RESEARCH REPORT - MAY 2009
MARKET STRATEGY MAY 2009
Global indices continued to rally in April as data-points that came The US government conducted the so-called stress tests on 19 of the through showed signs of some stability and led to optimism about nation's biggest banks. The aim is to determine which banks are an economic recovery, amidst the ongoing economic contraction. healthy enough to survive another financial shock and which will Significant fiscal and monetary stimuli across the world have likely need additional government support. The results of the test are raised the risk appetite of investors, leading to an increase in market expected on May 4th (Monday). If the results indicate that a liquidity and also a more sanguine view on growth expectations. The significant number of banks need greater capital infusion it may lead earnings season in the US too was marked by some better than to weakness in US financial stocks and have an impact on global risk expected numbers from the financial sector, which added steam to appetite. the rally. Emerging markets stocks, over the last month have outperformed Economic data in the US continued to remain weak; the pace of the developed markets on better growth prospects and a relatively decline has however shown some signs of moderation. While it may healthier financial sector. Liquidity too has improved for EM's given be early to call for economic growth (particularly in the US and EU), the increased risk appetite of investors- a likely outcome of the the outlook looks to have improved, in the backdrop of these economic stimuli announced that has led to a more sanguine perceived 'green shoots'. outlook on a global economic recovery. Outlook for equities too as an asset class For India even though the leeway to has consequently improved resulting in provide a large fiscal stimulus remains fund flow into the emerging markets limited, RBI's sustained monetary easing gaining momentum during the month. and consumption boosting measures As a result, emerging markets including The equity markets have rallied adopted over the recent past are showing some signs of an impact. India have outperformed the developed on the belief that the worst for the markets given better growth prospects Sanguine bottom up indicators like global economy and financial markets is and a relatively healthier financial sector. recent automobile sales and cement Indian indices have gained close to 15% behind us. We believe that for the rally dispatches are examples. over the last 1m whereas the developed to sustain, stability of the US financial Global economic contraction markets (US, UK, Japan) have gained sector, effectiveness of the monetary and continues but pace of decline seems between 3-5%. fiscal stimuli, globally and locally and to be moderating The earnings announcements so far in the outcome of the ongoing general The US Gross domestic product fell at a India have been largely in line with 6.1% annualized rate in the first quarter expectations. We believe that, further elections will be the key variables to after falling 6.3% in the fourth quarter. improvement in economic data, both monitor. Economists expected it to fall at 4.7%. global and local, only will make the GDP was weighed down by a sharp current rally sustainable. We also believe decline in exports and plummeting the effectiveness of the monetary and business inventories. However, the fiscal stimulus will be a key for the inventory slowdown was seen as a performance of equities through CY09. positive, as it could mean the correction Going into the month of May, our markets would focus on the cycle is ending. results of the ongoing general election. Uncertainties on the The Fed Reserve has said that although the economic outlook has outcome of the general elections could lead to risk aversion and may improved modestly, partly reflecting some easing of financial market cap any significant upsides from the close to 12,000 levels of the conditions, economic activity is likely to remain weak for a time. It Sensex. added that the pace of contraction appears to be somewhat slower, We expect the markets to follow a longer term trend once the a belief that has helped lift US stocks over the last two months. election results are out and there is more clarity on FY10 earnings. Indian markets rally on FII inflows Equity gains continued in April- positive sentiment given Domestic equity indices have rallied, taking cues from the global higher risk appetite and liquidity, on the back of 'green equity markets and more so from the stable US markets. The rally in shoots' contribute the Sensex was also spread to the small and mid cap indices, making The US markets began on a strong note in April as better than it a broader market up-move. expected earnings announcements by Wells Fargo and expectations Sector wise the Capital Goods index and Banking index posted that banks will pass the government's stress test, boosted strong gains during the month. During the month, the bidding sentiments towards financials. The US Fed Beige book pointed to process of the fraud-hit Satyam Computers was consummated with continued decline in economic activity but indicated that the pace of Tech Mahindra emerging as the highest bidder at Rs.58. Tech decline is moderating. The Eurozone stocks also rallied taking Mahindra will now have to make an open offer for 20% stake at comfort from results announcements. Rs.58.
RESEARCH REPORT - MAY 2009 Page 1 MARKET STRATEGY MAY 2009
FIIs turned significant buyers during the month. FIIs invested Rs. 72.1 factors, in the midst of a global economic contraction: (a) bn in Indian equity markets (cash market) in March 09 on a net basis continuation of monetary easing by the RBI aimed at safeguarding v/s an outflow of about Rs 61 bn in the first three months of the growth; low WPI inflation levels will be a cushion (b) a declining calendar. We have been maintaining that, outflows on account of FII current account deficit if crude prices remain benign, and (iii) the selling will remain a major concern to watch out for. Stabilization of impact of consumption boosts, given to the rural economy, that FII flows and / or positive FII flows are important for the markets to remains relatively resilient. find its feet and move up. Also, critically banks seem to have commenced lending again, going by the data points coming through RBI. Credit-deposit (CD) ratio for Market performance- sector wise for the month of April '09 the banking industry was 71.4% at the end of February 2009 (down from 73.6% at the end of March 2008). Over the month of March 30% 2009, CD ratio increased to 72.3% from 71.4%. Even though this 24% increase is partly seasonal, we believe the RBI's discouragement to 18% banks (by cutting reverse repo rate) from investing in the reverse repo 12% window has likely begun to work. 6%
0% The Indian Government has not provided fiscal stimulus in the l l l l X s Y p e G g h U o a a s a r t a t t E a n T c i E C i d S a u e c m e S F p k G o S
p P conventional sense like large capital investment, tax cuts etc that c I M d s A a T i n M o N a B h N F & t a g l c C E E m l i B a S S e O
B have been carried out by developed markets and also Asian H economies like China. The Government has however been giving Source: Bloomberg boost to domestic consumption through consistent budgetary measures over past two years. The farm loan waiver, implementation Factory output continues to stagnate - successive contraction of the NREGA, maintaining minimum support prices for food grains witnessed in the IIP readings at high levels in FY09, and also the implementation of Sixth Pay The IIP for January 2009 posted a contraction of 0.5% as compared Commission are examples of such measures, which are aimed at to a 6.2% growth in January 2008. This contraction follows the 2% boosting domestic consumption. contraction witnessed in December 08. The impact of such consumption stimulus is likely visible in recent Mining and manufacturing output contracted at 0.8% and 0.4% auto sales volumes, cement consumption, telecom subscriptions etc. respectively. Capital goods index grew 15.4% yoy, however on While we do believe that a part of the recent upturn in these data- month-on-month basis, there was a decline. points may be due to pre-election spending, the extent of relative demand resilience in our opinion also points to benefits of The RBI and Government have taken several measures recently to government spend/measures. spur growth including interest rate cuts and series of stimulus measures. The recent fall in inflation would provide greater leeway Initial set of Q4FY09 results have been largely in line with to RBI for adopting a softer monetary stance, going forward. expectations Inflation near zero level The earnings announcements so far in India have been largely in line with expectations. Management guidance by frontline IT companies Inflation continued to moderate and was at 0.27% for the week indicated weakness in offshoring market and pressure on billing ended February 14, 2009. This is the lowest level of inflation since rates. Infosys guided for flat earnings scenario going into FY10. annual records started 32 years ago. Reliance Industries results came in line with market expectations. The decline in inflation has been magnified due to base effect. A decline in primary food articles and fuel items also helped in Recommendation containing inflation. We believe that, further improvement in economic data, both global We expect headline inflation to enter negative territory by April and and local, only will make the current rally sustainable. We also remain there till almost the end of CY09. The moderation in inflation believe the effectiveness of the monetary and fiscal stimulus will be a rate is a positive as it gives more headroom for the Government and key for the performance of equities through CY09. RBI to pursue growth through various monetary and fiscal tools. Going into the month of May, our markets would focus on the results of the ongoing general election. Uncertainties on the Crude prices have gained- a headwind for the current account outcome of the general elections could lead to risk aversion and may deficit picture cap any significant upsides from the close to 12,000 levels of the Crude oil prices are ruling at USD 53 per barrel and are up already Sensex. 55% from their lows in December 2008. Although global demand We expect the markets to follow a longer term trend once the for crude oil has stayed low as reflected by record high inventory election results are out and there is more clarity on FY10 earnings. levels of crude in the US, the supply cuts by the OPEC has ensured buoyancy in crude oil. From India's perspective, firm crude prices Market valuations are currently at about 12x-13x FY09 consensus may again pose the risk of higher fuel prices putting upward earnings. In the backdrop of a challenging economic situation, we pressure on inflation. Besides, elevated crude price bloats the import believe that, companies which benefit from Government spending bill thereby expanding the current account deficit. (in construction, capital goods and power / power related sectors) and select FMCG companies (which have exhibited demand Domestically, the economy has shown some improving resilience) will find favor with the market. indicators and bank lending has picked up We believe in the Indian economy, on whose longer term prospects we remain positive, is likely to take support from the following
RESEARCH REPORT - MAY 2009 Page 2 MARKET STRATEGY MAY 2009
The following are our preferred picks from among the sectors we cover:
Preferred picks Sector Stocks
Banking Union Bank, BoB, PNB
Construction IVRCL, NCC, Sunil Hi Tech
Engineering Bharat Electronics, Thermax, Blue Star, L&T
IT Infosys, Infotech, Mphasis
Logistics Gateway Distriparks
Media Zee News
Metals & Mining Sesa Goa
NBFCs LIC Housing
Oil & Gas Petronet LNG, GSPL
Other Midcaps AIA Engg, JBF, EKC
Source: Kotak Securities - Private Client Research
Benchmark indices FII & Mutual Fund investment (Rs Cr) IIP growth (%)
Sensex (LHS) FII MF 16 9,000 Nifty (RHS) 12 19000 5300 4,000 8 16375 4625 (1,000) (6,000) 4 13750 3950 (11,000) 0 11125 3275 (16,000) -4 l t r n C 9 y b 6 6 7 7 7 8 8 8 9 p V 8 u g 9 6 7 8 c 8500 2600 a u a 0 e 0 0 0 0 0 0 0 0 0 E e 0 J u 0 0 0 0 O ------r r J O _ - - l l l - F M y v 8 y 9 t t t _ S _ p M A D l r r n n n r a a r N n r u u u o 0 a 0 c c c e u ' ' p p a p a a p a p J J J M M J S N n n M O J O J O J A A A J A A a a J J
Source: Bloomberg Source: Bloomberg Source: MOSPI
Inflation (%) Crude (US$/bl) Rupee /US$
14.0 165 54.0
138 51.0 10.5 111 48.0 7.0 84 45.0 3.5 57 42.0 39.0 - 30 5 5 7 7 8 9 5 7 8 6 6 5 8 6 7 7 5 6 8 9 5 6 7 8 7 0 0 0 5 5 7 7 8 8 9 0 0 0 0 5 6 6 0 0 0 0 0 0 0 0 ------0 0 0 0 0 0 0 0 0 0 0 0 l 0 0 0 0 0 0 0 0 - t - - - - r ------n n c ------v r b y - p u l l t c t r c r c r c c r r r a r g g g g u a o p e a b c y c y e e J u u c e c p e e p e p p p a a u u u u J J O e e e a a A F M N S D J J M A A A A A D D D D O O A A A A F M M D D M M
Source: Bloomberg Source: Bloomberg Source: Bloomberg
RESEARCH REPORT - MAY 2009 Page 3 REPORTS
After the April Report we have released several reports, out of which we are presenting you a few reports in detail here. We request you to visit www.kotaksecurities.com to read the other reports.
