Investor's Eye
[September 12, 2013] | | |
| Summary of Contents
PULSE TRACK IIP grows by 2.6%in July 2013, ahead of market's estimate -
In July 2013 the Index of Industrial Production (IIP) grew by 2.6%. The growth was higher than expected largely due to growth in the manufacturing and electricity sectors. However, the weakness in the mining sector persisted as it declined by 2.3%. A 336.0% year-on-year (Y-o-Y) spurt in the 'cable, rubber insulated' products lifted the growth in the capital goods segment to 15.2% year on year (YoY). The June IIP growth has been revised upwards to -1.8% (from the provisional estimate of -2.2%). Based on the three-monthly moving average, the IIP growth for July 2013 stands at -0.7% as against 0.1% in July 2012. -
From the sectoral perspective, the manufacturing sector, which constitutes about 76% of the IIP, grew by 3.0% YoY in July 2013 as compared with a decline of 1.8% in June 2013. The mining output remained bleak as it declined by 2.3% in July 2013 after a 4.3% Y-o-Y decline in June 2013. The electricity sector grew by 5.2% YoY in July 2013. In the use-based category, the growth in the capital goods segment jumped to 15.6% from -5.8% in June 2013 while in case of the consumer goods it declined by 0.9% vs a decline of 1.9% in June 2013. -
On a sequential (month-on-month [M-o-M]) basis, the IIP grew by 3.9% in June 2013 to an absolute figure of 171.5 (165.0 in June 2013). Barring the consumer goods segments, all other segments in the general and the used-based category grew on an M-o-M basis. Moreover, the capital goods segment grew by 22.3% MoM due to the spurt in the volatile 'cable, rubber insulated' products. -
The IIP numbers for July surprised on the positive side though its sustainability doubtful. The growth in capital goods is not sustainable given the weak investment activity in the economy. In addition the growth in the consumer segment has come off significantly in the past few months. Going ahead, given the liquidity tightening undertaken by the Reserve Bank of India (RBI) and the weakening of demand, the IIP growth may not improve significantly. On the other hand, the Consumer Price Index (CPI) inflation for August has remained high at 9.5%. While the macro-economic issues remain, the RBI guidance in the coming mid-quarter monetary policy review will be based upon the stance taken by the US Fed and exchange rate volatility.
SPECIAL REPORT Cement Good bargain for UltraTech; JP Associates' commences asset sale to deleverage balance sheet Event: JP Associates to sell part of its cement business (4.8MTPA) to UltraTech for Rs3,800 crore (largely constituting Rs3,650 crore debt)
After a long negotiation for more than one year, Jaiprakash Associates (JP Associates) has sold two cement units (4.8MTPA) based in Gujarat (Kutch and Wanakbori) to UltraTech Cement (UltraTech). Along with the two grinding units, the asset sale includes 57.5MW captive thermal power plant, limestone reserves and a captive jetty at Sewagram.
UltraTech-good bargain; retain preference for UltraTech among cement companies -
Acquisition at EV/tonne of $125 (close to replacement cost)
UltraTech has struck a deal to acquire two units of JP Associates located in Gujarat at an enterprise valuation (EV) of Rs 3,800 crore, which turns out to EV/tonne of around $125. The valuation is at a steep discount to the earlier expectation of $160-170/tonne. Moreover, both the acquired units are at a lower utilisation level and a good strategic fit for UltraTech. -
No pressure on UltraTech's balance sheet; but deal not earnings accretive in near term
The deal does not put any pressure on UltraTech's balance sheet with post-acquisition debt/equity at 0.26x. The acquisition along with the debt and some equity expansion (in lieu of equity consideration to JP Associates) would not be earnings accretive for UltraTech in the near term. -
Retain preference for UltraTech
The deal to buy a stake in the Gujarat cement plant of JP Associates and the commissioning of the 10MTPA cement capacity would improve UltraTech's volume growth outlook (total capacity would stand close to 69MTPA by 2015). We maintain our Hold recommendation on stock with a price target of Rs2,100. JP Associates-commences asset sale; deal to marginally reduce its gigantic debt -
Marginal debt reduction for JP Associates at consolidated basis; lower valuations negative
In addition to lower than expected proceeds from the sale of its cement assets, the deal would only make marginally difference to Rs63,000 crore of debt on its books on a consolidated basis. After paying off the debt on assets based in Gujarat, JP Associates will be left with Rs1,800 crore for debt reduction. Out of Rs1,800 crore, Rs1,650 crore will be utilised in reducing debt at JP Associates' stand-alone entity. JP Associates would require a lot more measures to come out of the present difficult situation. -
But deal earnings accretive for JP Associates
JCCL had reported a turnover of Rs2,017 crore and a net loss of Rs488 crore for FY2013. After hiving off the Gujarat assets, the turnover of the consolidated entity is likely to be impacted downwards by 6-7% but it is likely to be value accretive on the earnings front due to the lower interest expenditure and depreciation. -
JPA-deleveraging of balance sheet key for re-rating of the stock
In case of JP Associates, the high debt burden is a drag on the valuation. The muted outlook in two of its key businesses (real estate and infrastructure) resulted in sale of assets at less than desired valuation and put a question mark on the valuation of the company. Thus, we are downgrading the stock to Hold rating and would revise the price target in the follow-up detailed note after interacting with the company.
VIEWPOINT Tech Mahindra Better times ahead; positive bias retained We attended the annual analyst meet of Tech Mahindra Ltd (TML) on September 11, 2013 in their Pune campus. The meet was addressed by C P Gurnani (chief executive officer and managing director) along with other senior members of the management team. This is the first combined analyst meet of both TML and Satyam after the merger. TML's management has indicated at a strong revival in the demand environment in both the telecommunications (telecom) and non-telecom verticals led by a recovery in the USA and some pockets of the European regions. The business visibility has improved in recent time in the verticals like manufacturing and telecom (despite continued weakness in the top client accounts of British Telecom [BT], 12% of revenues), and has also witnessed signing of some good deals in the banking, financial services and insurance (BFSI) space. Further, the management has put emphasis on its aspiration of reaching $5 billion in revenues by 2015 through both the organic and inorganic routes. Overall, the management commentary on the demand environment was positive and it sounded comfortable on beating the industry growth in revenues (14%) in FY2014. It also indicated at continuation of demand momentum in FY2015E. Valuation
In the last three months, the stock has already run up close to 37%. At the current market price of Rs1,314, the stock is currently trading at 11x FY2014E earnings per share (EPS) of Rs121.9 and 10.2x FY2015E EPS of Rs129 (consensus estimates, excluding treasury shares), which is at a discount of 23% (for FY2015E) as compared with its nearest comparable peer like HCL Technologies. HCL Technologies is currently trading at 13x FY2015 EPS but has consistently reported strong results for the past many quarters and is one of the top performing stocks in the information technology services sector. However, we believe there is scope for an upgrade in TML's consensus earnings estimates on account of the rupee's depreciation and improved demand traction led by overall recovery in the US and European markets. We maintain our positive bias on TML and expect it to see further upside in the next 12 months. Currently, we do not have any active rating on the stock .
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Regards,
The Sharekhan Research Team | |
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