Last one year has been bad for the stock market and in times like this small and mid-cap companies tend to suffer the most. However, that was not the case with our last year's list of 100 Fastest Growing Small Companies. Between last and this October BSE Small Cap lost 36%, BSE MidCap fell 27% and BSE Sensex slipped over 15%.
Monday, October 31, 2011
Reliance Industries- Shale gas, CBM next growth avenues :Macquarie Research,
Reliance Industries
Shale gas, CBM next growth avenues
Event
RIL reported a PAT of Rs57.03bn for 2QFY11, a modest growth of 16% YoY,
exactly in line with forecasts. A 28% YoY rise in GRM was the key driver. A
revival in domestic petrochemical demand, higher exports and a 2.4% INR
depreciation offset an 18% dip in gas volumes. RIL's US shale gas production
is rapidly ramping-up. We maintain our Outperform with a TP of Rs1,083.
Impact
Refining EBIT +37% YoY, but -4% QoQ: RIL’s GRM’s rose 28% YoY to
US$10.1/bbl, but fell QoQ by US$0.2/bbl. Premium over Singapore complex
narrowed YoY from US$1.8/bbl to US$0.2/bbl, as light-heavy crude oil
differential narrowed by US$1.3/bbl. Also benefit of a US$3/bbl rise in gasoline
spread was partially offset by a US$2.7/bbl contraction in spread by US$2.7/bbl
of major product, diesel. RIL achieved a record 110% utilization.
Petrochem EBIT rises 10% on domestic demand rebound. Inventory restocking
due to price revival enabled a 21% QoQ demand surge. Exports,
primarily to China also surged rising to 1/3rd of turnover. Polymer margin revival
should strengthen off lows as global capacity additions shrink. Polyester
margins should also remain healthy. While cotton prices have halved cotton –
polyester price spread remains a healthy ~US$800/t vs historical average of
US$350/t. RIL is negotiating technology for its gas cracker. Polyester chain
expansion implementation has commenced and RIL expects production to
double from 6.5m tpa to 14m tpa over 42 months.
KGD6 output fell 22% YoY to 46.3mmscmd. This precipitated a 10% YoY fall
in upstream EBIT. KG production revival is unlikely prior to 2015. BP-RIL
started re-assessment in true earnest, but has deferred fresh drilling till
4QFY12. The business head stated that RIL has not cut reserves as gas is
distinctly visible, but is proving difficult to extract. RIL is working with regulator
for developmental approval for R1 cluster and satellite wells in KGD6.
Shale gas ramping up: Production with Chevron and Pioneer JVs started,
achieving gross production of 210 mmscfd of gas and 24.7mbpd of condensate.
Carrizo production should start in 3QFY12 along with pipeline connectivity.
Shale gas isn’t reflected in current standalone 2QFY12 results.
CBM taking shape: RIL has drilled 26 wells towards a target of 112. They can
commence production in 24 months after they receive government approval on
LNG-linked pricing (at 3x of KGD6). Production would plateau at 4mmscmd, ie,
1/10th of current KG production. Given its strong balance sheet (US$10bn cash,
net gearing of 14%, plus US$7.2bn to be received from BP) and extremely
large cash flows of US$6-7bn pa, the company is in the process of formalizing
plans for even stronger growth.
Action and recommendation
Our second independent institutional investor e-survey on RIL suggests that
investor portfolios remain underweight RIL, but mindsets have turned positive,
perhaps explaining the 6% quarterly stock outperformance vs Sensex. We think
RIL presents compelling value and that upstream business is available for free
as BP has paid nearly as much for 1/3rd stake as entire upstream value.
Moreover, at 1.1x book value, Reliance Industries is at low end of historical
valuation range.
Shale gas, CBM next growth avenues
Event
RIL reported a PAT of Rs57.03bn for 2QFY11, a modest growth of 16% YoY,
exactly in line with forecasts. A 28% YoY rise in GRM was the key driver. A
revival in domestic petrochemical demand, higher exports and a 2.4% INR
depreciation offset an 18% dip in gas volumes. RIL's US shale gas production
is rapidly ramping-up. We maintain our Outperform with a TP of Rs1,083.
Impact
Refining EBIT +37% YoY, but -4% QoQ: RIL’s GRM’s rose 28% YoY to
US$10.1/bbl, but fell QoQ by US$0.2/bbl. Premium over Singapore complex
narrowed YoY from US$1.8/bbl to US$0.2/bbl, as light-heavy crude oil
differential narrowed by US$1.3/bbl. Also benefit of a US$3/bbl rise in gasoline
spread was partially offset by a US$2.7/bbl contraction in spread by US$2.7/bbl
of major product, diesel. RIL achieved a record 110% utilization.
Petrochem EBIT rises 10% on domestic demand rebound. Inventory restocking
due to price revival enabled a 21% QoQ demand surge. Exports,
primarily to China also surged rising to 1/3rd of turnover. Polymer margin revival
should strengthen off lows as global capacity additions shrink. Polyester
margins should also remain healthy. While cotton prices have halved cotton –
polyester price spread remains a healthy ~US$800/t vs historical average of
US$350/t. RIL is negotiating technology for its gas cracker. Polyester chain
expansion implementation has commenced and RIL expects production to
double from 6.5m tpa to 14m tpa over 42 months.
KGD6 output fell 22% YoY to 46.3mmscmd. This precipitated a 10% YoY fall
in upstream EBIT. KG production revival is unlikely prior to 2015. BP-RIL
started re-assessment in true earnest, but has deferred fresh drilling till
4QFY12. The business head stated that RIL has not cut reserves as gas is
distinctly visible, but is proving difficult to extract. RIL is working with regulator
for developmental approval for R1 cluster and satellite wells in KGD6.
Shale gas ramping up: Production with Chevron and Pioneer JVs started,
achieving gross production of 210 mmscfd of gas and 24.7mbpd of condensate.
Carrizo production should start in 3QFY12 along with pipeline connectivity.
Shale gas isn’t reflected in current standalone 2QFY12 results.
CBM taking shape: RIL has drilled 26 wells towards a target of 112. They can
commence production in 24 months after they receive government approval on
LNG-linked pricing (at 3x of KGD6). Production would plateau at 4mmscmd, ie,
1/10th of current KG production. Given its strong balance sheet (US$10bn cash,
net gearing of 14%, plus US$7.2bn to be received from BP) and extremely
large cash flows of US$6-7bn pa, the company is in the process of formalizing
plans for even stronger growth.
Action and recommendation
Our second independent institutional investor e-survey on RIL suggests that
investor portfolios remain underweight RIL, but mindsets have turned positive,
perhaps explaining the 6% quarterly stock outperformance vs Sensex. We think
RIL presents compelling value and that upstream business is available for free
as BP has paid nearly as much for 1/3rd stake as entire upstream value.
Moreover, at 1.1x book value, Reliance Industries is at low end of historical
valuation range.
UBS :: Coal India- Key takeaways from call with management
UBS Investment Research
Coal India
K ey takeaways from call with management
Event: labour strike called off after higher bonus settlement
1) The labour unions of Coal India (CIL) have called off a proposed three-day
strike (in early November) after the company agreed to a higher bonus payout of
Rs21,000/worker (vs. CIL’s offer of Rs17,000 and union demand of Rs23,000).
The higher bonus will cost cUS$30m. 2) Wage negotiations are expected to
conclude by 31 December although there could be delays. We have factored in a
wage increase of cRs45bn in FY12 (+25% YoY), though CIL expects wage
provision of cRs23bn in FY12 (provision only from Q2).
Impact: production loss will be avoided; rake availability to increase
1) The strike cancellation is positive, in our view, as production loss will be
avoided. A recent strike (10 October) led to production loss of c1mt. 2) We believe
the recent crisis in the power sector will ensure more coordination between the
power/coal/railway ministries and lead to an increase in rake availability to CIL.
The mining ban at Karnataka has also led to an increase in rakes. CIL has said rake
availability has increased to 180 rakes/day.
Action: structural theme intact; recent correction overdone
1) CIL sold 200mt in H1 FY12 (12% miss)—it needs to sell c254mt in H2 to meet
its guidance of 454mt (sold 225mt in H2 FY11—53% of FY11 sales). 2) CIL has
said its e-auction sales quota of c50mt for FY12 will not reduce despite diverting
c4mt from e-auction in October to the power sector. 3) Worst-case impact from the
proposed mining tax is c19% on our PAT estimate. However, there could be major
changes in the bill. We forecast FY12/FY13 ASP of Rs1,344/1,400 and volumes of
452/473mt.
Valuation: maintain Buy rating and price target of Rs400
We continue to value CIL on 15x FY13E PE.
Key takeaways from the management call
We have factored in higher wages:
— We have estimated incremental wages of cRs45bn in FY12 (+25%
YoY) though CIL expects wages to increase on an annualised basis by
Rs30bn—FY12 provision will only be cRs23bn i.e. provision only
from Q2 FY12.
CIL missed production/sales by c10%/12% in H1 FY12:
— CIL is confident of achieving the full-year targets by ramping up
production and sales in H2 FY12. In FY11, H2 production/sales
accounted for 57%/53% of full-year production/sales. CIL
management is confident of achieving 447mt/454mt of full-year
production/sales.
— Even if there is some downside to sales in FY12, we have factored in
significantly higher wage costs and do not expect significant downside
to our earnings. 1% lower sales volume would lead to 2% lower
earnings.
Rake availability has increased:
— We spoke to management and understand that the current rake
availability has increased to 180 rakes/day. The mining ban in
Karnataka has also led to an increase in rakes available for CIL.
— CIL received c166 rakes per day in Q1 FY12 and less than 160 rakes
in Q2 FY12.
Details of CIL’s Production/Sales miss in H1 FY12
CIL missed its production target by c10% or 19mt in H1 FY12 primarily due
to heavy rains (please refer to rainfall data in Table 4).
— In FY11, CIL produced c57% (245mt) of its full-year production
(431mt) in H2. To meet the lower end of its production guidance for
FY12 (447mt), CIL would need to produce 270mt in H2 (vs. 245mt in
the same period last year).
CIL missed its sales target by c12% or 26mt in H1 FY12 primarily due to the
heavy rains.
— In FY11, CIL sold c53% (225mt) of its full-year sales (424mt) in H2.
To meet the lower end of its sales guidance for FY12 (454mt), CIL
would need to sell 254mt in H2 (vs. 225mt in the same period last
year).
— We have assumed FY12 sales of c452mt.
Coal India
Coal India is the largest coal company in the world (primarily thermal coal). The
government owns 90% of the company. It sells its entire output (415Mt in
FY10) in the domestic market. Coal India sells coal at a significant discount (55-
60%) to international coal prices.
Statement of Risk
Coal India is a public sector enterprise and hence, may not be able to raise coal
prices in line with input costs (given inflation concerns), negatively impacting
earnings. Coal India is expanding capacity significantly; any delay in capacity is
likely to impact earnings.
Coal India
K ey takeaways from call with management
Event: labour strike called off after higher bonus settlement
1) The labour unions of Coal India (CIL) have called off a proposed three-day
strike (in early November) after the company agreed to a higher bonus payout of
Rs21,000/worker (vs. CIL’s offer of Rs17,000 and union demand of Rs23,000).
The higher bonus will cost cUS$30m. 2) Wage negotiations are expected to
conclude by 31 December although there could be delays. We have factored in a
wage increase of cRs45bn in FY12 (+25% YoY), though CIL expects wage
provision of cRs23bn in FY12 (provision only from Q2).
Impact: production loss will be avoided; rake availability to increase
1) The strike cancellation is positive, in our view, as production loss will be
avoided. A recent strike (10 October) led to production loss of c1mt. 2) We believe
the recent crisis in the power sector will ensure more coordination between the
power/coal/railway ministries and lead to an increase in rake availability to CIL.
The mining ban at Karnataka has also led to an increase in rakes. CIL has said rake
availability has increased to 180 rakes/day.
Action: structural theme intact; recent correction overdone
1) CIL sold 200mt in H1 FY12 (12% miss)—it needs to sell c254mt in H2 to meet
its guidance of 454mt (sold 225mt in H2 FY11—53% of FY11 sales). 2) CIL has
said its e-auction sales quota of c50mt for FY12 will not reduce despite diverting
c4mt from e-auction in October to the power sector. 3) Worst-case impact from the
proposed mining tax is c19% on our PAT estimate. However, there could be major
changes in the bill. We forecast FY12/FY13 ASP of Rs1,344/1,400 and volumes of
452/473mt.
Valuation: maintain Buy rating and price target of Rs400
We continue to value CIL on 15x FY13E PE.
Key takeaways from the management call
We have factored in higher wages:
— We have estimated incremental wages of cRs45bn in FY12 (+25%
YoY) though CIL expects wages to increase on an annualised basis by
Rs30bn—FY12 provision will only be cRs23bn i.e. provision only
from Q2 FY12.
CIL missed production/sales by c10%/12% in H1 FY12:
— CIL is confident of achieving the full-year targets by ramping up
production and sales in H2 FY12. In FY11, H2 production/sales
accounted for 57%/53% of full-year production/sales. CIL
management is confident of achieving 447mt/454mt of full-year
production/sales.
— Even if there is some downside to sales in FY12, we have factored in
significantly higher wage costs and do not expect significant downside
to our earnings. 1% lower sales volume would lead to 2% lower
earnings.
Rake availability has increased:
— We spoke to management and understand that the current rake
availability has increased to 180 rakes/day. The mining ban in
Karnataka has also led to an increase in rakes available for CIL.
— CIL received c166 rakes per day in Q1 FY12 and less than 160 rakes
in Q2 FY12.
Details of CIL’s Production/Sales miss in H1 FY12
CIL missed its production target by c10% or 19mt in H1 FY12 primarily due
to heavy rains (please refer to rainfall data in Table 4).
— In FY11, CIL produced c57% (245mt) of its full-year production
(431mt) in H2. To meet the lower end of its production guidance for
FY12 (447mt), CIL would need to produce 270mt in H2 (vs. 245mt in
the same period last year).
CIL missed its sales target by c12% or 26mt in H1 FY12 primarily due to the
heavy rains.
— In FY11, CIL sold c53% (225mt) of its full-year sales (424mt) in H2.
To meet the lower end of its sales guidance for FY12 (454mt), CIL
would need to sell 254mt in H2 (vs. 225mt in the same period last
year).
— We have assumed FY12 sales of c452mt.
Coal India
Coal India is the largest coal company in the world (primarily thermal coal). The
government owns 90% of the company. It sells its entire output (415Mt in
FY10) in the domestic market. Coal India sells coal at a significant discount (55-
60%) to international coal prices.
Statement of Risk
Coal India is a public sector enterprise and hence, may not be able to raise coal
prices in line with input costs (given inflation concerns), negatively impacting
earnings. Coal India is expanding capacity significantly; any delay in capacity is
likely to impact earnings.
