Investor's Eye: Update - Bharti Airtel, Mahindra & Mahindra, Oil India, Punj Lloyd, V-Guard Industries

 

Investor's Eye [August 08, 2012] Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE Bharti Airtel Cluster: Apple Green Recommendation: Buy Price target: Rs362 Current market price: Rs274 Q1FY2013 results: First-cut analysis Result highlights Bharti Airtel's Q1FY2013 results flash: Misses estimates; depressed operating performance of India and Africa businesses  In Q1FY2013 Bharti Airtel's consolidated performance was lower than expected on all counts, viz revenue, operating profit and earnings. The earnings stood at Rs762.2 crore, that is 33% lower than our estimate of Rs1,140 crore. The lower operating profit (down 6.2% sequentially) and the higher losses in the Africa business (a loss of Rs670 crore) were the prime reasons for the sharp drop in the earnings. Q1FY2013 result highlights During the quarter the consolidated income from operations grew by 3.3% on a sequential basis while the revenue growth in the South Asia mobile business was in line with expectation (up 1.7% sequentially). In constant-currency terms, the revenue growth of the Africa business contracted by 0.5% sequentially. On a consolidated basis, the cost structure showed a rise with an increase in the three key cost components, viz selling, general and admin expense; network operating cost; and employee cost which rose 13%, 9.2% and 5.5% respectively. This dragged the operating performance (the operating profit fell 6.2% sequentially) and caused the operating profit margin (OPM) to contract sharply by 310 basis points quarter on quarter (QoQ). The weak operating performance along with an increase in the depreciation charge and a higher effective tax rate resulted in a 24.2% sequential decline in the earnings.  Valuation and view: Bharti Airtel has missed analysts' expectations for around seven to eight quarters in a row. We believe that the Indian business environment remains challenging for the company. The Africa business is also not showing the required elasticity and agility. Against this backdrop, the ambiguous regulatory environment continues to keep the sector and the stock subdued. At present we have a Buy rating on Bharti Airtel with a price target of Rs362. In the light of the Q1FY2013 performance, we would review our earnings estimates for the company and come out with a detailed note shortly. At the current market price the stock is ruling at 6x its FY2014E EV/EBITDA and 14.5x its FY2014E price/earnings ratio.     Mahindra & Mahindra Cluster: Apple Green Recommendation: Hold Price target: Rs777 Current market price: Rs722 Price target revised to Rs777 Result highlights Result highlight: Q1FY2013 PAT grew 22% YoY on strong operating performance  For Q1FY2013 Mahindra and Mahindra (M&M) has reported a net profit of Rs726 crore, which is significantly above our and the Street's estimates. Cost control measures led to the better than expected operating performance, which boosted the profitability. Lower depreciation and interest charges improved the profitability further, leading to a significant outperformance vis-a-vis the expectations.  Highlights of Q1FY2013 results The company's revenues are in line with our estimate. The realisation of both the automotive segment and the farm equipment (FE) segment improved compared with that in Q1FY2012. The company had taken price increases of 1.5% in the automotive segment and of about 3% in the tractor segment during April 2012. A 180-basis-point sequential improvement in the automotive business (M&M + MVML) was commendable. The EBIT margin at 13.9% was the highest in two quarters. By maintaining the profitability of the tractor segment in the face of adverse macros and cost pressures the company boosted its profitability. The tractor segment's EBIT margin at 15.7% remained flat sequentially. The other expenditure/sales at 8.2% was among the lowest in the last few years. Cost control initiatives enhanced the profitability. Lower than expected depreciation and finance cost further helped the profitability during the quarter.  Valuation: We maintain our original assumption of a flat tractor growth for FY2013 but increase our automotive volume assumption for FY2013 from 16% to 19%. We are also revising our margin expectation for FY2013 and FY2014 slightly upwards, given the positive surprise in the Q1FY2013 results. Our sum-of-the-parts (SOTP) valuation estimates the M&M stock at Rs777; indicating an upside of 7% from the current levels. Given the aggressive headwinds in the tractor business, we maintain our Hold rating on the stock.     Oil India Cluster: Apple Green Recommendation: Buy Price target: Rs600 Current market price: Rs482 Q1 earnings ahead of estimates  Result highlights Net profit grew by 9.5% YoY to Rs930 crore: In Q1FY2013 Oil India Ltd (OIL) posted a net profit of Rs930 crore (an increase of 9.5% year on year [YoY]), which is ahead of our as well as the Street's estimates. The net profit growth was ahead of expectations on account of (1) a lower than expected subsidy burden (Rs2,016 crore vs our expectation of Rs2,141 crore); and (2) a lower than expected other expenditure (down 43.9% YoY to Rs125.9 crore) during the quarter. The net sales grew by 8.2% YoY to Rs2,439.6 crore during the quarter.  