BUY SP M
Oberoi Realty BUY SO L Orbit corporation HOLD SU H
The Phoenix Mills BUY SO M
RATING & INTERPRETATION
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
Buy More than 15%
Hold Between 15% and - 5%
Reduce Less than -5%
RELATIVE RETURNS RATING
Ratings Criteria
Sector Outperformer (SO) Stock return > 1.25 x Sector return
Sector Performer (SP) Stock return > 0.75 x Sector return
Stock return < 1.25 x Sector return
Sector Underperformer (SU) Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe
within the sector
RELATIVE RISK RATING
Ratings Criteria
Low (L) Bottom 1/3rd percentile in the sector
Medium (M) Middle 1/3rd percentile in the sector
High (H) Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return
Equalweight (EW) Sector return > 0.75 x Nifty return
Sector return < 1.25 x Nifty return
Underweight (UW) Sector return < 0.75 x Nifty return
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
GMR Infrastructure reported Q2FY12 loss of INR625mn against our estimate of INR285mn mainly due to higher interest costs at DIAL, deferred tax liability in power and airport projects, admin expenses in overseas units and lower PLF at one of its power plants (marginally offset by forex gains); adjusted for these, loss would have been INR403mn. Operational performance continues to be robust and with the regulatory approval for its airport assets on the anvil, we expect an upsurge in earnings. Maintain ‘BUY’ with target price of INR47
Pax growth robust, but PLFs dip due to seasonal factors The traffic growth across airports remained strong (23% in DIAL, 20% in Istanbul and 15% in HIAL). However, there are early signs of impact from global economic weakness as sequentially, pax has fallen in the range of 2% – 7% in India. Power plants operated at PLF of ~58% against 65% last year and 75% in Q1FY12 mainly due to the maintenance shutdown at Vemagiri and lower merchant realisation at Kakinada.
Sinar Mas stake purchase in Q3; EPC margins to stabilize at 5‐6% The management has indicated that it will acquire 30% stake in Sinar Mas, the Indonesian coal mining company, through the latter’s proposed IPO and subsequent stake buys. As part of the deal, it would be eligible to receive 1 MT of coal which will gradually increase to 9 MT over a period of time at 6%‐8% discount to the benchmark index. The EPC business ‐ entirely captive ‐ is likely to deliver 5%‐6% EBITDA margins over the life of project.
Outlook and Valuation: Regulatory clarity likely; Maintain ‘BUY’ The management has indicated that the airport regulator is in an advanced stage of deciding on both ADF and tariffs for Delhi and Hyderabad which we believe would alleviate the regulatory concern on the stock. We have factored in Ahmedabad – Kishangarh mega road project and the Island Energy gas project in our valuation which stands at INR47/share (INR 56/share earlier). We are confident on an improvement in GMR’s financial performance and management’s stated objective of greater focus on cash flows. At CMP of INR 26/share, the stock is trading at 1.1x and 1.0x FY12E and FY13E P/BV. Maintain ‘BUY’.
Company Description GMR is the flagship company of the GMR Group promoted by Mr. G. M. Rao. The group was initially active in the agri business and banking sector through a controlling stake in Vysya Bank, the largest private sector bank in India, before banking sector reforms and subsequent sale to ING. GMR follows the developer model for infrastructure projects across different verticals—power, roads, airports, and urban infrastructure. The promoter group is closely involved with the management with each of the different verticals in the company.
Investment Theme
Further upsides from commercial development linked to airports
If GMR manages to sell remaining 205 acres of land at a price greater than the value at which it has sold 45 acres presently, it could result in further upsides for the company. Similarly, monetization of Hyderabad airport land and SEZ land at higher than expected valuations could result in a positive surprise. Power project expansion pipeline at nascent stage
The company has about 3,290 MW of generation units in various stages of development, which include ~2,800 MW of thermal generation and 1,190 MW of hydro power units. The company plans to have a reasonable blend of merchant and PPA sale for its expansion projects. Timely financial closure for the hydro projects and execution without cost overrun of projects could result in increased earnings for the company. Increase in passenger traffic in airports and toll‐based roads
If the passenger traffic picks up in airports and the toll‐based road projects, the operating leverage is expected to be higher which would expand valuations. Traction in projects
Huge cash reserves and likely listing of power entity separately means that there is a likelihood of more projects being added to the portfolio like the recent Male airport and Vemagiri expansion projects. If the same trend of value accretion continues, then there can be further upside to valuations.
Key Risks Falling passenger traffic critical for airports’ valuations
Passenger traffic had been down due to slowdown in economic activities leading to lower earnings at both Delhi and Hyderabad airports. This has been a drain on the valuation of airports. Failure to monetise airport land at attractive valuations on time
GMR has been successful in monetizing 45 acres out of 250 acres of land at Delhi airport. However, if it does not succeed in monetizing the balance tranche at similar or higher levels, it could drag valuations downwards. Further equity dilution, unrelated diversification
The company has been raising equity money frequently in the recent past for enhancing its project portfolio. One of the acquisition was stake in Intergen which was not value accretive. If a similar trend continues going forward then the same could impact valuations.
Adani Enterprises HOLD SU M Adani Power REDUCE SU L
CESC BUY SU H GMR Infrastructure BUY SO H
GVK Power and Infra HOLD SO H JSW Energy REDUCE SU H
Lanco Infratech BUY SO H Marg BUY SO H
Mundra Port & SEZ BUY SO M Navabharat Ventures BUY None None
NTPC HOLD SU L Power Grid Corp of India BUY SP L
PTC India BUY SO L Reliance Infrastructure BUY SO M
Tata Power Co BUY SO M
RATING & INTERPRETATION
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
Buy More than 15%
Hold Between 15% and - 5%
Reduce Less than -5%
RELATIVE RETURNS RATING
Ratings Criteria
Sector Outperformer (SO) Stock return > 1.25 x Sector return
Sector Performer (SP) Stock return > 0.75 x Sector return
Stock return < 1.25 x Sector return
Sector Underperformer (SU) Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe within the sector
RELATIVE RISK RATING
Ratings Criteria
Low (L) Bottom 1/3rd percentile in the sector
Medium (M) Middle 1/3rd percentile in the sector
High (H) Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return
Equalweight (EW) Sector return > 0.75 x Nifty return
Sector return < 1.25 x Nifty return
Underweight (UW) Sector return < 0.75 x Nifty return
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Indi
a M
idca
ps
Led by a strong performance from the EPC segment, IRB Infrastructure (IRB) reported a Q2FY12 PAT of INR1.1bn (up 11% YoY), ahead of ours as well as consensus estimates. Toll collection from BOT assets remained steady with a traffic growth of around 6% in most assets. We expect the company to focus on project execution rather than winning new projects in the near term. Maintain ‘BUY’ with revised target price of INR 207/share.
Steady traffic growth in most assets, EPC does well EPC revenues jumped up 79% YoY riding a strong execution in Surat-Dahisar project, which is now complete by nearly 95%. EBITDA margins in the EPC business remained strong at 23%. Toll revenue in BOT projects at INR2.4bn (up 17% YoY) was broadly in line with our estimates. Traffic growth was steady at 6% in most assets (excluding Bharuch-Surat project where traffic growth was ~3%-4%).
Earnings outlook for H2FY12 subdued, Robust growth in FY13 We expect a significant pick up in execution in H2FY12 and FY13 in Amravati-Talegaon, Jaipur-Deoli and Amritsar-Pathankot projects. Despite this, we expect EPC revenues to decline ~20% YoY in H2 on high base of last year, given that execution on Surat-Dahisar and Kolhapur projects is now almost over. Also, IRB will start providing depreciation on Surat-Dahisar in H2. We estimate a net loss of INR680mn for Surat-Dahisar in FY12. IRB has raised INR7bn via ECB at Libor plus 4.5% for under-development projects, which will help contain overall interest costs.
Outlook and valuations: Attractive; maintain ‘BUY’ Management expects competition in road project awards to ease going forward. They indicated that they are bidding with minimum threshold IRR of 18% now. We have revised our SOTP based TP to INR207/share (earlier INR 212) to factor in a higher project cost (and correspondingly debt) in the Surat-Dahisar project. EPC arm contributes INR83 while BOT projects provide INR129 per share with the balance coming from cash and real estate. We maintain ‘BUY’.
Company Description IRB is an infrastructure development and construction company with wide experience in the roads and highways sector. Till date, it has won 20 road projects. It is primarily a holding company; various BOT projects as well as the construction activities of the IRB Group are handled by the company’s subsidiaries. The IRB Group started operations in 1977 when Ideal Road Builders (IRBPL) was incorporated to undertake the road contracting business. Between 1977 and 1995, it completed several projects in the roads and highways sector. In 1995, the group ventured into the BOT space through the Thane–Bhiwandi bypass project. The group entered the real estate development space through its subsidiary Aryan Infrastructure. It plans to develop a township along the Mumbai-Pune expressway.
Investment Theme IRB is a premier toll road developer and operator. Its projects cover highly strategic & lucrative routes. It has 16 projects spread over 1,400 kms worth INR 166 bn, of which 9 are currently operational (7 projects are debt free). The company boasts of a robust order book which is likely to result in a strong growth in its EPC revenues. IRB’s integrated approach enables value maximization since its operation span across construction, operation & maintenance. While the EPC division generates over 30% RoEs consistently, much higher than its peers, the BOT project portfolio generates substantial operating cash flows which are likely to help the company achieve a high growth trajectory going ahead.
Key Risks Geographical concentration with 13 projects in two states: Of the 16 projects in IRB’s kitty, 12 are in the states of Maharashtra and Gujarat. This exposes the company to the risk of geographical concentration with revenues from toll projects dependent on economic activity in these states. Inherent risk associated with BOT-toll projects: With the company focusing on PPP projects, it is exposed to risks like those associated with gaining right-of-way on land stretches, execution risk, ‘force majeure’ risk, etc. Also, the focus on toll projects exposes it to the unpredictability of traffic growth, etc.
