VIKAS PARSHURAM SAMWATSAE

Hold Ambuja Cement. For Target Rs.203

Robust Operating Performance

Ambuja Cement’s (ACL) 2QCY12 EBITDA/tn of Rs1,284 and EBITDA margin of 28.2% was better than our estimates, primarily driven by  igher realisation. EBITDA rose 24% and net profit rose 35%, which was 4%/3% and 5%/4% higher than our/Bloomberg estimates,  espectively. Despite the likely decline in cement prices and subdued demand in the monsoon season, we expect reduced prospects of  arnings downgrade in 2HCY12 following easing cost pressure and a sequential increase in realisation by 7%. Therefore, we retain our  arnings estimates for CY12 and CY13 and target price of Rs203, but downgrade the rating on the stock from Buy to Hold following the recent  run-up in its price.

Realisation beat estimates:

ACL’s net sales rose 18.1% YoY to Rs25.7bn, broadly in line with our and Bloomberg estimates. Cement realisation increased 11% YoY (7% QoQ) to Rs4,562/tn against our estimate of Rs4,474/tn. Cement sales volume (including clinker) grew 6.3% to 5.63mt (lower than our  stimate of 5.80mt). For 2QCY12, cement realisation was 4% higher than our than our estimate of Rs4,368/tn for CY12E. Thus, despite the  xpected price cut during the monsoon season, we don’t see the prospects of lower realisation compared to our estimate for CY12. 

EBITDA/tn at Rs1,284 near historical high:

EBITDA increased 24% YoY to Rs. 7.22bn (up 4%/3% than our/Bloomberg estimates, respectively). The company posted EBITDA/tn of  s1,284, which is near its historical high, and EBITDA margin improved 130bps to 28.2%, primarily driven by higher realisation. Freight costs  including internal raw material transfer) increased 10.9% to Rs 1,009/tn, primarily due to full impact of the increase in rail freight and higher  iesel prices. Power and fuel costs remained flat YoY. Overall total expenses rose 9% to Rs3,278/tn (up Rs271/tn versus rise in realisation by  s453/tn) which led to robust operating performance.

Net profit higher than estimates:

Net profit increased 34.9% to Rs. 4.68bn, (up 5% and 4%, respectively, compared to our/Bloomberg estimates), driven by robust operational  erformance and higher other income. The company reported EPS of Rs 6.4, which is 62% of the CY12 estimate. Therefore, we believe there  s lower probability of earnings downgrade in 2HCY12.

Valuation:

At the CMP of Rs 180, ACL trades at a PE multiple of 13x, EV/EBITDA multiple of 7.3x and EV/tn of US$169 on CY13E earnings. We have  etained our target price of Rs203 based on 8.5x EV/EBITDA, which is ~ACL's past 10 years’ average one-year forward EV/EBITDA multiple  which captures the upcycle/downcycle). However, we have downgraded our rating on the stock from Buy to Hold following the recent run-up  in the stock price.

2.  Buy Sterlite Industries India For Target Rs.138

Performance In Line; Maintain Buy

Sterlite Industries India’s (SIIL) 1QFY13 EBITDA was 5%/7% below our/street estimates, while PAT was 1%/5% above our/street estimates,  espectively, due to higher other income and lower tax despite being hit by forex loss. Power segment posted a strong performance, while  ther segments like aluminium, zinc and copper witnessed minor pressure. SIIL will witness multiple expansion projects getting  ommissioned in the next one year, which would ensure healthy growth. We retain our Buy rating, earning estimates as well as the TP on SIIL  of Rs138. Our  TP is based on the combined entity, Sesa-Sterlite’s valuation.

Power segment gives a positive surprise, aluminium and copper drags:

Driven by lower costs due to higher power generation and better coal availability, the power segment was able to post EBITDA margin of  7.6% versus 32.4% in 4QFY12 and 27.0% in 1QFY12. Power realisation per unit increased 1% QoQ, while costs/unit dropped 6% QoQ.  luminium segment, particularly BALCO, continued to witness high costs to the tune of 17% YoY and 7% QoQ in rupee terms due to tapering  f coal linkage and higher costs of alumina due to low grade of bauxite. Copper segment also disappointed due to lower Tc/Rc margin and  igher production costs.

Expansion update:

BALCO is likely to start metal tapping operations at its 325,000tn smelter from 3QFY13 onwards, while the first 300MW unit of its 1,200MW  ower plant is set for synchronisation in 2QFY13 (deferred by a quarter). SEL’s fourth unit is under trial run and the same is likely to start  ommercial power generation in 2QFY13. After getting environmental clearance, SIIL is looking at obtaining stage-II forest clearance for  11mt BALCO coal block, but we expect a major delay. Talwandi Sabo plant is progressing well and its first unit of 660MW is set to be synchronised   t the end of 4QFY13, although we expect a delay of 3-6 months. SIIL has indicated that the new expansion plan for HZL is being prepared and would be presented in due course.

