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STOCK UPDATE Pratibha Industries
Recommendation: Buy
Price target: Rs65
Current market price: Rs41 Margin pressure, higher depreciation and tax rate dent earnings growth Result highlights -
Healthy revenue growth of 36% supported by better project execution: The consolidated revenues of Pratibha Industries Ltd (PIL) grew by an impressive 36.3% year on year (YoY) to Rs614 crore, which was above our expectation. The growth was led by strong execution across projects and the start of revenue recognition from some of the large orders bagged in FY2012. The infrastructure and construction division grew by 16.5% YoY. Not surprisingly, the manufacturing division continued to disappoint with its performance, with a 92% year-on-year (Y-o-Y) fall in the revenues during the quarter. -
Margin contracts by 149 basis points: The operating profit margin (OPM) contracted by 149 basis points YoY to 11.3% vs 12.8% in Q3FY2012 (168 basis points lower than expected). An increase of 295 basis points YoY in the raw material prices and operating expenses eroded the margins. However, part of the impact was nullified on account of lower personnel and other expenses. Thus, the EBITDA grew by 20% YoY, which was lower than our expectation.
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Muted earnings growth led by higher depreciation and tax rate: The reported net profit during the quarter stood at Rs20.3 crore (lower than our expectation), registering a growth of 6.4% YoY. The depreciation charge for the quarter increased by 72% YoY to Rs9.5 crore while the effective tax rate stood at 32.7% (as against 28.3% in Q3FY2012), which restricted the profit after tax (PAT) growth. -
Estimates revised: We have upwardly revised our revenue estimates for FY2013 and FY2014 by 7% and 5% respectively factoring the execution of a higher number of projects. However, on account of higher depreciation and interest expenses we have downgraded our FY2014 earnings estimate by 15%. We have introduced our FY2015 earnings estimate, Rs13, in this note. -
Maintain Buy with a price target of Rs65: However, going ahead, we will be keenly watching three essential things: (1) bagging of large orders; (2) keeping a check on the working capital and debt levels; and (3) progress on divestment of the H-saw pipe division. We continue to like PIL, given its presence in the high-margin water segment, well-diversified order book and better than industry OPM. The stock currently trades at 4.8x and 4.0x its FY2013E and FY2014E earnings respectively. Hence, we maintain our Buy recommendation on the stock with a price target of Rs65.
SECTOR UPDATE Telecommunications Telecom players withdraw from GSM spectrum auctions The government's plans of auctioning the GSM and CDMA spectrum received a major jolt as none of the companies expressed their desire to participate in the upcoming GSM spectrum auctions citing high reserve prices while Sistema Shyam Teleservices Ltd (SSTL) was the lone applicant for the sale of spectrum in the 800-MHz (CDMA) band. The development most likely delays the spectrum auction schedule beyond the expected date of March 11, 2013 and also potentially upsets the fiscal deficit targets as the government was counting on the auction receipts to bridge the deficit to a certain extent. This would be the second auction failure along with the November 2012 auctions, which also failed to garner the expected response. Outlook
The failure of the auctions reflects the fact that there is a lack of appetite for spectrum at high reserve prices as the telcom companies are already suffering from a huge debt burden and falling profitability. It is likely that the government would auction the spectrum again in a third auction. In this case, it is likely that the reserve price would be revised further downwards, which would be positive for the incumbent telecom companies. We believe that the fundamentals of the telecom companies are improving. The operators are witnessing an improvement in the pricing power. The era of cut-throat tariff war is over. We believe that the telecom companies are likely to witness an uptick in realisations (RPM) in the medium term. Any positive developments relating to the contentious decisions such as spectrum refarming and one-time spectrum fee issue are likely to provide upside triggers to our price targets. We reiterate our positive stance on the telecom sector and prefer Bharti Airtel owing to its leadership position in the Indian telecom space. Currently, we have a Hold rating on Bharti Airtel with a price target of Rs372.