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LIC Housing Finance’s (LICHFL) Q2FY12 PAT of INR984mn (down 58% YoY) was primarily dented by provisioning of INR2bn (due to revised norms mandated by NHB in August). Even after adjusting for one‐time provisioning, PAT was below consensus estimate as NIMs dipped 34bps (as against expectation of 10‐15bps). On the positive side, individual disbursement growth was sustained; traction was gained in developer loans; NPLs came off QoQ. We maintain ‘HOLD’ with a TP of INR275. NIMs came off 34bps to 2.45%; close to bottoming out NIMs have come off 100bps in the past two quarters to 2.45%, largely unwinding previous six quarters’ benefit. Despite having raised lending rates by 25bps each in April and July 2011, yields improved only marginally (by 8bps) since Q4FY11 as special scheme loans constituted ~40% (not due for repricing due to fixed rate nature), coupled with slow build up in developer loans. On the other hand, funding cost increased 125bps as INR50bn of liabilities matured in H1FY12. The company has raised lending rates by 40‐50bps since October 2011 and we expect NIMs to bottom out.
Revised provisioning norms dent earnings In August 2011, NHB mandated standard asset provisioning of 40bps alongwith higher provisioning for non‐standard loans. In this respect, LICHFL provided INR2bn in Q2FY12. Management indicated that it has not utilized excess provisioning of INR1.12bn (contrary to its earlier guidance). Out of INR2.05bn, we believe ~INR1.6bn was provided towards standard assets (of ~INR400bn excluding INR120bn Fix‐O‐Floaty loans and INR40bn developer loans) and INR450mn towards revised provisioning on INR3.0‐3.3bn of substandard/doubtful loans. Management stated that “Advantage 5” loans (INR100bn) are not yet categorized as teaser loans. We are increasing our credit cost estimate to factor in 40bps standard asset provisioning (against 25bps earlier). Outlook and valuations: NIMs bottoming out; maintain ‘HOLD’ Though margins have come off 100bps in the past two quarters, we believe they are close to bottoming out (40‐50bps increase in lending rates in October to offset cost pressures). Growth trajectory is expected to sustain in individual as well as corporate segments. It is evaluating raising equity in H2FY12 (can act as a trigger being book value accretive). The stock is currently trading at 1.9x FY13E book and 8.6x FY13E earnings. We maintain ‘HOLD/ Sector Performer’ recommendation/rating.
RESULT UPDATE
LIC HOUSING FINANCEProvisioning dents earnings; NIMs dip further
Disbursement growth: Back to guided range • After moderating to 15% in Q1FY12, individual loan disbursements were back to the
guided range of 20‐25% (up 24% Y‐o‐Y). Following ICICI and HDFC, LICHFL too has introduced “New Advantage 5” product offering fixed rate of 11.15‐11.65% for the first five years. We are building in growth of 20‐23% in the individual loan category.
• As was indicated by the management that sanctions in the corporate developer segment were strong in July and will pick up in the coming months, disbursements improved to INR4.1bn (compared to merely INR770mn in Q1FY12). The proportion of corporate loan book has, however, has come off to 7.2% and management expects to inch up the proportion of this portfolio to 9‐10% in the next 18‐24 months.
• We are building in disbursement growth of 15% over FY11‐13E considering the trend in H1FY12 and are building in overall loan CAGR of 25% over the same period.
Chart 1: Loan growth back to guided range
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0
12
24
36
48
60
Q110 Q210 Q310 Q410 Q111 Q211 Q311 Q411 Q112 Q212
(%)
(INR
bn)
Individual Project Loan growth Y‐o‐Y (RHS) Source: Company
Table 1: LICHF has priced its product 10bps lower to HDFC for 5 years tenor
NIMs came of 34bps to 2.45%; close to bottoming out • NIMs have come off 100bps in the past two quarters (by 67% in Q1FY12 and 34bps in
Q2FY12) to 2.45%, largely unwinding previous six quarters’ benefit (it gained by growing high yielding corporate developer book).
• LICHFL has raised its lending rates by 25bps in July 2011 and by another 40‐50bps in August 2011. However, since loans under special home loan schemes (with fixed rate for 3 or 5 years) constitute ~40% of the loan book, coupled with slow build up in corporate developer loans, yields improved only marginally (by 8bps) to 10.7% from Q4FY11. Increase in yield was not sufficient to offset the cost pressure on the funding side (which increased 125bps to 9.25%). ALM was also unfavorable in H1FY12 for rising interest rate environment—INR50bn of liabilities were due for maturity while on the asset side only INR21bn was to be repriced.
• Considering margin performance in H1FY12, we are revising our NIMs estimate downwards to 2.7% for FY12 (from 2.8% earlier).
Chart 2: NIMs came off due to funding cost pressures
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Yield on advances Cost of funds NIMs
Source: Company
Chart 3: ALM as of FY11 was unfavourable in less than 6 months bucket
Gross NPLs came off; revised norms dent earnings • Following the historical trend, gross NPLs came off from 0.84% in Q1FY12 to 0.64% in
Q2FY12 (lower than 0.74% in Q2FY11) – asset quality trend was better than estimate. Management maintained its stance on keeping asset quality under check.
• In August 2011, NHB mandated standard asset provisioning of 40bps alongwith higher provisioning for non‐standard loans. In this respect, LICHFL provided INR bn in Q2FY12. Management indicated that it has not utilized excess provisioning of INR1.12bn (contrary to its earlier guidance). Out of INR2bn, ~INR1.6bn was provided towards standard assets (of ~INR400bn excluding INR120bn Fix‐O‐Floaty loans and INR40bn project developer loans) and INR405mn towards revised provisioning on INR3.0‐3.3bn of substandard/doubtful assets. Management also mentioned that “Advantage 5” loans (INR100bn) are not classified as teaser loans.
Chart 4: NPLs down in line with historical trend
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Chart 5: Higher proportion of loans in doubtful category
Sub‐standard
assets28%
Doubtful assets65%
Loss assets7%
2010
Source: Company
Sub‐standard
assets23%
Doubtful assets68%
Loss assets9%
2011
LIC Housing Finance
5 Edelweiss Securities Limited
Impact of NHB regulation relating to prepayment penalty • As far as housing loans under special schemes are concerned (which are fixed for 1,3 or
5 years and floating thereafter), prepayment penalty will be waived during the floating rate tenor. However, nomenclature the product was offered (whether fixed, floating or fixed‐cum‐floating) and the marketing strategy while launching the product will have to be considered. Regulator has indicated that industry players will be consulted before making it applicable.
• Individual loan repayment in a year is of 15‐17%, of which about two thirds is by way of prepayment and one third being regular amortization. Even though the prepayment penalty is 2%, some financiers do not levy any penalty if it is from own sources (which forms almost two‐thirds of the total prepayment). Hence, in a year, LICHF do not earn more than ~5‐6bps (maximum) of outstanding individual loan book as prepayment fee income.
• Apart from the financial impact, we believe non‐levy of prepayment charges will lead to a significant increase in refinancing demand as loan pricing will only be a key determinant for sticking with a financier. This will increase churn and impact stability of loan book and ALM profile.
Company Description LICHF is the fourth‐largest mortgage finance company in India. It provides loans for homes, construction activities, and corporate housing schemes. Almost ~92% of the company’s loans are to retail customers and the balance ~8% to project developers. The company has loan outstanding of INR 560 bn as at September 30, 2011. It has 7 regional offices, 13 back offices and 181 marketing offices covering over 450 locations. LIC India is its majority shareholder with 36% equity holding, followed by FIIs at ~40%.
Investment Theme The company has gained significant scale in the past 2 years building a loan book of INR 530 bn. It has surprised positively in terms of loan growth and margin improvement in the past 2 quarters. LICHFL has surprised positively in terms of operating metrics through FY11. Q1FY12 witnessed unwinding of some of the benefit of FY11 and operating metrics came in below Street’s expectations. However, we believe margins are close to the bottom and should recover in H2FY12. Growth trajectory is also expected to improve in individual as well corporate segments Q2FY12 onwards. The company indicated it will evaluate raising equity in Q2FY12 and this will act as a trigger as it will be book value accretive.
Key Risks Disbursements continue to lose traction in individual and project loans. NIMs may come under pressure if not able to pass on the pressure of increased funding cost. Asset quality deteriorates in rising interest rate environment.
Valuation metricsYear to March FY09 FY10 FY11 FY12E FY13EDiluted EPS (INR) 12.5 13.9 17.7 21.2 26.9 EPS growth (%) 37.2 11.5 27.3 19.6 26.5 Book value per share (INR) 53 71 88 102 123 Adjusted book value per share (INR) 52 71 88 101 122 Diluted P/E (x) 18.4 16.5 13.0 10.8 8.6 Price/ BV (x) 4.4 3.2 2.6 2.3 1.9 Price/ Adj. BV (x) 4.5 3.3 2.6 2.3 1.9 Dividend yield (%) 1.1 1.3 1.5 1.8 2.3
11 Edelweiss Securities Limited
Company Absolute
reco
Relative
reco
Relative
risk
Company Absolute
reco
Relative
reco
Relative
Risk
Allahabad Bank REDUCE SO H Axis Bank BUY SO M
Bank of Baroda HOLD SO L Federal Bank BUY SO M
HDFC HOLD SU L HDFC Bank HOLD SP L
ICICI Bank BUY SO L Indian Overseas Bank HOLD SU H
Infrastructure Development Finance Co HOLD SU M ING Vysya HOLD SP H
Karnataka Bank BUY SO L Kotak Mahindra Bank REDUCE SP L
LIC Housing Finance HOLD SP M Mahindra & Mahindra Financial
Services
HOLD SP M
Manappuram General Finance HOLD SU M Oriental Bank Of Commerce REDUCE SU H
Power Finance Corp BUY SO L Punjab National Bank REDUCE SU L
Reliance Capital BUY SP M Rural Electrification Corporation BUY SO L
Shriram City Union Finance BUY SO H South Indian Bank HOLD SP H
State Bank of India HOLD SP L Union Bank Of India HOLD SO L
Yes Bank BUY SO M
RATING & INTERPRETATION
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
Buy More than 15%
Hold Between 15% and - 5%
Reduce Less than -5%
RELATIVE RETURNS RATING
Ratings Criteria
Sector Outperformer (SO) Stock return > 1.25 x Sector return
Sector Performer (SP) Stock return > 0.75 x Sector return
Stock return < 1.25 x Sector return
Sector Underperformer (SU) Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe within the sector
RELATIVE RISK RATING
Ratings Criteria
Low (L) Bottom 1/3rd percentile in the sector
Medium (M) Middle 1/3rd percentile in the sector
High (H) Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return
Equalweight (EW) Sector return > 0.75 x Nifty return
Sector return < 1.25 x Nifty return
Underweight (UW) Sector return < 0.75 x Nifty return
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Mahindra Satyam (Satyam) reported a reasonable 4.5% QoQ volume growth in Q2FY12 comparable to tier‐1 peers. Revenue in constant currency surged 4% QoQ, a tad lower than peers, due to higher offshore revenue share. Margin improved just 50bps QoQ despite currency boost due to provision for doubtful debts and higher share of systems integration revenue. Muted hiring and management commentary on large deal ramp ups delay hint at muted performance in the near term. The stock is not under coverage.