Hold NTPC; Target :Rs 192:: ICICI Securities
O n e o f f s d r i v e h i g h e r p r o f i t s …
Revenues grossed up at normal tax rate, decline in availability of coal for
thermal power stations, one off sales of ~| 760 crores, higher fuel cost
(increase of 30 bps on YoY basis), higher other income, increase in
debtors days and lower interest costs were the key highlights of Q2FY12
results of NTPC. Adjusted PAT post adjustments is | 1664 crore (lower
than our estimates of | 1810 crore and street estimates of | 2000 crore).
Average realisation per unit for the quarter stood at |2.92/kwhr (Aux
consumption of 7.5%). While we like the regulated nature of its business,
capacity addition backed by fuel security (to maintain 80%+ PLFs for coal
based power plants), lower PAF due to muted coal production (resulting
in under recovery of fixed charges), capacity slippages and back down by
SEBs are the key risks for the company. We downgrade the stock from
Buy to Hold mainly on account of possible under recoveries due to lower
PAF (for thermal power stations).
ƒ Planned outages impacted PAF of thermal stations in Q2 FY12
In Q2 FY12, PAF of coal based power plants was 83.4 % (decline of
300 bps YoY) on account of planned shutdown of coal fired plants.
The company lost ~5.4 billion units (10.6% of generation) due to
backing down by SEBs.
ƒ Capacity addition of 4320 MW in FY12
The company remains confident of adding 4320 MW in FY12 (on a
consolidated basis). As per CEA data, we expect a capacity addition
of 3320 MW. Till date, the company has added 1160 MW (660 MW in
Sipat and 500MW in Jhajjar) and commercialised 1160 MW (500
MW in Simhadri and 660 MW in Sipat) .
V a l u a t i o n
At the CMP of | 174, the stock is trading at P/E of 15.1x FY12E & 14.3x
FY13E EPS, respectively. Similarly, on P/B multiple the stock is trading at
1.9x FY12E & 1.7x FY13E, respectively. Superior execution (in terms of
commercialisation of power capacities), higher PAF could re rate the
stock. We downgrade the stock from Buy to Hold. Slippage in capacity
ramp up in FY12 and back down by SEBs is the key risk to our call.
Key highlights of conference call
• PLF for H1FY12 for coal based power stations stood at 82.73%
(v/s 86.13% in H1 FY11) while PLF for Gas based power for H1
FY12 was 61.7% (v/s 74.21% in H1 FY11).
• ACQ (Actual contract quantity) received from coal India was
91.17% in H1FY12 v/s 94.46 %( H1 FY11).
• The company imported coal to the tune of 7.23 mn tonnes in H1
FY12 v/s 6.2 mn tonnes in H1 FY11.
• Units lost due to unavailability of fuel was at 1.944 billion units
• In Q2FY12, the company received 29.54 mn tonnes (v/s~31 mn
tonne in Q1FY11). This included imported coal of 3.87 mn tonnes.
• Receivable days for the company were at 69 days (H1 FY12) v/s
33 days (H1 FY11). The company maintains 100% recovery, till
date no SEB have defaulted.
• Average cost of debt of 7.06% in H1 FY12 v/s 6.42% in H1 FY11
• Weighted average cost of coal is | 2651/tonne in Q2FY12 v/s |
2100/ tonne in Q2FY11.
Revenues grossed up at normal tax rate, decline in availability of coal for
thermal power stations, one off sales of ~| 760 crores, higher fuel cost
(increase of 30 bps on YoY basis), higher other income, increase in
debtors days and lower interest costs were the key highlights of Q2FY12
results of NTPC. Adjusted PAT post adjustments is | 1664 crore (lower
than our estimates of | 1810 crore and street estimates of | 2000 crore).
Average realisation per unit for the quarter stood at |2.92/kwhr (Aux
consumption of 7.5%). While we like the regulated nature of its business,
capacity addition backed by fuel security (to maintain 80%+ PLFs for coal
based power plants), lower PAF due to muted coal production (resulting
in under recovery of fixed charges), capacity slippages and back down by
SEBs are the key risks for the company. We downgrade the stock from
Buy to Hold mainly on account of possible under recoveries due to lower
PAF (for thermal power stations).
ƒ Planned outages impacted PAF of thermal stations in Q2 FY12
In Q2 FY12, PAF of coal based power plants was 83.4 % (decline of
300 bps YoY) on account of planned shutdown of coal fired plants.
The company lost ~5.4 billion units (10.6% of generation) due to
backing down by SEBs.
ƒ Capacity addition of 4320 MW in FY12
The company remains confident of adding 4320 MW in FY12 (on a
consolidated basis). As per CEA data, we expect a capacity addition
of 3320 MW. Till date, the company has added 1160 MW (660 MW in
Sipat and 500MW in Jhajjar) and commercialised 1160 MW (500
MW in Simhadri and 660 MW in Sipat) .
V a l u a t i o n
At the CMP of | 174, the stock is trading at P/E of 15.1x FY12E & 14.3x
FY13E EPS, respectively. Similarly, on P/B multiple the stock is trading at
1.9x FY12E & 1.7x FY13E, respectively. Superior execution (in terms of
commercialisation of power capacities), higher PAF could re rate the
stock. We downgrade the stock from Buy to Hold. Slippage in capacity
ramp up in FY12 and back down by SEBs is the key risk to our call.
Key highlights of conference call
• PLF for H1FY12 for coal based power stations stood at 82.73%
(v/s 86.13% in H1 FY11) while PLF for Gas based power for H1
FY12 was 61.7% (v/s 74.21% in H1 FY11).
• ACQ (Actual contract quantity) received from coal India was
91.17% in H1FY12 v/s 94.46 %( H1 FY11).
• The company imported coal to the tune of 7.23 mn tonnes in H1
FY12 v/s 6.2 mn tonnes in H1 FY11.
• Units lost due to unavailability of fuel was at 1.944 billion units
• In Q2FY12, the company received 29.54 mn tonnes (v/s~31 mn
tonne in Q1FY11). This included imported coal of 3.87 mn tonnes.
• Receivable days for the company were at 69 days (H1 FY12) v/s
33 days (H1 FY11). The company maintains 100% recovery, till
date no SEB have defaulted.
• Average cost of debt of 7.06% in H1 FY12 v/s 6.42% in H1 FY11
• Weighted average cost of coal is | 2651/tonne in Q2FY12 v/s |
2100/ tonne in Q2FY11.
Sunday, October 30, 2011
Oct 31 week: Pivotals: Reliance IndustriesInfosys, SBI, Tata Steel :: Business Line
Pivotals: Reliance Industries (Rs 898)
The truncated week saw RIL move up smartly to move briefly above Rs 900 on Friday. It will be interesting to see if the stock garners strength to move above the 200 DMA present at Rs 904. Short-term reversal from this zone can drag the stock lower to Rs 847 or Rs 830. Traders can buy in declines as long as the stock trades above the first support. Reversal above this level will take the stock up to Rs 920 or Rs 970. Supports on decline below Rs 830 are at Rs 809 and Rs 787.
The medium-term trend in the stock is down. But it is reversing from its key long-term support zone between Rs 700 and Rs 750. Investors with greater penchant for risk can therefore buy the stock in declines with stop at Rs 700.
State Bank of India (Rs 1,907)
SBI put up a disappointing show last week, closing Rs 41 lower. Short-term traders can, however, hold their long positions with stop at Rs 1,800. If the stock holds above this level, rally to Rs 2,000 or Rs 2,106 is possible in the upcoming sessions. However longs should be avoided on decline below Rs 1,800 since that will mean that the stock is heading towards the trough at Rs 1,710.
If we follow classic trend-following methods, SBI is in a severe medium-term downtrend. However the stock is holding around the key long-term support zone between Rs 1,700 and Rs 1,900. Next long-term support that investors can watch out for is the July 2009 trough formed at Rs 1,510.
Tata Steel (Rs 480.6)
It was a sparkling week for Tata Steel as it rocketed to close 12 per cent higher. Next short-term target for the stock is Rs 503 and then Rs 515. However, if the stock decides to take a breather in the early part of the week, it can ease lower to Rs 454 or Rs 430. Traders can hold their long positions as long as the stock trades above the first support.
The stock faces key medium-term resistance at Rs 515. Reversal below this level will result in the stock moving sideways in the band between Rs 400 and Rs 500 for few more weeks. Conversely, strong move past Rs 515 will pave the way for rally to Rs 553 or Rs 592.
Infosys (Rs 2,859.6)
Infosys too blazed ahead last week to close Rs 136 higher. It moved past our outermost short-term target at Rs 2,900 to record the intra-week high of Rs 2,971. The stock is now approaching a key medium-term resistance zone around Rs 3,000. Move above this level will mean that the stock can move on towards its life-time high of Rs 3,500 in the upcoming weeks.
Investors should however desist from initiating fresh long positions if the stock fails to move beyond Rs 3,000 early next week. That would imply an impending decline to Rs 2,730 or Rs 2,660 in the upcoming sessions. The short-term uptrend will, however, not be threatened unless the stock goes on to close below the second support.
52 week Flop: Everest Kanto Cylinder:: Business Line
The stock of high pressure cylinders maker, Everest Kanto Cylinders, declined 63 per cent in the last three years.
As export market sales account for well over half the consolidated revenues, the global meltdown in 2008 resulted in drop in demand for industrial and jumbo cylinders from its key markets abroad. Realisations in the domestic market too declined over the above period.
The full impact of the slowdown was visible only in Everest Kanto's FY10 numbers as slowing order flow affected revenues only in 2009.
Net profits in FY10 dropped to a third of the previous year's profits. As a result, the stock could not entirely participate in the broad market rally that began after the market lows in March 2009.
The company however, witnessed strong revival in its cylinder volumes in FY11 and has been able to sustain growth, thanks to robust sales seen in its Dubai facilities, which caters to West Asian markets.
For the quarter ended June, sales jumped 50 per cent over a year ago and earnings moved to the profit zone from losses in the June 2010 quarter.
Foreign currency convertible bonds due for repayment in 2012, besides lack lustre realisations in the domestic segment, appear to be reasons for the market's pessimism in the stock.
Reader Query Corner: South Indian Bank, Jet Airways,Dishman Pharma, Engineers India, PFC, CanFin Homes, MTNL, GMR:: Business Line
Please let me know the short- and medium-term targets for South Indian Bank and Jet Airways.
John
South Indian Bank (Rs 23.6): After retracing 38.2 per cent Fibonacci retracement level of the stock's prior up move from its lifetime high of Rs 29.7 in November 2010, the stock found support at around Rs 19 in February. The price band between Rs 19 and Rs 20 is a significant support band from a long-term perspective.
This support band cushioned the stock from declining further in late August this year. Building a strong base at around Rs 20, the stock resumed its long-term uptrend that has been in place ever since bottoming out in the first quarter of 2009.
The stock is presently testing a key medium-term resistance level around Rs 23.5. Emphatic breakthrough of this level will take the stock northwards to Rs 25.5-26 range in the short-term. Investors with short-term horizon can hold the stock with stop loss at Rs 22. However, a fall below Rs 22 will mar the short-term positive view and pull the stock down to Rs 20.
Strong move beyond Rs 26 will pave the way for a rally to Rs 30 in the medium-term. Investors with a medium-term perspective can consider holding the stock with stop-loss at Rs 20. On the other hand, breach of Rs 20 can drag the stock down to Rs 17 or to Rs 15 in the coming months.
Jet Airways (Rs 251.3): Ever since encountering resistance in the range between Rs 900 and Rs 925 in November 2010, Jet Airways resumed its long-term downtrend. Following a sideways consolidation phase between February and August in the band between Rs 400 and Rs 515, the stock breached southwards.
Subsequently, the stock landed at its long-term significant support at around Rs 220 in early October and is reversing upwards. The stock is currently testing its immediate short-term resistance (late August trough) at Rs 253. Decisive jump above this level will give short-term targets of Rs 285 and Rs 308.
Short-term investors can hold the stock with stop-loss at Rs 230. Medium-term investors can hold the stock with deeper stop-loss at Rs 215. Strong move beyond Rs 308 will take the stock higher to Rs 335, Rs 373 and Rs 400 in the medium-term.
Nevertheless, dive below Rs 215 will pull the stock down to Rs 178 or even further down to its long-term support at around Rs 130.
I got PFC (Power Finance Corporation) through the FPO (Follow-on Public Offer). Please advise if I can buy more shares now.
Srinivasan
PFC (Rs 155.1): In our previous review of this stock in July this year, we had mentioned that inability to move above Rs 250 will mean that the stock can head lower to Rs 150 or Rs 125 over the ensuing months. In line with our view, the stock failed to rally and declined to Rs 150 and then found support just above Rs 125, at Rs 130 in late August 2011.
The support zone between Rs 125 and Rs 130 is an important zone from a long-term perspective. The short-term trend is a sideways consolidation. Investors with higher penchant for risk can consider buying the stock with stop-loss at Rs 125. Strong penetration of resistance at Rs 170 will lift PFC higher to the Rs 215-220 range in the ensuing quarters. The next target is at Rs 250.
However, breach of Rs 125 downwards will reinforce the downtrend that has been in place from its lifetime peak of Rs 383; the stock can roll down to Rs 107 or even to Rs 86 in the long-term.
Kindly let me know the long-term prospects of CanFin Homes and MTNL.
Shantha.D. Pai
CanFin Homes (Rs 103.7): After retracing 61.8 per cent Fibonacci retracement level of the prior up move (from the October 2008 low of Rs 37.5 to August 2010 peak of Rs 172), CanFin Homes took support at its long-term support zone between Rs 85 and Rs 90 during February to August this year, and bounced upwards. Subsequent supports are at Rs 77 and Rs 67.
The stock has been on an intermediate-term downtrend from its August 2010 peak. This trend remains in place as long as the stock trades below Rs 130. Strong weekly close above this level will strengthen the stock's long-term uptrend and take the stock higher to Rs 150 and then to Rs 170. Nonetheless the stock has immediate resistance at Rs 110.
MTNL (Rs 30.9): MTNL has been on a long-term downtrend from its January 2008 peak of Rs 219. Medium- as well as short-term trends are also down for the stock. However, after recording an all-time low at Rs 29.15 on October 24, the stock found support around this level and is on the brink of reversing, triggered by positive divergence in weekly indicators. Only a strong move above Rs 37.5 will signal that the stock has bottomed out, and it can then rally to Rs 41, Rs 48 and 52.
Next significant resistance is at Rs 68. Emphatic breakthrough of long-term key resistance at Rs 90 will reverse the stock's intermediate-term downtrend and lift the stock higher to Rs 110 or Rs 124.
Conversely, inability to rally beyond Rs 37.5 will pull the stock down to Rs 29. On a breach of immediate support level at around Rs 29, will drag the stock to new lows.
