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PULSE TRACK July 2013 WPI inflation rises to 5.79% -
The WPI inflation number for July surprised negatively as it was higher than the Reserve Bank of India (RBI)'s comfort level of about 5%. While the core inflation remains low, the rising pressure on the food inflation and the depreciation in the local currency cast a shadow on the inflation outlook for the rest of the year. The Consumer Price Index (CPI) inflation already remains high (9.64% for July 2013) which along with fuel price hikes could further affect the prices. However, the RBI is concerned about the rising current account deficit and has taken several measures (tightened liquidity, curbed gold imports etc) to deal with it. Therefore, we do not expect any respite from the RBI in the near term unless the macro-economic situation improves significantly. -
The Wholesale Price Index (WPI)-based inflation for July 2013 rose above the market estimate as it inched up to a five-month high of 5.79%. The sequential increase in inflation is largely attributed to the rise in the fuel group and primary articles. However, the manufactured goods inflation rose marginally to 2.81% in July 2013. The inflation rate for May 2013 was revised downwards to 4.58% from 4.70% as per the provisional estimate. -
The primary articles inflation rose to 8.99% driven by food articles (up 217 basis points month on month [MoM] to 11.91%). Non-food articles posted a decline of 207 basis point MoM in the same period. The fuel group inflation rose to 11.31% from 7.12% in the previous month on the account of a spike in the mineral oil inflation to 16.01% (9.55% in July 2013). The manufacturing inflation rose by about 5 basis points as it increased to 2.81% from 2.75% sequentially. -
On an month-on-month (M-o-M) basis, the Wholesale Price Index (WPI) reading rose by 1.56% to 175.4 from 172.7 in June 2013. The primary articles index was up by 2.71% to 238.8 led by a 3.4% increase in the food articles index. The fuel index rose by 2.99% sequentially to 199.8 as the mineral oil index inched up to 220.3 in July 2013. The manufacturing index was largely flat as it rose by a meagre 0.60% in July 2013 to 150.2.
STOCK UPDATE Oil India
Recommendation: Buy
Price target: Rs650
Current market price: Rs491 Earnings below estimates Result highlights -
Net profit declined by 34.5% YoY; lower than estimates: In Q1FY2014, Oil India Ltd (OIL) posted a net profit of Rs.609.1 crore (a decline of 34.5% year on year [YoY]), which is lower than our and the Street's estimates on account of a lower than expected sales volume of crude oil and higher than expected other expenses. The revenues of the company declined by 14% YoY due to a decline in the sales volume of crude oil and a correction in the net realisation ($45.9/barrel in Q1FY2014 as against $53.9/barrel in Q1FY2013). However, the production of natural gas was impressive and grew by 5% YoY. -
Production of crude oil continues to be affected during the quarter: The production of crude oil during the quarter was affected adversely due to an external environmental issue and was unable to support the revenue growth of the company. The crude oil production and sales volume for the quarter have declined by 4.6% YoY and 7.5% YoY respectively. However, on the natural gas front, the company posted an impressive production growth of 5% YoY and a sales growth of 7.6% YoY to 0.52 billion cubic metre (bcm) in Q1FY2014. Going ahead, in FY2013-15, we expect the company's oil and gas production to grow at a compounded annual growth rate (CAGR) of 3% and 4% respectively. -
Correction in crude oil price results in lower net realisation: With the correction in the crude oil price during Q1FY2014, the gross realisation of the company declined by 7.2% YoY to $101.9/barrel. Further, despite a reduction in the total under-recoveries of oil marketing companies, the subsidy burden on OIL has been kept unchanged at $56/barrel, which leads to higher pressure on the net realisation of the company (a decline of 14.8% YoY to $45.9/barrel) as compared with a correction in the gross realisation. The subsidy outgo (to make up for the loss incurred by the oil marketing companies) was Rs1,982 crore as compared with Rs2,016 crore in the corresponding quarter of the previous year. However, the rupee's depreciation against the dollar partially offset the impact of a correction in the crude oil prices. On the margin front, the operating profit margin (OPM) contracted sharply by over 10 percentage points YoY to 38.8% on account of a lower net realisation and a higher than expected other expenses. -
Other income supported by huge cash balance: During the quarter, the company's other income continued to remain strong and stood at Rs351.7 crore. It is well supported by the company's huge cash balance. As on March 2013, the company has a cash balance of Rs12,133 crore. Going ahead, this cash could be utilised for the acquisition of oil and gas assets, which could provide an inorganic growth to the company. -
