Investor's Eye: Special - High on cocktail of policy measures; Update - India Cements (Downgraded to Hold; price target revised to Rs95), Retail - (awaited 51% FDI in multi-brand retail becomes a reality)

 

Investor's Eye [September 17, 2012]  Sharekhan www.sharekhan.com

Summary of Contents   SHAREKHAN SPECIAL High on cocktail of policy measures   The equity markets are celebrating the recent flurry of policy measures. Another round of liquidity infusion by the central bankers in Europe and the USA is soothing investor nerves and unleashing a "risk-on" rally globally. In India also, the government has finally shaken off the policy inertia and announced some critical policy steps to curtail the bloating subsidy bill and attract foreign inflows in the retail and aviation sectors. The developments have come as an unexpected pleasant surprise and the domestic market has accordingly reacted with a sharp appreciation of close to 7-8% in the past one week. Nifty-within kissing distance of the higher end of range and the highs made earlier this year Contrary to general pessimism and the bearish consensus view, we had always been convinced that the benchmark index (Nifty) would remain within its multi-month trading range (4600-5600) with an upward bias. Driven by the recent events, the Nifty has surged ahead touching the higher end of the range and tested the recent highs (at least on an intra-day basis). In the absolute near term, the equity market could give up some of the recent gains on account of profit booking and the growing political uncertainties domestically. However, we believe that the bias remains positive and the probability of the benchmark indices breaking out of their range has increased substantially now. The caveat is the that the government should follow up the recent moves with more policy actions and take corrective steps to support the key sectors such as power and small and medium enterprises as well as the other troubled sectors. Thus, the idea should be to buy on corrective pull-backs.  Risk/concerns: The stock market rally could lose steam if the crude oil prices remain at uncomfortable alleviated levels on the back of QE3-inducted speculative interest in commodities. Domestically, the ability of the government to move forward with reforms despite the discontent among allies and the growing pressure from the opposition on the government over the corruption charges would influence investor sentiments.   STOCK UPDATE   India Cements Cluster: Ugly Duckling Recommendation: Hold Price target: Rs95 Current market price: Rs83 Downgraded to Hold; price target revised to Rs95  Key points Robust earnings growth supported by higher realisation and base effect: During FY2012, India Cements delivered an impressive performance, with a 20% growth in the revenue and over 3x jump in the net profit to Rs296 crore as compared with just Rs66 crore in the previous fiscal. The robust earnings growth during the fiscal was supported by a surge of 25% in the cement realisation and the low base effect of FY2011. However, the demand environment in the southern region (the company's key market area) remains sluggish; therefore, during FY2012, the cement volume of the company declined by 4.4% to 9.53 million tonne over FY2011. Commissioned captive power plant to ensure regular flow and cost saving: To overcome the issue of power shortage and also to save on the power cost, the company commissioned 48MW of captive power plant (CPP) at Sankarnagar in January 2012. From March 2012, the commercial production of CPP started. Further, the company also commissioned 20MW of CPP in the Q4FY2012. Therefore, the positive impact in terms of a regular power supply and cost saving will be reflected in FY2013. Further, the work is on for the development of its coal mines in Indonesia and the project expected to be commissioned in near term. Demand environment to remain sluggish in FY2013: According to the management commentary and our interaction with the cement dealers, the demand environment in the southern region, particularly Andhra Pradesh, continues to remain sluggish on account of the absence of government infrastructure project and the poor activity in the housing segment. Therefore, delivering a better volume will be a difficult task for the company in FY2013.  Debt raising to fund Trinetra Cement; improved working capital cycle: During this fiscal, the company raised close to Rs400 crore of debt, and the overall debt stood at Rs2,429 crore (debt:equity ratio of 0.6x). The company raised funds mainly to inject capital in its subsidiary, namely Trinetra Cement. Therefore, the investment of the company increased to Rs852 crore from Rs160 crore in FY2011. On the working capital front, the company witnessed improvement in its debtors and inventory days; therefore, the overall working capital cycle improved to 147 days as compared with 217 days in FY2011. Further, the net operating cash flow of Rs826 crore was highest in three years. Valuation and outlook: Though the benefits in terms of a recent correction in the coal price and the commissioning of CPP will reflect in the company's performance in FY2013, but we believe that the lacklustre demand environment in the southern region and a sharp correction in the cement price in the month of August 2012 could affect the company's performance adversely. Further, the pressure on the cement price was relatively higher in the state of Andhra Pradesh (key area of India Cements) compared with the other states of the southern region. Therefore, we believe India Cements could underperform the broader market in the coming couple of quarters. Thus, we are downgrading our recommendation on the company from Buy to Hold with the revised price target of Rs95. At the current market price, the stock is trading at price/earnings (PE) of 8.4x, discounting its FY2014 earnings per share (EPS), and at enterprise value (EV)/earnings before interest, tax, depreciation and amortisation (EBITDA) of 4.2x, discounting its FY2014E EPS.   SECTOR UPDATE Retail Long awaited 51% FDI in multi-brand retail becomes a reality The event: government allows 51% FDI in multi-brand retail with riders  The Indian government on Friday (September 14, 2012) opened the doors to foreign direct investment (FDI) in multi-brand retail by allowing foreign players to set up shops in India with up to a majority stake of 51%. However, the government has left the final decision on the matter to the individual states. Apart from allowing the states the final discretion, the other riders or conditions for FDI in retail remain the same as announced in the last cabinet note (November 24, 2011). The conditions are as under: - Stores to be set up in cities having over one million of population - The minimum investment would be $100 million - As much as 50% of the FDI brought should be invested in back-end infrastructure (such as warehouses and logistics) within three years of investment  - 30% of the sourcing should be done from the small and medium enterprises The impact: a mixed response from the state governments Congress Party-ruled states support: All the Congress Party-ruled states (Delhi, Assam, Maharashtra, Andhra Pradesh, Rajasthan, Uttarakhand, Haryana and the governments of the State of Manipur and the Union Territory of Daman & Diu, and Dadra and Nagar Haveli) have expressed their support for the decision. Hence, as per the condition, the foreign retailers could establish their outlets in these states. Some states disagree: The state governments of Bihar, Karnataka, Kerala, Madhya Pradesh, Tripura, Uttar Pradesh, Orissa and Gujarat have publicly expressed their reservations against the decision. Our view FDI in multi-brand retail was a long-pending reform and the approval of the same would likely spur major investments in the sector. Besides improving the supply chain infrastructure, the reform is likely to lead to a moderation in the inflation rate and an improvement in the investor sentiment in the country. 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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