I purchased GMR Infrastructure at Rs 70, and Engineers India at Rs 300. I see the prices of both the stocks going down. Could you please let me know the latest supports and resistances?
Pavan
GMR Infrastructure (Rs 27.7): Ever since peaking out in June 2009 at Rs 91, the stock resumed its long-term downtrend. Trends in all time frames are down for the stock, and it is still in the bear's grip. Nevertheless, last week the stock found support just above its long-term support level of Rs 23 (October 2008 trough), and bounced up sharply.
The stock has resistance ahead at Rs 30; a conclusive penetration of this level will take the stock northwards to Rs 34 and Rs 37. Strong rally above its long-term resistance at around Rs 45 is needed to alter its intermediate-term downtrend and take the stock higher to Rs 55-58 range.
Investors can consider switching from the stock in rallies. Tumble below Rs 23 will drag the stock down to Rs 20 and to fresh lows.
Engineers India (Rs 239.8): After peaking out in May 2010 at Rs 538, the stock has been on an intermediate-term downtrend forming lower peaks and lower troughs. In April this year, the stock resumed its downtrend after testing important long-term resistance in the band between Rs 310 and Rs 315.
Since then, it has been on a medium-term downtrend. The stock has retraced 61.8 per cent Fibonacci retracement level of its prior up move from October 2008 low of Rs 50, to its May 2010 peak. Investors with long-term perspective can hold the stock with stop-loss at Rs 215.
A reversal from current levels will face resistance at Rs 260, Rs 290 and Rs 315. Decisive breakthrough of Rs 315 will pave the way for an up move to Rs 350-360 band in the long-term; investors can take partial profits off the table at that juncture. On the other hand, fall below Rs 215 can pull the stock down to Rs 180 and then to Rs 150 levels in the ensuing months.
Please review the long-term prospect of Dishman Pharmaceuticals and Chemicals as earlier stated (May 2011).
Mukesh Kumar
Dishman Pharmaceuticals and Chemicals (Rs 53): In our review of this stock in May this year, we had mentioned that there are no signs of reversal in the stock as yet, and it is likely to breach a low at Rs 87, and decline to the 2004 low of Rs 72 or even Rs 61. Investors should have divested their holding on a decline below Rs 87.
In line with our expectation, the stock breached Rs 87 and continued to decline. It has even declined below Rs 61 to register its lifetime low at Rs 52.3 on October 28. The stock is in a longer-term downtrend. Upward reversal will encounter resistances at Rs 61, Rs 72 and Rs 87.
Dynamic move above Rs 87 will take the stock higher to Rs 110 or Rs 120. Failure to surpass Rs 87 will reinforce the downtrend. Investors can make use of rally to switch out of the stock. Only on a strong close above Rs 250 will reverse the long-term downtrend.
JPMorgan:: Reliance Industries- 2QFY12 - In-line print; and a glimmer at the end of the E&P tunnel
RIL 2QFY12 earnings of Rs57bn (+16% y/y) were in line with our and
consensus expectations. Lower-than-expected refining margins was offset
by robust petchem earnings, but more importantly management
commentary on ramping up of D6 block production was positive, though
no firm timelines for ramp-up were specified
Glimmer at the end of the E&P tunnel? RIL management provided
positive commentary on D6 block E&P ramp-up, stating D1-D3 shortfall
could be made up through satellite fields and R-series fields’ production.
Key challenge was on regulatory approvals, with tie-up of these fields to
existing infrastructure technically feasible in 2 years after approvals.
2QFY12 – Petchem provides cushion: Petchem EBIT of Rs24.2bn was
ahead-of-expectations on the back of a rebound in domestic demand in
2Q that management attributed to re-stocking to normalized inventory
levels by downstream players and steady end-use demand. Polyester
chain margins were robust with tight PX and MEG markets in 2Q. RIL
expects polyester chain margins to sustain at higher levels with strong
PX spreads and ability of polyester to pass through higher intermediate
costs due to continuing differential vis-à-vis cotton.
Refining was a tad disappointing: Refining margins of US$10.1/bbl
was below our expectation of US$10.5/bbl. Management attributed
lower delta v/s Singapore benchmark to 1) tighter light-heavy
differentials, 2) correction in gasoil crack, 3) higher LNG fuel costs and
4) weaker LPG margins. While RIL expects refining margin
environment to be strong as they expect low delivery on expected cap
adds and continued demand from EM; we are cutting our complex GRM
expectations on poor outlook for Light-Heavy crude differentials as
Libya ramps-up crude production faster than earlier expected.
Retain OW, Sep-12 PT of Rs1140: We roll-over our PT basis to Sep-12
and incorporate conservative GRM, gas ramp-up assumptions. Key risk:
prolonged economic downturn, further regulatory delays
consensus expectations. Lower-than-expected refining margins was offset
by robust petchem earnings, but more importantly management
commentary on ramping up of D6 block production was positive, though
no firm timelines for ramp-up were specified
Glimmer at the end of the E&P tunnel? RIL management provided
positive commentary on D6 block E&P ramp-up, stating D1-D3 shortfall
could be made up through satellite fields and R-series fields’ production.
Key challenge was on regulatory approvals, with tie-up of these fields to
existing infrastructure technically feasible in 2 years after approvals.
2QFY12 – Petchem provides cushion: Petchem EBIT of Rs24.2bn was
ahead-of-expectations on the back of a rebound in domestic demand in
2Q that management attributed to re-stocking to normalized inventory
levels by downstream players and steady end-use demand. Polyester
chain margins were robust with tight PX and MEG markets in 2Q. RIL
expects polyester chain margins to sustain at higher levels with strong
PX spreads and ability of polyester to pass through higher intermediate
costs due to continuing differential vis-à-vis cotton.
Refining was a tad disappointing: Refining margins of US$10.1/bbl
was below our expectation of US$10.5/bbl. Management attributed
lower delta v/s Singapore benchmark to 1) tighter light-heavy
differentials, 2) correction in gasoil crack, 3) higher LNG fuel costs and
4) weaker LPG margins. While RIL expects refining margin
environment to be strong as they expect low delivery on expected cap
adds and continued demand from EM; we are cutting our complex GRM
expectations on poor outlook for Light-Heavy crude differentials as
Libya ramps-up crude production faster than earlier expected.
Retain OW, Sep-12 PT of Rs1140: We roll-over our PT basis to Sep-12
and incorporate conservative GRM, gas ramp-up assumptions. Key risk:
prolonged economic downturn, further regulatory delays
Thursday, October 27, 2011
Coal India Ltd. :: Diwali Picks 2011: GEPL Capital
Summary
Coal India ltd. (CIL) is the largest coal producing company in the world based on their raw coal
production, it supplies to 80% of India’s power production.
CIL to benefit from huge incremental potential for electricity generation from Coal
Coal supports around 52% of the primary energy consumption and over 80% of electricity
generation in India. Given the reserves of over 60 bn MT of coal, it can support 409 GW of
incremental power generation. Planned incremental capacity is expected to reach 196 GW from
current levels of 99GW by the end of XIIth five year plan. This would benefit coal India limited
over long term as it supplies to 80% of India’s power production.
Indian Power plants designed to use imported coal only to around 50% reduces the risk of
imports for CIL.
Given the huge demand supply gap of around 90 mn MT in FY11, which is expected to reach 170
to 200mn MT by end of FY12e as per the draft paper by planning commission poses a big
advantage to CIL primarily because of following two reasons.
• Firstly Indian power plants are not designed to take more than 50 % of imported coal
presently.
• Secondly imported coal meant for power plants being dearer by almost over 60% in
comparison to domestic coal, makes it costlier to resort to imported coal.
Accordingly the off take risk for CIL’s product remains negligible unlike players present in other
commodities such as steel and cement, who face huge off take risk.
Rise in e-auction price to aid CIL in long term
With 25% of CIL sales being done at close to international prices, together with sales of ~11% of
total sales through e-auction route and demand supply gap, we believe the prices of coal to
remain firm over next one year impacting CIL’s profitability positively over coming quarters.
The price increase for the linkage coal are not explicitly set out, however it aligns with inflation
and wage increase, we expect another price increase of around 10% during this year. Company
sells around 11% of total sales, through e-Auction with a premium to domestic linkage coal,
which has risen from 60% in FY10 to 80% levels during FY11.Currently the premiums are running
at 90%, with international coal prices expected to rise we see the premium to remain firms and
would benefit the CIL.
Valuation
The stock has corrected more than 14.5% in last one month against a correction of 1.6% in
sensex. While concerns over New Mining Bill for setting aside 26% of profit sharing to the
regional development around the mines, would impact the earnings of CIL in FY13E. Company’s
volume has grown at a CAGR of 5.6% over past 4 years. We believe the new mining bill once
implemented would help the company in getting approvals; mainly forest clearances. We are
positive on the CIL’s long term growth story, we have valued CIL on EV/EBIDTA basis at a target
price of Rs.395 per share with a target multiple of 8.5x on FY13E EBIDTA of Rs. 293bn.
Coal India ltd. (CIL) is the largest coal producing company in the world based on their raw coal
production, it supplies to 80% of India’s power production.
CIL to benefit from huge incremental potential for electricity generation from Coal
Coal supports around 52% of the primary energy consumption and over 80% of electricity
generation in India. Given the reserves of over 60 bn MT of coal, it can support 409 GW of
incremental power generation. Planned incremental capacity is expected to reach 196 GW from
current levels of 99GW by the end of XIIth five year plan. This would benefit coal India limited
over long term as it supplies to 80% of India’s power production.
Indian Power plants designed to use imported coal only to around 50% reduces the risk of
imports for CIL.
Given the huge demand supply gap of around 90 mn MT in FY11, which is expected to reach 170
to 200mn MT by end of FY12e as per the draft paper by planning commission poses a big
advantage to CIL primarily because of following two reasons.
• Firstly Indian power plants are not designed to take more than 50 % of imported coal
presently.
• Secondly imported coal meant for power plants being dearer by almost over 60% in
comparison to domestic coal, makes it costlier to resort to imported coal.
Accordingly the off take risk for CIL’s product remains negligible unlike players present in other
commodities such as steel and cement, who face huge off take risk.
Rise in e-auction price to aid CIL in long term
With 25% of CIL sales being done at close to international prices, together with sales of ~11% of
total sales through e-auction route and demand supply gap, we believe the prices of coal to
remain firm over next one year impacting CIL’s profitability positively over coming quarters.
The price increase for the linkage coal are not explicitly set out, however it aligns with inflation
and wage increase, we expect another price increase of around 10% during this year. Company
sells around 11% of total sales, through e-Auction with a premium to domestic linkage coal,
which has risen from 60% in FY10 to 80% levels during FY11.Currently the premiums are running
at 90%, with international coal prices expected to rise we see the premium to remain firms and
would benefit the CIL.
Valuation
The stock has corrected more than 14.5% in last one month against a correction of 1.6% in
sensex. While concerns over New Mining Bill for setting aside 26% of profit sharing to the
regional development around the mines, would impact the earnings of CIL in FY13E. Company’s
volume has grown at a CAGR of 5.6% over past 4 years. We believe the new mining bill once
implemented would help the company in getting approvals; mainly forest clearances. We are
positive on the CIL’s long term growth story, we have valued CIL on EV/EBIDTA basis at a target
price of Rs.395 per share with a target multiple of 8.5x on FY13E EBIDTA of Rs. 293bn.
Tuesday, October 25, 2011
Mahurat Picks for Diwali 2011 ::ShareKhan
Happy Diwali 2011
Dear investors,
We feel that though there are many challenges and concerns being faced by the market, its important
not to lose sight of the good investment opportunities that exists in quality stocks for the next 12-
18 months.
We present the best investment ideas across sectors (with technical levels to help you decide the
right entry and exit).
Happy Investing !!!
Mahurat Picks for Diwali 2011 (Click on link below for company specific details:)
Coal India
Divi’s Laboratories
Escorts
MindTree
Sintex
State Bank of India
Tata Chemicals
Tata Motors DVR
Tata Steel
V-Guard Industries
Dear investors,
We feel that though there are many challenges and concerns being faced by the market, its important
not to lose sight of the good investment opportunities that exists in quality stocks for the next 12-
18 months.
We present the best investment ideas across sectors (with technical levels to help you decide the
right entry and exit).
Happy Investing !!!
Mahurat Picks for Diwali 2011 (Click on link below for company specific details:)
Coal India
Divi’s Laboratories
Escorts
MindTree
Sintex
State Bank of India
Tata Chemicals
Tata Motors DVR
Tata Steel
V-Guard Industries
Monday, October 24, 2011
Pilani investment is going to be listed with NSE
The share of Pilani investment is going to be listed with NSE during
Muhurt trading of eve of Diwali
Currently this share is traded off market at Rs. 1800/2000.
The share may get listed at Rs. 3000: Target Rs 5000
The share of Pilani Investment, the Birla Group Company, is going to be listed with NSE during Muhurt trading on eve of Diwali. It may be recalled that the share of Pilani Investment is currently listed with Delhi
UBS : Sun TV - Reiterate our cautious view ; Rs300.00 price target
UBS Investment Research
Sun TV Limited
R eiterate our cautious view [EXTRACT]
Sun TV’s share price underperformed BSE Sensex index by 37% YTD
Sun TV’s share price is down 48% YTD due to newsflow regarding its Chairman’s
alleged involvement in a 2G scam and an unfavourable Tamil Nadu (TN) state
assembly election result, wherein the Dravida Munnetra Kazhagam (DMK) party
was voted out.
Fundamentals still intact; a worst-case FY13E EPS impact of a 27% drop
Our discussions with media experts affirmed our view that the fundamentals of Sun
TV’s business in TN are likely to remain intact in the near term despite negative
newsflow on the 2G scam and political/regulatory developments, such as Arasu
Cable’s launch. This is mainly due to Sun TV’s strong content offerings and large
movie library. We estimate a worst-case FY13E EPS impact of a 27% decline, if
its dominant viewership share comes under significant pressure in TN.
Maintain our anti-consensus cautious view
Newsflow suggests the Central Bureau of Investigation (CBI) has filed a first
information report against Sun TV’s chairman Kalanithi Maran and his brother
Dayanidhi Maran in relation to the 2G scam. We maintain our anti-consensus
cautious view on Sun TV as we believe further developments regarding the 2G
case could create an overhang for its share price in the near term.
Valuation: Sell rating; Rs300.00 price target
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. We assume a 15% WACC
to incorporate the above high-event risk. We believe the risk-reward profile is not
favourable at current levels.
Sun TV Limited
Sun TV Network Ltd (Sun) is the largest TV broadcaster in south India and has
channels catering for the four regional languages: Tamil; Telegu; Kannada; and
Malayalam. Kalanithi Maran is the majority shareholder with a 77% stake. Sun
and its two subsidiaries have radio licences in 44 cities.