Volumes surge, but margin disappoints Satyam’s Q2FY12 revenue at INR15.8bn grew 10% QoQ partly aided by better realised exchange rate and hardware/software licence purchases for certain projects. In constant currency, it reported 4% QoQ revenue growth driven by 4.5% QoQ volume surge. EBITDA margin improvement of just 50bps QoQ was disappointing, despite benefiting from 6.7% higher QoQ realised exchange rate. Margin was impacted by higher share of India business, hardware/software licence purchases, visa expenses and provision for doubtful debts. Net profit at INR2.4bn grew just 5.8% QoQ despite forex gain of INR337mn as tax rate surged to 19.5% from 15.9% in Q1FY12. Commentary on near‐term business less optimistic The company reported 6% QoQ growth (nearly double its average growth rate) in USD terms in top 20 clients. Yet, Satyam’s commentary on near‐term performance was less optimistic. It stated some delays in ramp up of large deals, especially in Europe. It hired 650 people (2% QoQ growth in headcount) during the quarter, mostly laterals, and stated that it is focusing on just‐in‐time hiring. It also highlighted that since 52% of revenue came from time & material based pricing projects, fewer working days in Q3FY12 are likely to impact growth. It expects margin to be impacted by 250‐300bps in Q3FY12 due to salary hikes, which are effective October 2011.
Outlook and valuations: Building back gradually; NOT RATED Satyam’s Q2FY12 performance is reasonable. While margin will decline in Q3FY12 due to salary hikes, it is focused on improving margin in the future. The Street is estimating INR8.7bn EBITDA in FY12 compared to INR4.5bn in H1FY12. Hence, there will likely be upgrades. It is trading at 11x FY12E earnings. The stock is not under our coverage.
Key highlights Revenue, at USD330mn, up 3.1% QoQ; in INR terms, revenue, at INR15,777 mn, was ahead of consensus estimate of INR 15,137 mn. This sequential revenue growth was driven by volume growth of 4.5% QoQ. EBITDA for the quarter stood at INR2,417mn (INR2,100mn in Q1FY12). EBITDA margin at 15.3% surged 50bps QoQ. Management stated that EBITDA margin will be impacted by 250‐300bps in Q3FY12 due to wage hikes effective October 1, 2011. While net profit stood at INR2.4bn, net margin came in at 15.1% (15.7% in Q1FY11) due to higher tax rate of 19.5% versus 15.9% in Q1FY11 . Chart 1: Revenue traction and EBITDA margin expansion continues
Source: Company
Headcount addition takes a breather: Satyam added just 654 (2,172 in Q1FY11) with most of them being laterals, taking its total headcount to 32,092. Attrition continued its downward trend and stood at 15.6% versus 17.0% in the previous quarter.
Segmental performance
• IT services business
• IT services revenue stood at INR15,479mn, up 10.0% QoQ.
• While EBIT was at INR1,974mn, EBIT margin surged marginally 70bps QoQ to 12.8%. • BPO
• Revenue at INR363mn jumped 14.9% QoQ. EBIT stood at INR47mn against INR12mn in the previous quarter.
• Current cash and equivalents in hand at INR 27.5bn (including. USD70 mn in escrow
account for the Upaid lawsuit).
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(%)
(%)
Q‐o‐Q revenue growth EBITDA margin (RHS)
Mahindra Satyam
3 Edelweiss Securities Limited
Table 1: Operating metrics (standalone) for Q2FY12
Company Description Mahindra Satyam provides top‐class business consulting, information technology and communication services. Leveraging on deep industry and functional expertise, leading technology practices and a global delivery model, it enables companies to achieve their business goals and transformation objectives. The company is powered by a pool of talented IT and consulting professionals across enterprise solutions, client relationship management, business intelligence, business process quality, operations management, engineering solutions, digital convergence, product lifecycle management, and infrastructure management services, among other capabilities and has development and delivery centers in the US, Canada, Brazil, the UK, Hungary, Egypt, UAE, India, China, Malaysia, Singapore and Australia. It has 32,092 employees. The company’s revenues for the past twelve months stood at INR 56.7 bn.
Key Risks Double dip recession in major market US and prolonged slowdown in Europe, sharp cross currency movements and appreciation of rupee against USD, Euro and GBP. Outcome of the class action lawsuits can have material impact on financials.
IT
6 Edelweiss Securities Limited
Financial Statements
Note: * FY08 as reported earlier, FY09 restated
Income statement (INR mn)Year to March FY08* FY09* FY10 FY11
Common size metrics ‐ as % of revenuesYear to March FY08 FY09 FY10 FY11Cost of revenues 62.1 68.9 72.6 69.9 Gross margin 37.9 31.1 27.4 30.1 SG&A expenses 16.2 27.7 19.0 21.3EBITDA margin 21.7 3.4 8.3 8.8EBIT margin 19.7 (0.3) 4.4 5.3Net profit margins 19.9 (92.8) (2.3) (2.8)
Growth metrics (%)Year to March FY08 FY09 FY10 FY11Revenues NA 4.0 (37.8) (6.1) EBITDA NA (83.6) 51.4 (0.4)EBIT NA (101.5) NM 11.5PBT NA (101.2) NM 76.0Net profit NA (584.3) NM 16.2EPS NA (591.7) NM 9.6
Mahindra Satyam
7 Edelweiss Securities Limited
Note: * FY08 as reported earlier, FY09 restated
Balance sheet (INR mn)
As on 31st March FY08* FY09* FY10 FY11Equity share capital 1,359 1,348 2,352 2,353
Coverage group(s) of stocks by primary analyst(s): Power
Adani Power, Adani Enterprises, CESC, GMR Infrastructure, GVK Power and Infra, JSW Energy, Lanco Infratech, Marg, Mundra Port & SEZ, Navabharat
Ventures, NTPC, PTC India, Power Grid Corp of India, Reliance Infrastructure, Tata Power Co
Distribution of Ratings / Market Cap
Edelweiss Research Coverage Universe
Rating Distribution* 119 47 15 184
* 3 stocks under review
Market Cap (INR) 111 57 16
Date Company Title Price (INR) Recos
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Pantaloon Retail’s (PRIL) core retail disappointed in Q1FY12 due to slowdown in same store sales growth across segments (3.64% in value retail, 6.53% in lifestyle, 1.26% in home retail) vis‐à‐vis Shoppers Stop, which posted robust growth (11% in departmental, 8% in HyperCity). Interest costs gobbled ~75% of its EBIT and jumped 40% YoY. Surge in working capital has been one key reason behind the spurt in debt. The company’s inventory days increased from 93 in FY10 to 110 in FY11 (much higher than 32 for Shoppers stop). Slowdown in sales for two consecutive quarters, mounting debt, delay in sale of non‐core assets, rising inventory and unlikely allowance of FDI in multi brand retail are likely to impact PRIL’s future growth plans. Hence, we downgrade the stock to ‘HOLD’. Higher interest expense dents PAT
PRIL’s net sales surged ~13% YoY to INR29.1bn in Q1FY12. Growth was slow due to muted consumer sentiments amidst high inflation. Sales were impacted by close down of stores for a total of 12 days in Hyderabad due to the Telangana issue. PAT declined 23% YoY to INR330mn following higher interest expense (up 40% YoY) despite 420bps YoY dip in tax rate to 29.5% from ~34.0%; net profit margin dipped 52bps YoY. Margin improves as COGS pressure eases; expansion on track EBITDA rose 18.6% YoY to INR2.5bn for the quarter. Gross margin improved due to check on COGS (down 46bps YoY); EBITDA margin also improved (43bps YoY) to 8.7%. Benefit of softening in cotton prices is evident from lessening of COGS pressure as per our expectation. 0.44mn sq ft of retail space was added during the quarter to 15.68mn sq ft (slightly below earlier run rate 0.5mn sq ft per quarter). Outlook and valuations: Gloomy; downgrade to ‘HOLD’
Although we like PRIL’s diversified mix of retail business and its size, burgeoning debt and higher inventory days remain key concerns which we have been highlighting repeatedly; both these parameters continue to worsen. Due to upcoming elections in major states, FDI in multi-brand retail looks unlikely. Hence, we are downgrading our recommendation to ‘HOLD’ from ‘BUY’; maintain ‘Sector Underperformer’ rating. At CMP, the stock is trading at 19.2x FY12E and 14.7x FY13E EPS.
Company Description PRIL is a leading Indian retail company with presence across most sectors of organized retail. The company, entered modern retail in 1997 with the opening of its department store format Pantaloons. In 2001, PRIL launched Big Bazaar, a hypermarket chain, followed by Food Bazaar, a supermarket chain. A five format company, two years back, it now operates over 20 formats which include Central (seamless malls located in city centers), Collection I (home improvement products), Depot (books, music, gifts and stationeries), aLL (fashion apparel for plus-size individuals), Shoe Factory (footwear), and Blue Sky (fashion accessories).
Investment Theme The Indian retail landscape is evolving with interplay of several demographic and economic factors. Despite the slowdown expected in real GDP growth in the near term, the long term prospects backed by changing consumer behaviour in favour of larger discretionary spend, has set the stage for a healthy growth in the retail space over the next five years. The big opportunity lies in the growing share of organised retail with the growing trend among consumers to allocate a larger share of income to consumption and gradual improvement in lifestyle. We continue to remain optimistic about PRIL’s strong presence across multiple consumption categories and its size. However, burgeoning debt and higher inventory days remain key concerns and continues to deteriorate. Also delay in allowing FDI in multi brand retail does not provide any respite to the company. We believe PRIL is best placed to benefit from the change in regulation whenever it happens.