Report Date Company Name Recommendation Report Date Price Target Price
25-Mar-09 Nitin Fire Protection ACCUMULATE Rs.175 Rs.225
25-Mar-09 Crompton Greaves ACCUMULATE Rs.122 Rs.170
26-Mar-09 Zee News Ltd BUY Rs.30 Rs.41
31-Mar-09 Sesa Goa ACCUMULATE Rs.102 Rs.123
1-Apr-09 Voltas Ltd ACCUMULATE Rs.46 Rs.55
2-Apr-09 AIA Engineering BUY Rs.125 Rs.200
6-Apr-09 Bharat Electronics ACCUMULATE Rs.914 Rs.950
9-Apr-09 Punj Lloyd ACCUMULATE Rs.115 Rs.158
RESEARCH REPORT - MAY 2009 Page 4 NITIN FIRE PROTECTION LTD
RECOMMENDATION: ACCUMULATE REPORT DATE PRICE: Rs. 175 TARGET PRICE: Rs. 225
25 March 2009 Apurva Doshi
We recently met the management of NFPIL to understand the impact of current economic downturn Revise FY09E EPS downwards by 16.0% to Rs.26.0 Incorporate FY10 earning estimates on increased earnings visibility Stock up sharply by ~70% in last one week We downgrade the stock to ACCUMULATE with revised price target of Rs.225 (Rs.275 earlier).
Introduction of FY10E numbers
We recently met with the management of NFPIL and have taken note earnings visibility due to stabilization of its CNG cylinders of the slowdown in the fire protection business and also slower then manufacturing plant at Vizag. In FY10E, we expect NFPIL to report expected growth in the CNG cylinders manufacturing business. net sales of Rs.2.7 bn, EBIDTA margin of 21.5% and PAT of Rs.379 However we are positive about the long term growth prospects of mn, thereby translating into an EPS of Rs.30.0 and CEPS of Rs.35.2. the company. We are introducing our FY10E estimates on higher
Slower then expected ramp up of CNG cylinders manufacturing plant
Nitin cylinder, 100% subsidiary of NFPIL, is manufacturing CNG Thus we expect the plant to produce 95000 cylinders in FY09E. cylinders at Vizag since April 2008. The plant has the capacity to produce 500,000 CNG cylinders per annum of various However the Indian economy which is domestic demand driven diameters. It is aimed at both industrial users as well as and stimulus package announced by the government is likely to automobiles with the majority being meant for automobiles. lead to growth in the domestic demand for CNG cylinders in FY10E. Thus we expect it to produce 130000 cylinders in FY10E. It produced approximately 75000 cylinders in 9MFY09 at an This would translate into capacity utilization of 19.0% in FY09E average realization of ~Rs.6000 per cylinder. However due to moving upto 26.0% in FY10E. However it is important to note temporary slowdown in the economy and global economic that the ramp up is slower then our earlier expectations. turmoil it is likely to produce only ~20000 cylinders in Q4FY09E.
Rising domestic demand - good long term potential
The demand for CNG cylinders in India is also picking up due to Reliance and GSPC we expect good amount of gas to be increasing focus on reducing the environmental pollution and available for the automobiles. also due to the fact that even after reduction in global oil prices, CNG is still ~55% cheaper then petrol. In long term we expect huge demand of CNG cylinders for all segments of automobiles like cars, trucks, buses and even two The Supreme Court has also mandated the public transport wheelers. Thus there is lot of visibility and confidence in the system of the 28 cities to be converted to CNG to reduce CNG cylinders business going forward. emissions over next few years. Also with the recent gas finds of
Fire protection business to witness slowdown in growth
With the overall slowdown in the economy the fire protection, safety expected to lead to lower then expected growth in the revenues of and security business of the company is also expected to slowdown. the fire protection business. The current order book of the company There is visible slowdown in areas like malls, multiplexes, retail is around Rs.150 mn which is likely to be executed in next four chains, manufacturing plants, IT, BPO and data centers. This is months.
RESEARCH REPORT - MAY 2009 Page 5 NITIN FIRE PROTECTION LTD
Slowdown in Dubai to impact the operations of Dubai based Fire Protection Company
In January 2008 NFPIL had acquired 40% stake in a Dubai based revenues. However looking at the severe slowdown in the fire protection Company 'New Age Company' LLC (NACL) for construction activity in the Middle East we expect the financials 15 mn Dirham (Rs.162.9 mn). NACL is engaged in fire of the company to be under pressure. protection system, fire detection system, emergency lighting system and water mist fire protection system. For FY09E we expect NACL to report revenues of Rs.528 mn and PAT of Rs.84 mn. For FY10E we expect NACL to report revenues The current order book of the company is around Rs.175 mn. of Rs.554 mn and PAT of Rs.89 mn. At 40% holding, we expect Majority of the orders are of the industrial projects which are Rs.34 mn in FY09E and Rs.35 mn in FY10E to be added to the supported by the government and thus there is visibility for its net profit of NFPIL as share of profit form associate company.
Change in FY09 earning estimates
We have revised the earnings estimates for FY09E to account for We expect NFPIL to report consolidated EBIDTA margin of the current economic slowdown impacting its fire protection 21.1% in FY09E (no change), PAT of Rs.328 mn in FY09E (down and CNG cylinders business. 16.0%).
For FY09E we now expect NFPIL to report lower revenues of Accordingly, we expect the company to report lower EPS of Rs.2.4 bn (down 12.1%). We now expect the Vizag plant to Rs.26.0 as against our earlier estimate of Rs.31.0 for FY09E produce 95000 cylinders in FY09E (down 28.0%) with average (down 16.0%). realizations of Rs.6000 per cylinder.
Introduction of FY10E numbers
In FY10E we expect Nitin Cylinders to manufacture and sell Over FY08 to FY10E the revenues of NFPIL are expected to grow 1,30,000 CNG cylinders at an average realization of Rs.6000 at CAGR of 43.9% and PAT is expected to grow at CAGR of per cylinder. 39.7%.
We expect NFPIL to report revenues of Rs.2.7 bn (up 15.8%), We have valued NFPIL on DCF method of valuation with 13.6% EBIDTA margins of 21.5% (as against 21.1%) and PAT of Rs.379 WACC and 3.0% terminal growth rate. Thus the price target is mn (up 15.5%). Accordingly we expect NFPIL to report EPS of revised to Rs.225 per share as against Rs.275 earlier. Rs.30.0 and CEPS of Rs.35.2 in FY10E.
Valuation & Recommendation
The stock of NFPIL has risen sharply by ~70% in last one week. However the long term growth prospects of the company At the current market price of Rs.175, it trades at 1.3x book remain intact and would recommend investors to value, 5.8x earnings and 5.0x cash earnings based on FY10E. ACCUMULATE the stock at lower levels.
We feel that post the recent sharp run up the stock is fairly Thus, we are downgrading the stock of NFPIL to ACCUMULATE valued at current levels. Also there are medium term concerns with revised price target of Rs.225. like slowdown in the Global and Indian economy which would negatively impact its fire protection and CNG cylinders business.