Partial de-regulation of diesel and likely increase in the gas price augurs well: The oil ministry has initiated a move to partially de-regulate the diesel price by allowing the oil marketing companies to increase the price by Rs0.50/litre on a monthly basis and eventually make diesel a completely de-regulated product. The move will result in a reduction in the subsidy outgo of the company and will improve the net realisation and earnings of the company. In addition to this, the oil ministry has also accepted the formula recommended by the Rangarajan Committee for increasing the price of natural gas. Hence, the move will further increase the profitability and earnings of the company going ahead. However, currently, we are not incorporating impact of these developments into our earnings estimate and would like to wait a little longer for better clarity. -
Maintain Buy with price target of Rs650: We continue to hold our bullish stand on OIL because of its huge reserves and healthy reserve/replacement ratio (RRR), which would provide a reasonably stable revenue growth outlook. Further, the move to de-regulate diesel price and a likely revision in the natural gas price augurs well for the company. In terms of valuation, the fair value of OIL works out to Rs650 per share (based on the average fair value arrived at using the discounted cash flow [DCF], price earnings [PE] and EV/EBIDTA valuation methods). In our fair value computation, we have not incorporated the impact of a partial de-regulation of diesel and the new gas pricing, which could provide a further upside to our price target of Rs650. Hence, we maintain our Buy recommendation on OIL with a price target of Rs650. At the current market price, the stock trades at PE of 7.8x its FY2014E earnings per share (EPS) of Rs62.8 and 6.7x its FY2015E EPS of Rs73. Max India
Recommendation: Buy
Price target: Rs296
Current market price: Rs183 Steady performance Result highlights Max India reported a consolidated profit before tax (PBT) of Rs42 crore in Q1FY2014 as compared with Rs874 crore in Q1FY2013. However, the results are not comparable on a year-on-year (Y-o-Y) basis due to a one-off income of Rs802 crore in Q1FY2013 (stake transfer from New York Life to Mitsui Sumitomo in insurance business). The operating revenues were flat at Rs1,722 crore (Rs1,731 crore in Q1FY2013) due to a slight moderation in revenues from the life insurance business. Max India also received the dividend of Rs113.3 crore for FY2013 from Max Life Insurance (MLI). -
Life insurance-premium growth better than industry's: MLI's annualised premium equivalent (APE) saw a growth of 10.1% year on year (YoY) compared with a decline of 0.8% recorded by the other private players in Q1FY2014. Moreover, it also ourperformed the industry. However, its shareholder PBT declined by 12.5% YoY to Rs112 crore mainly due to an increase in the expense ratio (22.4% vs 21.8% in Q1FY2013) and a high one-off surrender income in Q1FY2013. The conservation ratio declined to 77% from 81% in Q4FY2013 due to surrenders in the old unit linked insurance plan (ULIP) book. The new regulations will have an impact on the margin, but the same will be partly offset by product diversification, cost rationalisation etc. -
Healthcare business-revenue growth remains strong: In Q1FY2014, Max Healthcare's revenues were up by 21.3% YoY to Rs319 crore due to an expanded capacity and an increased average revenue per bed. However, the EBITDA declined by 12.4% YoY to Rs17 crore due to a temporary lag of lower revenue growth in the existing hospitals. Max Healthcare is implementing a decision to replace the low-margin institutional business with a retail business in key hospitals. -
Health insurance: Max Bupa Health Insurance (Max Bupa), the health insurance business of Max India, registered a gross written premium (GWP) of Rs59.8 crore in Q1FY2014, which is a growth of 64% YoY. The conservation ratio declined to 80% from 84% in Q4FY2013. -
Specialty films-back in profit: Max Specialty Products (MSP) reported a PBT of Rs2 crore after posting losses in the past two quarters. The outlook for the business had improved due to an improvement in prices and demand. -
Maintain Buy with a price target of Rs296: Despite a subdued growth in the industry, MLI has grown its APE by 10% and is expected to sustain the growth in FY2014.The new regulations will have an impact on the margin, but the same will be partly offset by product diversification, cost rationalisation etc. In the healthcare business, the company has invested into expanding the facilities, which will increase the profitability. Further, the company has a treasury corpus of Rs430 crore, which should be sufficient to fund the healthcare business, health insurance business and other businesses. We maintain our sum-of-the-parts (SOTP)-based price of Rs296 and Buy rating on the stock. Eros International Media
Recommendation: Buy
Price target: Rs165
Current market price: Rs130 Price target reduced to Rs165 Result highlights A soft quarter: For Q1FY2014 Eros International Media Ltd (EIML) has reported a soft performance with a 27.5% drop in the top line and a 6.5% decline in the net income. EIML's performance continues to be lacklustre in the absence of any big releases in the recent quarters, the postponement of the big-budget movie "Kochadaiyaan" and lower monetisation of its movie catalogue on account of the launch of premium advertising-free movie channels, HBO Defined and HBO Hits (its joint ventures with HBO Asia). Valuation