Production of oil and gas affected due to technical issue in exploration: The production of crude oil and natural gas was affected during the quarter due to a technical issue faced by the company during April and mid May of 2012. However, the company has resolved the issue and achieved its normal monthly run rate of production. The crude oil production and sales volume for the quarter declined by 2% and 3.3% YoY respectively. On the natural gas front, the company reported a decline of 2.3% in the production to 0.63bcm in Q1FY2013 whereas the sales volume was lower by 4.5% YoY. As the company has resolved the issue and recovered its normal monthly run rate, we expect the production of oil and gas to grow by 3% and 6% YoY respectively in FY2013. Realisation affected by correction in crude oil prices: With the crude oil prices correcting during Q1FY2013, the gross realisation of the company declined by 5.6% YoY and by 8.3% quarter on quarter (QoQ) to $109.8/barrel. Further, with the increase in the subsidy burden (to make up for the loss incurred by the oil marketing companies) to Rs2,016 crore from Rs1,780 crore in Q1FY2012, the net realisation of the company declined by 9.6% YoY to $53.8/barrel. However, in rupee terms the net realisation of the company improved by 9.4% YoY to Rs2,913/barrel on account of the depreciation in the rupee. On the margin front, though the operating profit margin (OPM) contracted marginally by 91 basis points YoY to 49.3%, the same is better than our estimate.  Other income supported by huge cash balance: During the quarter the other income increased by 25.8% YoY to Rs377.2 crore. The other income was well supported by the company's huge cash balance. In March 2012 the company had cash balance of Rs10,935 crore. Going ahead, this cash could be utilised to acquire oil and gas assets that could provide inorganic growth to the company.  Maintain Buy with price target of Rs600: We largely maintain our earnings estimates for FY2013 and FY2014. We also maintain our bullish stance on OIL because of its huge reserves and healthy reserve/replacement ratio (RRR), which would provide a reasonably stable revenue growth outlook. Further, the stock is available at attractive valuation and is trading at a discount to its historical average valuation. The fair value of OIL works out to Rs600 per share (based on the average fair value derived using the discounted cash flow [DCF], price/earnings [P/E] and EV/EBIDTA valuation methods). Hence, we maintain our Buy recommendation on OIL with a price target of Rs600. At the current market price the stock trades at a P/E ratio of 7.8x its FY2013E earnings per share (EPS) of Rs62 and 7.3x its FY2014E EPS of Rs66. Punj Lloyd Cluster: Apple Green Recommendation: Hold Price target: Rs60 Current market price: Rs52 Price target revised to Rs60 Result highlights Revenues below estimate, but OPM expands: In Q1FY2013 the consolidated revenues of Punj Lloyd Ltd (PLL) grew by 20% year on year (YoY; but dropped by 10% sequentially) to Rs2,707 crore. The same was lower than our estimate because the company executed slightly lesser projects than expected during the quarter. In terms of segmental contribution, the infrastructure and pipeline segments continued to dominate with approximately a 60% share (combined) in the total revenues. Geography-wise, South Asia and Asia Pacific remained the leaders by contributing 36% each to the total revenues. The highlight of the quarter came in the form of margin expansion to 8.1% from 7.4% in Q1FY2012 and 7.6% in Q4FY2012. The operating profit margin (OPM) improved on account of the withdrawal of the financial support to Simon Carves (now in administration), thanks to which the low-margin legacy orders are now out of the order book and the company is more efficient. Subsequently, the EBITDA of PLL shot up by 32% YoY during the quarter. Earnings disappoint due to escalating depreciation and interest charges: In spite of a good top line growth and margin expansion the company reported a loss of Rs13.4 crore (vs our expectation of a Rs3-crore loss) for the quarter. This was because of high interest and depreciation charges both of which surged by 61% YoY and 52% YoY respectively during the quarter. The depreciation charge in particular increased by 34% on a sequential basis because in Q4FY2012 the company had witnessed some write-back on account of the revised lifeline of its rigs. The interest cost zoomed due to higher borrowing during the quarter. Currently, PLL's debt stands at Rs5,701 crore, which is Rs100 crore more than its debt in Q4FY2012 and translates into a debt/equity (D/E) ratio of 1.9x. Further, the company also made a higher tax provisioning during the quarter which also eroded the bottom line. Debt reduction and restructuring may take another two to three quarters: PLL's debt has been constantly increasing (denting its net profit to a great extent) on account of its higher working capital needs and new project investments. It plans to reduce its debt by selling some real estate assets and replacing the domestic loans with foreign loans. However, it expects these to materialise over the next six to nine months by when the macro economy is expected to stabilise. These steps would help in lowering the debt burden as well as reducing the cost of debt. The company is also exploring the option to list its subsidiary, Sembawang, in a year or so.  