RESEARCH REPORT - MAY 2009 Page 6 NITIN FIRE PROTECTION LTD
Consolidated summary table
(Rs mn) FY08 FY09E FY10E Sales 1,324 2,367 2,742 Growth (%) 31.7 78.8 15.8 EBITDA 254 499 589 EBITDA margin (%) 19.2 21.1 21.5 Net profit 194 328 379 Net debt 332 651 764 EPS (Rs) 15.4 26.0 30.0 Growth (%) 94.0 68.9 15.5 DPS (Rs) 2.0 2.0 2.0 ROE (%) 25.9 22.9 21.9 ROCE (%) 25.1 23.0 22.0 EV/Sales (x) 1.9 1.2 1.1 EV/EBITDA (x) 10.0 5.7 5.0 P/E (x) 11.4 6.7 5.8 P/BV (x) 1.9 1.6 1.3
Source: Company, Kotak Securities - Private Client Research
Change in Estimates
Old Revised FY09E FY09E FY10E Revenues 2,694 2,367 2,742 EBIDTA % 21.1 21.1 21.5 Profit 390 328 379 EPS 31.0 26.0 30.0 CEPS 33.7 28.6 35.2 CNG cylinders produced 132,000 95,000 130,000 Price Target (Rs.) 275 225
Source: Company, Kotak Securities - Private Client Research
RESEARCH REPORT - MAY 2009 Page 7 NITIN FIRE PROTECTION LTD
CNG cylinders manufacturing capacity utilization
Capacity Lakh cylinders (LHS) Capacity Utilisation (% - RHS) 6 40
5 30
4 20
3 10
2 0 FY09E FY10E
Source: Company, Kotak Securities - Private Client Research
Fire Protection business revenue growth (Rs mn)
1,500
1,200
900
600
300
- 7 8 6 E E 0 0 0 0 9 1 0 Y Y Y Y Y F F F F F
Source: Company, Kotak Securities - Private Client Research
Cylinder business revenues (Rs. mn)
2,000
1,500
1,000
500
- 6 7 8 E E 0 0 0 9 0 0 1 Y Y Y Y Y F F F F F
Source: Company, Kotak Securities - Private Client Research
RESEARCH REPORT - MAY 2009 Page 8 NITIN FIRE PROTECTION LTD
Cons. Net sales (Rs bn)
3,000
2,250
1,500
750
- 6 8 4 5 7 E E 0 0 0 0 0 9 0 1 0 Y Y Y Y Y Y Y F F F F F F F
Source: Company, Kotak Securities - Private Client Research
Cons. EPS (Rs)
32
24
16
8
0 8 4 5 6 7 E E 0 0 0 0 0 9 0 0 1 Y Y Y Y Y Y Y F F F F F F F
Source: Company, Kotak Securities - Private Client Research
Revenue breakup - FY08
Cylinder 30%
Fire Protection 70%
Source: Company
RESEARCH REPORT - MAY 2009 Page 9 NITIN FIRE PROTECTION LTD
Revenue breakup - FY09E
Fire Protection 46%
Cylinder trading 54%
Source: Company, Kotak Securities - Private Client Research
Revenue breakup - FY10E
Fire Protection 44%
Cylinder trading 56%
Source: Company, Kotak Securities - Private Client Research
Profit and Loss Statement (Rs mn)
(Year-end March) FY08 FY09E FY10E Revenues 1,324 2,367 2,742 % change YoY 31.7 78.8 15.8 EBITDA 254 499 589 % change YoY 51.7 96.3 17.9 Other Income 30 (22) 14 Depreciation 14 33 66 EBIT 270.5 444.8 537.4 % change YoY 71.9 64.4 20.8 Net interest 8 52 79 Profit before tax 262 393 459 % change YoY 70.1 49.8 16.7 Tax 68.3 99.1 115.5 as % of EBIT 25.3 22.3 21.5 Net income 194 294 343 add minority int - 34 35 NPAT 194.1 327.7 378.5 % change YoY 94.0 68.9 15.5 Shares outstanding (m) 12.6 12.6 12.6 EPS (reported) (Rs) 15.4 26.0 30.0 CEPS (Rs) 16.5 28.6 35.2 DPS (Rs) 2.0 2.0 2.0 Source: Company, Kotak Securities - Private Client Research
RESEARCH REPORT - MAY 2009 Page 10 NITIN FIRE PROTECTION LTD
Cash Flow Statement (Rs mn)
(Year-end March) FY08 FY09E FY10E EBIT 270 445 537 Depreciation 14 33 66 Change in working capital (543) (205) (199) Changs in other net current assets 8 (105) (37) Operating cash flow (251) 167 367 Interest (8) (52) (79) Tax (75) (99) (116) Cash flow from operations (334) 17 172 Capex (775) (300) (250) (Increase)/decrease in investments (242) - - Dividends - (36) (36) Cash flow from investments (1,017) (336) (286) Proceeds from equity issue 1,078 - - Increase/(decrease) in debt 426 207 250 Deferred tax credit (1) - - Cash flow from financing 1,502 207 250 Opening cash 61 212 99 Closing cash 212 99 236
Source: Company, Kotak Securities - Private Client Research
Balance sheet (Rs mn)
(Year-end March) FY08 FY09E FY10E Cash and cash equivalents 212 99 236 Accounts receivable 328 592 713 Inventories 520 769 960 Others 322 592 686 Current assets 1,382 2,052 2,594 Misc exp. 0 0 0 LT investments 242 242 242 Net fixed assets 667 935 1,119 Total assets 2,292 3,230 3,956
Payables 401 710 823 Others 191 355 411 Current liabilities 592 1,065 1,234
LT debt 543 750 1,000 Other liabilities(deferred tax) 1 1 1 Equity 126 126 126 Reserves 1,029 1,287 1,595 Total liabilities 2,292 3,230 3,956 BVPS (Rs) 91.7 112.2 136.6
Source: Company, Kotak Securities - Private Client Research
RESEARCH REPORT - MAY 2009 Page 11 NITIN FIRE PROTECTION LTD
Ratio Analysis
(Year-end March) FY08 FY09E FY10E
EBITDA margin (%) 19.2 21.1 21.5 EBIT margin (%) 20.4 18.8 19.6 Net profit margin (%) 14.7 13.8 13.8 Adjusted EPS growth (%) 94.0 68.9 15.5
Receivables (days) 81.7 70.9 86.8 Inventory (days) 82.8 99.4 115.1 Sales/assets (x) 2.0 2.5 2.5 Interest coverage (x) 33.4 8.6 6.8 Debt/equity ratio (x) 0.5 0.5 0.6
ROE (%) 25.9 22.9 21.9 ROCE (%) 25.1 23.0 22.0 EV/ Sales (x) 1.9 1.2 1.1 EV/EBITDA (x) 10.0 5.7 5.0 Price to earnings (x) 11.4 6.7 5.8 Price to book value (x) 1.9 1.6 1.3 Price to Cash Earnings (X) 10.6 6.1 5.0
Source: Company, Kotak Securities - Private Client Research
RESEARCH REPORT - MAY 2009 Page 12 CROMPTON GREAVES LTD
RECOMMENDATION: ACCUMULATE REPORT DATE PRICE: Rs. 122 TARGET PRICE: Rs. 170
26 March 2009 Sanjeev Zarbade
Investment of Rs 2.3 bn in group power utility company engaged in development of power projects. Approved share buyback through open market at a price not exceeding Rs 170. Expect marginal increase in debt equity ratio due to buyback and investment in group company. Maintain Accumulate given slowdown in domestic industrial production. Overseas subsidiaries also face pressure as the Euro Zone has been slowing down. Maintain Target price at Rs 170.
Investment of Rs 2.2 bn in group power utility
CGL has approved an investment of Rs 2.3 bn in equity shares of Rs four captive power plants and is developing two 600 MW power 10 each of Aventha Power and Infrastructure Ltd (APIL). The projects in the state of Madhya Pradesh. investment will be made at book value and would represent approximately 41% stake in APIL. APIL, a group company is engaged CGL has also indicated that it may in the future pursue similar in generation, transmission and distribution of power. APIL operates opportunities for investment in the power sector.
Market's reaction has been negative to this move
Following the announcement during trading hours, the stock had a T&D equipment supplier and has not focused on project based sharp correction. Our understanding is that opportunities for orders, which further reduces opportunities for the company in the synergies are limited. There have been instances of main power plant Electrical Balance of Plant segment. package suppliers taking minority stake in power projects. However, for them the addressable opportunity in a power projects is large to Moreover, the investment is of a long-term nature as returns in the the extent of 60% of project cost. In case of CGL (pure T&D form of dividends would be generated only after a period of 3-4 equipment supplier) the addressable equipment supply opportunity years (being the execution timeframe). is limited to 10-15% of project cost. CGL has also traditionally been a
Pricing of stake - Rs 2.2 bn for a company developing 1200 MW project:
CGL would be investing Rs 2.2 bn in APIL for a 41% stake. APIL is The project has received coal linkage, debt closure, land acquisition already in the middle of developing 1200 MW of project consisting and clearances. Thus to that extent the risk involved with this project of 600 MW each at Korba and Jhabua. This project has already made is limited. significant progress so far as necessary prerequisites is concerned.
CGL has also indicated that the pricing had been approved by independent directors.
Pricing of stake appears to be reasonable. Equity commitment of a 1200 MW project assuming 70:30 debt equity ratio works out to Rs 14.4 bn. Thus for a 41% stake equity commitment would be Rs 5.9 bn, however CGL is paying only Rs 2.2 bn for the stake.
Buyback of equity shares
CGL has approved buyback of equity shares of Rs 2/ each from the open market at a price not exceeding Rs 170/- per share, upto an amount of Rs 2.2 bn (25% of paid-up capital). At the current price, the maximum stake that can be bought works out to 5%.
Impact on balance sheet:
The total outgo on account investment in APIL and Buyback works company may have to raise debt for funding substantial portion of out to Rs 4.5 bn. We forecast the company to end the year with a investment. We see the consolidated debt equity ratio to increase cash of Rs 2.7 bn after incurring capex of Rs 2.0 bn. Thus, the marginally to 0.66x.
RESEARCH REPORT - MAY 2009 Page 13 CROMPTON GREAVES LTD
Valuation
CGL is currently trading at 8.8x and 7.6x FY09 and FY10 earnings respectively. We maintain Accumulate with a price target of Rs 170.
