Investor's Eye: Update - Orbit Corporation (Upgrade to Buy; price target revised to Rs75), Insurance (APE of private players up by 5% on a Y-T-D basis) Special - Q2FY2013 Power earnings preview (Relatively a weak quarter for thermal generators)

 

Investor's Eye [October 04, 2012]  Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE Orbit Corporation Cluster: Ugly Duckling Recommendation: Buy Price target: Rs75 Current market price: Rs64 Upgrade to Buy; price target revised to Rs75 In our interaction with the management of Orbit Corporation, the management highlighted that its strategy is to focus on exiting the slow-moving projects to ease the pressure on its balance sheet and also to shift focus on few large projects for the next couple of years. We believe this could result in re-rating of the stock.   Looking to fully exit the two-slow moving large projects: Orbit Corporation (Orbit) is looking to fully exit its two large projects, namely Orbit Grandeur, Santa Cruz (a slum rehabilitation authority [SRA] project; 569,507 square feet) and Orbit Midtown, Lalbaugh (900,000 square feet), all in Mumbai by the end of this fiscal. It has already initiated talks for the SRA project at Santa Cruz. If Orbit manages to successfully close these deals, it will help the company to bring down the debt on the books, which is currently at about Rs1,000 crore. The management is eyeing Rs300-400 crore from these deals (price/book value of 2-2.3x). Currently, these two projects contribute Rs24/share to our price target. If the management manages to garner its expected valuation, then the upside from these deals to our net asset value will be ~Rs2-11/share.    Focus shifts to Mandwa township and Napean Sea Road projects: Orbit has received most of the clearance for its mega township project at Mandwa (around 24.85 lakh square feet of saleable area) and is expected to launch the project formally by Q4FY2013. Further, the company will also apply for the Special Township Act for the floor space index (FSI) of 1x, which if received would change the total saleable area in a drastic way. Currently, the FSI on the project is ~0.5x. Orbit has also signed an agreement with Hyatt for setting up a seven-star resort in Mandwa spread over 11 acres.    In addition to it, the company has a robust portfolio of high-margin ultra-premium projects around Napean Sea Road area. The major forthcoming projects in Napean Sea Road comprise of Orbit Magnum (Napean Sea Road Block project; 300,000 square feet), Kilachand property (550,000 square feet; Orbit currently holds 50% stake), Kemps Corner project (70,000 square feet) and another property (60,000 square feet). Further, it will be executing a project on behalf of JSW group's promoter, Mr Jindal, in Napean Sea Road comprising of 120,000 square feet, wherein Orbit will earn revenue share of 12%.   Expect Q2FY2013 to improve sequentially: With the regulatory environment improving and the clearances starting to come in, we expect the sales volume and execution to improve sequentially in Q2FY2013. Thus, we expect a 25% quarter-on-quarter growth in the revenues. We expect the company to report a profit after tax (PAT) at Rs4.6 crore as against the reported loss of Rs2.2 crore in Q1FY2013. On a year-on-year basis, we expect the revenues and PAT to grow by 2.3% and 9.4% respectively. The higher growth in the PAT will be led by improvement in the operating profit margin to 40%, which was sharply lower in Q2FY2012 at 33.6%.   Upgrade to Buy; estimates revised to factor in better than expected realisation in the Mandwa project: While we maintain our estimates for FY2013, we increase them for FY2014, factoring in the earlier launch of the Mandwa project. Still we have been conservative in our estimates and increase our revenue and PAT estimates for FY2014 by 5% and 6% respectively. We have not factored Orbit's plan to exit two large projects in our estimates, which will further boost the earnings. Given the change in the regulatory environment (faster approvals), slew of events planned (reduce in debt due to exit from two projects and the launch of the Mandwa project and projects around Napean Sea Road area) and revision in our estimates, we see potential for further re-rating of the stock. We have revised our price target to Rs75 (from Rs60 earlier) by factoring in early launch of the Mandwa project and the Jindal property. Given the improved fundamentals, we upgrade the stock from Hold to Buy. However, we have not taken any upside from the change in FSI in case of Mandwa (which could lead to 35-40% upside to our target price) and profit from the sale of two assets (upside of ~Rs2-11/share). At the current market price, the stock trades at profit/earnings of 16.9x and 8.1x its FY2013E and FY2014E earnings. SECTOR UPDATE Insurance APE of private players up by 5% on a Y-T-D basis Key points The annual premium equivalent (APE) of the life insurance industry during August 2012 declined by 18.6% year on year (YoY). This was mainly led by Life Insurance Corporation of India (LIC), which showed a decline of 26.5% YoY. However, the private sector players fared relatively better and