Key Risk Rising share of debt
Going forward, the company will have to depend primarily on debt for funding growth. Steep increase in cost of borrowing can impact the profitability of the company.
Slow revenue growth due to rollout delays and poor same store growth
A large number of retailers are facing delays in roll outs due to delays by developers. This is a significant risk and can lead to cost overruns. The delays on account of other retailers could also impact PRIL as malls will not be viable unless all tenants are tied in. The company’s same store sales as a whole have been falling steadily due to rising competition. Continued sharp decline in the same in the future will be a risk to the company’s growth. Pressure on margins due to competition
With increasing competition, catchment areas are shrinking and the PSFPAs are not scaling up as expected. Coupled with this, the shortage of quality retail space leading to spiraling rentals, underdeveloped supply chain, and rising employee costs, which could add to the cost and impact the company’s margins. Macro slowdown
Macro concerns could hamper domestic consumption trends and result in lower footfalls.
Sector Outperformer (SO) Stock return > 1.25 x Sector return
Sector Performer (SP) Stock return > 0.75 x Sector return
Stock return < 1.25 x Sector return
Sector Underperformer (SU) Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe within the sector
RELATIVE RISK RATING
Ratings Criteria
Low (L) Bottom 1/3rd percentile in the sector
Medium (M) Middle 1/3rd percentile in the sector
High (H) Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return
Equalweight (EW) Sector return > 0.75 x Nifty return
Sector return < 1.25 x Nifty return
Underweight (UW) Sector return < 0.75 x Nifty return
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Rural Electrification Corporation’s (REC) Q2FY12 PAT came in at INR6.2bn (flat YoY), marginally ahead of our estimate, as normalised NIMs improved 8bps QoQ to 4.47%. It booked INR1.26bn MTM loss on unhedged forex borrowings and INR346mn of one‐time upfront fee incurred on raising ECB. Liability management continued to be commendable as: (a) stayed away completely from bank borrowings; (b) raised money via bond market where cost was lower QoQ; and (c) hedged USD500mn forex borrowings in September to minimise MTM hit due to INR depreciation. However, business growth indicators failed to enthuse as: (1) disbursement growth slowed down to 10% YoY; and (2) sanctions declined sharply to INR108bn (compared to INR160‐175bn run rate). At current valuations of 1.2x FY13E book and 6.0x FY13E earnings, the risk–reward is favourable. We maintain ‘BUY’ with TP of INR240. Liability management continues to be commendable With banks having aggressively raised base rates in Q2FY12, REC has completely stayed away from bank borrowings (proportion has come off from 14% in Q1FY12 to 8% in Q2FY12). Borrowing was skewed in favour of bonds/debentures where incremental cost has come off 23bps QoQ. Its reliance on low-cost foreign borrowings continued in Q2FY12 as well (raised USD300mn via ECBs); the share of forex borrowings has jumped to 12%. Therefore, increase in blended cost of funds was capped at 40bps to 8.29%, whereas yields improved 45bps to 11.5%. Consequently, normalised NIMs improved 8bps QoQ to 4.47% against our expectation of marginal decline. Management indicated that in FY12E INR120bn of assets and INR90bn of liabilities will come up for reprising. We are building in margins of 4.2-4.3% for FY12-13E.
Outlook and valuations: Risk‐reward favourable; maintain ‘BUY’ Led by concerns surrounding the power sector, REC has underperformed broader markets by more than 26% over the past one year. We believe at the current trading range of 1.2x FY13E book and 6.0x FY13E earnings, the risk–reward is favourable. Also, its limited dependence on private projects, coupled with lower share of working capital finance, offers comfort. Led by 21% CAGR in loan assets and relatively stable NIMs, we expect 14% earnings CAGR and average ROEs of 20-21% over FY11-13E. We maintain ‘BUY/Sector Outperformer’ recommendation/rating on the stock.
India Equity Research| Banking and Financial Services
November 11, 2011
Promoters*66.8%
MFs, FIs & Banks6.6%
FIIs18.5%
Others8.1%
Financials
Year to March Q2FY12 Q2FY11 Growth (%) Q1FY12 Growth (%) FY11 FY12E
Net int. inc. (INR mn) 8,241 7,801 5.6 9,097 (9.4) 33,808 39,260
PAT (INR mn) 6,229 6,182 0.8 6,620 (5.9) 25,066 28,315
Diluted EPS (INR) 6.3 6.3 0.8 6.7 (5.8) 25.4 28.7
BV per share (INR) 130 148
Price/ Earnings (x) 7.8 6.9
Price/ Book (x) 1.5 1.3
Banking and Financial Services
2 Edelweiss Securities Limited
Asset quality stable; no restructuring during Q2FY12 Gross NPLs remained stable at 0.3% and management indicated there was no restructuring request from any entity during the quarter. However, considering the structural concerns surrounding the power sector (fuel linkage, SEB losses), we are building in credit cost of 15-20bps over FY12-13E.
Business growth indicators fail to enthuse Disbursement growth slowed down to 10% YoY to INR61.2bn, primarily due to lower disbursements in the generation segment. However, management indicated that momentum has picked up post Q2FY12. Loan book sustained momentum, growing 24% YoY to INR909bn. More disappointing has been sharp decline in sanctions to merely INR108bn (compared to a run rate of INR160-175bn) as in generation segment sanctions slowed down significantly to INR30bn (compared to average of INR110bn in past 4-6 quarters). While sanctions in the T&D segment were strong at INR63bn compared to run rate of INR40bn, management indicated that it has been conservative in providing working capital loans to distribution entities. We are building in disbursement growth of 14% over FY11-13 and expect loan book to post 21% CAGR to INR1.21tn. Other highlights • REC hedged USD500mn of forex borrowings in September 2011 to minimise the impact
of MTM loss due to INR depreciation and now the unhedged position stands at merely USD250mn (compared to USD970mn in FY11).
• Booked one-time upfront fee of INR346mn on raising USD300mn ECB.
Company Description Rural Electrification Corporation (REC), incorporated in 1969, is a leading public institution primarily involved in the financing of T&D and generation projects across India. It was established by GoI for the purpose of developing the T&D infrastructure in rural India and currently acts as a nodal agency for RGGVY, a GoI initiative for rural electrification. Over the last decade, the company has diversified into urban areas and it plays a strategic role in GoI plan to improve the transmission and distribution infrastructure of India. REC, along with Power Finance Corporation (PFC), is the nodal agency for APDRP, a GoI initiative to improve the financial viability of state power utilities. Loans to T&D projects constituted ~50% to the total loan book as on March 31, 2011.
Investment Theme Over the Eleventh and Twelfth Five Year plans (FY07-17), India targets to add ~170 GW, creating huge investment opportunities across the power value chain. High growth, long-term visibility and sustainable returns, coupled with demand-supply gap (~12% peak deficit) and rising energy consumption, make the sector an attractive investment option. REC, being a specialised power financier, plays a strategic role in GoI’s ongoing financing plans for development of the power sector. Superior domain knowledge, financing expertise and government support will enable it to leverage emerging financing opportunities in the power sector over Eleventh and Twelfth plans (FY07-17) as well. According to the estimates of Working Group of Power, REC is expected to disburse at least INR 592 bn in the Eleventh Plan (against the expected disbursement of INR 812 bn for PFC). We believe REC will be able to fund 15-20% of its total funding requirement in the Eleventh Plan. We, thus, expect its loan book to grow at 21% CAGR over FY12-13E delivering a ROAE of ~21% over FY11-13.
Key Risks • REC’s growth depends on its ability to remain effectively competitive in the power
financing space and to pass the higher cost of funds to customers. Also, benefits under Section 54EC are being curtailed continuously and there are uncertainties surrounding the level of benefits REC will receive from these instruments, going forward.
• REC’s gross NPAs are at near zero levels. Any major slippage or ineffective recoveries can raise NPAs significantly, adversely affecting profitability and growth.
• REC is subject to risk arising from asset-liability mismatch as majority of its loans are long-term in nature due to wholesale financing of large power projects, whereas its borrowings are relatively for shorter term.
• REC’s ability to borrow from banks may be restricted with the limit on exposure of a bank in infrastructure finance companies at 25% of bank’s capital funds (tier I+tier II).
• REC is exposed to project-specific and general risks inherent to the power sector. Any delay in the power sector projects due to lack of fuel supplies, supply of key equipment or delay in getting environment clearances can adversely affect the profitability of power projects, increasing the company’s NPAs.
• There have been qualifications by auditors with respect to internal control and audit system; these do not have any quantifiable impact as of now, but could impact REC’s business in the long term.