Summary table - Cons
(Rs mn) FY08 FY09E FY10E
Sales 68463.4 87022.6 98883.2 Growth (%) 20.7 27.1 13.6 EBITDA 7578.7 9137.4 10382.7 EBITDA margin (%) 11.1 10.5 10.5 Net profit 4066.3 5061.4 5883.9 Net cash (debt) -5975.5 -6226.8 -5697.3 EPS (Rs) consolidated 11.1 13.8 16.0 Growth (%) 44.3 24.5 16.3 ROE (%) 35.8 33.3 29.4 ROCE (%) 34.2 34.8 32.5 EV/Sales (x) 0.8 0.6 0.1 EV/EBITDA (x) 7.0 5.9 0.5 P/E (x) 11.0 8.8 7.6 P/BV (x) 3.4 2.6 2.0
Source: Company, Kotak Securities - Private Client Research
Shareholding pattern
Others 23% promoters 39%
FIIs 13%
MFs 25%
Source: Company
RESEARCH REPORT - MAY 2009 Page 14 ZEE NEWS LTD (ZNL)
RECOMMENDATION: BUY REPORT DATE PRICE: Rs. 30 TARGET PRICE: Rs. 41
26 March 2009 Saurabh Gurnurkar
Recent ratings for ZNL's bouquet point to core business continuing to garner good ratings and enjoying strong competitive positioning. Marathi and Bangla remains leaders, new launches- Telugu, Kannada report stable GRP's. For ZNL the competitive positioning of its bouquet and a systematic scale up across properties while maintaining reasonable financial discipline, which we believe is critical, offer opportunities in the market-place. While we remain pessimistic on prospects of medium term advertising spend trends, ZNL is likely better off given positioning of strong franchises in regional markets, which are likely to enjoy better growth prospects. Nevertheless, a challenging macro for ad spends is likely to impact ZNL in the near term in addition to new investments that are expected over the succeeding quarters. At a forward P/E of 12x, ZNL is amongst the few names in the segment that will see a decent growth momentum in the media broadcast space. Amid the current macro environment, we retain preference for news and regional language channels. We recommend that investors pare down exposure to Hindi GECs; continue to prefer ZNL over ZEEL. ZNL remains our only BUY rated stock with a price target of Rs.41.
Zee News- well diversified, reasonable financial discipline, news genre to see healthy advertiser interest in an otherwise cautious environment
ZNL has three driver channels - Zee Marathi, Zee Bangla and Zee Management expects Zee Tamil to break even in 36-48 months, News - making up close to 70% of its total advertising revenues. which will likely happen on achieving 180 GRPs weekly. Zee We believe this reduces the risk of overdependence on one Tamil currently logs 35 GRPs a week and enjoys a No.3 position property and ensures a well diversified revenue stream, unlike in the Tamil GEC market. other competitors in broadcasting. The management has indicated that Zee Gujarati is being shut Further, the composition of ZNL's advertising revenue is well down on 20 April 2009 because the channel is unlikely to turn balanced between the two genres of regional entertainment profitable in the near future. This is also based on the and news: regional genre contributes c60% while news assessment that market growth for Gujarati regional channels contribute c40% of advertising revenues. entertainment is stunted since Gujarat as a market consumes content in the Hindi language, more than in the Gujarati Positive catalyst in the June quarter from the upcoming General language. We see this as positive as it will help management Elections. ZEEN expects advertising revenues of Rs.1-1.5bn to focus on new channels that have better profit prospects like Zee accrue to television channels in the June 2009 quarter from the Tamil & 24 Ghanta. upcoming elections. We note a majority of that spend is likely to happen on news channels, due to their audience profile and Weekly GRP trends for Regional channels have not shown any reach. change. We believe regional channels are better placed vis-a-vis Hindi GEC's to ride the slowdown. Zee News continues to have Tamil regional TV advertising market is worth Rs.6.9bn, a solid leadership in its key regional GEC markets of according to estimates and ZNL remains confident of garnering Maharashtra and Bengal, with a solid lead over the a decent share of the market in the next two years. competition.
RESEARCH REPORT - MAY 2009 Page 15 ZEE NEWS LTD (ZNL)
Projected financials- we remain pessimistic on advertising spend trends in a deteriorating economy. ZNL bouquet's positioning, stable ratings and regional media's better positioning will likely help ZNL outpace industry growth
ZNL has grown its advertising revenues strongly over the recent preference for regional media given its reach, its cost quarters; FY08 ad revenues grew at 69% and in 9MFY09 it has effectiveness and also saturation in certain urban markets could clocked a growth of 51%. These rates remain above industry likely end up being longer term enablers for revenue growth and also other broadcasters that have released results- ZEEL has sustenance in the regional media space. grown ad revenues by 21% YoY for the 9M period while In our projections, we expect advertising revenues to grow at a registering a dismal 2% growth in Q3FY09. CAGR of 26% over FY08-10E. While this may look aggressive in We see these above industry growth rates as a factor of a the current macro, we note that of this, we expect the existing favorable macro-environment and its ratings that have been channels (79% of FY10E ad revenues) to grow at a reasonable steadily dominant in their niches. Of these factors while ratings 16% CAGR. for ZNL remain stable, the macro has deteriorated significantly. The new channels are expected to contribute incrementally to We have not tried of pointing this fact out and we expect the revenues, from a smaller base and grow at a 52% CAGR over impact of this macro to be debilitating for many companies the period. We expect new channels to contribute to 11% of across the sector. FY10E ad revenues from their 7% contribution in FY08. We opine ZNL's currently strong positioning and diversified For FY10E we are factoring in a modest 14% growth in existing bouquet lends reasonable revenue visibility over the medium channel ad revenues, a significant slowing from the 19% ad term that is better off than segments and companies within the revenue growth we are building for FY09E. sector. Still dominant ratings of its properties and a premise of regional That said we do not expect ZNL to grow at the rates it has till media growth outpacing national media lend support to our ad now and see a definite moderation in growth. While we remain revenue growth estimates, possibly. pessimistic on prospects of medium term advertising spends, a
Subscription revenues- we expect a 26% CAGR over FY08-10E. Pay revenues- a counter cyclical growth opportunity, expect domestic subscriptions to grow led by increasing DTH penetration:
Going forward over FY08-10E we expect subscription revenues estimated international pay revenue given the favorable INR to grow at a 26% CAGR. We believe pay revenues will likely be a equation. strong growth driver for ZNL financials along with ad revenue While initial CAS off-take has been muted, the opportunity in contributions from existing channels. our opinion will be led by a strong traction in DTH services, This growth is expected to be driven by a revamp of the domestic which is expected to have 21mn subscribers by FY11E, up from cable distribution business and strong growth in the DTH the c9mn currently. We expect DTH collections to rise at a 62% subscriber base. We also believe ZNL's international CAGR over the period- aided by strong growth in the DTH sub subscription revenues are likely to benefit from the recent INR count and relatively strong positioning of the ZNL bouquet. depreciation. In our estimates we have marginally upped our
Margins- to largely hold over FY08-10E despite new investments and slowing growth. Stable ratings and breakeven of new properties may support.
Earnings growth for ZNL, in our opinion is likely to be driven by margins and likely offsetting to an extent the general rise in revenue momentum due to stable ratings for its assets and also operating costs that we envisage for ZNL over the period. currently loss-making businesses contributing to the bottom In our projections we have accounted for slower ad revenue line. Of the current loss-making ventures, Zee Telugu is growth in the medium term and higher cost structures on expected to breakeven in FY09E while Zee Kannada may follow account of new investments. Rising competitive intensity and in 1HFY10E, as per management guidance. new properties will likely entail higher programming Gains from this though would be offset by start up losses in new investments as ZNL looks to grow its positioning and channels (Tamil, Telugu news, UP channel and Bengali movies), addressable market. in our opinion. On the back of the above we expect EBITDA to We estimate a still strong and above peer EPS CAGR of 28% grow at a CAGR of 27% over FY08-10E. over FY08-10E; an EPS of Rs.2.1 in FY09E and Rs.2.6 in FY10E We see the incremental pay revenue stream as a positive for from Rs.1.5 in FY08.
RESEARCH REPORT - MAY 2009 Page 16 ZEE NEWS LTD (ZNL)
Valuations: look okay, given no further material deterioration in business fundamentals. They also appear favorable vis-à-vis the growth on offer and also on comparison with peers
At 12x FY10E EPS ZNL is trading at reasonable valuations with on account of the same, in addition to its better visibility and respect to the growth on offer (28% EPS CAGR over FY08-10E) reasonable financial discipline. and also relative positioning of its bouquet and resilience of target markets. Nevertheless we remain cognizant of the fact that a meaningful re-rating from current levels will likely follow more encouraging We also opine the stock may likely quote at a premium to peers news-flow on the macro and advertising revenue trends.
Recommendation - retain our BUY rating. Reasonable Q3 numbers, above industry growth rates and reasonable financial discipline validate it being our only preferred pick in the sector.
We arrive at a DCF based price target of Rs.41. Our DCF model A premium is justified in our opinion after factoring in the uses a higher WACC of 14.2% and terminal growth of 4%. relative growth rates, stability in competitive positioning and a strong franchise in niche segments that is expected to outpace Our exit multiple remains at a premium to ZEEL's target multiple. industry growth.