Other highlights:

SIIL started an additional 700MW power transmission capacity in 1QFY13, while, it expects to commission another 1,000MW transmission  apacity by 4QFY13, taking the total capacity to 2,850MW. SIIL has responded to Coal India’s offer of supplying pit-stock inventory (logistics  rrangements have to be made by the buyer) at the administered price. It expects 2-3mt of additional coal from this route.

  

3.Buy Mrf Limited. For Target Rs.11582

* MRF Ltd is India’s largest tyre manufacturer and it is the first tyre company in India to reach a turnover of 5000 Crores.

* The Company engages  n the manufacture, distribution, and sale of tyres for various kinds of vehicles in India and internationally. MRF exports  its products to over 65 countries.

* The company also provides tubes, flaps, tread rubber, conveyor belts, specialty coatings, and sports goods.

* During the quarter, the robust  rowth of Net Profit is increased by 352.46% to Rs. 1445.60 million.

* MRF Ltd has approved the payment of interim dividend of Rs. 3/- per each equity share.

* Net Sales and PAT of the company are expected to grow at a CAGR of 22% and 21% over 2010 to 2013E respectively.

* The prototypes for  erification and validation testing are manufactured in one of MRF's 6 factories all of this are TS 16949/ISO 9001 certified, and the national standards like BIS/JIS/ETRTO/T&RA.

Investment Highlights

Results updates- Q3 FY12

MRF Ltd a leader in the category holds the No.1 position is the top producers of tyres & Tubes in the world and in India, reported its financial  esults for the quarter ended 30th Jun, 2012. The third quarter witnesses a healthy increase in overall sales as well as profitability on ccount, nenhanced Dealers network and robust infrastructural Support system.

The company’s net profit spring to Rs.1445.60 million against Rs.319.50 million in the corresponding quarter ending of previous year, an  ncrease of 352.46%. Revenue for the quarter rose 16.91% to Rs.30082.70 million from Rs.25730.60 million, when compared with the prior  ear period. Reported earnings per share of the company stand at Rs.340.94 a share during the quarter, registering 352.46% increase over  revious year period. Profit before interest, depreciation and tax is Rs.3267.30 millions as against Rs.1647.60 millions in the corresponding  eriod of the previous year.

4.  Hold Gujarat Gas Company. For Target Rs.329

Quiet Quarter, But Early Sign Of Convalescence

Gujarat Gas Company (GGCL) reported net profit 10.5%/10.8% lower than Bloomberg consensus/our estimates, although sales were up 5.0%/4.7% higher than consensus/our estimates, respectively. The key reason for lower earnings are: (1) 5% QoQ fall in volume growth (2) 71% fall in other income on YoY basis, which led PAT/scm to drop to Rs1.83/scm from Rs2.14/scm in the previous quarter. We upgrade the stock to Hold from Sell with a revised target price of Rs329 from Rs315  earlier, following early signs of positive developments on company-specific issues and macro issues related to the city gas distribution (CGD) space in Gujarat.

Margins scenario improving:

EBITDA increased to Rs2.67/scm in 2QCY12 versus Rs2.20/scm in 1QCY12. EBITDA/scm has been perking up since the last three uarters
with the company being able to pass on higher gas costs to consumers, but is still lower than Rs2.91/scm in CY11 and Rs3.14/scm in CY10. With a rising proportion of RLNG in the gas basket, blended gas cost inched up to Rs21.94/scm (US$14.46/mmBtu) compared to Rs19.59/scm(US$13.46/mmBtu) in the previous quarter. Blended gas sale prices increased by 13% QoQ to Rs26.50/scm from Rs23.50/scm, though gas costs rose 12% QoQ. In the past two quarters, the company has seen a higher increase in blended realisation  ompared to increase in blended gas costs, which led to improvement in EBITDA/scm. We believe it is likely to maintain EBITDA/scm of  s2.74/Rs2.91 in CY12E/CY13E, respectively.

Volume stuck in a tight range:

Gas sold during 2QCY12 in volume terms dropped 5.0%QoQ/4.3% YoY to 3.18mmscmd (289 mmscm). The volume growth in 2QCY12 was the lowest in the past 10 quarters, despite the fact that more than 5,800 vehicles were converted to natural gas during the quarter and  10,700 households connected to gas supply, taking the total number of households to more than 352,000. We expect the volume to remain  t 3.3mmscm/3.45mmscm in CY12E/CY13E, respectively. The key upside risk to our volume growth - impact of recent Gujarat High Court’s  erdict on mandatory conversion to natural gas for all cars with an assured allocation from lowpriced APM (administered price mechanism)  as.