grew by 1.2% YoY. On a year-to-date (Y-T-D) basis (April-August 2012), the industry showed a decline of 5% mainly due to a 9% de-growth by LIC. On the other hand, the private players showed a growth of 5% on a Y-T-D basis, mainly contributed by players like ICICI Prudential Life (ICICI Prudential; 27.6%) and Bajaj Allianz (18.8%). On a month-on-month (M-o-M) basis, the APE numbers for the industry declined by 9.3%. LIC posted a decline of 9.3% in the APE while private players showed a slightly higher decline of 9.7%. On a M-o-M basis, seven out of the 23 players posted a decline in the APEs, with ICICI Prudential reporting a decline of 57.5%. The companies which showed a positive growth on a M-o-M basis include Birla Sun Life (37.8%), Bajaj Allianz (23.7%) and Kotak Life (82%). The market share of the private players improved by ~320 basis points to 33.6% (LIC, 66.4%) in April-August 2012 compared with 30.4% in the corresponding period of the previous year. During the period under review, the companies like TATA AIA (2.3 vs 4.4%), Max Life Insurance (7.2% vs 8.4%) and Reliance Life (5.8%vs 6.2%) showed a decline in the market shares. Moreover, ICICI Prudential turned out to be a major gainer as its market share improved by ~376 basis points to 21.2%. The APE growth for the industry has been impacted by the regulatory overhaul and the uncertainty with regard to the new regulations. However, the government is likely to take several measures to boost the insurance sector, which includes faster approval of products, tax breaks, easing investment norms, easier know your customer (KYC) norms etc. Therefore, a growth in the APE is likely to improve in the second half of FY2013. SHAREKHAN SPECIAL Q2FY2013 Power earnings preview  Relatively a weak quarter for thermal generators  Power generation to decline sequentially to 223BU in Q2FY2013  In Q2FY2013, the country is estimated to have generated 223 billion units (BU) of power. This reflects a growth of 2.6% year on year (YoY). The country's power generation capacity has grown by 14% over the last year. This clearly shows that the plant load factor (PLF) of thermal plants and the generation of hydro power have both declined. The all-India PLF is expected to be lower in Q2FY2013, which is a traditionally a weak quarter for thermal plants. Moreover, this year on account of a delayed monsoon, power generation from the hydro sources also declined by around 11-13% in the first two months of Q2FY2012. We believe the volume of power generated should improve with the revival of the monsoon in several regions of the country in August and September this year. However, the all-India PLF is expected to be around 64% in Q2FY2013 against 66% in Q2FY2012 and 74% during Q1FY2013. With a depressed PLF sequentially, we expect the all-India power generation volume to decline by about 4% on account of the lower generation of hydro power during the period. Energy deficit nearing double digits  During Q2FY2013, power requirement is expected to have grown by 12% YoY to 255BU while the availability is likely to have fallen behind with an 8% year-on-year (Y-o-Y) growth. Hence, we expect a power deficit of about 9% in Q2FY2013 as against about 6% in Q2FY2012 and 8% in Q1FY2013.  Merchant power prices remained volatile: The merchant power prices are expected to have been volatile in Q2FY2013; however, the prices are likely to have remained at Rs4.0-4.5/unit on an average. Hence, amidst volatility, the blended price of the merchant power players should have been healthy at Rs4.0-4.5/unit levels. The average price realisation of the merchant power players should be better than that in the last year but lower than that seen in Q1FY2013. SEB restructuring-a step in right direction; fuel agreement issues also getting clarity  The government recently approved the bail-out package for the state electricity boards (SEBs) through a scheme to restructure their short-term loans where 50% of the outstanding debt will be converted into bonds guaranteed by the state governments and the remaining 50% will be restructured by the banks. Further, the central government would support the SEBs through a transitional finance mechanism fund for the next three years. We believe this was a major milestone in terms of reforms related to the power sector and is clearly a step in the right direction. Nevertheless, several steps are required from the SEBs to make the proposal a clear success in the long run.  There have been some more positive developments as finally NTPC has agreed to sign a new fuel supply agreement (FSA) with Coal India, as per the new term, for the units that have come up after January 2010. Moreover, Coal India is apparently taking adequate steps to ensure a steady supply of fuel to companies that have an 80% trigger level with 15% of the demand being met through imports. We have also learned from media sources that Coal India is working on a plan to import coal to supply to the power plants. However, price pooling method is yet to be finalized for imported coal. 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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