Key Concerns:
A sharp slowdown in the economic growth trajectory, which will Hyper-competition impacting player and industry profitability impact advertising revenue growth and company financials negatively negatively. Lower than estimated pick-up in the subscription revenue Loss in ratings and competitive positioning stream
ZNL's flagship regional offerings- Bangla, Marathi remain market leaders
0.15 Zee 24 Ghanta
0.12 Akaash Bangla DD7 Bangla 0.09 ETV Bangla Kolkata TV 0.06 Sangeet Bangla
0.03 Star Ananda Star Jalsha 0 Tara Muzik 8 8 8 8 8 8 8 9 9 9 9 9 8 8 0 0 0 0 0 0 0 0 0 0 0 0 0 0 ------Zee Bangla t t r v v v c n b c n b p p c c a o o o e e a e e a e e O O J J F F M S S N N N D D
Source: Company, Kotak Securities - Private Client Research
RESEARCH REPORT - MAY 2009 Page 17 ZEE NEWS LTD (ZNL)
ZNL's flagship regional offerings- Bangla, Marathi remain market leaders
0.20 DD10 Marathi 0.16 ETV Marathi 0.12 IBN Lokmat Mi Marathi 0.08 Star Majha 0.04 Zee 24 Taas Zee Marathi 0.00 8 8 8 8 8 8 9 9 9 9 9 8 Zee Talkies 8 8 0 0 0 0 0 0 0 0 0 0 0 0 0 0 ------t t r b v v v c c n n b p p c c a o e e a a e e o o e e O O J J F F M S S N N N D D
Source: Company, Kotak Securities - Private Client Research
ZNL's hindi news channel maintains positioning
Aaj Tak 0.28 DD New s IBN 7 0.21 India TV
0.14 Live India New s24
0.07 NDTV India Sahara Samay 0.00 Star New s 8 8 9 8 8 8 8 8 9 9 9 9 8 8 0 0 0 0 0 0 0 0 0 0 0 0 0 0 ------TEZ - - t t r v v v c c b b n n p p c c a o o o e e e e a a e e O O J J
F F M Zee New s S S N N N D D
Source: Company, Kotak Securities - Private Client Research
RESEARCH REPORT - MAY 2009 Page 18 ZEE NEWS LTD (ZNL)
Summary table
(Rs mn) FY08 FY09E FY10E
Sales 3675.1 5095.8 5994.9 Growth (%) 52.8 38.7 17.6 EBITDA 677.6 943.8 1087.7 EBITDA margin (%) 18.4 18.5 18.1 Net profit 370.8 499.5 612.1 Net debt (cash) 128.4 375.6 212.0 EPS (Rs) 1.5 2.1 2.6 Growth (%) 396.3 34.7 22.5 CEPS 1.9 2.5 3.1 DPS (Rs) 0.4 0.4 0.4 ROE (%) 19.1 22.3 23.1 ROCE (%) 29.6 31.7 28.3 EV/Sales (x) 1.9 1.4 1.2 EV/EBITDA (x) 10.5 7.8 6.6 P/E (x) 18.8 13.9 11.4 P/Cash Earnings 15.3 11.7 9.5 P/BV (x) 3.4 2.9 2.4
Source: Company, Kotak Securities - Private Client Research
RESEARCH REPORT - MAY 2009 Page 19 SESA GOA
RECOMMENDATION: ACCUMULATE REPORT DATE PRICE: Rs. 102 TARGET PRICE: Rs.123
31 March 2009 Saurabh Agrawal
We are revising our recommendation on Sesa Goa to "ACCUMULATE" from "BUY". We are not altering our earning's estimates and valuation but given the sharp 45% rally in the stock price in the last three weeks, the expected upside to our target price stands considerably reduced, prompting us to change our recommendation. The target prices remains unchanged at Rs.123 based on 2.5x EV/EBITDA for FY09E.
While we expect the following positives in medium term...
We feel while traders can book partial profits, investors with medium Declaration of exploration results for iron ore mines at Goa and term outlook should continue to hold for time being as some Karnataka. Sesa Goa's mining life expectation would increase interesting developments may unlock better value in the near term. very significantly once exploration results of iron ore mines at We anticipate following positive triggers for the stock in the next few Goa and Karnataka are announced within next 2 months. The months: present iron ore reserves stand at 180mn tonnes which is sufficient for about 8-10 years of mining life at FY10 expected Robust Q409 results. Our preview for the same would be out rate of production. shortly. It is well understood that coking coal and pig iron businesses would make negligible contribution in Q409. Lets Any announcement of commencement of prospecting at high focus on iron ore which traditionally also contributes bulk of grade iron ore mine at Jharkand. That would bring in focus to a profitability. Sesa Goa's iron ore business operating highly valuable asset which doesn't seem to be discounted in performance has turned extremely volatile in last few months. the present valuations of the company. Jharkand iron ore is For Q4FY09, our study indicates (a) Terrific iron ore sales usually a high grade ore (both lumps and fines) which has high performance in first three weeks of both Jan and Feb 2009 (b) domestic demand by sponge iron producers in the vicinity and Iron ore sales coming to complete standstill in fourth week of commands a significant premium to the iron ore fines which both Jan and Feb 2009 and first week of March 2009 (iii) Iron Sesa Goa presently mines. ore sales volume revived from second week of March.
...hindrances also exist
We note that the following concerns might hinder in the upward re- It is observed that in the last few months, Indian and Australian rating of the stock: iron ore miners have gained market share in iron ore exports to China at the expense of world's top iron ore major, Brazil's Vale. Iron ore inventory stockpiles at Chinese ports have shot up to This is possible because of spot iron ore sales by Australian and 67mn tonnes levels from 57mn tonnes levels few weeks back. Indian miners at a considerable discount to the annual contract Iron ore inventory had peaked at 76mn tonnes in late 2008 and prices at which Vale is selling, making the latter's supply the return of inventory declining trend is needed to revive action considerably expensive. This trend might not last for long if in the iron ore spot imports. annual contract prices are settled at sharply lower levels in the For last 2-3 quarters, Sesa Goa's iron ore sales volume from its near future or if Vale starts selling at a discount in the spot operations in Orissa and Karnataka mines has been markets. continuously disappointing. Logistics costs has shot up sharply Global steel production ex China continues to fall sharply which while iron ore spot prices have crashed, this has severly hurt the has put the iron ore industry in surplus for the time being. Any competitiveness of the iron ore from these geographies. We sustained revival in iron ore spot prices looks unlikely for the believe the company management needs to demonstrate some next 1-2 years. concrete steps to meaningfully mitigate this problem else the incremental volume guidance for the coming years would be at risk in the challenging macro environment.
RESEARCH REPORT - MAY 2009 Page 20 SESA GOA
Update on Board Meeting held at March 30 2009
Mr. P.K. Mukherjee has been reappointed MD of Sesa Goa for amalgamation approved with Sesa Industries has been stayed next three years beginning April 1 2009 by a Supreme Court order. There have been no material changes in the result as pig iron division had negligible contribution to Mr. D.D. Jalan and Mr. Akhilesh Joshi has resigned as board of the profitability. Net profit of the standalone entity stood at directors of the company Rs.4629mn (EPS Rs.5.88) as against Rs.4708 (Rs.5.98) for Company has declared standalone results for the quarter ended amalgamated. December 31 2009. This has been done as the scheme of
Some positives worth reflecting
China currency has remained steady against US$ and prices stands reduced. appreciated against all the other iron ore exporting nations including India. This makes imported iron ore more attractive to At cost of repetition, Sesa Goa has ~ Rs.22000mn in cash & cash the domestically production iron ore. equivalents and Rs.10000mn as advance to group company and has zero debt. Balance sheet strength provides cushion to Recent comments from Baosteel and Rio Tinto suggest that any further unexpected turmoil in the global economy. infrastructure projects expected from the China's US$586bn stimulus package have not yet started and that might happen in Sesa Goa is still trading at an attractive valuations of 4.4x P/E and 2HCY09 1.8x EV/EBITDA for FY09E which already discounts most of the known concerns. Almost 90% of Sesa Goa's iron ore sales is happening in the spot markets, so the hit in earnings from sharp fall in contract
Weekly Indian iron ore export price to China CFR (US$/t)
Weekly Indian iron ore export price to China CFR (US$/t)
85 62% Fe 58% Fe
75
65
55
45 8 9 8 8 9 9 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 ------r r r r c c c n n n n n b b b b a a a a e e e a a a a a e e e e J J J J J F F F F M M M M D D D ------6 3 0 2 9 6 3 0 7 6 3 7 0 2 9 6 1 2 3 1 2 2 1 2 2 1 1 2
Source: Bloomberg
Monthly iron ore exports to China (mn tonnes)
Monthly iron ore exports to China (mn tonnes)
20 India Australia Brazil
16
12
8
4
0 8 8 8 8 8 9 7 8 8 8 8 9 8 8 8 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 ------l - t r c n b r y n v c n b p u g c a a a u e e p o e a e e J u J J O J F M A F D S N D M A
Source: Bloomberg RESEARCH REPORT - MAY 2009 Page 21 SESA GOA
Target Price based on FY09E amalgamated earnings (remains unchanged) EBITDA Multiple Valuation Value (Rs mn) (x) (Rs mn) (Rs/Share) Enterprise Value 24,783 2.50 61,957 77.8 Add: Net Cash (at end of FY09) 36,145 45.4 Target Market Capitalization 98,103 123.1 Target Price 123 Source: Company & Kotak Securities - Private Client Research
Summary table - amalgamated
(Rs mn) FY08A FY09E FY10E Sales 37,659 51,552 47,062 Growth (%) 91.3 36.9 -8.7 EBITDA 23,032 24,783 21,779 EBITDA Margins (%) 60.3 47.8 46.0 Net Profit 15,489 19,494 17,956 EPS (Rs.) 19.7 23.2 22.5 Growth (%) 155 18 -3 ROE (%) 52.6 40.3 29.0 ROAE (%) 68.0 49.0 33.2 EV/Sales (x) 1.6 0.9 0.7 EV/ EBITDA (x) 2.6 1.8 1.5 P/E (x) 5.2 4.4 4.5 P/B (x) 2.7 1.8 1.3 BVPS (x) 37.4 57.5 77.2
Source: Company, Kotak Securities - Private Client Research
Profit and Loss Statement (Rs mn) (Year end March) FY08A FY09F FY10F
Net Sales 37659 51552 47062 EBITDA 23032 24783 21779 Other Income 744 1805 2875 Depreciation 500 562 676 Interest 28 0 0 PBT 23249 26026 23977 Taxes 7760 6532 6021 PAT 15489 19494 17956 Shares Outstanding mn 787.2 796.6 796.6 EPS 19.7 23.2 22.4
Source: Company, Kotak Securities - Private Client Research
RESEARCH REPORT - MAY 2009 Page 22 SESA GOA
Cash Flow Statement (Rs mn)
(Year end March) FY08 FY09E FY10E Net Profits 15489 18444 17806 Add Depreciation 500 562 676 Decrease in Working Capital -1003 327 -754 Increase in Deferred Tax 15 0 0 Cash flow from Operations 15001 19333 17729 Capital Expenditure -490 -1549 -2213 Increase in Investments 0 0 0 Increase in Loans and advances -199 0 0 Other items 0 0 0 Cash flow from investing -688 -1549 -2213 Increase in Equity 0 5 0 Increase in Borrowings 0 0 0 Dividend Payment -2072 -2097 -2097 Cash flow from financing -2072 -2092 -2097 Total Cash Flow 12240 15691 13419 Opening Cash in Hand 8666 20720 36145 Closing Cash in Hand 20720 36145 49564 Change in Cash Balance 12054 15425 13419
Source: Company, Kotak Securities - Private Client Research
Balance Sheet (Rs mn) Year end March) FY08A FY09F FY10F LIABILITIES LIABILITIES Equity Share Capital 393.6 398.3 398.3 Reserves & Surplus 29,040.9 45,387.9 61,097.2 Net Worth 29,435 45,786 61,495 Short Term Loans 0 0 0 Long Term Loans 0 0 0 Deferred Tax Liabilities 664 664 664 Total Liabilities 30,365 46,450 62,159 ASSETS Gross Block 7,696 9,073 11,120 Less Depreciation 2,936 3,498 4,174 Net Block 4,760 5,575 6,946 CWIP 215 387 553 Investments 20,510 35,935 49,354 of which financial investments 20,510 35,935 49,354 Total Current Assets 8,643 9,402 10,187 Total Current Liabilities 3,763 4,849 4,881 Net Current Assets 4,880 4,553 5,307 Total Assets 30,365 46,450 62,159 Source: Company, Kotak Securities - Private Client Research
RESEARCH REPORT - MAY 2009 Page 23 SESA GOA
Key Ratios (%) (Year end March) FY08A FY09F FY10F EBITDA Margins (%) 60.3 47.8 46.0 NPM Margins (%) 40.5 37.6 37.9 ROE on yr-end equity (%) 52.6 40.3 29.0 ROAE (%) 68.0 49.0 33.2 EPS growth (%) 155.4 17.7 -3.5 P/E (x) 5.2 4.4 4.5 EV/sales (x) 1.6 0.9 0.7 EV/EBITDA (x) 2.6 1.8 1.5 P/B (x) 2.7 1.8 1.3 BVPS (Rs) 37.4 57.5 77.2
Source: Company, Kotak Securities - Private Client Research
RESEARCH REPORT - MAY 2009 Page 24 VOLTAS LTD
RECOMMENDATION: ACCUMULATE REPORT DATE PRICE: Rs. 46 TARGET PRICE: Rs. 55
1 April 2009 Sanjeev Zarbade
We recently interacted with the management of Voltas. The management has indicated that order book is comfortable and adequate to drive growth in FY10 and FY11. However, order booking in Q4FY09 has been slack and hence there could be sequential degrowth in order backlog.