Outlook and valuation:

We upgrade the stock to Hold from Sell to reflect: (1) Slim chances of aggressive bidding war on pressure emerging from Gujarat overnment, (2) Gujarat High Court’s verdict to compulsorily convert all cars to natural gas could bring in the much desired volume growth  ven with existing geographies, (3) Improving margin profile with EBITDA/scm since the past three quarters. We have valued GGCL on DCF basis (WACC 13.75%, terminal growth 1%) with a revised TP of Rs329 from our earlier TP of Rs315.

5. Buy Tata Motors. For Target Rs.245 

 

TATAMOTORS (TTMT IS EQUITY) – WEEKLY
Given below is the weekly chart of TATAMOTORS. The stock has taken support at the Long term Trendline joining the lows of July 2009 and September 2011. In addition, the stock held the 61.85 retracement level (207.5) of the rise from September 2011 to April 2012. In the previous uptrend the weekly RSI broke above the 60 levels establishing a Bullish Range therefore the current RSI level of 40 should also act as a  upport. We initiate a Buy call on TATAMOTORS with a Target of Rs 245. Traders can keep a stop loss at Rs 200 on a closing basis.

6.  Hold Bharat Heavy Electricals. For Target Rs.221

Performance Likely To Moderate

Bharat Heavy Electricals (BHEL) reported revenue of Rs83.3bn for 1QFY13, up 16.9% YoY and 9.5%/6.4% higher than our/Bloomberg consensus estimates, respectively. However, we believe the pace of order execution may not sustain in the coming quarters with a declining order book, subdued order placement  activity and possible delay from the clients’ side owing to structural issues in the power sector. Consequently, we maintain our revenue estimates for FY13E/FY14E. Driven by higher revenue, EBITDA/PAT were higher than our estimates by 7.9%/8.6%, respectively, but margins were largely in line with our estimates. EBITDA grew 17.8% YoY to Rs10.9bn, translating to an operating margin of 13.1%, 20bps lower than our estimate of 13.3%. PAT registered 12.9% YoY growth at Rs9.2bn, resulting in a net profit margin of 11.1%, in line with our estimate. Consequently, we maintain our view of sharp erosion in profitability for BHEL over FY12-14E. We retain our Hold rating on the stock with a target price of Rs221 based on 9xFY14E EPS.

Order intake to remain weak:

Procedural delays on account of land acquisition, fuel linkage and environment/forest clearance continued to hamper order placement activity in the power sector. For the quarter, BHEL reported order inflow of only Rs56bn (weak order intake in four out of the past five quarters) leading to order backlog of Rs1,329bn,  13.3% lower YoY. BHEL is yet to be awarded orders worth Rs93.8bn by NTPC through its bulk tenders. Although the management reiterated its order inflow guidance of Rs600bn for FY13E, we are factoring in order inflow assumption of Rs450bn as we expect the policy paralysis in the power sector to continue.

Margin compression likely:

We expect a sharp erosion in profitability for BHEL over FY12-14E due to pricing pressure in the BTG (boiler, turbine and generator) space
owing to dual impact of oversupply and weak demand. The industry segment is also beginning to witness softening margins as it registered a 160bps YoY decline in operating margin to 21% for the quarter. Consequently, we expect BHEL’s operating margin to fall 160bps/150bps YoY in FY13E/FY14E to 17.7%/16.2%, respectively.

Outlook and Valuation:

BHEL is unlikely to sustain its revenue growth traction on such a high base, considering the subdued order placement activity. Also, ompression in operating margin is likely to lead to earnings CAGR decline of 7.9% over FY12-14E. However, we believe the recent correction in its stock price factors in these negatives. At Rs212, BHEL trades at 8.0x/8.6x FY13E/FY14E earnings, respectively, compared to average PE of 16x over the past 10 years and least PE of 7.9x/6.5x over the past 6/10 years, respectively. We value the stock at 9xFY14E EPS of s24.6 with a target price of Rs221 and retain our Hold rating on it.

7.  Buy Acc. For Target Rs.1,469

ACC’s 2QCY12 results are above our expectations, with EBITDA at Rs6.5bn (up 6.2% than our/Bloomberg estimates), EBITDA margin at 23.4% (90bps higher than our estimate) and EBITDA/tn of Rs1,076 (Rs70/tn higher than our estimate) driven by 8% QoQ improvement in realisation (Rs122/tn higher than our estimate). Net sales rose 15.6% to Rs27.8bn (up 2%/1% than our and Bloomberg estimates) and net profit increased 24.2% to Rs4.17bn (up 8.2%/11% than our and Bloomberg estimates). Despite the likely decline in cement prices and subdued demand during the monsoon season, we see strong prospects of earnings upgrade in 2HCY12 following easing cost pressure and a sequential increase in realisation by 8%. Therefore, we retain our Buy rating on the stock with a target price of Rs1,469.

