Investor's Eye: Update - PTC India (Price target revised to Rs82, maintain Buy), Automobiles (Skidding industry pins festive hopes)

 

Investor's Eye [October 01, 2012] Sharekhan www.sharekhan.com

Summary of Contents   STOCK UPDATE PTC India Cluster: Apple Green Recommendation: Buy Price target: Rs82 Current market price: Rs70 Price target revised to Rs82, maintain Buy  Key points SEB reforms ease payment delay concerns: PTC India (PTC) witnessed a severe downgrade in valuation multiples in the last one year on account of delay in payment from its major state electricity board (SEB) clients-Tamil Nadu and Uttar Pradesh SEBs-which stretched its working capital (WC) cycle. However, the recent debt restructuring reforms of the SEBs should augur well for the company, as around Rs1,900 crore worth of payments are due from the above two SEBs. The management has indicated that the company is likely to receive the due amount of Rs450 crore from Tamil Nadu government by Q3FY2013 while Uttar Pradesh government is in the process of hiking the power tariffs.  Improving outlook in power sector augurs well for its investments/subsidiaries: We continue to believe that PTC remains a direct player in the power sector because its strong free cash flows have also been invested in the power sector via investment/subsidiaries (PTC India Financial Services [PFS]). With investment sentiments improving in the power sector, we feel that PTC could be looking at more profitable exits from many of its investments in the power sector. The company has also started selling power under the power tolling agreement in Q1FY2013 and has made an operating profit of Rs12.5 crore (approximately Rs1/unit) from the power tolling business.  Volume and margins also likely to improve: As the company stopped supplying power to few of its major SEB clients, the short-term-traded power units have severely suffered in recent times (fell by 15% in FY2012 on a yearly basis). Improving financials of the SEBs would help in resuming the power supply to them. Further, in FY2013, around 750-MW power projects will be commissioned, which would boost its long-term volumes. The trading margins have also fallen from 4.4 paise/unit seen in FY2011 to 4 paise/unit in FY2012. However, the rising contribution from the higher-margin long-term trade volumes would boost the trading margins in the coming quarters.  Better short-term trading volumes to boost revenues and margins: We have updated the annual report details in our projections and have marginally upgraded the short-term volume and margin assumption. Overall, we have upgraded our estimates for FY2013 and FY2014 by ~12% each, albeit on lower base of FY2012. We expect the profit from its core trading business to grow at a compounded annual growth rate of 34% over FY2012-14. We also remain positive on the company's power tolling business where one 200-MW power project has already been commissioned and another 150-MW power project is due to start operation by Q3FY2013. We have upgraded our estimates for PTC Energy Ltd (PEL) and are expecting PEL to earn net profit of Rs58 crore by FY2014. Price target revised to Rs82: While we are positive on the recent developments in the power sector, the payment recovery from the SEBs and the improvement in execution of the power projects remain crucial for keeping PTC's growth story intact. We are now valuing PEL at 4x its FY2014 profit after tax (PAT; earlier we were valuing it on the price to book value basis) because the revenues from the first of its power tolling projects have started flowing from this quarter and revenues from the second one are in the offing. On account of our upgraded estimates for the core power trading business, our sum-of-the-part (SOTP)-based price target is revised upwards to Rs82. In spite of the recent rally in the stock, the current valuations still look attractive at 0.8x FY2014 estimated book value. Hence, we maintain our Buy rating on the stock.     SECTOR UPDATE Automobiles Skidding industry pins festive hopes Broad-based volume decline accentuated by high base effect of corresponding period of last year The automotive volumes are not strictly comparable year on year (YoY) because September 2011 had the benefit of the festive season. While the volume slowdown is due to unfavourable macros, the high base in September 2011 has painted a gloomier picture as we saw a double-digit decline in the volumes. October 2012 would see a reversal of sorts as the festive season spurts the demand. Festive season to support the demand in the near term While the H2FY2013 volume outlook remains subdued, the automobile (auto) companies are hoping to see spurt in October and November numbers due to the festive season. These months would have the benefit of a low base of the last year as the volumes had dropped after increased sales in the festive season.  MHCV and two-wheelers to witness slowdown coupled with increased competition  Our competitive analysis reveals that the medium/heavy commercial vehicle (MHCV) and two-wheelers will be the most vulnerable in the medium term. The MHCV industry is likely to see growth moderation on the back of increased freight rates due to diesel price hikes. Also, the two-wheeler industry would see further slowdown in volumes on account of the increased fuel prices and economic slowdown. Subdued volumes coupled with increased competition (from Honda Motorcycle & Scooter India in case of two-wheelers and from Daimler India in case of MHCV) would increase the incumbents' woes.  Maruti Suzuki and M&M can outperform  With labour woes behind, Maruti Suzuki (Maruti) is all set to reach full production at its Manesar plant. Maruti already has an order backlog for Swift, Dzire and Ertiga. Further, with the launch of new Alto 800 cc, the company could revive sales of the entry-level cars. Mahindra and Mahindra (M&M), on the other hand, is most likely to capture the shift in consumer preference towards utility vehicles (UVs) from sedans and premium hatchbacks. With the launch of Quanto and the expected launch of Rexton, M&M has captured the entire spectrum of UVs.   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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