The consumer durables segment is likely to report improved profitability in the coming months. Inventory levels are under control.
The Voltas stock has posted a strong outperformance since our previous update. As against a return of 18% by the Sensex, the Voltas stock has returned 40% over the past couple of weeks.
In view of the sharp run-up in stock price, we downgrade the stock to Accumulate from BUY. Maintain target price at Rs 55.
Stock trading at 6.9x and 6.4x FY09 and FY10 earnings respectively.
Concall Highlights
Order backlog may degrow sequentially as order booking has believes that current order backlog (30 months of project been slack in Q4 FY09: Voltas management indicated that the revenues) is adequate for ensuring growth in the medium term company has not won significant orders during the quarter including FY10 and part of FY11. partly due to subdued project finalization. Also the company
Order book (Rs bn)
60
45
30
15
0 Q1 FY08 Q2 FY08 Q3 FY08 Q4 FY08 Q1 FY09 Q2 FY09 Q3 FY09
Source: Company
Voltas is the lead project manager in HVAC package of the Burj robust fundamentals of the economy. Moreover, the economy tower project. There are two consortium partners including ETA is not likely to be significantly impacted by the fluctuation in and Hitachi. The company indicated that the project is likely to energy prices as the most the supply contracts are long-term in be completed as per schedule by October 2009. nature.
In the Dubai market, the company has two projects under In Qatar, the company has two large projects under implementation. Exposure to the Dubai region has been implementation: Barwa Township project and Citra research restricted to a minimum as the management creditably foresaw and medical centre. Both these projects are prestigious and are an overheating of the real estate market and diverted its focus government funded in some form. on the Abu Dhabi and Qatar region The management highlighted that the Abu Dhabi economy is Voltas indicated that despite the overall slowdown in global cash rich and has vast reserves to sustain capital expenditure for economy including the Middle East, some estimates put the a long time. Moreover, the demand for infrastructure and economic growth of Qatar in the range of 9-10% reflecting the residential housing is immense in this region.
RESEARCH REPORT - MAY 2009 Page 25 VOLTAS LTD
Voltas has received certification to bid for government funded decline of 13% in the third quarter. In the fourth quarter, projects in air conditioning and water treatment. The Singapore offtake has improved and Voltas has managed to improve its government has plans to increase infrastructural spending as market share. counter cyclical measures to revitalize its economy. Voltas foresees large opportunities in this market. Voltas also indicated that segment margins in consumer durables business should improve in Q4 FY09 and Q1 FY10 as The prospects of the consumer durables Segment has improved the third quarter had several one-offs that compressed margins. in view of the possibility of having an extended summer season Going ahead, the company expects segment margins in this this calendar. The Room airconditioner industry had posted a business to stay in the range of 4-5%.
PBIT margins (%) Q3 FY09 Q3 FY08 Q2 FY09
Electromechanical projects 6.8 7.4 5.9 Engg products and services 9.8 17.7 21.7 unitary cooling 0.7 5.2 6.8 Others 7.1 10.5 3.6 Total 6.4 9.5 8.8
Source: Company
Inventory levels in consumer durables under control
The consumer durables industry was saddled with excess inventory result of which the capital engagement had increased substantially as a result of early commencement of monsoons in CY08. The at Voltas by Q3 FY09. This is reflected in the table below wherein subsequent economic slowdown only aggravated the situation as a capital employed had increased by 84% in unitary cooling business.
Capital Employed (Rs mn) Q3 FY09 Q3 FY08 % change
Electromechanical projects 3539.3 1879.4 88
Engg products and services 1343.7 1006 34
Unitary cooling 1777 965 84
Others 115 86.9 32
Source: Company
Engineering services business continue to be under stress: The the form of uptrend in orders for garment exporters (may lead to engineering products and services business continues to face increased capex by textile cos). Besides iron ore exports have also subdued demand trend. But there are some signs of improvement in picked up.
RESEARCH REPORT - MAY 2009 Page 26 VOLTAS LTD
Valuation
Voltas is currently trading at 6.9x and 6.4x FY09 and FY10 Since our previous update, the company has outperformed the earnings respectively. broad market. The stock has returned 40% compared to 18% rise in the benchmark. In view of this, we downgrade the stock At the current price, dividend yield works out to 3.0%. Debt free to Accumulate with the price target of Rs 55. and cash on hand of Rs 3.0 bn. We revise rating downwards to Accumulate from BUY with a Return on Capital Employed at 49.4%. Return on Equity of price target price of Rs 55. 29.1% in FY10.
Summary table (Rs mn) FY08 FY09E FY10E
Sales 30,445 38,103 42,918 Growth (%) 26.8 25.2 12.6 EBITDA 2,509 2,861 3,103 EBITDA margin (%) 8.2 7.5 7.2 Net profit (adjusted) 1,700 2,219 2,390 Net cash (debt) 2,275 1,773 1,157 EPS (Rs) 5.1 6.7 7.2 Growth (%) 50.9 30.6 7.7 CEPS 5.6 7.2 7.8 DPS (Rs) 1.2 1.4 1.4 ROE (%) 37.0 35.0 29.1 ROCE (%) 62.9 59.9 49.4 EV/Sales (x) 0.3 0.3 0.3 EV/EBITDA (x) 3.5 4.3 4.2 P/E (x) 6.5 6.4 5.9 P/Cash Earnings 6.0 5.9 5.5 P/BV (x) 2.1 1.9 1.6
Source: Company, Kotak Securities - Private Client Research
RESEARCH REPORT - MAY 2009 Page 27 AIA ENGINEERING LTD
RECOMMENDATION: BUY REPORT DATE PRICE: Rs. 125 TARGET PRICE: Rs. 200
2 April 2009 Apurva Doshi
Steady demand from the cement and utility industry as the product is consumable in nature Good pick up in volumes for the mining segment - approved by new players Maintain FY09 EPS estimate of Rs.18.1 Stock attractively valued at 5.8x FY10E EPS of Rs.21.5 Maintain BUY with unchanged price target of Rs.200
FY10E earning estimates
We recently spoke with the management of AIA Engineering Ltd and industry. In FY10E, we expect AIA to report net sales of Rs.12.1 bn, are positive about the growth prospects of the company. We are EBIDTA margin of 25.1% and PAT of Rs.2.0 bn, thereby translating introducing our FY10E estimates on higher earnings visibility due to into an EPS of Rs.21.5 and CEPS of Rs.24.0. visible demand for mill internals from the cement and the mining
Steady replacement demand for the cement sector
India's current cement capacity is ~208 MT. On an average, the wear CAGR of 7.0% form 182 MT in FY09E to 208 MMT in FY11E. AIA rate of grinding media per ton of cement production is around 100 with more then 95% market share for the mill internals of the grams. Hence, we estimate 20000 MT as annual replacement domestic cement market is expected to continue to grow. Thus we demand. As per Cement Manufacturers Association (CMA) and see steady growth in the demand for the mill internals for the industry sources the total cement dispatches are expected to grow at cement industry.