Statement of Risk
We believe the company faces regulatory risks and competitive risks in its core
business of broadcasting.
Sun TV Limited
R eiterate our cautious view [EXTRACT]
Sun TV’s share price underperformed BSE Sensex index by 37% YTD
Sun TV’s share price is down 48% YTD due to newsflow regarding its Chairman’s
alleged involvement in a 2G scam and an unfavourable Tamil Nadu (TN) state
assembly election result, wherein the Dravida Munnetra Kazhagam (DMK) party
was voted out.
Fundamentals still intact; a worst-case FY13E EPS impact of a 27% drop
Our discussions with media experts affirmed our view that the fundamentals of Sun
TV’s business in TN are likely to remain intact in the near term despite negative
newsflow on the 2G scam and political/regulatory developments, such as Arasu
Cable’s launch. This is mainly due to Sun TV’s strong content offerings and large
movie library. We estimate a worst-case FY13E EPS impact of a 27% decline, if
its dominant viewership share comes under significant pressure in TN.
Maintain our anti-consensus cautious view
Newsflow suggests the Central Bureau of Investigation (CBI) has filed a first
information report against Sun TV’s chairman Kalanithi Maran and his brother
Dayanidhi Maran in relation to the 2G scam. We maintain our anti-consensus
cautious view on Sun TV as we believe further developments regarding the 2G
case could create an overhang for its share price in the near term.
Valuation: Sell rating; Rs300.00 price target
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. We assume a 15% WACC
to incorporate the above high-event risk. We believe the risk-reward profile is not
favourable at current levels.
Sun TV Limited
Sun TV Network Ltd (Sun) is the largest TV broadcaster in south India and has
channels catering for the four regional languages: Tamil; Telegu; Kannada; and
Malayalam. Kalanithi Maran is the majority shareholder with a 77% stake. Sun
and its two subsidiaries have radio licences in 44 cities.
Statement of Risk
We believe the company faces regulatory risks and competitive risks in its core
business of broadcasting.
BUY HCL, Target Price `545 :Angel Broking,
For 1QFY2012, HCL Technologies (HCL Tech) reported lower-than-expected
results. Volume growth during the quarter was modest at 5.1% qoq. The company
signed 12 transformational deals during the quarter. Management has indicated
that deal bookings will be higher in 4QCY2011 as compared to 9MCY2011,
which is indicated by TPI data – according to which ~US$8bn of restructuring
deals are coming for renewals in OND2011. HCL Tech has been a beneficiary of
the return in demand for enterprise services, and we expect it to ride on spending
on discretionary services. We maintain our Buy rating on the stock.
Quarterly highlights: For 1QFY2012, HCL Tech reported revenue of
US$1,002mn, up 4.1% qoq, on the back of 5.1% qoq volume growth (volume
growth of 4.0% qoq in core software services and 5.8% qoq in infrastructure
services). EBITDA and EBIT margins declined by 138bp and 120bp qoq to 17.1%
and 14.3%, respectively, because of 200bp negative impact due to wage hikes
given during the quarter – this impact was partially absorbed by qoq depreciating
INR against USD. PAT came in at `497cr, negatively affected by `18cr forex loss.
Outlook and valuation: Management is witnessing a strong demand environment
and has signed 12 transformational deals in 1QFY2012 itself on the back of 20
sign-offs in 4QFY2011. We expect HCL Tech to be the outperformer among tier-I
IT companies, with USD and INR revenue CAGR of 19.6% and 20.6%,
respectively, over FY2011–13E, on the back of its higher-value services portfolio.
At the operating front, levers such as 1) managing SG&A, 2) expanding utilization
and 3) turnaround in the BPO segment are expected to improve margins.
Thus, we expect EBITDA to grow at a 22.5% CAGR over FY2011–13E. PAT, on the
other hand, is expected to post a much higher CAGR of 27.7%, with improving
profitability, forex gains on hedges and treasury gains. We maintain our Buy
rating on the stock with a target price of `545.
results. Volume growth during the quarter was modest at 5.1% qoq. The company
signed 12 transformational deals during the quarter. Management has indicated
that deal bookings will be higher in 4QCY2011 as compared to 9MCY2011,
which is indicated by TPI data – according to which ~US$8bn of restructuring
deals are coming for renewals in OND2011. HCL Tech has been a beneficiary of
the return in demand for enterprise services, and we expect it to ride on spending
on discretionary services. We maintain our Buy rating on the stock.
Quarterly highlights: For 1QFY2012, HCL Tech reported revenue of
US$1,002mn, up 4.1% qoq, on the back of 5.1% qoq volume growth (volume
growth of 4.0% qoq in core software services and 5.8% qoq in infrastructure
services). EBITDA and EBIT margins declined by 138bp and 120bp qoq to 17.1%
and 14.3%, respectively, because of 200bp negative impact due to wage hikes
given during the quarter – this impact was partially absorbed by qoq depreciating
INR against USD. PAT came in at `497cr, negatively affected by `18cr forex loss.
Outlook and valuation: Management is witnessing a strong demand environment
and has signed 12 transformational deals in 1QFY2012 itself on the back of 20
sign-offs in 4QFY2011. We expect HCL Tech to be the outperformer among tier-I
IT companies, with USD and INR revenue CAGR of 19.6% and 20.6%,
respectively, over FY2011–13E, on the back of its higher-value services portfolio.
At the operating front, levers such as 1) managing SG&A, 2) expanding utilization
and 3) turnaround in the BPO segment are expected to improve margins.
Thus, we expect EBITDA to grow at a 22.5% CAGR over FY2011–13E. PAT, on the
other hand, is expected to post a much higher CAGR of 27.7%, with improving
profitability, forex gains on hedges and treasury gains. We maintain our Buy
rating on the stock with a target price of `545.
Larsen and Toubro (L&T) :: 2QFY2012 - Result Review: Angel Broking,
Result Reviews
L&T
Larsen and Toubro (L&T) posted good set of numbers for 2QFY2012, which were
above our expectations mainly on account of good top-line performance.
On the order booking front, L&T has an order backlog of `1,42,185cr as of
2QFY2012. Order inflow for the quarter stood at `16,096cr (`20,464cr), led by
the infrastructure segment (31%). The company has significantly cut its guidance of
order inflow from 15-20% to 5% for FY2012, mainly to factor in general slowdown
faced by the sector; but it has maintained revenue growth guidance of 25% for the
whole year, which we believe is aggressive. We believe L&T is best placed to
benefit from the gradual recovery in the capex cycle, given its diverse exposure to
sectors, strong balance sheet and cash flow generation as compared to its peers.
Further, at current valuations, after an underperformance of ~16.5% to BSE
Sensex over the last three months, we believe most of the negatives are factored in
and, hence, we maintain our Buy view on the stock with a revised target price of
`1,714 (`1,857). We have assigned lowered PE multiple of 18x (earlier 19x) to
L&T parent’s FY2013E EPS of `76.4 and its subsidiaries to factor in macro
headwinds faced by the sector and economy.
L&T
Larsen and Toubro (L&T) posted good set of numbers for 2QFY2012, which were
above our expectations mainly on account of good top-line performance.
On the order booking front, L&T has an order backlog of `1,42,185cr as of
2QFY2012. Order inflow for the quarter stood at `16,096cr (`20,464cr), led by
the infrastructure segment (31%). The company has significantly cut its guidance of
order inflow from 15-20% to 5% for FY2012, mainly to factor in general slowdown
faced by the sector; but it has maintained revenue growth guidance of 25% for the
whole year, which we believe is aggressive. We believe L&T is best placed to
benefit from the gradual recovery in the capex cycle, given its diverse exposure to
sectors, strong balance sheet and cash flow generation as compared to its peers.
Further, at current valuations, after an underperformance of ~16.5% to BSE
Sensex over the last three months, we believe most of the negatives are factored in
and, hence, we maintain our Buy view on the stock with a revised target price of
`1,714 (`1,857). We have assigned lowered PE multiple of 18x (earlier 19x) to
L&T parent’s FY2013E EPS of `76.4 and its subsidiaries to factor in macro
headwinds faced by the sector and economy.
Persistent Systems- Performance highlights: Angel Broking,
For 2QFY2012, Persistent Systems (Persistent) reported numbers that were almost in-line with our as well as street expectations on the revenue front; however, it outperformed the street as well as our expectations on the operating and profitability front. Though management has maintained its PAT guidance for FY2012 of having it at least flat yoy despite the surge in tax rates to 31% from 7% in FY2011, but its commentary has turned highly cautious. Persistent is into pure-play offshore product development (OPD), which is highly discretionary in nature and, thus, poses a huge risk for the company if any slowdown kicks in the economies. We recommend Neutral on the stock. Quarterly highlights: For 2QFY2012, Persistent reported revenue of US$51.5mn, up 3.1% qoq, majorly led by volume growth. In INR terms, revenue came in at `238.2cr, up by whopping 6.4% qoq. Despite giving wage hikes, EBITDA margin grew by 112bp qoq to 19.0%, aided by higher INR revenue growth due to qoq depreciating INR, lower SG&A expenses and wage hikes not applicable for the full employee base. PAT came in at `32.4cr, aided by higher other income due to tax-free dividend of `1.2cr, which led to lower tax outgo as well. Outlook and valuation: Persistent, due to its niche focus on OPD, is exposed to a high amount of risk if any slowdown kicks in the developed economies. This, along with the cautious commentary by management, poses a downside risk to management’s guidance of 29% yoy revenue growth in FY2012. Thus, we have trimmed our USD revenue growth estimates for FY2012 to 24.1% from 30.0% earlier. Over FY2011-13E, the company is expected to record USD and INR revenue CAGR of 18.9% and 19.4%, respectively. On the EBITDA margin front, we expect margin to dip to 19.9% for FY2012 and remain at 20.0% in FY2013 from 20.4% in FY2011, as we do not expect higher growth in high-margin IP-led revenue (due to its lumpy nature). Thus, over FY2011-13E, we expect the company to record EBITDA and PAT CAGR of 18.2% and 2.5%, respectively. We value the stock at 9x FY2013 EPS, which gives us a target price of `330, and recommend Neutral on the stock.
Friday, October 21, 2011
Power Grid �� Capex and capacity addition going strong, ::HSBC Research
Power Grid
�� Capex and capacity addition going strong, 2Q net profit expected
to grow 15% y-o-y
�� Best placed in the sector with limited operational risks unlike peers;
earnings outlook is strong on the back of capacity expansion
�� Reiterate Overweight rating with a target price of INR130
2Q preview – expect good numbers
We expect Power Grid to report net profit of
INR7.5bn (up 15% y-o-y) on the back of
increased capacity addition (INR75bn in FY11)
and additional income from the JV amounting to
INR410m relating to 1QFY12.
We expect the firm to incur capex of INR35-40bn
in 2QFY12 (INR135bn for FY12e), and capacity
additions of INR20bn (INR100bn in FY12).
Strong outlook, limited operational
risks unlike its peers
Regulated equity base is expected to more than
double over next three years from INR129bn in
FY11 to INR273bn in FY15. It has cINR265bn of
capital work in progress (largely capex from
FY10-FY11) to be translated into assets over the
next two to three years, providing more visibility
in the growth in the regulated equity base. This
drives our expectation that net profit will grow at
a 15.5% CAGR over FY12-14 from a high base of
FY11. We do not see any significant downside
risks to these earnings estimates, given the
assured return model (15.5% post-tax ROE) once
the asset is operational.
Operational risks are limited compared to a
power plant. There is no fuel cost risk, with its
major costs being those for employees and
maintenance, which are largely fixed in nature
and not volatile.
Investor focus on capex and capacity
addition
PGCIL is expected to complete its eleventh fiveyear
plan ending FY12 with total capex of
INR520bn (versus a target of INR550bn). This
represents a significant c177% increase over the
last plan period.
We do not expect any slowdown in capex post the
plan period (contrary to market fears). We
forecast PGCIL will incur capex of INR276bn and
capacity addition of INR240bn in FY13-14
similar to FY12. This would be driven by about
INR430bn of projects under construction and
INR580bn worth of ordering for high capacity
power transmission corridors (HCPTC) projects
expected to start in 2HFY12.
Still, we remain conservative, factoring capex of
INR800bn for the twelfth plan period (FY13-17)
against the company’s guidance of INR1,100-
1,200bn.
Reiterate Overweight rating with a TP
of INR130We use DCF to value Power Grid and apply a cost
of equity of 10.3% and terminal growth rate of
3% to derive our target price of INR130 per share.
Our target price of INR130 implies a potential
return of 32.9% (including dividend yield), which
is above the Neutral band for non-volatile Indian
stocks of 6-16%; thus, we have an Overweight
rating on the stock.
Our target price implies an FY13e PB of 2.3x versus
the current FY12e PB of 2.0x, and an FY13e PE of
17.2x versus the current FY12e PE of 15.1x.
Risks
Key downside risks include longer-than-expected
delays in commissioning of projects. Other risks
include a potential default by SEB and a reduction
in regulated returns, although both look highly
improbable in the immediate future.
�� Capex and capacity addition going strong, 2Q net profit expected
to grow 15% y-o-y
�� Best placed in the sector with limited operational risks unlike peers;
earnings outlook is strong on the back of capacity expansion
�� Reiterate Overweight rating with a target price of INR130
2Q preview – expect good numbers
We expect Power Grid to report net profit of
INR7.5bn (up 15% y-o-y) on the back of
increased capacity addition (INR75bn in FY11)
and additional income from the JV amounting to
INR410m relating to 1QFY12.
We expect the firm to incur capex of INR35-40bn
in 2QFY12 (INR135bn for FY12e), and capacity
additions of INR20bn (INR100bn in FY12).
Strong outlook, limited operational
risks unlike its peers
Regulated equity base is expected to more than
double over next three years from INR129bn in
FY11 to INR273bn in FY15. It has cINR265bn of
capital work in progress (largely capex from
FY10-FY11) to be translated into assets over the
next two to three years, providing more visibility
in the growth in the regulated equity base. This
drives our expectation that net profit will grow at
a 15.5% CAGR over FY12-14 from a high base of
FY11. We do not see any significant downside
risks to these earnings estimates, given the
assured return model (15.5% post-tax ROE) once
the asset is operational.
Operational risks are limited compared to a
power plant. There is no fuel cost risk, with its
major costs being those for employees and
maintenance, which are largely fixed in nature
and not volatile.
Investor focus on capex and capacity
addition
PGCIL is expected to complete its eleventh fiveyear
plan ending FY12 with total capex of
INR520bn (versus a target of INR550bn). This
represents a significant c177% increase over the
last plan period.