Revise estimates downwards: We are revising our earnings estimates for FY2013 and FY2014 downward by 11% and 2% respectively to factor in the higher depreciation and interest charges, and tax provisions. However, taking into consideration the recent margin expansion, we have incorporated in our estimates a 40-basis-point margin expansion and a slightly higher other income during FY2013 which should restrict the fall in the bottom line in the fiscal.  Hold with a revised price target of Rs60: PLL witnessed a strong order inflow in FY2012 which has improved the revenue visibility for the next two years. It has shown an improvement at the execution level and margin expansion over the last five quarters. The company recorded a stable OPM of 7-8% in this period except for in Q3FY2012. Even the Libya situation is slowly improving though it has not stabilised so far. Thus, the worries for PLL now remain bringing the debt under control and reducing its working capital requirement. These steps would help to lower the interest burden and cause the operating profit to percolate to the net level. Hence, any success in lowering the cost of debt or improving the working capital days will add to the growth at the net profit level. Thus, we maintain our Hold recommendation on the stock as the visibility is improving. But there is not much upside from the current level. We place a price target of Rs60 (earlier Rs63) on the stock based on the enterprise value (EV)/EBITDA of 6x its FY2014 estimate.    V-Guard Industries Cluster: Ugly Duckling Recommendation: Hold Price target: Under review Current market price: Rs401 Growth on track, downgraded to Hold on recent rally Result highlights Top line growth led by non-south region and products like stabilisers, pumps and digital UPS: In Q1FY2013, V-Guard Industries (V-Guard) continued to achieve some new milestones by recording its highest quarterly revenue. During the quarter, its revenues grew by 36% year on year (YoY) to Rs327 crore (11% higher than expected). The revenue growth was driven by a growth in the sales of stabilisers (up 38% YoY), pumps (36% YoY) and digital uninterrupted power supply (UPS) systems (up 151% YoY). Further, the non-south region, which accounts for 27% of the company's total sales, demonstrated a robust growth of 46% in Q1FY2013.  Improvement in margin to 10.4%: The raw material cost decreased to 70.8% as a percentage of sales from 71.4% in Q1FY2012 mainly led by an increase in the inventories. Lower selling and distribution expenses (in Q1FY2012 the selling cost had included Rs6.3 crore of advertising cost related to the Indian Premier League event) further boosted the operating profit margin (OPM) to 10.4% vs 9.5% in Q1FY2012. The product-wise margins varied across categories, ranging from 4-6% in products like cables and fans to as high as 17-19% in stabilisers and solar water heaters. Segments like UPS systems and digital UPS systems reported slight pressure on the margin for the quarter. On the other hand, the cable and wires segment reported an uptick in profitability on account of a fall in the price of copper.  Adjusted PAT rises by 68% YoY: A lower increase in the interest and depreciation expenses contributed towards a profit after tax (PAT) of Rs20.7 crore (up 68% YoY). The same is 37% higher than our expectation. The tax rate was lower during the quarter at 25.1% (as compared with 27.7% in Q1FY2012) because of the increased contribution from the company's new Kachipuram plant, which enjoys tax benefits.  Estimates fine-tuned: The company has marginally upgraded its revenue growth target for FY2013 to over 30% YoY from 25% estimated earlier and indicated an OPM of 9.5-10.0% for the same period. We have fine-tuned our earnings estimates for FY2013 and FY2014 after incorporating the robust growth outlook for stabilisers, inverters and the recently launched products (like induction cookers and domestic switchgears) as well as the lower tax rate. We are now expecting a compounded annual growth rate (CAGR) of 29% in the company's revenue and a CAGR of 35% in its earnings over FY2012-14.  Downgraded to Hold on recent rally: The company has delivered results in line or ahead of its growth guidance in recent quarters. In Q1FY2013 its margin improved in spite of a slowdown in the consumer durables space and a fierce competitive landscape. The company's foray into product segments like induction cookers and switchgears also holds promise. V-Guard has remained our preferred play on the Indian consumption boom since we initiated coverage on the company in September 2010 and has given an upside return of 148% so far. However, after the rally in the stock price in the past few days the stock's valuations at 16.6x and 12.9x its FY2013 and FY2014 expected earnings look a bit stretched and offer limited upside from the current level. Hence, we downgrade our recommendation on V-Guard from Buy to Hold and put the price target under review.     Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.

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