Cement industry volume and growth
250 15 Cement (MT - LHS) Grow th (% - RHS) 12 200 9 150 6
100 3
50 0 E E E 3 4 5 6 7 8 9 0 1 0 0 0 0 0 0 0 1 1 Y Y Y Y Y Y Y Y Y F F F F F F F F F
Source: Company, Kotak Securities - Private Client Research
Huge potential for high chrome mill internals in mining segment
The average cost of high chrome mill internals for the mining chrome. So, there is a huge potential to convert the balance into sector can go up to 10% of the total cost of production as the high chrome mill internals, which can lead to substantial savings grinding media requirement may vary significantly depending in terms of better efficiency, reduction in power consumption on the location and the condition of the mines. In the mining and consistent production. industry, the mineral ore has to be ground to a specific size before further processing can be done to recover the metals The company has been very successful in the initial trial of the from the mining ores. mill internals for the mining segment. AIA has got a positive response from the Brazil, North American and South African The global market of mill internals for the mining segment is markets. ~2.5 mn TPA of annual replacement demand. Currently, only 10-15% of the mill internals in the mining industry are of hi-
RESEARCH REPORT - MAY 2009 Page 28 AIA ENGINEERING LTD
Expanded scope in mining segment
Post the expansion of capacities from 65000 to 165000 TPA in fairly confident of supplying around 50000 MT of mill internals H1FY09, the management is looking at the mill internals for for mining segment in FY10E. mining segment as its next big growth driver. However due to commodities meltdown most of the iron ore mines abroad are In the mean time the company has got its mill internals approved operating at significantly low capacities. This has made the for the gold, copper and platinum mines of some of the big management cautious and thus it is unwilling to commit big miners in Brazil, Australia and South Africa. This is positive as it supplies in such volatile times. The management prefers to would lead to increased capacity utilization of the expanded currently execute small orders and would tie up long term capacities. contracts only after the situation stabilizes. We are positive on the long term growth prospects of the high However the long term scenario looks good as the company still chrome mill internals for the mining segment. This is due to has several large enquiries to the tune of 80000 MT and it is superior quality of its products which would lead to overall cost saving of about 10% to 25% for its users.
To reach 2 lakh TPA capacity by October 2009
At present, the company has 165,000 TPA capacities on softening demand for the metals. However the company has already consolidated basis. The second expansion of 100000 TPA is delayed initiated some de-bottlenecking plans which would help to enhance since the company has not been able to procure land in an SEZ near the capacity to two lakh TPA by October 2009 at a capex of Rs.600 to its existing facility and also the global meltdown has led to mn.
Stable operating margins
On the margin front, AIA has been able to fully pass on the hike in its for the mill internals is expected to remain robust as these are key raw material i.e. Ferro chrome prices, thereby keeping its replacement products in cement, utility and mining industries. Thus margins intact. Currently while the raw material prices are going going forward the operating margin of AIA is likely to remain stable. down it is also passing the benefit to its customers. Also the demand
Newer orders - increase in capacity utilization
The company is continuously developing new high quality products 35% currently and it is looking to take it up to 40% next year. We for the mining and the utility segment. AIA has already established feel AIA is likely to get new orders that would further improve its itself in China. We expect the company to scale up its supplies in capacity utilization of the new plants and, thereby, raise its operating China due to its superior quality. The company has increased its share efficiency. in the global cement market excluding China from 25% last year to
Capacity utilization
Capacity (TPA - LHS) 200000 120% Utilisation rate (% - RHS)
100% 150000 80% 100000 60% 50000 40%
0 20% FY04 FY05 FY06 FY07 FY08 FY09E FY10E
Source: Company, Kotak Securities - Private Client Research
RESEARCH REPORT - MAY 2009 Page 29 AIA ENGINEERING LTD
Robust order book - could grow further at rapid pace
The current order book of the company is ~Rs.4.0 bn. Out of this is for exports. Going forward the company is likely to receive large order book; nearly 80% is for the cement, 10% for utility and orders for the export of mill internals for the mining segment and balance 10% for the mining segment Almost 60% of the order book thus we expect the order book to grow further at a rapid pace.
Debt free company - Dividend yield of 3.2%
The company is debt free and in fact has cash surplus of Rs.1.7 bn on share. At the current market price of Rs.125 it translates into tax free the books. AIA has strong history of increasing dividend payout since dividend yield of 3.2% which is an added incentive for investing in 2005. For FY08 the company paid 40% divined i.e. Rs.4 per equity the stock of AIA.
Earning estimates and price target
We maintain our earning estimates for FY09E and expect AIA to In FY10E we expect AIA to report revenues of Rs.12.1 bn (up report revenues of Rs.10.0 bn, EBIDTA margin of 25.6% and 20.8%), EBIDTA margins of 25.1% (as against 25.6%) and PAT PAT of Rs.1.7 bn thereby translating into EPS of Rs.18.1 and of Rs.2.0 bn (up 19.0%). Accordingly we expect AIA to report CEPS of Rs.20.2. AIA is expected to sell 95000 MT of mill EPS of Rs.21.5 and CEPS of Rs.24.0 in FY10E. internals in FY09E at an average realization of Rs.106 per kg. Over FY08 to FY10E the revenues of AIA are expected to grow at Going forward for FY10E we expect AIA to sell 135000 MT (up CAGR of 32.6% and PAT is expected to grow at CAGR of 42.1%) of mill internals at an average realization of Rs.90 per kg 23.2%. (down15.0%). The growth in volume is primarily due to foray into export of mill internals for the mining segment. The drop in We have valued AIA on DCF method of valuation with 13.6% average realizations is primarily due to fall in prices of its key raw WACC and 3.0% terminal growth rate. The price target materials like ferro chrome and mild steel scrap which the remains unchanged at Rs.200. company would pass on to its customers.
Earning Estimates
(Rs mn) FY09E FY10E % shift Revenues 10,063 12,155 20.8 EBIDTA (%) 25.6 25.1 (1.8) Profit 1,700 2,023 19.0 EPS (Rs) 18.1 21.5 19.0 CEPS (Rs) 20.2 24.0 18.9 Qty. sold (MT) 95000 135000 42.1 Avg. Realization (Rs/Kg) 106 90 (15.0) Price Target (Rs/share) 200 200 -
Source: Company, Kotak Securities - Private Client Research
Valuation & Recommendation
At the current market price of Rs.125, AIA trades at 1.3x book AIA which revealed that currently is trading at the lower end of value, 5.8x earnings and 5.2x cash earnings based on FY10E. its band of 5x -20x one year forward earning estimates which makes it very attractive at current levels. We have also done a one year forward rolling band analysis for
RESEARCH REPORT - MAY 2009 Page 30 AIA ENGINEERING LTD
One year forward rolling PE band AIA
500 Price 5x 10x 15x 20x 400
300
200
100
- 6 6 7 7 7 8 8 8 8 9 5 6 6 7 7 8 6 7 8 6 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 ------t t t n n c b n c r c b r c b r b g g g c c c u e u e e e p u e e p e p e u u u J O J O J O F A F A F A F D D D D A A A
Source: Company, Kotak Securities - Private Client Research
We continue to remain positive on the medium to long term growth prospects of the company and continue to recommend BUY on AIA Engineering with unchanged price target of Rs.200.
Key Risks
Lower then expected capacity utilization could lead to lower Ferrochrome is the main raw material for making mill internals. revenues and profitability. Thus, any increase in prices, which the company is not able to pass on to its customers, or disruption in its availability, could Adverse forex movement could impact the financials in the short impact the profitability of the company. term as more then 50% of revenues are out of exports.