We do not expect any slowdown in capex post the
plan period (contrary to market fears). We
forecast PGCIL will incur capex of INR276bn and
capacity addition of INR240bn in FY13-14
similar to FY12. This would be driven by about
INR430bn of projects under construction and
INR580bn worth of ordering for high capacity
power transmission corridors (HCPTC) projects
expected to start in 2HFY12.
Still, we remain conservative, factoring capex of
INR800bn for the twelfth plan period (FY13-17)
against the company’s guidance of INR1,100-
1,200bn.
Reiterate Overweight rating with a TP
of INR130We use DCF to value Power Grid and apply a cost
of equity of 10.3% and terminal growth rate of
3% to derive our target price of INR130 per share.
Our target price of INR130 implies a potential
return of 32.9% (including dividend yield), which
is above the Neutral band for non-volatile Indian
stocks of 6-16%; thus, we have an Overweight
rating on the stock.
Our target price implies an FY13e PB of 2.3x versus
the current FY12e PB of 2.0x, and an FY13e PE of
17.2x versus the current FY12e PE of 15.1x.
Risks
Key downside risks include longer-than-expected
delays in commissioning of projects. Other risks
include a potential default by SEB and a reduction
in regulated returns, although both look highly
improbable in the immediate future.
Thursday, October 20, 2011
Coal India – Back to basics:: RBS
We believe Coal India will not be able to offset its steep 1H volume shortfall in 2HFY12. Any
significant diversion of e-auction volumes to the power sector at notified prices would likely
have a significant impact on its earnings. We cut our FY12/13 EBITDA forecasts 17% each
and maintain a Sell rating.
Volume losses unlikely to be offset in 2H; we cut our volume forecasts 6% for FY12/13
Production volumes in 1HFY12 totalled 176Mt (down 5% yoy and versus the company’s
target of 196Mt). While 1Q production (at 96Mt) was flat yoy, 2Q production (at 80Mt) was
11% lower yoy due to excessive rain in key mining areas. We expect Coal India to
significantly miss its FY12 target of 452Mt. Although we believe volumes should recover
strongly in 2H, we do not believe it will be enough the offset a weak 1H. Railway rake
availability would be key as volumes ramp up, and volumes could further play spoilsport. We
cut our FY12/13 production volume forecasts 6% to 421Mt/438Mt, respectively.
Diversion of e-action coal to the power sector could hurt realisations
Despite the company’s power capacity having risen to 18-20GW since March 2009, Coal India,
with its production growth constrained, has not been able to sign new fuel supply agreements
(FSAs) with power utilities. With new capacities facing a serious shortage of coal, the Coal
Ministry has asked Coal India to divert 4Mt of e-auction volumes to be sold in October to the
power sector. With e-auction realisations at an 80-90% premium to FSAs, any significant
diversion of e-auction volumes at notified prices would significantly hurt earnings. Although this
may well be a one-off occurrence, it indicates an environment in which further increases in eauction
volumes is unlikely. We reduce our realisation estimates 2% each for FY12/13 to
Rs1,371/1,423/t, respectively.
We cut our FY12/13 EBITDA forecasts 17% each and maintain a Sell rating
With lower volumes and realisations, we cut our FY12/13 EBITDA forecasts 17% each. Wage
revisions for non-executives (85% of the workforce) and bonus payments are pending, with
negotiations under way. We model 23%/8% increases in employee expenses for FY12/13,
respectively. We note that the Mines and Mineral Development Regulation bill in its current form
could have a 15% impact on our FY13 earnings forecast. Our new DCF-based TP is Rs285. Sell
significant diversion of e-auction volumes to the power sector at notified prices would likely
have a significant impact on its earnings. We cut our FY12/13 EBITDA forecasts 17% each
and maintain a Sell rating.
Volume losses unlikely to be offset in 2H; we cut our volume forecasts 6% for FY12/13
Production volumes in 1HFY12 totalled 176Mt (down 5% yoy and versus the company’s
target of 196Mt). While 1Q production (at 96Mt) was flat yoy, 2Q production (at 80Mt) was
11% lower yoy due to excessive rain in key mining areas. We expect Coal India to
significantly miss its FY12 target of 452Mt. Although we believe volumes should recover
strongly in 2H, we do not believe it will be enough the offset a weak 1H. Railway rake
availability would be key as volumes ramp up, and volumes could further play spoilsport. We
cut our FY12/13 production volume forecasts 6% to 421Mt/438Mt, respectively.
Diversion of e-action coal to the power sector could hurt realisations
Despite the company’s power capacity having risen to 18-20GW since March 2009, Coal India,
with its production growth constrained, has not been able to sign new fuel supply agreements
(FSAs) with power utilities. With new capacities facing a serious shortage of coal, the Coal
Ministry has asked Coal India to divert 4Mt of e-auction volumes to be sold in October to the
power sector. With e-auction realisations at an 80-90% premium to FSAs, any significant
diversion of e-auction volumes at notified prices would significantly hurt earnings. Although this
may well be a one-off occurrence, it indicates an environment in which further increases in eauction
volumes is unlikely. We reduce our realisation estimates 2% each for FY12/13 to
Rs1,371/1,423/t, respectively.
We cut our FY12/13 EBITDA forecasts 17% each and maintain a Sell rating
With lower volumes and realisations, we cut our FY12/13 EBITDA forecasts 17% each. Wage
revisions for non-executives (85% of the workforce) and bonus payments are pending, with
negotiations under way. We model 23%/8% increases in employee expenses for FY12/13,
respectively. We note that the Mines and Mineral Development Regulation bill in its current form
could have a 15% impact on our FY13 earnings forecast. Our new DCF-based TP is Rs285. Sell
Reliance Industries – 2QFY12 results: no surprises :: RBS
RIL reported in-line 2QFY12 results. The BP transaction is effective from 30 Aug 2011 and we
believe that RIL's standalone balance sheet would have moved to a net cash position on 3
October 2011 (when the final cash instalment from BP was received). We maintain our earnings
estimates, Buy rating and TP of Rs925.
Overall results in line
RIL reported 2QFY12 net profit of Rs57bn (16% yoy), which was in line with our as well as
Bloomberg consensus expectations. The BP transaction was effective from 30 August 2011,
meaning that the drop in stake in KG-D6 block from 90% to 60% was effective from that date.
The final transaction value (which was value of US$7.2bn agreed on 1 January 2011 less
cash inflows due to BP by 30 August 2011) worked out to Rs322bn, which was adjusted
against the cost of the assets. As a result of this adjustment, the drop in depreciation for the
month of September was Rs2.7bn. Consequently, the depreciation costs in 2HFY12 would
broadly decline at that rate (also depending upon production rate).
Gross debt at Rs714bn was up Rs44bn qoq only due to rupee depreciation. Net debt at end
of quarter was Rs99.1bn (compared to Rs212.6bn at end of 1QFY12). At end of 2QFY12, the
last instalment due from BP was Rs147bn, which was disclosed under 'Other current assets'.
This amount was realised on 3 October 2011, which leads us to believe that RIL standalone
would now be a net cash company.
E&P segment
Segment EBIT at Rs15.3bn (down 10.3% yoy) was in-line with expectations. KG-D6 gross
gas production was 44.8mmscmd in 2QFY1 2 (down from 48.1 in 1QFY12) and management
has not provided any guidance on the near-term production profile. RIL and BP are now keen
to develop the balance discoveries in KG-D6 and expect the additional production to start
from 2015 (we are assuming 2016).
RIL and BP have decided to review afresh the entire exploration portfolio and new drilling has
been stopped until completion of this review. Given that each block needs to be explored
within a specified period, the Indian government (GOI) may need to be asked to extend these
deadlines. RIL/BP are unlikely to commence drilling unless these GOI extensions are in
place.
RIL's CBM block can potentially produce 4mmscmd and it is currently seeking GOI approval
to price this gas at per LNG long-term contracts. For evacuation of this gas, a 300km pipeline
connection to GAIL's HVJ pipeline needs to be built, which would take 24 months. Pipeline
construction would commence only after GOI approves the gas price.
R&M segment
Segment EBIT at Rs30.8 (up 40.3% yoy) was 6% below our estimates. Refining throughput
was 17.1mmt (our estimate 16.9mmt) while GRM was US$10.1/bbl (US$10.2/bbl). While
Singapore GRMs were strong (US$9.2/bbl vs US$8.8/bbl in 1QFY12), they were driven by
higher margins for gasoline and fuel oil. The relative weakness in RIL GRMs were on account
of lower crude differentials (US$3.8/bbl vs US$5/bbl in 1QFY12) and lower margins for diesel
(US$17.1 vs US$15.1 in 1QFY12). Further, most of the internal gas consumption was
sourced via LNG where pricing has strengthened.
Petrochem segment
Segment EBIT at Rs24.2bn (up 10.2% yoy) was up 13% yoy. Realised margins appear to be
better than our estimates driven by a sharp 21% qoq improvement in demand for both
polymers and polyester.
The final investment decision for the two mega projects (petchem cracker and coke
gasification) is still pending. Project economics are improving as time is passing (costs are
coming down) and the company is obviously trying to get the capex cycle right.
The polyester and polyester intermediate projects appear on track for completion by 2HCY13.
Other issues
Asset capitalisation during the quarter of Rs54.9bn was mainly on account of capitalisation of
forex losses (Rs45bn). The actual cash spending on new assets was just Rs8.5bn.
RIL management did not provide any guidance on timing of the launch for the telecom
operations.
During 1HFY12, RIL standalone invested an additional Rs8bn in retail operations, Rs2.5bn in
telecom and Rs2bn in SEZs.
believe that RIL's standalone balance sheet would have moved to a net cash position on 3
October 2011 (when the final cash instalment from BP was received). We maintain our earnings
estimates, Buy rating and TP of Rs925.
Overall results in line
RIL reported 2QFY12 net profit of Rs57bn (16% yoy), which was in line with our as well as
Bloomberg consensus expectations. The BP transaction was effective from 30 August 2011,
meaning that the drop in stake in KG-D6 block from 90% to 60% was effective from that date.
The final transaction value (which was value of US$7.2bn agreed on 1 January 2011 less
cash inflows due to BP by 30 August 2011) worked out to Rs322bn, which was adjusted
against the cost of the assets. As a result of this adjustment, the drop in depreciation for the
month of September was Rs2.7bn. Consequently, the depreciation costs in 2HFY12 would
broadly decline at that rate (also depending upon production rate).
Gross debt at Rs714bn was up Rs44bn qoq only due to rupee depreciation. Net debt at end
of quarter was Rs99.1bn (compared to Rs212.6bn at end of 1QFY12). At end of 2QFY12, the
last instalment due from BP was Rs147bn, which was disclosed under 'Other current assets'.
This amount was realised on 3 October 2011, which leads us to believe that RIL standalone
would now be a net cash company.
E&P segment
Segment EBIT at Rs15.3bn (down 10.3% yoy) was in-line with expectations. KG-D6 gross
gas production was 44.8mmscmd in 2QFY1 2 (down from 48.1 in 1QFY12) and management
has not provided any guidance on the near-term production profile. RIL and BP are now keen
to develop the balance discoveries in KG-D6 and expect the additional production to start
from 2015 (we are assuming 2016).
RIL and BP have decided to review afresh the entire exploration portfolio and new drilling has
been stopped until completion of this review. Given that each block needs to be explored
within a specified period, the Indian government (GOI) may need to be asked to extend these
deadlines. RIL/BP are unlikely to commence drilling unless these GOI extensions are in
place.
RIL's CBM block can potentially produce 4mmscmd and it is currently seeking GOI approval
to price this gas at per LNG long-term contracts. For evacuation of this gas, a 300km pipeline
connection to GAIL's HVJ pipeline needs to be built, which would take 24 months. Pipeline
construction would commence only after GOI approves the gas price.
R&M segment
Segment EBIT at Rs30.8 (up 40.3% yoy) was 6% below our estimates. Refining throughput
was 17.1mmt (our estimate 16.9mmt) while GRM was US$10.1/bbl (US$10.2/bbl). While
Singapore GRMs were strong (US$9.2/bbl vs US$8.8/bbl in 1QFY12), they were driven by
higher margins for gasoline and fuel oil. The relative weakness in RIL GRMs were on account
of lower crude differentials (US$3.8/bbl vs US$5/bbl in 1QFY12) and lower margins for diesel
(US$17.1 vs US$15.1 in 1QFY12). Further, most of the internal gas consumption was
sourced via LNG where pricing has strengthened.
Petrochem segment
Segment EBIT at Rs24.2bn (up 10.2% yoy) was up 13% yoy. Realised margins appear to be
better than our estimates driven by a sharp 21% qoq improvement in demand for both
polymers and polyester.
The final investment decision for the two mega projects (petchem cracker and coke
gasification) is still pending. Project economics are improving as time is passing (costs are
coming down) and the company is obviously trying to get the capex cycle right.
The polyester and polyester intermediate projects appear on track for completion by 2HCY13.
Other issues
Asset capitalisation during the quarter of Rs54.9bn was mainly on account of capitalisation of
forex losses (Rs45bn). The actual cash spending on new assets was just Rs8.5bn.
RIL management did not provide any guidance on timing of the launch for the telecom
operations.
During 1HFY12, RIL standalone invested an additional Rs8bn in retail operations, Rs2.5bn in
telecom and Rs2bn in SEZs.
Wednesday, October 19, 2011
Larsen & Toubro – Slowdown looks priced in ::RBS
The current investment cycle slowdown has been led by internal factors, vs external factors in the
previous cycle, and hence recovery will likely be slow. The current price seems to factor in a
sluggish recovery and possible cut in guidance. Thus, we resume coverage with a Buy rating and
Rs1,575 target price.
Slowdown led by internal factors; recovery likely to be weak
The present investment cycle slowdown is led by cyclical (high interest rate) and structural issues
(fuel shortages, EC clearances, corruption, etc). We expect recovery to be slower than in the last
cycle (2008-2009) as the current slowdown has been led by internal factors, rather than external
factors as in the previous cycle.
Weak macro, award deferrals, increasing competition all weigh on order inflows
Our analysis of L&T’s potential order list (see table 5) suggests a lack of buoyancy due to macro
issues (power, process), award deferrals (roads, ports, metro, power) and/or greater competition
(from hydrocarbon, power segments). Any potential market share gains in infrastructure (factories
& buildings, roads) will not easily offset the slowdown in other segments. While L&T has won
Rs252bn in orders (announced) so far, it will have to win another Rs665bn to meet its 15% growth
guidance for FY12 (FY11 order inflow was Rs798bn), which looks difficult. We expect order inflow
to grow 2% /12%/11% in FY12/ FY13/FY14.
Medium-term margins at risk
L&T’s EBITDA margin rose from 6% in FY04 to 12.8% in FY11; a cyclical high led by operating
leverage and efficiency gains. The company has already guided for a 50-75bp yoy margin decline
in FY12. Given the weak macro outlook and increasing competition across segments, new order
intake at potentially lower margins could drag down overall margins for FY13/FY14, in our view.
