Investor's Eye
[January 04, 2013] | | |
| Summary of Contents STOCK UPDATE Aditya Birla Nuvo
Recommendation: Buy
Price target: Rs1,254
Current market price: Rs1,123 Price target revised to Rs1,254 Key points -
CCI node for Pantaloon takeover: The Competition Commission of India (CCI) has given green signal to the takeover of Future Group's Pantaloon brand business by Aditya Birla Nuvo Ltd (ABNL). ABNL through a subsidiary has proposed to acquire a majority of Pantaloon format business from the Future Group. As part of the proposed transaction, ABNL would subscribe to debentures amounting to Rs800 crore issued by Pantaloon Retail (India) Ltd (PRIL) and Rs800 crore debt of Pantaloon. The proposed combination fills the gap in the kids wear and women's fashion segment for ABNL. -
Idea-improving performance: With the regulatory uncertainties easing, we are of the view that the telecom sector is poised for a better tomorrow. Operators like Telenor and Videocon withdrew from some circles as they failed to regain the lost spectrum. Thus, we expect Idea Cellular (Idea) to benefit from the same. Also, the data usage is finally gaining traction for the company. This should be a key long-term growth driver for the company as the data usage in the country is still very low, providing Idea with a substantial opportunity in the future. -
Urea policy-a major boost for the company: ABNL may spend as much as $1 billion to double its urea capacity after the government approves the new urea policy. The company plans to sell the increased urea output in the states of Bihar, Jharkhand, West Bengal, Uttar Pradesh and in Chhattisgarh. -
Information technology (IT) and information technology enabled services (ITES) segment: In USA, ABNL works with the automotive (auto) sector, which suffered significantly in 2008. General Motors (GM) and Chrysler Group LLC (Chrysler) were ABNL's major customers that went through the crisis during 2008. The auto sector has rebounded significantly since. ABNL has also diversified within the auto sector with Hyundai Motor Company (Hyundai), Toyota Motor Corporation (Toyota) and Honda Motor Company (Honda). The company has also successfully diversified with other auto companies that have been growing sharply. -
Import duty on insulators from China: The government imposed a 35% safeguard duty on electrical insulators imported from China, which is expected to give ABNL and other domestic players a temporary relief while they adjust to the pricing tactics of the competitive foreign players. -
Valuation: With Idea's performance improving coupled with the potential benefits accruing from the Pantaloon deal, we believe that these business will be valued at higher multiples going forward. Given the diverse businesses in which ABNL is present, we value the company on a sum-of-the-parts (SOTP) basis and adjusting it with the company's consolidated debt to arrive at a price target. Factoring the higher multiple for the telecom business, we revise our target price for the company to Rs1,254 and maintain Buy rating.
SHAREKHAN SPECIAL Q3FY2013 Cement earnings preview
A weak quarter ahead Key points -
Margin pressure to dent earnings: The cement companies are expected to display a contraction in their earnings during Q3FY2013, mainly on account of complete impact of cost escalation, particularly freight charges and power & fuel cost. On the other hand, the all-India average cement prices softened by around 3-4% sequentially due to lower than expected post monsoon recovery in the construction activity. Hence, the cumulative earnings of Sharekhan's cement universe are expected to decline by 22.9% on a year-on-year (Y-o-Y) basis. The companies like Shree Cement (on account of low base effect) and Madras Cements (on account of strong volume growth supported by stabilisation of its new capacity) are expected to post positive earnings growth, whereas companies like India Cements, Orient Paper and Industries, UltraTech Cement (UltraTech), Grasim Industries (Grasim) and Jaiprakash Associates (JP Associates) are expected to post a decline in their earnings. -
Demand environment fails to pick up post monsoon recovery in volume growth: Due to slower than expected execution of infrastructure projects and other construction activity, particularly in few states of northern, central and southern regions, the cement offtake witnessed a slowdown during Q3FY2013. The cumulative volume growth of the cement companies under Sharekhan's universe is expected to increase by 4.2% on a Y-o-Y basis and by 3% on a quarter-on-quarter (Q-o-Q) basis. Hence, the volume growth is unlikely to drive the revenues growth of the cement players in Q3FY2013. For FY2013, we expect the all-India cement demand to grow by around 7-7.5% as compared with 6% registered in FY2012. -