6 Edelweiss Securities Limited
Banking and Financial Services
Financial Statements Income statement (INR mn)Year to March FY09 FY10 FY11 FY12E FY13EInterest income 47,898 65,687 82,318 101,218 123,572 Interest expended 28,971 39,256 48,510 61,959 77,337 Net interest income 18,927 26,431 33,808 39,260 46,235 Non interest income 922 1,189 1,481 1,388 1,448 Income from operations 19,849 27,620 35,289 40,648 47,683 Other income 378 200 300 330 363 Net revenues 20,227 27,820 35,589 40,978 48,046 Operating expenses 1,110 1,326 1,674 1,762 1,876 - Employee exp 872 1,171 1,275 1,355 1,429 - Depreciation /amortisation 14 22 30 22 16 - Other opex 224 133 369 385 431 Preprovision profit 19,117 26,494 33,915 39,216 46,170 Provisions 34 2 2 1,278 2,042 - Loan loss provisions 24 2 2 1,278 2,042 - Investment depreciation 11 - - - - PBT 19,083 26,492 33,913 37,938 44,128 Taxes 5,295 6,478 8,847 9,622 11,521 PAT 13,788 20,014 25,066 28,315 32,607 Extraordinaries 88 - 633 (740) 74 Reported PAT 13,876 20,014 25,699 27,575 32,681 Basic number of shares (mn) 859 987 987 987 987 Basic EPS (INR) 16.1 20.3 25.4 28.7 33.0 Diluted number of shares (mn) 859 987 987 987 987 Diluted EPS (INR) 16.1 20.3 25.4 28.7 33.0 DPS (INR) 4.5 6.5 7.5 8.0 8.5 Dividend pay out (%) 28.0 32.1 29.5 27.9 25.7
Growth metrics (%)Year to March FY09 FY10 FY11 FY12E FY13ENet interest income 30.1 39.6 27.9 16.1 17.8Net revenues growth 37.2 37.5 27.9 15.1 17.2Opex growth (0.8) 19.4 26.3 5.3 6.5PPP growth 40.3 38.6 28.0 15.6 17.7Provisions growth (91.4) (93.6) - NA 60 PAT growth 43.2 45.2 25.2 13.0 15.2
Operating ratios (%)Year to March FY09 FY10 FY11 FY12E FY13EYield on assets 10.4 11.0 11.0 11.0 11.1 Yield on advances 10.3 10.9 10.9 11.0 11.1 Cost of funds 7.3 7.8 7.7 7.9 8.1 Spread 3.0 3.3 3.3 3.1 3.0 Net interest margins 4.1 4.4 4.5 4.3 4.2 Cost-income 5.5 4.8 4.7 4.3 3.9 Tax rate 27.7 24.5 26.1 25.4 26.1
Total liabilities 175,470 208,619 240,204 272,886 313,274
Assets
Loans 118,051 124,283 157,290 189,335 222,934
Investments 52,865 85,209 97,795 99,543 101,915
Current assets 26,646 24,286 13,661 16,904 26,326
Current liabilities 23,394 26,274 29,592 33,885 38,840
Net current assets 3,251 (1,988) (15,931) (16,982) (12,514)
Fixed assets (net block) 1,169 981 916 856 806
Other assets 133 133 133 133 133
Total assets 175,470 208,619 240,204 272,886 313,274
9 Edelweiss Securities Limited
Company Absolute
reco
Relative
reco
Relative
risk
Company Absolute
reco
Relative
reco
Relative
Risk
Allahabad Bank REDUCE SO H Axis Bank BUY SO M
Bank of Baroda HOLD SO L Federal Bank BUY SO M
HDFC HOLD SU L HDFC Bank HOLD SP L
ICICI Bank BUY SO L Indian Overseas Bank HOLD SU H
Infrastructure Development Finance Co
Ltd
HOLD SU M ING Vysya HOLD SP H
Karnataka Bank BUY SO L Kotak Mahindra Bank REDUCE SP L
LIC Housing Finance HOLD SP M Mahindra & Mahindra Financial
Services
HOLD SP M
Manappuram General Finance HOLD SU M Oriental Bank Of Commerce REDUCE SU H
Power Finance Corp BUY SO L Punjab National Bank REDUCE SU L
Reliance Capital BUY SP M Rural Electrification Corporation BUY SO L
Shriram City Union Finance BUY SO H South Indian Bank HOLD SP H
State Bank of India HOLD SP L Union Bank Of India HOLD SO L
Yes Bank BUY SO M
RATING & INTERPRETATION
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
Buy More than 15%
Hold Between 15% and - 5%
Reduce Less than -5%
RELATIVE RETURNS RATING
Ratings Criteria
Sector Outperformer (SO) Stock return > 1.25 x Sector return
Sector Performer (SP) Stock return > 0.75 x Sector return
Stock return < 1.25 x Sector return
Sector Underperformer (SU) Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe
within the sector
RELATIVE RISK RATING
Ratings Criteria
Low (L) Bottom 1/3rd percentile in the sector
Medium (M) Middle 1/3rd percentile in the sector
High (H) Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return
Equalweight (EW) Sector return > 0.75 x Nifty return
Sector return < 1.25 x Nifty return
Underweight (UW) Sector return < 0.75 x Nifty return
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Adjusted consol. PAT of Shree Renuka Sugars (SHRS) in Q4FY11 was significantly below estimates (at loss of INR460mn) owing to a huge disappointment in Brazilian operations. Heavy forex loss further added to losses at the reported level. Brazilian operations are likely to be weak for few more quarters and coupled with high debt levels, the outlook is negative for SHRS. We lower our FY12E EPS to INR4.2/share (earlier INR8.5/share) and downgrade the stock from ‘HOLD’ to ‘REDUCE’.
Poor Brazilian operations, huge forex loss dent profitability SHRS reported loss of INR6,158mn in Q4FY11 owing to huge forex loss of INR5,698mn (on account of INR and Brazilian real (BRL) depreciating against USD by 9.5% and 18.8% respectively, impacting the debt in Brazilian subsidiaries). Even after adjusting for forex losses, the company reported a loss of INR460mn for Q4FY11 largely due to adverse Brazilian weather conditions that damaged cane yields and the capacity utilization. EBITDA margin for Q4FY11 came at 10.5%, 340 bps dip YoY.
Key highlights • SHRS cut its earlier guidance of USD300mn EBITDA from Brazilian subsidiaries for
April 2011‐March 2012 period to USD160mn.
• Weather conditions in Brazil (with attacks of frost and drought‐like conditions) affected cane yield by ~31% YoY for SHRS (vis‐à‐vis 22% dip for industry), owing to which SHRS lowered its cane crushing guidance from 10.5 mn MT to 8.3 mn MT.
• Due to INR depreciation against USD, even on a standalone basis, SHRS had a forex loss of INR728mn. Considering the significant amount of repayment done to creditors in Q4FY11, we believe that some of this forex loss has been realized.
Outlook and valuations: Challenges galore; downgrade to ‘REDUCE’ Considering the high debt levels coupled with additional capex requirements and issues on operating performance in Brazilian subsidiaries (which we expect to continue for at least two more quarters), we see low probability of an improvement in near future. Moreover, unhedged USD loan exposes the company to the exchange rate risk in the current volatile environment. Factoring in weak Brazilian operations and higher interest costs, we lower our FY12E EPS to INR4.2/share. Based on 6x FY13E EV/EBITDA, we lower our target price to INR41/share (previously INR72/share) and downgrade our recommendation on the stock to ‘REDUCE’ from ‘HOLD’.
Other highlights • Consolidated debt is at INR86bn at the end of September 2011 end vis‐à‐vis INR83bn at
end of March 2011.
• SHRS management has guided that it is interested in spinning off cogeneration assets so as to reduce the debt burden in Brazilian subsidiaries. The management has been getting interest from few energy companies for the same. SHRS would accept bids before December 2011.
• The company has increased its stake in Renuka do Brazil (RdB; erstwhile Equipav) from 50% to 59% by infusing USD35mn during Q4FY11 and is likely to infuse USD80mn during the current quarter to increase the stake further.
• Kandla refinery is still under trial production and is in the process of ramping up its capacity utilization.
• Standalone inventory as on September 30, 2011 comprises 151,225 MT of white sugar, 29,853 MT of raw sugar, 18,944 KL ethanol and 137,612 MT of molasses.
• Due to globally expanded operations (especially since its Brazilian operations having April‐March fiscal), SHRS is shifting from the current Oct‐Sept year to April‐March year hence the current accounting year gets extended for 18 months.
Power realisation (INR/KWH) 3.5 3.5 (1.4) 6.4 (45.4) 5.0 4.8 5.6 Source: Company, Edelweiss research
Brazilian subsidiaries ‐ RVDI and RdB • RVDI and RdB posted revenue of INR2,214mn and INR6,883mn respectively in Q3FY11.
• At PAT level, inclusive of forex loss, RVDI and RdB posted loss of INR6,116mn and INR284mn respectively.
• As against the earlier guidance for cane crushing in Brazilian subsidiaries at ~10‐10.5 mn MT, the total cane crushing guidance has been lowered by the management to ~8.3 mn MT due to lower recovery, induced by adverse climatic conditions. This is likely to result in poor capacity utilization, thus lowering the EBITDA margin and hence the profitability of these Brazilian subsidiaries. Further, the high interest cost owing to huge debt continues to be a drag.
as % of net revenuesRaw material 76.2 76.1 70.3 73.6 68.3 68.6 Other operating expenses 13.4 10.0 10.4 11.9 11.9 11.5 EBITDA 10.5 13.9 19.3 14.5 19.8 19.8 Reported profit (26.4) 4.8 8.3 (3.5) 3.2 3.5
Shree Renuka Sugars
5 Edelweiss Securities Limited
Company Description
SHRS, based in Karnataka and Maharashtra, with a sugar manufacturing capacity of 35,000 TCD and 6,000 TPD refining capacity. Starting with a crushing capacity of 3,500 TCD in FY03 under the leadership of its Managing Director, Mr. Narendra Murkumbi, the company has gradually become a large sugar and bio‐fuel conglomerate. It remains one of best integrated business models in India, with the ability to grow across sugar cycles on the back of its flexible operating model where co‐products support profitability during a downturn, while sugar and refining help in leveraging up‐cycle benefits.
Investment Theme SHRS’ uniqueness is its versatile and secular business model, which gives it several advantages over its peers: (1) highly integrated and flexible operations with large coproducts capacity; (2) all capacities are based in Maharashtra and Karnataka, where the operating environment is less regulated compared to Northern India. Also, yields in these states are higher than country average. The sugar mills in these states also have higher crushing days as compared to the Northern sugar mills; (3) SHRS sugar plants have the proximity to ports, and high inter‐plant synergies. In addition to these, the latest acquisitions in Brazil – VDI and Equipav gives SHRS, a presence in the world’s largest sugar manufacturing country and to take advantage of the tightness in supply globally. However, the high debt levels in Brazilian subsidiaries, poor operating performance from the Brazilian subsidiaries and the subdued operations in refinery are likely to be a drag on the stock in the short term.