We forecast standalone EBITDA margins will decline 75bp in FY12 to 12.1% and 75bp in FY13 to
11.3%, with FY14 margins the same as FY13.
Current price appears to factor in macro/micro headwinds
We believe that at the current consolidated P/E of 14.8x FY13F (40% discount to historical
average), the majority of macro headwinds and potential guidance downgrades are already
priced in. Risk-reward looks favourable. Resuming coverage with Buy and Rs1,575 TP
previous cycle, and hence recovery will likely be slow. The current price seems to factor in a
sluggish recovery and possible cut in guidance. Thus, we resume coverage with a Buy rating and
Rs1,575 target price.
Slowdown led by internal factors; recovery likely to be weak
The present investment cycle slowdown is led by cyclical (high interest rate) and structural issues
(fuel shortages, EC clearances, corruption, etc). We expect recovery to be slower than in the last
cycle (2008-2009) as the current slowdown has been led by internal factors, rather than external
factors as in the previous cycle.
Weak macro, award deferrals, increasing competition all weigh on order inflows
Our analysis of L&T’s potential order list (see table 5) suggests a lack of buoyancy due to macro
issues (power, process), award deferrals (roads, ports, metro, power) and/or greater competition
(from hydrocarbon, power segments). Any potential market share gains in infrastructure (factories
& buildings, roads) will not easily offset the slowdown in other segments. While L&T has won
Rs252bn in orders (announced) so far, it will have to win another Rs665bn to meet its 15% growth
guidance for FY12 (FY11 order inflow was Rs798bn), which looks difficult. We expect order inflow
to grow 2% /12%/11% in FY12/ FY13/FY14.
Medium-term margins at risk
L&T’s EBITDA margin rose from 6% in FY04 to 12.8% in FY11; a cyclical high led by operating
leverage and efficiency gains. The company has already guided for a 50-75bp yoy margin decline
in FY12. Given the weak macro outlook and increasing competition across segments, new order
intake at potentially lower margins could drag down overall margins for FY13/FY14, in our view.
We forecast standalone EBITDA margins will decline 75bp in FY12 to 12.1% and 75bp in FY13 to
11.3%, with FY14 margins the same as FY13.
Current price appears to factor in macro/micro headwinds
We believe that at the current consolidated P/E of 14.8x FY13F (40% discount to historical
average), the majority of macro headwinds and potential guidance downgrades are already
priced in. Risk-reward looks favourable. Resuming coverage with Buy and Rs1,575 TP
NHPC – Delays the only constant ::RBS
NHPC will likely add 1.7GW capacity in the XIth Plan vs target of 5.4GW. Barring 3.7GW spillover
capacity to be commissioned in the XIIth Plan, NHPC has signed no new PPAs in the last several
years, which raises concerns for future growth. Though valuations provide partial comfort, more
needs to be done.
Capacity addition delays will continue to haunt NHPC
In the best case scenario, NHPC is likely to add 1.7GW of generation capacity in the XIth Plan, or
31% of the original target. We expect the remaining 3.7GW from the XIth Plan to be
commissioned between FY13-16 and for it to be back-ended, with FY15-16 likely to see a 2GW
addition; further delays cannot be ruled out. We believe that delays will continue to be a recurring
feature for hydro projects, led by geological surprises, natural calamities and local protests. As
per our estimates, without any delays our core book would have been higher by Rs5/share and
target price by Rs10/share.
Is NHPC’s long-term growth at risk?
As said earlier, NHPC will add 3.7GW in the XIIth Plan, which should ideally have been
commissioned in the XIth plan. Note that NHPC has not signed PPAs for any new projects in the
last several years, despite pipeline projects of over 15GW. This is largely because most projects
are stuck at different stages of clearance from state and central bodies. Also, state governments
have been reluctant to sign PPAs with NHPC (despite all the initial work done by NHPC) as
private companies are offering a higher free share of power, for example, to the state vs NHPC.
The Ministry of Power (MoP) recently decided to allow developers of hydro projects to sign PPAs
on a cost-plus basis until December 2015, provided all the clearances are received, a PPA is
signed, financial closure is done and work has started for the project. MoP’s supplementary
conditions have put additional burden on NHPC to prove itself, otherwise its long-term growth will
be at risk.
Our Buy rating is purely on cheap valuations as the stock is trading below FY13F book
NHPC is currently trading at 0.98x FY13F P/BV, which we believe factors in most of our
concerns. Our one-year forward SOTP-based target price for NHPC is Rs26, which assigns
P/BVs of 2x to core equity and 1x for investment and cash. Our target price implies a target
multiple of 1.1x on FY13F balance sheet book value.
capacity to be commissioned in the XIIth Plan, NHPC has signed no new PPAs in the last several
years, which raises concerns for future growth. Though valuations provide partial comfort, more
needs to be done.
Capacity addition delays will continue to haunt NHPC
In the best case scenario, NHPC is likely to add 1.7GW of generation capacity in the XIth Plan, or
31% of the original target. We expect the remaining 3.7GW from the XIth Plan to be
commissioned between FY13-16 and for it to be back-ended, with FY15-16 likely to see a 2GW
addition; further delays cannot be ruled out. We believe that delays will continue to be a recurring
feature for hydro projects, led by geological surprises, natural calamities and local protests. As
per our estimates, without any delays our core book would have been higher by Rs5/share and
target price by Rs10/share.
Is NHPC’s long-term growth at risk?
As said earlier, NHPC will add 3.7GW in the XIIth Plan, which should ideally have been
commissioned in the XIth plan. Note that NHPC has not signed PPAs for any new projects in the
last several years, despite pipeline projects of over 15GW. This is largely because most projects
are stuck at different stages of clearance from state and central bodies. Also, state governments
have been reluctant to sign PPAs with NHPC (despite all the initial work done by NHPC) as
private companies are offering a higher free share of power, for example, to the state vs NHPC.
The Ministry of Power (MoP) recently decided to allow developers of hydro projects to sign PPAs
on a cost-plus basis until December 2015, provided all the clearances are received, a PPA is
signed, financial closure is done and work has started for the project. MoP’s supplementary
conditions have put additional burden on NHPC to prove itself, otherwise its long-term growth will
be at risk.
Our Buy rating is purely on cheap valuations as the stock is trading below FY13F book
NHPC is currently trading at 0.98x FY13F P/BV, which we believe factors in most of our
concerns. Our one-year forward SOTP-based target price for NHPC is Rs26, which assigns
P/BVs of 2x to core equity and 1x for investment and cash. Our target price implies a target
multiple of 1.1x on FY13F balance sheet book value.
Power Grid – Steady growth ::RBS
Power Grid (PWGR) has a low-risk business model, earning a regulated return of 17-18% on its
core book. We expect its core book to rise by an average Rs90bn annually over the next five
years vs an average Rs45bn annually over FY08-10, which would drive earnings by a 14%
CAGR over FY11-14F. Buy.
Higher power capacity addition is a positive for PWGR
According to Central Electricity Regulatory Commission (CERC) norms, PWGR earns an ROE on
capitalised assets. The company is penalised for any delays in capitalisation due to delays in
generation capacity addition that are beyond its control. Hence, PWGR’s asset capitalisation
averaged Rs45bn annually in FY08-10, when India added only 19GW in the first three years of
the XIth Plan vs the Plan target of 62GW. But capitalisation rose to Rs73bn in FY11 as capacity
increased to 12.5GW. We forecast annual capitalisation of Rs90bn in the next five years as
capacity addition picks up based on India’s target of adding 20GW annually for the next five
years. This should help drive PWGR’s earnings by a 14% CAGR over FY11-14F. The value of
PWGR’s projects under construction has risen to about Rs800bn as of March 2011 vs about
Rs400bn as of March 2009, which clearly points to increased capitalisation in the next few years.
Earnings from consultancy and telecom to increase
About 9% of PWGR’s FY11 EBIT was from ancillary businesses such as consultancy (4.4% of
total EBIT), ULDC (3.3% of total EBIT) and telecom bandwidth leasing (1% of total EBIT). All
these require little incremental capital but help increase reported ROE. Also, PWGR has initiated
the process of leasing telecom towers from a nationwide network of 150,000 towers (it could
lease 10-15% based on company’s study) and has sought regulatory approval for determining
revenue-sharing with transmission beneficiaries.
We prefer PWGR to other Indian utilities
We prefer PWGR to other Indian utilities as: 1) it is partially insulated from coal shortage issues
faced by power generators; 2) low risk to our earnings CAGR of 14% over FY11-14F; 3) it factors
in no tax arbitrage profits (NTPC and NHPC do) and so there is no downside risk from this; and 4)
we think the stock should outperform given its earnings quality, strong momentum and
sustainable ROE. At 1.76x FY13F BV, valuations look reasonable to us. We resume coverage
with a Buy rating and Rs110 target price.
core book. We expect its core book to rise by an average Rs90bn annually over the next five
years vs an average Rs45bn annually over FY08-10, which would drive earnings by a 14%
CAGR over FY11-14F. Buy.
Higher power capacity addition is a positive for PWGR
According to Central Electricity Regulatory Commission (CERC) norms, PWGR earns an ROE on
capitalised assets. The company is penalised for any delays in capitalisation due to delays in
generation capacity addition that are beyond its control. Hence, PWGR’s asset capitalisation
averaged Rs45bn annually in FY08-10, when India added only 19GW in the first three years of
the XIth Plan vs the Plan target of 62GW. But capitalisation rose to Rs73bn in FY11 as capacity
increased to 12.5GW. We forecast annual capitalisation of Rs90bn in the next five years as
capacity addition picks up based on India’s target of adding 20GW annually for the next five
years. This should help drive PWGR’s earnings by a 14% CAGR over FY11-14F. The value of
PWGR’s projects under construction has risen to about Rs800bn as of March 2011 vs about
Rs400bn as of March 2009, which clearly points to increased capitalisation in the next few years.
Earnings from consultancy and telecom to increase
About 9% of PWGR’s FY11 EBIT was from ancillary businesses such as consultancy (4.4% of
total EBIT), ULDC (3.3% of total EBIT) and telecom bandwidth leasing (1% of total EBIT). All
these require little incremental capital but help increase reported ROE. Also, PWGR has initiated
the process of leasing telecom towers from a nationwide network of 150,000 towers (it could
lease 10-15% based on company’s study) and has sought regulatory approval for determining
revenue-sharing with transmission beneficiaries.
We prefer PWGR to other Indian utilities
We prefer PWGR to other Indian utilities as: 1) it is partially insulated from coal shortage issues
faced by power generators; 2) low risk to our earnings CAGR of 14% over FY11-14F; 3) it factors
in no tax arbitrage profits (NTPC and NHPC do) and so there is no downside risk from this; and 4)
we think the stock should outperform given its earnings quality, strong momentum and
sustainable ROE. At 1.76x FY13F BV, valuations look reasonable to us. We resume coverage
with a Buy rating and Rs110 target price.
Tuesday, October 18, 2011
Query Corner: SKF surges, defying broader market
I purchased Crompton Greaves at an average price of Rs 151. Kindly let me know the targets for this stock.
Avanti Padhye
Crompton Greaves (Rs 160.3): In our review of Crompton Greaves in March this year we had advised investors to hold the stock only as long as it traded above Rs 215. We had indicated that decline below Rs 215 could pull the stock lower to Rs 206 or even Rs 172.
The stock declined slightly below the lower-most target to record the low at Rs 133 in August this year. Investors still holding on to the stock can lower their stop-loss to Rs 120. The stock could attempt to find its feet in the band between Rs 120 and Rs 150 in the upcoming months. However, breach of the lower band can pull the stock down to Rs 90 or even Rs 60.
Short-term resistance will be at Rs 190 or Rs 220. Key medium-term resistance is also at Rs 220 and investors with short- to medium-term perspective can divest their holding on failure to move above this hurdle. Medium-term trend will turn positive only on a close above Rs 270.
I recently purchased Ess Dee Aluminium at Rs 180 and Gayatri Projects at Rs 138. Please advise me on the long-term prospects of these stocks.
C.U. Prabhu
Ess Dee Aluminium (Rs 185.9): The long-term trend in Ess Dee Aluminium is down since the January 2008 peak of Rs 843. Following a brief hiatus between January 2009 and June 2010, this structural downtrend resumed.
The medium- as well as the short-term trend in the stock also reversed lower in August this year as it plunged below the key medium-term support at Rs 270.
The pattern in the weekly chart is negative and the stock can move lower to Rs 126 or even Rs 110 in the days ahead. Long-term investors can hold the stock with stop at Rs 110. If the stock reverses higher from current levels, it can move on to Rs 315 or Rs 395 in the months ahead.
Investors with a shorter investment horizon can divest their holdings at either of these levels. Long-term trend will turn positive only on a strong weekly close above Rs 520.
Gayatri Projects (Rs 140.5): Gayatri Projects too is precariously poised since it has breached its key medium-term support at Rs 200. The stock could head lower to Rs 70 or Rs 41 in the days ahead and investors with lower risk-taking ability can switch out of this stock at this juncture. Those who wish to hold on can do so with stop at Rs 120. Near-term outlook for the stock will turn rosy only when it goes on to close above Rs 230. Key medium-term resistance will be at Rs 265 and then at Rs 345.
What are the prospects of Everest Industries? Can I buy the stock with an investment horizon of 1-3 years?
Navendu Sharma
Everest Industries (Rs 147): Everest Industries went into a tailspin in the last quarter of 2010 that dragged it down from the height of Rs 282 to Rs 127. The long-term trend in the stock, however, continues to be up and investors can hold it with stop at Rs 120. The stock could attempt to form a base in the zone between Rs 120 and Rs 140.
If it manages to hold above Rs 120, the stock could rally to Rs 190 or Rs 225 in the months ahead. Medium-term view will, however, turn positive only on a close above Rs 225. That will pave the way for rally to the previous peak of Rs 285.
Conversely, strong close below Rs 120 will pull the stock down to Rs 82 or even to the March 2009 low at Rs 43.
Can Sun TV Network and Sundaram-Clayton be bought at current levels? What are the long-term prospects for these stocks?
Anil
Sun TV Network (Rs 276.3): In our review of Sun TV Network in September last year, we had indicated that the stock could move up to Rs 550 or Rs 600 in the near-term. We had also written that since extrapolation of the up-move from March 2009 lows gave the first target at Rs 560, investors with a lower holding period should exercise caution in the band between Rs 550 and Rs 600.
The stock formed a peak at Rs 556.5 in January this year and is in a serious correction since then. This correction has pulled the stock below the key support at Rs 450 indicated in our previous review as well as the medium-term trend decider at Rs 290.
Investors, however, can hold the stock with stop at Rs 200 since it is attempting to reverse higher following the recent trough at Rs 214 formed on October 4. If this rally sustains, the stock could move higher to Rs 350 or Rs 430 over the ensuing months. Investors with lower holding capacity can exit the stock at either of these resistances.