The fiscal gone by was soft for EIML in terms of its earnings performance; however the company has made inroads into some long-term strategic initiatives, like venturing into the HBO alliance and the launch of EROS Now (a digital platform) and strategic alliances with Endemol India and Sony for movie productions. However, the lack of super "A" category movies and lower monetisation of TV syndication (the company has forgone some part of its revenues on account of the launch of new TV channels in joint venture with HBO Asia) have dented the visibility of the company's business. We have reduced our earnings estimates for FY2014 and FY2015 by 15% and 20% respectively. We have also reduced our target multiple to 9x from 10x earlier based on the FY2015E earnings. Consequently, we have reduced our price target to Rs165 and we maintain our Buy rating on the stock. Listing on NYSE on anvil, a successful listing could be a medium-term trigger for the stock
After a long delay owing to difficult market condition in the USA, EIML's parent company Eros International Plc has filed a registration with the Securities and Exchange Commission (SEC) in the USA for listing its ordinary shares on New York Stock Exchange. EIML's management has indicated the listing may happen in November 2013. The listing will have two key implications: (a) the disclosure levels of EMIL would improve significantly in line with the SEC standards; and (b) the company also expects advances of close to Rs1,000 crore from its parent company. Orbit Corporation
Recommendation: Book out
Current market price: Rs14 Discontinuing coverage due to bleak outlook Result highlights -
Another dismal performance; next couple of quarters to remain weak: Like the previous quarter, the financial performance of Orbit Corporation (Orbit) in Q1FY2014 was dismal led by a poor execution and surging interest cost. What worries us more is the fact that the slowdown in approvals is creating an uncertainty on the revenue pipeline in future. The management also indicated that the slow approvals would impact the financial performance in the next couple of quarters. Consequently, the cash inflows would remain weak and put further stress on the balance sheet. -
Declining pre-sales adding further pressure: The pre-sales volume continued its declining trend as it dipped to Rs12.8 crore in Q1FY2014 (for an area of 5,735 square feet), which appears far lower compared with the Q1FY2013 performance of Rs52.7 crore of pre-sales (for an area of 33,571 square feet) and in tandem with the Q4FY2013 performance of Rs16.9 crore of pre-sales (for an area of 13,725 square feet). We believe the company has got stuck in getting timely approvals, which resulted in delays in the launch of upcoming projects. -
Asset sale; exit not materialising: We had persisted with the stock hoping that the proposed exit from the Santacruz and Lalbaug projects would bring in some cash flows that would ease the situation. Also, the progress on the Mandawa project is slow, which is other potential re-rating factor for the stock. However, any positive development on these events would boost sentiments and result in a considerable upside given the sharp correction in the stock. -
Better to exit on rallies: Though there is an inherent value in the stock, the positive developments on the above mentioned events could lead to a sharp bounce in the stock. We believe that would be an opportunity to exit the stock. Moreover, the real estate beaten down stock tends to give a sharp bounce back; hence, wait for one to lighten your commitments. We are discontinuing our coverage on the stock.
VIEWPOINT Escorts Strong results; positive view maintained Q3FY2013 result highlights; farm and railway businesses show strong performance -
Escorts Ltd (EL)'s Q3FY2013 revenues at Rs1,175.9 crore grew strongly by 16% year on year (YoY). The growth was led by the tractor and the railway segments, which posted a healthy double-digit growth. The construction equipment and the automotive (auto) ancillary segments declined in double digits. -
The operating profit margin (OPM) at 7.9% improved by 260 basis points YoY and 250 basis points quarter on quarter (QoQ) on account of an overall cost reduction and benefit of operating leverage. The margin of the tractor and the railway segments improved both on year-on-year (Y-o-Y) and quarter-on-quarter (Q-o-Q) bases. The margin of the construction and the auto ancillary segments dipped on both Y-o-Y and Q-o-Q bases. -
The lower interest expenses and taxation further boosted the profit. EL's net profit at Rs 58.8 crore almost trebled YoY and improved by 59% QoQ. Valuation-industry outperformer; retain positive view
We expect the company's revenues to grow by 11% in FY2014 given the strong demand for the tractors. The margin is expected to improve by 40 basis points on account of a margin improvement in the tractor space due to focus on the higher horse power (HP) range and cost control initiatives. The net profit is expected to grow by 29% in FY2014 on account of an improved operating performance and reduction in the interest expenses. The stock currently trades at 7x and 5.5x its FY2013 and FY2014 estimated earnings. Given the strong tractor demand and improved margin scenario, we have a positive view on the company.
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