Investor's Eye
[March 20, 2013] | | |
| Summary of Contents
STOCK UPDATE Bharti Airtel
Recommendation: Hold
Price target: Rs340
Current market price: Rs281 Price target revised to Rs340; maintain Hold After dismal Q3FY2013 results and the negative regulatory developments appearing in the media pertaining to the telecom sector in general and Bharti Airtel in particular, Bharti Airtel's stock price plummeted (-20% in two months) and underperformed the benchmark indices (-12% on relative basis). Taking cognizance of the improving domestic business environment, we believe that the quantum of the stock price decline is unwarranted and thus an opportunity for the investors to accumulate the stock. Negative developments that hammered stock price Event 1: CBI makes Sunil Mittal co-accused in 2G excess spectrum case -
On Tuesday March 19, 2013, the Central Bureau of Investigation (CBI) court summoned Bharti Airtel (Bharti)'s founder and managing director Sunil Mittal, along with two other competitor executives, Ravi Ruia and Asim Ghosh, to face criminal charges in a case pertaining to the allocation of excess spectrum to the concerned companies. Our assessment and analysis Event 2: DoT orders Bharti to stop 3G services in seven circles, slaps Rs350 crore fine -
The Department of Telecom (DoT) ordered Bharti to stop providing 3G services in Kolkata, Maharashtra, Gujarat and four other regions cracking the whip on companies offering 3G services in circles where they did not have permits. -
The DoT also slapped a fine of Rs50 crore per circle, translating into a total fine of Rs350 crore for Bharti for the same. Outlook and valuation
After the recent developments, Bharti's stock reacted negatively declining by around 10% in two days and the risk-reward has turned favourable. However, we believe that the regulatory uncertainties and the recent developments would limit any upside in the near term. Thus, we continue to maintain Hold rating on the stock with a revised price target of Rs340.
VIEWPOINT Deepak Nitrite Expansion to boost earnings growth in future Key points In our initial report on Deepak Nitrate, dated June 23, 2011, we had emphasised that the company's process innovation capabilities and expansion projects (a brownfield project at Nandesari and a greenfield project at Dahej) would sharply improve the financial performance of the company and result in the re-rating of its stock. Now that the expansion exercise is complete, in this follow-up note we shall discuss the company's strategy for forward integration and improving the operating profit margin (OPM) in the coming years. The stock has already given handsome returns of 58% since the release of our initial report. We maintain our positive bias on the company in view of its future growth prospects and earnings potential. -
Completes expansion projects; set to yield benefits: Deepak Nitrite has successfully completed its brownfield project at Nandesari for manufacturing sodium nitrite and greenfield project at Dahej for manufacturing fine and specialty chemicals (optical brightening agent [OBA]; which is also part of its forward integration strategy). After expansion into OBA and sodium nitrate, Deepak Nitrite will become the most integrated OBA player in the world. The company is targeting a total turnover of Rs500 crore from the Nandesari and Dahej projects which will help it to achieve the turnover target of Rs1,000 crore over the next couple of years. -
Segmental margin is stabilising; likely to improve ahead: The segmental margin was affected in Q1FY2013 mainly because of a sudden increase in the price of the key raw materials and the company was not able to pass on the hike to the end consumers. The segmental margin has shown signs of improvement as the company has now managed to pass the price increase to the end customers. The commencement of operations at the Dahej plant along with completion of the expansion project at Nandesari will help the company to increase its revenues and margin both. The margin of the Dahej plant will be higher than that of the other businesses mainly because the key raw material (DASDA) required for the production of OBA is manufactured by the company itself. Considering the above facts we believe the company will be able to sustain the margin or even improve it from the current levels. -
Solar salts segment is another growth driver: As the expansion of the projects are completed, Deepak Nitrite now plans to manufacture a series of nitrates, such as sodium and potassium nitrates, of advanced quality, to cater to the needs of the solar industry. The demand for such solar salts would be project-based particularly where solar companies are targeting peak power supply. The increasing oil prices make such solar-based projects more economically viable and less-dependant on government support. It is estimated that each megawatt (MW) of solar power needs 300 million tonne of sodium nitrate. Hence, the opportunity horizon for this product remains very wide within the country and overseas. The Indian government has established the Jawaharlal Nehru National Solar Mission (JNNSM) under which it intends to commission 20,000MW of solar power by 2022. Understanding the growing awareness of green and clean fuel, the government's initiative and support to renewable energy sectors like the solar sector will help to drive the demand for sodium nitrate in the coming years. We believe that the foray into the solar salt business may prove to be a game changer for the company. -
Outlook and valuation: In view of the complication of expansion in the fine, specialty and inorganic segments and the introduction of new products using its research and development capabilities and state-of-the-art technology, we believe Deepak Nitrate can potentially grow at a compounded annual growth rate of around 15.6% over the next three years. In terms of valuation, the stock trades at around 8.1x and 7.0x FY2014 and FY2015 rough estimates. The stock is not under our active coverage and we do not have a rating on it.
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