Medium-term view will, however, turn positive only on a close above Rs 430, next target being at Rs 550. Supports on a strong decline below Rs 200 are at Rs 180 and Rs 136.
Sundaram-Clayton (Rs 140.3): This stock never recovered from the bludgeoning it received from the bear market of 2008 that took it to the low of Rs 26. The recovery in 2009 could retrace only one-third of the loss, and the stock is once again sliding lower.
Key medium-term support for the stock is at Rs 115 and investors can hang on to the stock as long as it trades above this level. However, decline below this level will accelerate the decline to Rs 56 or even lower.
The stock will face hurdle at Rs 180 and Rs 208 in the upcoming months. Long-term view will turn positive only on close above Rs 286. Subsequent targets are Rs 370 and Rs 450.
I bought Unitech at Rs 45. What are its short- and medium-term prospects?
Ahammed Shebeeb P.A.
Unitech (Rs 27.3): Unitech did not have it easy over the last 12 months and the stock has been continuously marking lower troughs. The stock is currently poised at its March 2009 low of Rs 25. Since this level has not been tested in the last five years, investors can hold on to the stock as long as it trades above Rs 25.
However, breach of this level will drag Unitech below Rs 10. Short-term resistances will be at Rs 40 and Rs 49. Investors with short-term perspective should venture to buy the stock only if it goes on to close above Rs 50. Medium-term resistances are at Rs 61 and Rs 62.
Key long-term resistance band for the stock is between Rs 180 and Rs 200. This band needs to be surpassed to signal that the worst is behind.
Please give your technical outlook for SKF India.
Altaf Hussain
SKF India (Rs 653.5): SKF India is one of the rare stocks that have skirted the carnage in broader market over the last 12 months to move on to new life-time high. There was a sharp correction from the September 2010 peak of Rs 620, but the stock shrugged this off in no time to gain 26 per cent this year.
Short-term supports are at Rs 616 and Rs 570 and short- and medium-term investors can buy the stock on reversal from either of these levels. Medium-term supports for the stock are at Rs 505 and Rs 475. Investors with a longer investment horizon can buy the stock with stop at Rs 470.
If SKF manages to hold above Rs 475, there is a strong possibility of the stock breaking out to Rs 800 over the long-term.
Reduce SHIPPING CORPORATION OF INDIA (SCI) Target: Rs.86 ::Kotak Sec,
SHIPPING CORPORATION OF INDIA (SCI)
PRICE: RS.73 RECOMMENDATION: REDUCE
TARGET PRICE: RS.86 FY12E P/E: 15.6X
We interacted with the management of SCI to get an insight on the latest
developments in the shipping market and the company. We also factor in
FY11 annual report in our analysis.
The tanker market in which SCI primarily operates has fallen by ~25% YoY
in the last six months, more than what we had anticipated. The outlook also
continues to remain weak for medium term with both OPEC and IEA
bringing down the oil demand forecast for CY11 and CY12. Amidst weak
shipping market, SCI has either deferred or cancelled a part of its capex
programme. Consequently we have brought down our earnings estimate for
FY12E and FY13E and reduce our target price to Rs 86 per share (from Rs 110
per share).
Company has brought down its capex programme - a prudent
measure
In the beginning of FY12, SCI was having a capex programme of Rs 78 bn over FY12
to FY14E, with deliveries of ships happening in FY14 and FY15. But with the continued
weakness in the shipping market, the company has either curtailed or deferred
a part of its capex in the commercial segment in the last 3 months. We now estimate
the company to spend about Rs 47 bn (approx. ~ 40% less of earlier plan)
over FY12E to FY14E as capex on 30 ships (earlier 40 ships).
With shipping markets continuing to go through a bad phase and expected to remain
subdued atleast for the next two years, we believe SCI has taken a prudent
measure in curtailing its capex. Similarly other Indian companies like GE Shipping
and Mercator Lines Ltd (MLL) are also going slow with their capex program in the
shipping segment.
Capex would have highly leveraged the balance sheet for SCI
Though SCI did an FPO in FY11 of Rs 6.5 bn to buy assets, it would have primarily
resorted to high cost debt to pursue its huge capex programme which would have
leveraged the balance sheet and evaporated the cash reserve. With debt becoming
expensive and shipping market going through a bad phase, it would have been difficult
for the company to service its debt, do further capex and generate free cash
flow. With the above prudent step SCI has kept its financial position much
favourable.
Company currently has cash balance of Rs 17 bn - Secured loans
of the company has almost doubled in pursuing its capex program.
SCI did a capex of ~Rs 30 bn in FY11 through a mix of debt and equity. As a result
the gross debt of the company has gone up from ~Rs 26 bn in FY10 to ~ Rs 47 bn
in FY11. Gross debt of the company currently stands at ~Rs 52 bn with cash balance
of Rs 17 bn (which is ~12% of the capital deployed). Healthy cash balance is of
utmost importance for the company to make timely asset purchase and face the
cyclicality of shipping business. Healthy cash balance could positively impact the
other income component of the company with interest rates peaking and expected
to move up further.
Tough phase for shipping business continues - Supply side pressure
continues
In the dry market, the BDI still struggles to surpass the 1,500 points level mark with
weak expectations for the forthcoming days. Even the tanker market is very soft
with oversupply of ships and minimum tonnage available. We believe the current
spot market rates across most of the shipping segments are below the operational
cost of the ship. We are not bullish on the shipping business going forward primarily
due to oversupply of ships in the bulk segment (net supply of 7.0% per annum) and
even in the tanker segment (net supply of 3.2% per annum) over CY11E to CY14E
We estimate the net NAV at Rs 123 per share
The management indicated that the NAV for the company has fallen to Rs 133 per
share in the June quarter (it was Rs 145 per share as on March 2011). The three key
segments - dry, tanker and container market has fallen about 5% to 50 % YoY in
the quarter, the NAV for SCI has also fallen QoQ. We now estimate the net NAV of
the company at Rs 123 per share. Usually the shipping asset prices moves after a lag
of 2 to 3 months to shipping freight rates. We feel NAV of the company to remain
under pressure in subsequent quarters.
SCI has also shelved plans to buy a minority stake in a shipbuilding
company. It also postpones it plans to enter the high end offshore
market
SCI was doing due diligence of some of the shipyards including ABG, Bharati and
Pipavav for buying a small stake of ~10%. Company cited this step as an intitiative
towards backward integration. We estimate this purchase by SCI not to materialise
in near term (only after FY13E) and hence we don't factor this in our numbers.
Company also intends to get into high end off shore market like jack up, drill ships
and submersible. With oil above $ 100 per barrel, we believe the market for deep
water drilling is very lucrative. GE Shipping through its 100% subsidiary - Great India
Ltd - is already having significant presence in this area. As the segment is very capital
intensive, SCI has deferred its plans to enter this segment for now. Company also
intends to hive off the offshore segment into a separate 100% subsidiary which is
expected by end of FY13E.
Top line and earnings to remain under pressure
Subdued shipping market, higher bunker cost and higher depreciation has resulted
in SCI reporting loss for two subsequent quarters including Q4FY11 and Q1FY12. All
the three key segments of shipping including container, bulk and the tanker segment
have performed badly and performance is estimated to be weak in medium
term. Over supply of ships continues to put pressure on the freight rates affecting the
performance of most of the ship-owners including SCI. We estimate the revenues
and earnings of the company to remain under pressure in near term.
Valuation and Recommendation
We have reduced the target price of SCI to Rs 86/share (earlier Rs 110) to reflect
weakness in the shipping business (especially tanker segment) and the subsequent
fall in asset prices across segments by 5 to 50% over the last six months.
Historically most Indian Shipping companies including SCI have traded in a range of
0.6 x to 0.9 x of its NAV. We value SCI at 0.7 x NAV, in line with our view that the
shipping sector would remain under pressure at least till CY12. We reiterate Reduce
rating on SCI with a changed price target of Rs 86.
We also factor in the following while arriving at the fair value and Reduce rating:
1. Asset prices would continue to remain under pressure
2. Poor return ratios - ROE and ROCE are <10%, both in FY12E and FY13E.
3. Negative free cash flow for the company over FY11 - FY13E
PRICE: RS.73 RECOMMENDATION: REDUCE
TARGET PRICE: RS.86 FY12E P/E: 15.6X
We interacted with the management of SCI to get an insight on the latest
developments in the shipping market and the company. We also factor in
FY11 annual report in our analysis.
The tanker market in which SCI primarily operates has fallen by ~25% YoY
in the last six months, more than what we had anticipated. The outlook also
continues to remain weak for medium term with both OPEC and IEA
bringing down the oil demand forecast for CY11 and CY12. Amidst weak
shipping market, SCI has either deferred or cancelled a part of its capex
programme. Consequently we have brought down our earnings estimate for
FY12E and FY13E and reduce our target price to Rs 86 per share (from Rs 110
per share).
Company has brought down its capex programme - a prudent
measure
In the beginning of FY12, SCI was having a capex programme of Rs 78 bn over FY12
to FY14E, with deliveries of ships happening in FY14 and FY15. But with the continued
weakness in the shipping market, the company has either curtailed or deferred
a part of its capex in the commercial segment in the last 3 months. We now estimate
the company to spend about Rs 47 bn (approx. ~ 40% less of earlier plan)
over FY12E to FY14E as capex on 30 ships (earlier 40 ships).
With shipping markets continuing to go through a bad phase and expected to remain
subdued atleast for the next two years, we believe SCI has taken a prudent
measure in curtailing its capex. Similarly other Indian companies like GE Shipping
and Mercator Lines Ltd (MLL) are also going slow with their capex program in the
shipping segment.
Capex would have highly leveraged the balance sheet for SCI
Though SCI did an FPO in FY11 of Rs 6.5 bn to buy assets, it would have primarily
resorted to high cost debt to pursue its huge capex programme which would have
leveraged the balance sheet and evaporated the cash reserve. With debt becoming
expensive and shipping market going through a bad phase, it would have been difficult
for the company to service its debt, do further capex and generate free cash
flow. With the above prudent step SCI has kept its financial position much
favourable.
Company currently has cash balance of Rs 17 bn - Secured loans
of the company has almost doubled in pursuing its capex program.
SCI did a capex of ~Rs 30 bn in FY11 through a mix of debt and equity. As a result
the gross debt of the company has gone up from ~Rs 26 bn in FY10 to ~ Rs 47 bn
in FY11. Gross debt of the company currently stands at ~Rs 52 bn with cash balance
of Rs 17 bn (which is ~12% of the capital deployed). Healthy cash balance is of
utmost importance for the company to make timely asset purchase and face the
cyclicality of shipping business. Healthy cash balance could positively impact the
other income component of the company with interest rates peaking and expected
to move up further.
Tough phase for shipping business continues - Supply side pressure
continues
In the dry market, the BDI still struggles to surpass the 1,500 points level mark with
weak expectations for the forthcoming days. Even the tanker market is very soft
with oversupply of ships and minimum tonnage available. We believe the current
spot market rates across most of the shipping segments are below the operational
cost of the ship. We are not bullish on the shipping business going forward primarily
due to oversupply of ships in the bulk segment (net supply of 7.0% per annum) and
even in the tanker segment (net supply of 3.2% per annum) over CY11E to CY14E
We estimate the net NAV at Rs 123 per share
The management indicated that the NAV for the company has fallen to Rs 133 per
share in the June quarter (it was Rs 145 per share as on March 2011). The three key
segments - dry, tanker and container market has fallen about 5% to 50 % YoY in
the quarter, the NAV for SCI has also fallen QoQ. We now estimate the net NAV of
the company at Rs 123 per share. Usually the shipping asset prices moves after a lag
of 2 to 3 months to shipping freight rates. We feel NAV of the company to remain
under pressure in subsequent quarters.
SCI has also shelved plans to buy a minority stake in a shipbuilding
company. It also postpones it plans to enter the high end offshore
market
SCI was doing due diligence of some of the shipyards including ABG, Bharati and
Pipavav for buying a small stake of ~10%. Company cited this step as an intitiative
towards backward integration. We estimate this purchase by SCI not to materialise
in near term (only after FY13E) and hence we don't factor this in our numbers.
Company also intends to get into high end off shore market like jack up, drill ships
and submersible. With oil above $ 100 per barrel, we believe the market for deep
water drilling is very lucrative. GE Shipping through its 100% subsidiary - Great India
Ltd - is already having significant presence in this area. As the segment is very capital
intensive, SCI has deferred its plans to enter this segment for now. Company also
intends to hive off the offshore segment into a separate 100% subsidiary which is
expected by end of FY13E.
Top line and earnings to remain under pressure
Subdued shipping market, higher bunker cost and higher depreciation has resulted
in SCI reporting loss for two subsequent quarters including Q4FY11 and Q1FY12. All
the three key segments of shipping including container, bulk and the tanker segment
have performed badly and performance is estimated to be weak in medium
term. Over supply of ships continues to put pressure on the freight rates affecting the
performance of most of the ship-owners including SCI. We estimate the revenues
and earnings of the company to remain under pressure in near term.
Valuation and Recommendation
We have reduced the target price of SCI to Rs 86/share (earlier Rs 110) to reflect
weakness in the shipping business (especially tanker segment) and the subsequent
fall in asset prices across segments by 5 to 50% over the last six months.
Historically most Indian Shipping companies including SCI have traded in a range of
0.6 x to 0.9 x of its NAV. We value SCI at 0.7 x NAV, in line with our view that the
shipping sector would remain under pressure at least till CY12. We reiterate Reduce
rating on SCI with a changed price target of Rs 86.
We also factor in the following while arriving at the fair value and Reduce rating:
1. Asset prices would continue to remain under pressure
2. Poor return ratios - ROE and ROCE are <10%, both in FY12E and FY13E.
3. Negative free cash flow for the company over FY11 - FY13E
Fund Talk Query RESOLVED:: Business Line
am a 43-year-old doctor working in the private sector. I started monthly SIPs in May 2008 in the following funds: Rs 1000 in DSPBR World Gold, Rs 8000 in Reliance Regular Savings Equity and Rs 5000 in Reliance Growth and Reliance Infrastructure. When the market started declining, I stopped SIPs in Reliance Growth and Reliance Infrastructure in February 2011. In the same month, I started SIPs of Rs 5000 each in the following funds: IDFC Premier Equity, Reliance Equity opportunities, HDFC Equity, ICICI Pru Discovery and Reliance Gold Savings. Starting May 2011, I added Rs 5000 each in HDFC Prudence, HDFC Top 200, HDFC Children's Gift Fund, Quantum Long term Equity, Templeton India Growth fund and Fidelity equity. I don't have any target but expect 15 per cent capital appreciation. I plan to invest over the next 10 years. I feel there is duplication in my portfolio and it is overweight on large-caps. Please comment on my choice of funds and suggest changes if required. How can one judge whether a particular fund is not doing well and what should be the strategy at that point: stop SIPs or stop and switch? Can we, during market dips, take such a call?