Key Risks Sugar has been politically one of the most sensitive sectors in India, where decisions are populist and not based on economics. Any government move to control sugar prices which might result in the fall in sugar prices, will be a negative for the sector. Due to the substantial size of Equipav, any issue in terms of performance of Equipav might significantly alter the consolidated performance of SHRS. Any adverse movement in foreign currency movement might result in reversal of the unrealised MTM gains on long term debt in the Brazilian subsidiaries, resulting in denting the profits for SHRS. As SHRS will be having substantially higher leverage at the consolidated level, due to the Brazilian acquisitions, increase in interest rate may impact profitability.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Tata Steel reported EBITDA in line in the Indian business and surprised positively in Europe (our estimate: negative EBITDA/t). Stable European sales volume QoQ was also a positive against our estimate of 6% dip. The 2.9mtpa expansion in India is on track for completion by March 2012 and is a key trigger for the company. However, the EBITDA loss in minor subsidiaries was a negative. We maintain ‘BUY’ with TP of INR617/share. Domestic EBITDA in line, international EBITDA surpasses estimate Tata Steel reported consolidated EBITDA of INR27.5bn, surpassing our INR20.2bn estimate. Standalone (Indian) business reported INR27.7bn EBITDA, exactly in line with our estimate. International business posted EBITDA of INR3.7bn which after EBITDA loss at minor subsidiaries of INR3.9bn gave a negative EBITDA of INR 0.2bn; but, this was still above our expectation of negative EBITDA of INR7.5bn.
European business surprises with USD32/t EBITDA European business sales volume of 3.5mt was better than our 3.3mt estimate. Q3FY12 guidance is 3.2‐3.3mt. The business posted EBITDA and EBITDA/t of USD 112mn and USD32, respectively. For the international business, net EBITDA and EBITDA/t was USD32m and USD8, respectively (after netting the above EBITDA loss), were better than our expectations of negative EBITDA/t of USD 41 due to better volumes and realisations.
EBITDA losses of USD70‐80 mn in minor subsidiaries The company suffered EBITDA loss of USD70‐80mn in its minor JVs/subsidiaries, including Tata Metalliks, Tata Steel Thailand and Tata Steel South Africa (Tata KZN). The losses are expected to dip going ahead due to sale of Tata Metalliks unit and discontinuation of one‐offs.
Outlook and valuations: Positive; maintain ‘BUY’ We believe going ahead European business EBITDA will be sub‐par due to weak demand, but will benefit from declining raw material cost, reduced fixed cost and improved product mix. The completion of 2.9mtpa high margin Indian expansion by March 2012 is a key near‐term trigger for the company. We maintain our estimates and our ‘BUY’ recommendation with a target price of INR617/share.
Other conference call highlights Indian business: Expect EBITDA/t of USD350 in coming quarters
• Indian operations to post stable EBITDA of USD350/t (on upside could be USD375/t) in the next two quarters on account of stable steel prices in India. We believe the implied INR:USD exchange rate here is ~49, whereas we are currently modeling at 46. For FY13 we are modeling USD357/t @ INR46; hence, the downside risk on the same is limited.
• The 2.9mtpa expansion project in Jamshedpur will be completed in the Jan‐Mar 2012 timeframe as guided earlier.
• Other expenses rose 25% QoQ (absolute change : INR4bn) on account of MTM forex loss of INR2.2bn on unhedged foreign currency convertible debt (CARS/FCCBs), increased royalty charges of INR1.2bn and INR0.5bn increase in conversion charges. All other foreign currency exposure, including that for coking coal purchases, is hedged.
• Ferro alloy business was sluggish due to subdued demand from stainless steel producers, especially from Japan. Indian steel demand is stable, but Tata Steel is seeing signs of slowdown in the automotive sector.
• Indian business posted steel sales volume of 1.65mt, slightly above our expectation of 1.6mt. Due to forex loss of INR2.2bn on convertible bonds (this is booked in other expenses), the business had EBITDA/t of USD370, slightly lower than our expectation of USD383. Blended realisation of INR49.77k/t was in line with expectation. A key highlight was 46% YoY increase in retail longs’ sales in H1FY12. In spite of Indian flat demand hardly growing YoY in H1FY12, the company’s flat sales grew 7% YoY.
European business : Decline in volumes and margin in Q3FY12 likely
• Going forward, European volumes are likely to decline 6‐9% QoQ to 3.2‐3.3mt for Q3FY12. EBITDA/t (Q2FY12: USD 30/t) will be under pressure in the coming quarters due to decline in steel realizations and raw material costs peaking in Q3FY12. We expect negative EBITDA/t in Europe for Q3FY12, but expect that to be the trough EBITDA.
• Tata Steel Europe procures 25% of its coking coal requirement based on annual pricing (on Jun‐July period). Hence, the raw material cost pressure will continue to this extent until June 2012.
• Tata Steel Europe has mothballed 1mt Queen Bess blast furnace in Scunthorpe which was operating at 60‐70% capacity utilisation (Scunthorpe ‐ longs product facility; capacity reduced from 4mtpa to 3mtpa as a result of this). The corresponding billet and bloom caster is also closed. The company proposes to make up this volume partly from the Netherlands facility.
• The restructuring potentially involves loss of 1,200 jobs in Scunthorpe and another 300 in TCP. In addition, the company is planning reduction of 1,050 people in other facilities in 2012 to further reduce cost.
• Benefit of working capital release to be seen in the next quarter due to reduced steel and raw material prices.
• Net pension surplus for pension funds was GBP106mn as at Q2FY12 end but was down from GBP350mn as Q1FY12 end. Equity exposure in funds has reduced slightly from 28% in Q1FY12 to 25% in Q2FY12.
Tata Steel
3 Edelweiss Securities Limited
• Tata Steel clarified that the ongoing cash contribution to the pension fund is being accounted for in the P&L above EBITDA. Triennial valuation exercise for pension funds is on and the change in cash contribution would be decided post the same.
• European steel demand is slow, but producers have started cutting production to align with demand and the bottom should soon be found on steel prices, though this is getting influenced by sharp downward movements in raw material prices as well. Imports into Europe are reducing, but stocks are higher QoQ which need to be worked out.
• In the European business, average selling price reduced by USD28/t QoQ, but better than our expectations of USD 56/t, whereas raw material cost increase of USD23/t was only slightly above our expectation of USD20/t.
Overall business: EBITDA losses of USD 70‐80 mn in subsidiaries
• EBITDA losses in JVs/subsidiaries are reflected in inter‐group eliminations: The company suffered from EBITDA loss of USD70‐80mn in its JVs/subsidiaries, including Tata Metalliks, Tata Steel Thailand and Tata Steel South Africa (Tata KZN). Tata Metalliks incurred loss due to its Reddi (Maharashtra) unit not obtaining iron ore; since then this unit has been sold to Fomento for INR1.8bn and hence losses are expected to discontinue. Tata Steel Thailand incurred charges on account of moth‐balling of its blast furnace while Tata Steel South Africa faces structural issues of chrome ore availability. Tata Steel Australia is facing steel demand slowdown. Dhamra port has commenced operations, but incurred EBITDA loss.
• Capex guidance for FY12 and FY13 retained at ~USD2bn. Capex incurred for Q2FY12 and H1FY12 was USD557mn and USD1bn, respectively.
• Net debt (after deducting gain on forward cover) has remained virtually stagnant QoQ at USD8.4bn at Q2FY12 end; gain on forward cover is USD0.8bn. For Q2FY12, the company repaid total of USD1.3bn of debt and had forex loss of USD572mn.
• Consolidated tax rate was abnormally high due to taxes to be paid in individual entities which cannot be offset by tax losses in other entities. The company paid taxes of INR250mn in Europe since its Netherland operations are profitable and paid tax of INR300mn in Singapore as well.
• Mozambique coking coal project: Expected to produce 1mt of processed coking coal and 0.5mt of thermal coal in FY13 after commencing by FY12 end. Tata Steel owns 35% stake in this project for which we have assumed no benefit in our target price.
Metals and Mining
4 Edelweiss Securities Limited
Table 1: Operational performance summary
Source: Company, Edelweiss research
*includes other operating income
Note: For Q2FY12, we have adjusted the geography‐wise EBITDA with the average Q2FY12 exchange rate of INR/USD 45.7
as against the quarter end exchange rate of INR/USD 48.9 assumed by the company.
Q212 India Europe SE Asia Intergroup Adj OverallVolume (mt) 1.7 3.5 0.8 0.2 6.1Revenue (USD mn)* 1,677 4,321 637 63 6,698Revenue/tonne (USD) 1,016 1,242 817 1,096EBITDA (USD mn)* 610 112 5 (85) 643EBITDA/tonne (USD) 370 32 7 105
Q112 India Europe SE Asia Intergroup Adj OverallVolume (mt) 1.6 3.5 0.8 0.2 6.1Revenue (USD mn)* 1,759 4,594 746 284 7,383Revenue/tonne (USD) 1,099 1,313 933 1,210EBITDA (USD mn)* 704 274 20 (24) 974EBITDA/tonne (USD) 440 78 25 160
Q211 India Europe SE Asia Intergroup Adj OverallVolume (mt) 1.7 3.5 0.8 (0.2) 5.8Revenue (USD mn)* 1,582 4,092 598 103 6,375Revenue/tonne (USD) 953 1,159 757 1,095EBITDA (USD mn)* 748 197 29 27 1,001EBITDA/tonne (USD) 451 56 37 172
Company Description Established 100 years ago in 1907, Tata Steel is Asia’s first and India’s second largest private sector steel company. With the take over of Corus Steel (Europe’s second largest steel producer), Tata Steel is now the sixth largest steel company in the world with over 31mtpa of steel capacity. Tata Steel’s Indian operations are amongst the lowest producers of steel in the world comprising 6.8 mtpa steel making facility at Jamshedpur in Jharkhand.
Investment Theme We believe the worst is behind us for the global steel sector. Steel prices have ben rising albeit with volatility. While low capacity utilization will prevent outsized price rallies, we believe prices will move above marginal cost. Demand is picking up slowly and we expect reasonable recovery in European steel starting from Q2FY10 and going into FY12E. Tata Steel has already taken steps for cost reduction and hits on the P&L for such restructuring. Led by all this, we expect strong earnings growth in FY12E and FY13E.
Key Risks
• Any delay in demand revival and/or renewed slump in European steel.
• Higher than anticipated Chinese/CIS steel exports into Europe.