Net sales broadly in line with estimates:

ACC’s 2QCY12 net sales increased 15.6% YoY to Rs27.8bn, primarily driven by a 13.3% YoY (~8% QoQ) improvement in realisation and a 2% YoY cement sales volume growth. For 2QCY12, cement realisation was 4,591/tn, which is 3% higher than our estimate of Rs4,460/tn for CY12E.

Improvement in EBITDA/ tn by Rs148:

EBITDA increased 18.3% YoY to Rs6.5bn (up 6.2% than our/Bloomberg estimates).Despite the rise in overall costs/tn by 11%, EBITDA/tn increased by Rs148/tn to Rs1,076 and EBITDA margin rose by 50bps to 23.4% driven by the increase in realisation by 13.3%. Freight and forwarding costs increased by 19.2% to Rs 949/tn, primarily due to the full impact of increase in rail freight from March’12. Other expenses rose 9.3% YoY to Rs846/tn, but as a percentage of sales declined by 70bps. Power and fuel costs rose 4% YoY to Rs998/tn, but remained flat on a sequential basis.

Net profits beat estimates:

Net profit rose 24.2% to Rs4.17bn, (up 8.2% and 11.2%, respectively, compared to our/Bloomberg estimates), driven by robust      operational performance and higher other income. Other income increased 50% to Rs1.15bn. The company reported an EPS of Rs43 for 1HCY12, which is 55% of the CY12E estimate. Therefore, we believe there are lower prospects of earnings downgrade in 2HCY12.

Valuation:

We maintain our Buy rating on ACC with a target price of Rs1,469 based on EV/EBITDA multiple of 8.5x (~10% discount to past 10 years’ average trading multiple which captures the upcycle/downcycle of cement industry) and implied EV/tn of US$143 (discount of ~5% on  eplacement cost). We believe the EV/EBITDA multiple of 8.5x and replacement cost of US$143 is justified, given the company’s strong  alance sheet and improved profitability on the back of better efficiency.

8.  Hold Bata India. For Target Rs.1,008

Sales Growth Below Estimate;

Downgrade To Hold Revenue growth of Bata India (BIL) slowed to 17% in 2QCY12 compared to 30.6%/22.6% in 1QCY12/CY11, respectively, at Rs5,065mn, 4.1% lower than our estimate. It seems BIL was geared up for slower growth, which is visible from
the fact that inventory days reduced to 96 in 2QCY12 from 102/108 in 2QCY11/CY11, respectively. Following buoyant performance in CY11/1QCY12, the stock price increased 42.9% over the past six months. Third quarter isgenerally a weak quarter for BIL due to the monsoon season. In such a scenario further re-rating seems difficult until BIL resumes its earlier growth trajectory.
Following limited upside from current levels, we downgrade the stock to Hold from Buy. We maintain our estimates and the TP of Rs1,008 based on 16x CY13 EV/EBITDA.

Slower pace of growth:

BIL opened 108/145/61 stores in CY10/CY11/1QCY12, which drove its revenue up by 22.6%/30.6% in CY11/1QCY12, respectively. Compared to 68/145 new outlets in 1HCY11/CY11, BIL has opened over 100 outlets in 1HCY12. However, with high base and lower demand, tentatively due to the monsoon season as per the management, revenue growth moderated to 17% in 2QCY12. Inventory days
increased to 108 in CY11 from 99 in CY10 on account of lower demand and aggressive expansion in 4QCY11. However, BIL appears to be prepared for lower growth which can be seen from the fact that inventory days reduced to 96 in 2QCY12
from 102/108 in 2QCY11/CY11, respectively. We expect the valuation to be capped until BIL resumes its high-growth trajectory. BIL incurred a capex of Rs34mn in 1HCY12, mainly to increase retail outlets.

Better gross margin drove operating margin:

BIL witnessed a drop in gross margin from 3QCY11 to 1QCY12, and even after that it was able to report better operating
margin due to lower employee costs. However, with a better product mix, BIL was able to improve its gross margin by 99bps to 51.5% in 2QCY12, which led to a 86bps increase in operating margin. Following aggressive expansion, lease rent as a
percentage of sales increased by 213/186bps to 10.6%/9.1% in 1QCY12/1HCY12, respectively. It would be difficult for BIL to improve operating margin from the current levels if the pace of revenue growth moderates in 2HCY12.

Valuation:

We expect the valuation of BIL, which trades at CY13E P/E of 23.5x and EV/EBITDA of 14.3x, to be capped until revenue growth resumes its earlier trajectory.

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