Prakash Kochi
Duplication of portfolio-holding is bound to happen when you hold too many funds. You do not need a large assortment of funds to build wealth. On the contrary, returns delivered by a portfolio of, say, 10 or more funds may turn out to be suboptimal, with the laggards pulling down the overall returns. Add a fund only if you feel that it is unique in terms of its investment style or the theme holds potential to deliver returns over the next three years.
We don't think you are overweight on large caps. You have only one large-cap focussed fund, HDFC Top 200. Others such as Fidelity Equity and Quantum Long Term Equity have a large-cap tilt but are not large-cap funds. However, your portfolio offers enough scope to reduce the number of funds.
Continue SIPs in HDFC Equity, Quantum Long Term Equity, IDFC Premier Equity, Templeton India Growth and HDFC Prudence. Do not stop SIPs in them merely because the market is in a downturn. You can also run SIPs in ICICI Pru Discovery and Reliance Equity Opportunities for 3-5 years with an annual performance review.
You can consider exiting Fidelity Equity and HDFC Top 200. While these are, no doubt, top-notch funds, an exit will be required to hold a more compact portfolio. HDFC Children's Gift fund can find a place only if you are specifically looking for debt funds. If you have sufficient debt exposure, shift this SIP to HDFC Prudence.
Reliance Regular Savings Equity tends to sharply underperform during volatile markets, such as the one in 2008 as well as the current one. Its performance, therefore, undergoes huge swings on a yearly basis. If you are seeking stability, you may be better off exiting this fund. Also exit Reliance Growth as your mid-cap need will be met by IDFC Premier Equity and ICICI Pru Discovery.
Reliance Infrastructure, like all other infrastructure theme funds, has been struggling to perform. We would not recommend theme funds, unless you can reasonably time your entry and exit in such funds by actively tracking the fortunes of the sector. A 10-year portfolio can do well without theme funds. You can restrict investment in gold to 8-10 per cent of your portfolio. If you are looking at gold as a diversification option, then go for gold ETFs that Reliance Gold Savings invests in. DSP BR World Gold invests in gold mining stocks and would be subject to stock market vagaries as well.
With these funds, your return target appears achievable.
WHEN TO STOP SIPS
We shall move to your question on how to identify underperformance and what to do with SIPs in such a scenario. The first distinction you need to make is whether the market is in a down phase or your fund is.
In your case, you stopped SIPs in February 2011 stating market underperformance. That may not have been a prudent move. An SIP works best only if you buy units during the ups and downs of the market.
The down-market phase is vital to average your costs as you buy units at lower prices and bring down your overall capital cost of the fund. For instance, the NAV of Reliance Growth was Rs 504 at the beginning of January 2011. You stopped SIPs in February, post which NAV fell to as low as Rs 399 per unit beginning October. By stopping SIPs you have curtailed the rupee-cost averaging process that is unique to SIPs.
Of course, in your case, it so happens that the funds for which you have stopped SIPs are not currently the best performers. Hence you do not lose much.
To make a long story short, do not stop SIPs citing market decline as long as the fund performance is not off mark. In general, first look at your fund performance vis-à-vis its benchmark. If the fund has underperformed its benchmark by over 5 percentage points for a period of 12-18 months you should not only stop SIPs but exit the fund in a phased manner. As a next step, if the fund has been underperforming its category average (although beaten its benchmark) by 10 percentage points or more, stop SIPs and watch for six months. Further slip-ups need not be tolerated.
In both the above cases, switch the SIP to a good performer that you already hold, unless you are nearing your goal.
In general, there are a number of parameters (that we discuss in our fund recommendations) to assess performance. But if you are a passive investor, this is the simplest way to take a call
Saturday, October 15, 2011
401 K Q and A
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The federal government established the 401k plan as a way for people to save for their retirement. In order to encourage savings, the government created special tax advantages for 401k participants.
Your 401k plan is an incredible investment opportunity designed to assist you in reaching your retirement goals. Every company's 401k plan is a bit different, however. It was set up by your employer as a simple, convenient retirement savings vehicle that delivers significant tax benefits while you are working. It enables you to build personal wealth in the future. Your Summary Plan Description (SPD) will provide you with more detail on the specifics of your plan. Ask your Human Resources Department for a copy of this document. | ||
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A 401k plan is a retirement plan set up by your employer. When you join a 401k, you agree to contribute part of your salary to the 401k account. The money you contribute to your 401k is deducted from your paycheck before income taxes are taken out, so you end up paying less income tax. Additionally, you don't pay taxes on the money you contribute (and any interest it earns) until you withdraw money from your account at retirement -- so you enjoy the benefit of several years worth of tax-deferred compounding (which means your savings add up quickly!).
Each company's 401k plan has different rules, so the best source of information on your plan is the Summary Plan Description document. You can get a copy from your company's Human Resources Department or your benefits representative. | ||
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Your 401k plan helps you to start and stick with regular investing. Your contributions are automatically deducted from your salary before you receive your check. Since the money is deducted from your gross income, you will have lower taxable income, which means you will pay less in annual taxes. You couldn't ask for a simpler way to save!
The money you save will accumulate on a tax-deferred basis. This means you pay no Federal or State taxes on your contributions or investment earnings until you start withdrawing money from the plan. The benefit of a tax deferred account is that your dollars accumulate more quickly because your earnings are exempt from current taxation. | ||
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Your 401k account will have no effect on the amount of Social Security benefits you will be able to receive. However, it is important to realize that Social Security is not intended to provide for your entire retirement, but is meant to serve as a supplement to other income sources. For example, if your current income is $30,000 per year, the benefit you receive from Social Security will be approximately 40% of this, or $12,000 per year. This percentage varies according to your income. Hence, if you'd like to maintain the same standard of living you had while you were working, you do not want to rely on Social Security to be your only source of income after retirement.
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Legally, all a participant is required to receive is a Summary Plan Description, a Summary Annual Report and an annual statement. You might not receive a prospectus for every fund offered in the plan, but if your company's stock is offered in the plan you must receive a prospectus (or prospectus substitute) for that. Luckily for participants, most plan sponsors provide participants with a lot more information than required. Keep in mind that often if you need more information, all you have to do is ask.
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That depends on the rules of your specific plan. Many companies require new employees to complete six months or even up to a year of service before they're eligible to participate. Some companies also require employees to be at least 21 years old to participate.
Ask your company's Human Resources Department or Benefits Representative for information on your plan. This information is also available in your Summary Plan Description. | ||
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All the contributions made to a 401k account are held in trust by a custodian separate from the company sponsoring the plan, meaning that your employer does not have access to any of the money that is contributed to your 401k. In other words, regardless of whether your employer goes bankrupt or is bought by another company, the vested amount of money in your account is always yours.
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If you are under the age of 50, the 2010 limit for contributions to your 401k plan is $16,500. This limit is generally adjusted for inflation in $500-$1,000 increments annually. In addition, Highly compensated employees are usually limited in how much they can defer due to IRS testing requirements.
If you are over the age of 50, you now also have the option of making "catch-up contributions" in order to accelerate your savings. As mentioned above, the maximum amount of employee contributions for the year 2010 is $16,500. However, if you are over 50, you have the option of contributing an additional $5,500, bringing the limit up to $22,000. Similar to the increases in the contribution limits, this "catch-up contribution" amount may also be adjusted annually for inflation. For more information, please contact 401(k) Focus or your Human Resources Department. | ||
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People age 50 or older may make an additional contribution above any IRS or Plan limit. The Catch-up Contribution amount for 2010 is $5,500.
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The Tax Credit for low income savers is a temporary, nonrefundable tax credit for lower income taxpayers who make salary deferrals to 401(k), 403(b), 457, SIMPLE or SEP plan, or regular or Roth IRA. You should consult your tax advisor for more information on this credit.
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To change your contribution amount, see your Human Resources Department.
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The "vested" portion of your 401k account is the part that is yours and that cannot be forfeited. To better understand, consider that there are two types of 401k contributions: the contributions you make and the contributions your employer makes (such as "matching" contributions).
The money you contribute to the plan is always 100% vested. In other words, whatever money you put into the plan, adjusted for any investment gains or losses, is always 100% yours. The money your employer contributes, however, may be subject to a vesting requirement. Vesting requirements are very common in 401k plans and simply mean that you must earn your employer's contribution over time. For example, if you have only worked for the company for three years, which equals 40% vested under your plan's vesting schedule, you would only be entitled to $40 of every $100 contributed by your employer. | ||
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That depends on the rules of your particular plan. Plan sponsors have some flexibility in deciding vesting schedules when the plan is set up. In some plans, participants are 100% vested as soon as they join the plan, while in others, participants have to complete a set number of years of service before they're fully vested.
By law, all participants must be fully vested in the plan matching contributions after six years of service and other employer contributions after seven years of service with the company. Additionally, there are a few guidelines that typically apply to most plans. For instance, in most plans participants automatically become fully vested when they reach age 65, if they die or become disabled, or if the plan is terminated. Check with your company's Human Resources Department or Benefits Representative regarding the rules of your specific plan. | ||
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Many issues need to be considered when you are choosing your investment allocation. Two of the most important factors that need to be taken into account are how long you have until retirement and your personal risk tolerance. If you have many years until retirement (more than five is a good benchmark for some, but 10 or more years is even safer), then you can often afford to take more risk in your investments. However, you do not want to be uncomfortable with your choices, so you must find the perfect mix of investments for you personally. Reading a fund's prospectus or speaking with an investment advisor are just two examples of resources that may help you in this decision. You can speak to one of our investment advisors by calling 1-888- 321-401k during regular business hours. Don't forget-you can always change your investment allocation if you find that your first choice isn't working for you.
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You may change your investment choices as often as you wish to. Simply log on to your account or use our automated phone service, VoiceLink. You may access VoiceLink by calling 1-888- 321-4015. Both options are available 24 hours a day, seven days a week (except during scheduled maintenance times, which vary).
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Your account will be exposed to a variety of types of risk depending upon how you choose to allocate your funds between investments. Investing in stocks, for example, exposes you to the everyday volatility of the market, but long-term they often tend to have the highest potential for gains. If you choose to invest in foreign stock, you run the risk that a political problem may arise overseas or that exchange rates will drop, thus affecting your return. If you invest in bonds, there is a chance that interest rates drop, and the possibility that inflation may be higher than your return, meaning that you are actually losing money. There is no way to escape the risk that your investments will decrease in value, although some types of investments are seen as "less risky" and others as "more risky". Bonds, for example, are seen as less risky when compared to stocks. However, generally speaking, the higher the risk the higher your potential for greater gains. While it is impossible to completely avoid risk, there are certain things that you can do to decrease your chances for losses in your account. Most importantly, avoid putting all of your money into one fund, or one type of fund. Spread your assets among a variety of funds within your plan so that if one fund is not doing well, you have a chance for your other investments to make up for any losses. Bear in mind that everyone has a different tolerance for risk and the closer you are to retirement, the more closely you may want to guard your amount of risk exposure.
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While 401k plans were developed as a means for saving for retirement, there are a few cases where money can be taken from your plan before you retire.
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If you switch jobs, you have three options for what to do with the vested portion of your 401k account. The following outlines your options and tax implications for each:
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Yes, if your new company's plan allows rollovers. If you roll over your 401k money into another company's 401k plan, you maintain the account's tax-deferred status and will not have to pay taxes on your 401k assets until you withdraw money from the plan.
If your new company does not allow rollovers, you have two other options that would allow you to maintain the account's tax-deferred status: If your vested account balance is $5,000 or more and you're under age 65, you can leave your money where it is -- and taxes won't be due until you withdraw money from the plan. OR You can roll over your 401k into a rollover IRA account. If you request a direct rollover, meaning that the money is transferred directly into the new account, you won't owe taxes until you withdraw money from the account. | ||
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Once you have terminated employment with your company, you should be sent a distribution package that details your options and also includes the forms necessary to obtain a distribution. Remember that initiating the distribution is your responsibility so make sure that your address is up to date with your employer as well as the administrator of the plan. It never hurts to follow up to make sure your distribution package is sent to you and your distribution is in process.
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Many factors can affect how long it takes for you to receive your distribution. First, each plan has its own rules for how often distributions can be done- monthly, quarterly (every three months) or annually, for example. Keep in mind that a 401k is designed for retirement and is not like a savings account at a bank. You may have to wait anywhere from 30 days to a year or more before receiving a distribution. Typically, 401k plans process distributions on a monthly basis. For example, if your plan has a monthly distribution frequency, you will receive a distribution following the close of the month in which your correctly completed distribution paperwork was received by the plan administrator. Depending on many factors, distributions can take 30 to 60 days to process. To find out the frequency of distributions for your company, consult your Human Resources Department or your Summary Plan Description.
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That depends on what you decide to do with your 401k money. You have several options:
If your vested account balance is $5,000 or more and you're under age 65, you can leave your money where it is -- and taxes won't be due until you withdraw money from the plan. OR You can roll over your 401k into a rollover IRA account or into your new employer's 401k plan. If you do a direct rollover -- have the money transferred directly into the new account -- you won't owe taxes until you withdraw money from the account. If you elect to take your money out of the 401k and not roll it over into a rollover IRA or another 401k plan -- you will owe all applicable taxes plus the 10% early withdrawal penalty (if you are under age 59 1/2). | ||
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Ten percent of the untaxed money you withdraw, plus applicable federal, state and local taxes on that amount. So if you withdraw $5,000 from your 401k before age 59 1/2, you would owe a penalty of $500 (plus applicable federal, state and local taxes on the entire $5,000). To withdraw money before age 59 1/2 and avoid the 10% premature withdrawal penalty, you have to meet one of the following criteria (subject to the rules of your 401k plan):
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The 10% penalty applies to the entire untaxed amount that you withdraw. If you withdraw $5,000 from your 401k before age 59 1/2, you would owe a penalty of $500 (plus applicable federal, state and local taxes on the entire $5,000). If you've made after-tax contributions to your 401k, it gets a bit more complicated.
You do not have to pay the 10% penalty or any additional taxes on the amount of your after-tax contributions. You do, however, have to pay the 10% penalty and all taxes due on any interest earned and employer-matching contributions made as a result of your after-tax contributions. If you're thinking "I'll just take out my after-tax contributions and leave the earnings where they are" -- nice try, but no dice. For every after-tax contribution dollar you withdraw, the IRS requires you to withdraw a proportional amount of the earnings, too. To avoid paying current income taxes and the 10% penalty you can roll your account balance over into an IRA. To learn how to open an IRA account and roll over your 401k balance visit the IRA Center. | ||
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