• Delay in completion of 3mtpa expansion in India
Tata Steel
9 Edelweiss Securities Limited
Financial Statements
Income statement (INR mn)Year to March FY09 FY10 FY11 FY12E FY13ENet revenue 1,473,293 1,017,578 1,171,498 1,188,412 1,312,231 Accretion to stock 19,759 6,600 (13,560) ‐ ‐ Raw material costs 729,377 310,045 380,441 474,081 492,696 Purchase of goods ‐ 130,870 158,904 ‐ ‐ Employee expenses 179,751 164,630 152,869 168,101 184,495 Power and freight 59,574 55,491 63,896 102,579 110,428 SGA and other expenses 303,556 275,868 285,024 307,808 352,500 Total operating expenses 1,292,016 943,505 1,027,575 1,052,569 1,140,120EBITDA 181,277 74,073 143,923 135,843 172,111Depreciation and amortisation 42,654 44,917 44,148 46,581 53,170 EBIT 138,623 29,156 99,775 89,262 118,942Interest expenses 32,902 30,221 27,700 26,685 31,959 Other income 2,657 18,212 25,843 8,957 9,828 Profit before tax 108,378 17,147 97,917 71,534 96,811Provision for tax 18,940 21,518 32,459 30,841 35,113 Core profit 89,438 (4,371) 65,458 40,693 61,697 Extraordinary income/(loss) (40,945) (16,837) 23,102 40,995 ‐ Profit after tax 48,492 (21,208) 88,561 81,688 61,697Minority interest (1,017) (1,269) (603) (741) (667)Share of profit of associates 0 (152) 664 0 0Profit after minority interest 49,509 (20,092) 89,828 82,429 62,364Preferred dividend 1,095 459 0 0 0Basic shares outstanding (mn) 730 887 959 971 971Diluted shares (mn) 822 887 959 971 971Basic EPS 119.6 (7.0) 68.3 41.1 62.8Diluted EPS 106.2 (7.0) 68.3 41.1 62.8Dividend per share (INR) 13.0 8.0 12.0 12.0 12.0Dividend payout (%) 31.5 (36.7) 15.2 16.5 21.9
Common size metrics‐ as % of net revenuesYear to March FY09 FY10 FY11 FY12E FY13EOperating expenses 87.7 92.7 87.7 88.6 86.9Depreciation 2.9 4.4 3.8 3.9 4.1Interest expenditure 2.2 3.0 2.4 2.2 2.4EBITDA margins 12.3 7.3 12.3 11.4 13.1Net profit margins 6.1 (0.4) 5.6 3.4 4.7
Hindalco Industries BUY SO M Hindustan Zinc BUY SO L
Jindal Steel & Power BUY SO M JSW Steel BUY SO M
National Aluminium Company HOLD SU M Sesa Goa HOLD SP M
Steel Authority of India HOLD SU L Sterlite Industries (India) BUY SP M
Tata Steel BUY SO M Usha Martin HOLD SP M
RATING & INTERPRETATION
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
Buy More than 15%
Hold Between 15% and - 5%
Reduce Less than -5%
RELATIVE RETURNS RATING
Ratings Criteria
Sector Outperformer (SO) Stock return > 1.25 x Sector return
Sector Performer (SP) Stock return > 0.75 x Sector return
Stock return < 1.25 x Sector return
Sector Underperformer (SU) Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe within the sector
RELATIVE RISK RATING
Ratings Criteria
Low (L) Bottom 1/3rd percentile in the sector
Medium (M) Middle 1/3rd percentile in the sector
High (H) Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return
Equalweight (EW) Sector return > 0.75 x Nifty return
Sector return < 1.25 x Nifty return
Underweight (UW) Sector return < 0.75 x Nifty return
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Voltas (VOLT) reported very weak Q2FY12 numbers, significantly below ours and consensus estimates. Revenue grew by a mere 5% even as PAT (adjusted for property sale) dipped 72% with margins collapsing across all segments. EBTIDA margin was the lowest in 25 quarters at 2.4%. The biggest surprise came from 940bps dip in UCP margin. While the order book declined 10% YoY to INR44.6bn, the inflow dropped 29% to ~INR4.8bn. We cut our earnings estimate for FY12E and FY13E by 31% and 20% respectively as we trim revenues for EMPS and margins across segments. We believe most of the negatives are already factored in at the current level as we remain concerned over the near to medium term outlook of the company. We maintain ‘HOLD’ with target price of INR 83.
Earnings disappoint yet again; margin lowest in 25 quarters VOLT’s revenue reported a muted growth of 5% YoY to INR11.2bn. Earnings (adjusted for property sales), however, dropped by 72% YoY to INR228mn as profitability declined across segments. EBITDA declined 75% YoY to INR237mn as EBITDA margin dropped 770bps YoY to 2.4%, its lowest in 25 quarters. EBIT margin in EMPS and UCP collapsed by 750bps and 940bps YoY to 0.7% and 2.9% respectively. While cost overruns in its overseas project hit margin in EMPS, UCP margin suffered due to a combination of seasonality, inventory liquidation of inventory at lower margin and increased costs of imports. We believe cost overruns are likely to continue through the year in EMPS, putting pressure on margin. In UCP, given the high sensitivity of volume and increased competitive intensity, sustainable margin could be lower going forward.
Outlook and valuations: Challenging; maintain ‘HOLD’ The business environment has become extremely challenging for VOLT across all three segments as macro headwinds continue. New projects are hard to come in EMPS given the slowdown and excessive competition (which are likely to keep margin under pressure). UCP could also see a structural decline in margins. The stock is currently trading at 14.3x and 11.4x its revised earnings for FY12E and FY13E respectively. While the tough macro environment and negative management commentary mars outlook, we believe most of the negatives are factored in at current level and thus maintain ‘HOLD/Sector Underperformer’ with reduced target of INR83 (earlier INR 104).
Segmental performance: UCP springs biggest disappointment After a disappointing performance in EMPS over the past five quarters, VOLT reported a moderate revenue growth of 8% at INR7.b6bn during the quarter. Revenues in UCP and EPS declined 8% and 5% YoY to INR2.1bn and INR1.2bn respectively. UCP revenue declined as the air conditioning industry faced a slowdown due to unfavourable weather conditions while EPS revenue was lower as material handling business has been moved out to the JV with KION group. Profitability was hit across all three segments. The biggest disappointment was seen in UCP as its margin dipped 940bps YoY to 2.9% given the very high sensitivity to volume towards fixed cost absorption. Margin in EMPS and EPS declined 750bps and 610bps YoY to 0.7% and 14.8% respectively. UCP profitability was hampered due to lower volume sale as the company faced 18% decline in volume besides a higher competitive intensity. In EMPS, it faced significant cost over runs in its projects in Qatar which might last few more quarters even as new projects are hard to come by. EPS margin was affected due to slower equipment sale to the mining industry which faces several impediments like environment clearances amongst others.
Key takeaways from Q2FY12 results conference call • The company has already bagged orders worth ~ INR8.3bn during Q3FY12 which have
not been included in the current order book of INR44.6bn, providing a better order visibility.
• The order book comprises of INR26.4bn from international geographies, INR13.7bn from domestic market, INR1.9bn from water business and INR2.6bn from Rohini Electricals.
• The incremental orders in EMPS are coming at lower margins as VOLT lowered its margin requirement threshold on the back of increased competitive intensity and limited movement in order awards. (~5% in international geographies and 7%-8% in domestic market).
• The management indicated that the Sidra Hospital contract (worth INR9bn initially) in Qatar, expected to be over by June 2012, would be loss making as cost escalations continue. Variation, if any, could accrue only in FY13 after completion of the project.
• In UCP, the competitive intensity has increased significantly with several players resorting to major price cuts in order to liquidate inventory and gain market share.
• The slowdown in the mining sector has affected the EPS business significantly.
• In the EPS business, two major Principals - Bucyrus and Letourneau - have been taken over by Caterpillar and Joy respectively and there remains uncertainty about their future strategy wrt to business with VOLT.
Company Description Voltas, a part of the TATA group which holds ~31% stake, is a leading air conditioning and engineering services provider. It offers engineering solutions through its four business segments in areas such as heating, ventilation and air conditioning, refrigeration, climate control, electro-mechanical projects, textile machinery, machine tools, mining and construction, material handling, water management, building management systems, pollution control and chemicals. It has a large business of EMPS coming from Middle East and Far East.
Investment Theme VOLT’s strong presence in the West-Asian region (particularly Middle East) and Far East (Hong Kong & Singapore) specialising in EMPS contracts has made it a preferred EPC-HVAC contractor. The flagship EMPS division contributes 60% plus to the topline, driven by contracts in domestic as well as international markets. We believe VOLT may gain from international experience and tap opportunities from the ongoing infrastructure boom in India. Further, with capital goods industry continuing its growth trend, we expect VOLT’ EPS division to capitalise on the opportunity, which can lead to improvement in overall margins.
Key Risks Any slowdown in capex spend in Middle East and in economic activity with respect to infrastructure creation in India is likely to dry incremental order intakes for its EMPS division. Further, margins and lead time for delivery for its EMPS segment can come under pressure with local players strengthening their operations and entry of more global players. The profitability of its UCP division is vulnerable to rise in input costs, increase in Chinese imports, excess capacity and increased competitive intensity.
Bajaj Electricals BUY SO M BGR Energy Systems HOLD SP M
Bharat Heavy Electricals HOLD SP L Crompton Greaves REDUCE SU M
Cummins India BUY SO L Havell's India BUY SO M
Jyoti Structures HOLD SP M Kalpataru Power Transmission HOLD SP M
KEC International BUY SO M Larsen & Toubro BUY SO M
Siemens BUY SO L Techno Electric & Engineering BUY None None
Thermax BUY SO L Voltamp Transformers HOLD SU M
Voltas HOLD SP L
RATING & INTERPRETATION
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
Buy More than 15%
Hold Between 15% and - 5%
Reduce Less than -5%
RELATIVE RETURNS RATING
Ratings Criteria
Sector Outperformer (SO) Stock return > 1.25 x Sector return
Sector Performer (SP) Stock return > 0.75 x Sector return
Stock return < 1.25 x Sector return
Sector Underperformer (SU) Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe within the sector
RELATIVE RISK RATING
Ratings Criteria
Low (L) Bottom 1/3rd percentile in the sector
Medium (M) Middle 1/3rd percentile in the sector
High (H) Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return
Equalweight (EW) Sector return > 0.75 x Nifty return
Sector return < 1.25 x Nifty return
Underweight (UW) Sector return < 0.75 x Nifty return
1 Edelweiss Securities Limited
We hosted a conference call with Mr. Vineet Gupta of Moody’s, author of “Banking System Outlook: India” whereby the rating agency has changed the outlook of Indian banking system from stable to negative, citing expected deterioration in asset quality (hence profitability) and capitalization over the next 12-18 months. Below is the key stance of Moody’s as well as its raison d'être for the downgrade as discussed in the call:
Asset quality: Highly adverse scenario can witness GNPAs of 12% • Demanding operating environment coupled with growing interest burden leads to
stress on corporate portfolio, especially among SMEs. Power, airlines and textile are seen as potential culprits.