Cement realisation declines sequentially but remains higher on a Y-o-Y basis: The all-India average cement prices have corrected by around 3-4% sequentially due to poor demand environment. Among the regions, the correction in the cement prices on a sequential basis is relatively higher in the northern and central regions to the tune of Rs10-12/bag. Further, the southern region (particularly Andhra Pradesh) has witnessed a sharp correction of Rs25-30/bag at the end of December 2012. Hence, the complete impact of a sharp correction in the price on the southern-based cement players will be reflected in the coming quarter. On the other hand, a decline in the cement prices in the western and eastern regions was limited to Rs5-7/bag on a Q-o-Q basis. We estimate the average cement realisation in Q3FY2013 to be lower by around Rs100-200/tonne on quarter on quarter (QoQ) for the companies under our coverage. However, on a Y-o-Y basis, the cement realisation remains at a higher level. The cumulative revenues of the companies under our coverage are expected to increase by 8.2% on a Y-o-Y basis. Further, as per our channel check, the cement prices have increased by Rs10-15/bag in Gujarat and declined further in few states of the southern region. For FY2013, the average realisation will be higher as compared with FY2012. Q3FY2013 Capital Goods & Engineering earnings preview
Pressure persists Key points -
Mixed performance: The third quarter of FY2013 is likely to show a mixed trend for the capital goods universe of Sharekhan. While Larsen & Toubro (L&T) and V-Guard Industries (V-Guard) are likely to deliver a strong sales growth, Crompton Greaves Ltd (CGL), PTC India (PTC) and Thermax are expected to show a flattish sales growth year on year (YoY). On the contrary, we expect the sales growth of Bharat Heavy Electricals Ltd (BHEL) to decline by around 6% on account of a poor order inflow. We believe that there is still sluggishness in order inflows in the industry, though there are initial signs of positive improvement in the Index of Industrial Production (IIP) numbers recently (October IIP at 8.2%), which would be a key monitorables for the sector. -
Margins to stabilise: The operating profit margin (OPM) is largely expected to be stable on a yearly basis except in the case of CGL, which is facing several issues related to its restructuring at its Belgium plant. We believe in the current environment, sustaining the margin would be challenging for the companies as the commodity prices have inched up in the recent past. -
Order inflow remains weak: The order inflow announcements in the capital goods space witnessed a decline in Q3FY2013. However, historically, the trend in the order inflow picks up in the second half of a financial year and that too in the last quarter. In FY2013 (till date), the total order inflow stands at Rs94,695 crore, a decline of 12% YoY. The capital goods sector is still finding it difficult to secure new orders owing to the current macro-political setup in the country. -
Remain selective; prefer L&T and V-Guard: The financial performance of the overall coverage universe is likely to be tepid, but selectively companies like L&T and V-Guard are expected to do well. We opine that the overall macro environment is still unfavourable for the sector, which is reflected in the valuation of the companies. There are initial signs of revival (supported by the policy action announced by the government in the past) in the economy (positive October IIP). We are still away from the secular uptrend in investment cycle. Q3FY2013 Agri inputs earnings preview
Margin pressure to dent earnings Key points -
Good Rabi season to revive demand in Q3FY2013: In the current rabi season, the demand for the fertilisers and agrochemicals will remain robust, mainly on the back of good humidity in the soil due to the late revival of monsoon in the kharif season and due to the timely arrival of monsoon in the current rabi season. Demand for agrochemicals and urea fertilisers during Q3FY2013 will remain robust, whereas demand for non-urea fertilisers will remain weak due to a shift in demand towards urea fertilisers due to an increase in the price gap between urea and non-urea fertilisers. -
Revenues will be driven by higher realisation: The sales volume of the manufactured fertilisers, mainly urea, may see some traction in demand during Q3FY2013. The top line of all agricultural inputs will be mainly driven by higher realisation and good volume in urea as compared with the same period of the last year. The revenues in the fertilisers and agrochemicals will be driven by higher realisation of non-urea fertilisers and agrochemicals during Q3FY2013 as compared with the last year. A hike in the prices of fertilisers and agrochemicals was mainly taken to offset the higher cost of raw material due to depreciation of rupee against other currencies. We believe that the margin of agricultural inputs may remain under pressure during the Q3FY2013. -
Chemical to outperform during the Q3FY2013: During Q3FY2013, the chemical segment of the Sharekhan's agricultural inputs universe will perform better as compared with the fertiliser segment, mainly on the back of a price increase and an increase in volume due to revival in demand. From our agricultural inputs universe, we expect Deepak Fertilisers' performance in the quarter to remain weak on the margin front, mainly on the back input cost pressure as compared with Q3FY2012. The revenues of Tata Chemicals will grow at a slower pace, mainly due to a lower production of non-urea fertilisers on the back of a decline in demand. As per our estimate, the revenues of United Phosphorous for the quarter will increase by 15% but the company may see some pressure on the margin, mainly on the back of input cost pressure.
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| | | Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. | | | |
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