SHAREKHAN SPECIAL Monthly economy review Economy: Inflation moderates though widening trade deficit worries -
In December 2012 the Index of Industrial Production (IIP) declined by 0.6%, which was lower than the market's expectation. The fall in the manufacturing, mining, and consumer goods segments led to the overall decline in the IIP. Moreover, the IIP growth for November 2012 has been revised downwards to (0.8%) from the provisional estimate of (0.1%). Therefore, based on the three-monthly moving average, the IIP growth for December 2012 stands at 2.3% as against 1.2% in December 2011. -
The Wholesale Price Index (WPI)-based inflation for January 2013 declined to a three-year low of 6.62% (7.18% in December 2012). The month-on-month (M-o-M) decline in inflation was due to softness in all three groups, viz primary article inflation, fuel group inflation and manufactured goods inflation. The core inflation declined to 4.1% vs 4.2% in December 2012. Moreover, the inflation rate for November 2012 remained unchanged at 7.24%. -
India's trade deficit in January 2013 worsened to $20.0 billion, the second highest ever and higher than $17.7 billion seen in December 2012. The trade deficit increased by 13.8% year on year (YoY). After contracting for eight consecutive months, exports increased marginally by 0.8% YoY (down 1.9% in December 2012) to $25.59 billion while imports increased by 6.1% YoY (up 6.3% in December 2012) to $45.58 billion. Banking: RBI eases repo rates and CRR by 25 basis points each in Q3FY2013 policy review -
In its Q3FY2013 monetary policy review, the Reserve Bank of India (RBI) reduced the repo rate by 25 basis points (to 7.75% from 8% earlier). However, a 25-basis-point reduction in the cash reserve ratio (CRR) rate was a positive surprise as the RBI expects to manage the liquidity via the open market operations (OMOs). The monetary easing was guided by a moderation in the headline WPI inflation, fiscal steps taken by the government (foreign direct investment, fuel price increase etc) and rising concerns over growth, which is clearly below the trend. -
The credit offtake increased by 16.4% YoY (as on February 8, 2013), which was in tandem with the 16.3% year-on-year (Y-o-Y) growth recorded in the previous month (as on January 11, 2013). -
The deposits registered a growth of 13.2% YoY (as on February 8, 2013), which was similar to the 13.3% Y-o-Y growth recorded in the previous month (as on January 11, 2013). The growth in the deposits has been subdued due to the higher yields offered by the other debt instruments and a drop in the money supply. Consequently, the growth in deposits has been much lower than the RBI's guidance of 15.0%. -
A slower growth in the deposits compared with the advances remains a concern for the banks. Consequently, the credit/deposit ratio for the banks increased to 77.6% (as on February 8, 2013) from 75.5% (as on February 10, 2012). -
The yield on the government securities (G-Secs; of ten-year maturity) stood at 7.80% as on February 22, 2013 which was lower than the average of 7.90% maintained in January 2013. Moreover, the five-year and ten-year G-Sec yields declined by 8 and 5 basis points respectively on an Mo-M basis. The cancellation of the debt auction to the tune of Rs12,000 crore by the government to contain the fiscal deficit at 5.3% coupled with a drop in inflation led to the decline in the bond yields. Equity market: FIIs remain net buyers
During the month-to-date (MTD) period of February 2013 (February 1-21, 2013), the foreign institutional investors (FIIs) were net buyers of equities and the domestic mutual funds were net sellers of equities. For the MTD period the FIIs bought equities worth Rs22,363 crore while the mutual funds sold equities worth Rs1,423 crore.
Banking stocks underperform
In the last one month, the BSE Bankex has declined by 4.0% as compared with a decline of 3.3% in the Sensex. The subdued quarterly numbers by banks as a result of asset quality issues coupled with a slower than expected recovery in the economy contributed to the underperformance of the BSE Bankex.
RAILWAY BUDGET SPECIAL Rail Budget 2013-14: Neither reformist nor populist; a balancing act In the Railway Budget for 2013-14, the government has proposed to hike the freight tariffs to pass on some of the increase in the fuel prices to the passengers but restrained from proposing any hike in the passenger fares. The implementation of a fuel adjustment component (FAC)-linked revision on freight rates and the integration of the Mahatma Gandhi National Rural Employment Guarantee Act with the railway-related work are some of the positive steps proposed in the budget.
On the flip side, a sharp jump in the capital outlay headline figure is deceptive and a large part of the jump is related to the higher allocation for investments in government undertakings, joint ventures etc rather than allocation for components (other manufacturing items) and development of infrastructure (like gauge conversion, doubling of lines, rolling stocks, signalling system etc). Moreover, the hike in freight tariffs would impact the cement, coal, steel and power companies up to 1-3% of their earnings if they are not able to pass it on to consumers. Budget for 2013-14: Implementation of fuel adjustment cost in freight rates -
The gross traffic receipt is expected to grow by 14.5% year on year (YoY) to Rs143,742 crore in FY2013-14. This would be driven by a 30% growth in the passenger receipts and a 9% growth in the freight receipts. The 21% passenger fare hike taken during January 2013 should reflect on a full year basis in 2013-14. However, this year, the passenger fares have not been revised (expect for the Tatkal booking charges). -
In the current budget, the railway minister has proposed a hike of ~5% in the freight charges which could be broadly attributed to the growth in the freight receipts. More importantly, the budget proposes to link the freight rates to diesel price movements. -
The total working expenses are estimated to grow at 13% in FY2013-14 to Rs126,000 crore, resulting in an operating ratio of 87.7% (against 88.6% in FY2013RE). The ordinary working expense is expected to be higher by 14.3% YoY at Rs96,500 in FY2014. -
The budget estimates a surplus of Rs13,147 crore in FY2014 against Rs10,409 crore in FY2013RE, implying a growth of 26%. The growth in the surplus hinges on an increase in the average rates of both passenger and freight receipts and containment of working expenses. Impact on sectors
Impact on cement sector: According to our rough analysis, the impact of a 5% increase in the freight rates will be marginal on the overall transportation cost of the cement companies and works out to around Rs2/bag of 50kg. Hence, the move will result in an increase in the transportation cost but the impact would be marginal and there may be a chance that the cement companies pass on this incremental cost to the consumers.
Impact on steel, coal and power sectors: We expect a similar impact of 1-3% (depending upon the distance) for the steel, coal, and power sectors due to a hike in the freight tariffs in the Railway Budget for 2013-14.
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