• Increase in mortgage rates by 350bps over the past 12 months has led to home loan tenures rising to 35-37 years, way more than the working/actual life of the borrower.
• Concentration risk can lead to big jumps in GNPA. He cited the example of an Indian telecom tower company which is currently restructuring its debt of USD5bn with Indian banks.
• Despite focused endeavors to accelerate recovery efforts over the last 10-15 years, little has been achieved as recoveries still lag behind fresh NPA formation. SARFAESI Act has been of help, however, lot more needs to be done at the individual branch level by banks.
• Slowing pace of growth over FY12-13 will also lead to headline NPL ratios appearing elevated.
• Restructuring of debt of the loss ridden state discoms is seen more as a postponement of the problem as their underlying activity is not productive enough to fulfill obligations.
Profitability: PPP/gross loans drop to 1.8% from 3.6% in FY11 The adverse scenario - with GNPA of 12% with LGD of 60% - will translate into an expected loss of 7.2% of gross loans. Assuming a utilization of 1.3% of accumulated loan-loss provisions and Tier 1 absorbing another 4%, ensuing losses can see PPP/gross loans dropping to 1.8%.
Tier 1: Unfavorable landscape to see Tier 1 at sub‐6% level As mentioned above, in the event of GNPA at 12% and LGD at 60%, Tier 1 will possibly absorb 4% of the total 7.2% of likely losses (as a % of gross loans), taking Tier 1 to 5.6% from 9.5% in March 2011. Another area of significant concern for PSU banks is the uncertainty on timing, quantum and the form of support that can be expected from Government of India. Delay in capital infusion in SBI (Tier 1 at 7.47% as on September 2011) is a case in point. Loan growth of 16%-18% with a declining profitability does not make internal accruals a highly steadfast source either.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
BANKING Tête‐à‐tête with Moody’s: Adverse scenario to aggravate GNPAs
SECTOR UPDATE
India Equity Research | Banking and Financial Services
1 Edelweiss Securities Limited
IIP grew by a paltry 1.9% YoY in September, the lowest in two years and well below our expectation of ~3.0%. In fact, on a sequential basis (MoM%, sa, 3MMA), contraction in industrial output was close to the levels seen during the crisis of 2008‐09. Evidently, the economic slowdown is intensifying and becoming far more broad‐based. Sectoral data suggests that mining and manufacturing weakness has deepened although electricity has held steady. Weakness in capital goods output (reflecting investment demand) is leading the slowdown in manufacturing while consumer goods production is also turning soft. Going ahead, weak intermediate goods, unrelenting policy hurdles and an expected slowdown in exports do not augur well for industrial production. Accordingly, downside risks to our GDP growth projection of 7.6% have increased significantly. In sum, the data reinforces our belief that RBI would halt in its rate tightening cycle in the upcoming monetary policy. IIP slowdown deepens IIP for September came in at ~1.9% YoY, below consensus estimate of ~3.5% and our expectation of 3%. Clearly, the economic slowdown is intensifying and becoming broad-based with both consumption and investment goods production slowing considerably. Importantly, on a seasonally adjusted (SA) sequential 3MMA basis, IIP contracted by ~1.6%, a level last seen in Jan 09, reflecting the pronounced nature of weakness. Trend in sector-wise data suggests that the weakness in mining and manufacturing has stepped up although electricity production continued to be strong. Use-based classification reflected that production of consumer goods, forward-looking intermediate goods and capital goods remained soft. Meanwhile, aided by a strong electricity production, basic goods continued to grow at a healthy clip.
Manufacturing sees a sharp sequential contraction… Manufacturing sector continues to be on a downtrend, growing at a feeble~ 2.1% (YoY) in September compared to a trend growth of ~9%-10%. What is noteworthy is that on a sequential basis (SA M-o-M%, 3MMA), manufacturing activity contracted 1.9%, a level last witnessed during the crisis of 2008-09. Such a severe contraction is largely led by the ongoing weakness in investment activity (as seen in capital goods production) which in turn has been the result of multiple factors such as policy inaction by the government, aggressive RBI tightening and highly uncertain external environment.
Meanwhile, mining activity contracted yet again by ~5.6% in September (vs -4.1% in Aug), largely reflecting a sharp contraction in coal mining activity (~18% and ~15% in Sept and Aug respectively). Heavy rains disrupted the mining activity during the month. Nevertheless, the policy inaction (especially environmental) remains a big overhang on the sector as reflected by a 1.0% contraction in the sector on YTD basis compared to a growth of 7.2% during the same period last year.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
IIP Weakness intensifies
India Equity Research | Economy
1 Edelweiss Securities Limited
Open Offer
Bloomberg Code Company Start date End DateOffer Price
(INR)
Current Market Price
(INR)
BRFL IN BRFL 4-Nov-11 23-Nov-11 300.00 290.10
EEDU IN Everon Edu 16-Nov-11 5-Dec-11 528.00 376.25
MRGC IN Marg Ltd 1-Dec-11 20-Dec-11 91.00 87.45
IABS IN INEOS ABS 16-Dec-11 6-Jan-12 606.81 618.00
SII IN Safari Inds NA NA 170.00 155.75
SOG IN Sabero Organics Gujarat NA NA 160.00 127.70
WNDT IN Wendt (India) NA NA 1,366.34 1,621.10
NA : The opening and closing date are yet to be announced
Note: The above data is not exhaustive Delisting
Bloomberg Code Company Start date End Date
Floor Price (INR)
Exit Price (INR)
Current Market
Price (INR)
MHGA IN Sekurit Saint-Gobain NA NA NA 31 39.25
UTV IN UTV Software NA NA NA 1000 951.85
ALFA IN Alfa Laval NA NA 2,045 NA 2250.00
CIS IN Carol Info Services NA NA 106 NA 150.05
Source: BSE, NSE
NA: The opening, closing date, floor price and Exit price are yet to be announced.
Note: The above data is not exhaustive Buyback
Bloomberg Code Company Start date End Date
Max Buyback
Price (INR)
Current Market Price
(INR)
FDCLT IN FDC 18-Feb-11 25-Jan-12 135 87.60
SRF IN SRF 6-Apr-11 25-Feb-12 380 311.00
HEG IN HEG 11-Apr-11 13-Mar-12 350 200.75
RELI IN Reliance Infra 11-Apr-11 13-Feb-12 725 453.70
ALDS IN Allied Digit 25-Apr-11 17-Feb-12 140 28.95
ICSL IN INFINITE 6-May-11 10-Apr-12 230 87.05
DECH IN Deccan Chron 16-May-11 3-Jan-12 180 50.30
PVRL IN PVR 7-Jul-11 26-May-12 140 147.25
Z IN Zee Entert 27-Jul-11 23-Mar-12 126 118.40
Source: BSE
Note: The above data is not exhaustive Bonus & Splits
Bloomberg Code CompanyAction Type Ex-Date Ratio
HDP IN Maharashtra Polybutenes LStock Split 14-Nov-11 1:10
KNP IN Kanpur Plastipack Ltd Bonus 16-Nov-11 1:0.5
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
CORPORATE ACTION TRACKERWeekly dossier on corporate actions
India Alternative Research
2 Edelweiss Securities Limited
Corporate Action Tracker
Acquisitions Bloomberg Code Acquiring Company Target Company Ex-Date
Acquired(%)
GCI IN Private Investor Gupta Carpets International Ltd 14-Nov-11 20.00
RSPC IN Solvay SA Rhodia Specialty Chemicals India L 21-Nov-11 20.00
BRFL IN AAA United BV Bombay Rayon Fashions Ltd 23-Nov-11 20.00
EEDU IN Varkey Group Everonn Education Ltd 5-Dec-11 23.00
BLOM IN Private Investors Bloom Dekor Ltd 13-Dec-11 20.00
SVF IN Private Investor Savani Financials Ltd 26-Dec-11 20.00
GFL IN Digivision Holdings Pvt Ltd Media Matrix Worldwide Ltd 27-Dec-11 26.00
MDPY IN Multiple acquirers Midland Polymers Ltd 28-Dec-11 20.00
SUKH IN SR Jute Traders Pvt Ltd Subhkam Capital Ltd 28-Dec-11 20.00
The Indian markets dropped by 1% on Friday after a gap down opening owing to the bearish global cues and disappointing domestic economic data. Nifty opened with a huge gap down after a significant bearish day on Wednesday and traded in a narrow range of 52 points throughout the session. The index has retraced 38.2% of the October rally from 4728 to 5400 at 5142 as well as tested the lower boundary of a minor downward sloping trend channel. However it has closed below two important supports of 5200 and 5170 (earlier breakout point) suggesting a deeper retracement is likely to follow. Friday’s decline came on the back of substantial volume and a weak market breadth indicating overall bearish activity. Daily oscillators that were trading with buy cross have rolled bearish indicating short-term pressure. The coming sessions are likely to witness stiff resistance around 5240 (50 hourly EMA) from where the Nifty can slip down to 5100 / 5065. Trades should look to sell the rallies with reversal only on a close above 5280. Among the sectoral performances, Banking, Metals and Cap Goods indices took the markets lower with losses of 3% and 2.3% respectively. The winners list included Oil & Gas (+0.79%) and Autos (0.62%) shares. Broader market benchmarks Mid-cap and Small-cap indices witnessed deeper cuts of 1.13% and 1.57% respectively. Bullish Setups: ABGS, HUVR, BHARTI, BHEL, ACC Bearish Setups: RBXY, LPC, BPCL, INFY
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