Summary table - Consolidated
(Rs mn) FY08 FY09E FY10E Sales 6,912 10,063 12,155 Growth (%) 32.1 45.6 20.8 EBITDA 1,638 2,575 3,054 EBITDA margin (%) 23.7 25.6 25.1 Net profit 1,333 1,700 2,023 Net debt (Cash) (130) 63 (36) EPS (Rs) 14.2 18.1 21.5 Growth (%) 41.3 27.5 19.0 DPS (Rs) 4.0 5.0 5.0 ROE (%) 21.8 25.4 25.2 ROCE (%) 29.2 36.2 36.2 EV/Sales (x) 1.7 1.2 1.0 EV/EBITDA (x) 7.1 4.6 3.8 P/E (x) 8.8 6.9 5.8 P/BV (x) 1.9 1.6 1.3
Source: Company, Kotak Securities - Private Client Research
RESEARCH REPORT - MAY 2009 Page 31 AIA ENGINEERING LTD
Mill internal sales (000` TPA)
140
105
70
35
0 4 5 6 7 8 E E 0 0 0 0 0 9 0 0 1 Y Y Y Y Y Y Y F F F F F F F
Source: Company, Kotak Securities - Private Client Research
Operating margin (%)
30.0
25.0
20.0
15.0
10.0 5 6 7 E E 8 0 0 0 0 9 0 0 1 Y Y Y Y Y Y F F F F F F
Source: Company, Kotak Securities - Private Client Research
Dividend History - FV Rs.10
(%) FY05 10 FY06 25 FY07 35 FY08 40
Source: Company
RESEARCH REPORT - MAY 2009 Page 32 AIA ENGINEERING LTD
Net sales (Rs bn)
14
11
7
4
0 5 8 E E 6 7 0 0 0 0 9 0 0 1 Y Y Y Y Y Y F F F F F F
Source: Company, Kotak Securities - Private Client Research
EPS (Rs)
22
17
11
6
0 5 6 7 8 E E 0 0 9 0 0 0 0 1 Y Y Y Y Y Y F F F F F F
Source: Company, Kotak Securities - Private Client Research
Profit and Loss Statement (Rs mn) (Year-end March) FY08 FY09E FY10E Revenues 6,912 10,063 12,155 % change YoY 32.1 45.6 20.8 EBITDA 1,638 2,575 3,054 % change YoY 31.8 57.1 18.6 Other Income 317 86 125 Depreciation 136 196 232 EBIT 1,819 2,464 2,947 % change YoY 37.3 35.5 19.6 Net interest 16.8 17.8 21.0 Profit before tax 1,802 2,446 2,926 % change YoY 38.5 35.7 19.6 Tax 460 734 878 as % of EBIT 25.3 29.8 29.8 Net income 1,342 1,713 2,048 minority interest 9 13 26 Net Profit 1,333 1,700 2,023 % change YoY 41.3 27.5 19.0 Shares outstanding (m) 94.0 94.0 94.0 EPS (reported) (Rs) 14.2 18.1 21.5 CEPS (Rs) 15.6 20.2 24.0 DPS (Rs) 4.00 5.00 5.00 Source: Company, Kotak Securities - Private Client Research
RESEARCH REPORT - MAY 2009 Page 33 AIA ENGINEERING LTD
Cash Flow Statement (Rs mn) (Year-end March) FY08 FY09E FY10E
EBIT 1,819 2,464 2,947 Depreciation 136 196 232 Change in working capital (775) (1,244) (1,139) Changs in other net current assets (433) (219) (157) Operating cash flow 746 1,199 1,884 Interest (17) (18) (21) Tax (460) (734) (878) Cash flow from operations 269 447 985 Capex (821) (800) (350) (Increase)/decrease in investments 518 697 - Dividends (78) (536) (536) Cash flow from investments (382) (639) (886) Proceeds from equity issue - - - Increase/(decrease) in debt (29) (36) - Deferred tax credit (42) - - Cash flow from financing (71) (36) - Opening cash 449 266 37 Closing cash 266 37 136
Source: Company, Kotak Securities - Private Client Research
Balance sheet (Rs mn) (Year-end March) FY08 FY09E FY10E Cash and cash equivalents 266 37 136 Accounts receivable 1,748 2,616 3,160 Inventories 1,360 2,113 2,735 Others 1,949 2,767 3,343 Current assets 5,322 7,534 9,373 Misc exp. 0 0 0 Investments 947 250 250 Net fixed assets 2,150 2,754 2,871 Total assets 8,419 10,538 12,495 Payables 628 1,006 1,033 Others 1,413 2,013 2,431 Current liabilities 2,041 3,019 3,464
Debt 136 100 100 Other liabilities(deferred tax) 143 143 143 Equity 188 188 188 Reserves 5,912 7,088 8,600 Total liabilities 8,419 10,538 12,495 BVPS (Rs) 64.9 77.4 93.5
Source: Company, Kotak Securities - Private Client Research
RESEARCH REPORT - MAY 2009 Page 34 AIA ENGINEERING LTD
Ratio Analysis
(Year-end March) FY08 FY09E FY10E
EBITDA margin (%) 23.7 25.6 25.1 EBIT margin (%) 26.3 24.5 24.2 Net profit margin (%) 19.3 16.9 16.6 NPAT growth (%) 41.3 27.5 19.0
Receivables (days) 92.3 79.1 86.7 Inventory (days) 71.8 63.0 72.8 Sales/assets (%) 321.5 410.4 432.2 Interest coverage (x) 108.2 138.4 140.3
Debt/equity ratio (x) 0.0 0.0 0.0
ROE (%) 21.8 25.4 25.2 ROCE (%) 29.2 36.2 36.2
EV/ Sales (x) 1.7 1.2 1.0 EV/EBITDA (x) 7.1 4.6 3.8 Price to earnings (x) 8.8 6.9 5.8 Price to book value (x) 1.9 1.6 1.3 Price to Cash Earnings (X) 8.0 6.2 5.2
Source: Company, Kotak Securities - Private Client Research
RESEARCH REPORT - MAY 2009 Page 35 BHARAT ELECTRONICS
RECOMMENDATION: ACCUMULATE REPORT DATE PRICE: Rs. 914 TARGET PRICE: Rs. 950
6 April 2009 Sanjeev Zarbade
Provisional results indicate subdued fourth quarter numbers. Full year PBT below our expectations Order book at Rs 100 bn indicates lackluster order booking Maintain Accumulate with target price of Rs.950
Provisional results for FY09 FY09 FY08 % Chg Q4 FY09 Q4 FY08 % chg Revenue 46,180 40,254 14.7 27,654 22,499 23.0 PBT 10,950 11,713 -6.5 7,280 7,824 -7.0 PBT margin % 23.7 29.1 26.3 34.8 Source: Company, Kotak Securities - Private Client Research
Revenue growth in line with expectations
BEL disappointed in the first nine months of FY09 and recorded a skewness in quarterly distribution of revenues has continues in FY09. revenue growth of 4%. In the fourth quarter, as per our estimates, The fourth quarter contributed 60% of revenues in FY09 as against the company managed to report a 23% rise in turnover. The 56% in FY08.
Significant decline in margins
PBT margins for the fourth declined from 34.8% in Q4 FY08 to 26.3% in Q4 FY09.
Healthy order backlog despite sluggish order inflows
The order book as on April 01, 2009 is estimated to be around Rs 100 bn, which is up 5.8%. Order backlog provides a revenue visibility of 26 months. However, for the year we estimate order inflows to have grown by 10% in FY09.
Strategic tie-ups with global defence majors
BEL is looking for new growth opportunities through organic or agreement with Bharat Electronics Limited to manufacture inorganic growth. In this direction, BEL is discussing with reputed components of the F-16 fire control radar. As part of a foreign and Indian players for forming joint venture companies in comprehensive co-production programme, Northrop India, in the areas of defence electronics, namely electro optics, Grumman engineers will work side-by-side with engineering airborne electronic warfare, missile electronics and guidance teams from BEL to provide training and support to ensure a systems, microwave super components, etc. The company has also smooth transition to production. Initial radar component appointed KPMG to identify future growth opportunities for the deliveries from BEL will begin by the first half of next fiscal. company. Pact with Boeing to establish a facility in India to test military Agreement with Northrop Grumman: India is one of the largest products: Boeing co of US has recently announced that it has defence equipment importers in the world. This is attracting signed an pact with BEL to set up a facility for analysis and several global defence majors to India. The U.S. defence experimentation of military products and equipments. Boeing manufacturer Northrop Grumman has recently entered into an has similar centers in Australia and the U.K., the statement said.
RESEARCH REPORT - MAY 2009 Page 36 BHARAT ELECTRONICS
Valuation
At the current price, BEL is trading at 8.3x FY10E earnings. The stock Increase in geopolitical tensions in the aftermath of the terror has outperformed the capital goods index in view of its non-cyclical attacks. business model. Debt-free and cash surplus business with limited competition The major reasons for Outperformance include thereby indicating low business risk.
Defence business being largely non-cyclical and not likely to be Given the sustained outperformance by the stock, we do not see impacted by the economic cycles. significant upside from current levels. We maintain Accumulate with a DCF based target price of Rs 950.
Summary table
(Rs mn) FY08 FY09 FY10E
Sales 38,104 46,487 52,066 Growth (%) (2.2) 22.0 12.0 EBITDA 10,133 9,921 11,668 EBITDA margin (%) 26.6 21.3 22.4 Net profit 8,267 7,665 8,844 Net cash (debt) 24,521 26,137 31,944 EPS (Rs) 103.3 95.8 110.5 Growth (%) 15.1 (7.3) 15.4 CEPS 114.9 107.9 123.4 DPS (Rs) 18.0 20.7 20.7 ROE (%) 29.0 22.0 21.0 ROCE (%) 39.0 31.0 30.0 EV/Sales (x) 1.3 1.0 0.8 EV/EBITDA (x) 4.8 4.7 3.5 P/E (x) 8.8 9.5 8.3 P/Cash Earnings 8.0 8.5 7.4 P/BV (x) 2.3 2.0 1.7
Source: Company, Kotak Securities - Private Client Research
RESEARCH REPORT - MAY 2009 Page 37 PUNJ lLOYD lTD
RECOMMENDATION: ACCUMULATE REPORT DATE PRICE: Rs. 115 TARGET PRICE: Rs. 158
9 April 2009 Apurva Doshi
We recently interacted with the management of Punj Lloyd to understand the progress on delayed orders as well as court case related to SABIC Petrochemicals.
While decision on court case pertaining to SABIC Petrochemicals is expected to come by third week of April, other delayed orders have made some progress.
Project worth Rs 18bn related to Integrated Condensate Splitter Aromatics Complex at Jurong Island, Singapore may face cancellation.
We revise our operating margin assumptions downwards for FY10 to factor in the above mentioned delays and revise our price target to Rs 158 (Rs.189 earlier) on FY10 estimates.
We continue to maintain our ACCUMULATE rating on the stock till the time issues related to SABIC petrochemicals and other project delays are resolved.
Progress on adjudication proceedings against SABIC
Post termination of the contract by SABIC Petrochemicals, Simon with likely decision expected to be announced within 2-3 days after Carves had commenced adjudication proceedings against SABIC. the final hearing. Since client has also revoked the performance and Earlier SABIC Petrochemicals had argued that adjudication doesn't advance bank guarantee to the tune of Rs 2.14bn, we have written have the jurisdiction to decide the case. But the court has overruled off this amount as an exceptional item in the current fiscal financials this and final hearing is expected by third week of April(15th April), on the basis of conservative accounting policy.
Status of other delayed projects mentioned during Q3FY09
Certain orders of Punj Lloyd have been facing delays since Q3FY09 commenced, however it is currently progressing at a slow pace. due to the credit crunch. Work on some of these projects has commenced with details mentioned below - For project worth Rs 10bn from GVK Power, GVK is in the process of land acquisitions and handover of the site is expected Project worth Rs 18bn related to Integrated Condensate Splitter by June, 2009. Aromatics Complex at Jurong Island, Singapore has still not achieved financial closure and is likely to be cancelled. Work on Ador power plant project worth Rs 3.3bn has commenced. Project worth Rs 8bn related to construction of Dighi port, Maharashtra has faced a lot of delays. Work on this project has Thus we believe that delays witnessed in these projects may likely have a negative impact on company's operating margins.
Heera redevelopment project may be postponed till October, 2009
The Heera platform redevelopment project had also faced delays Punj Lloyd is liable for US$26 million in liquidated damages as a result due to cost overruns and was expected to be completed by March, of the delay. Out of this amount, $13mn has already been deducted 2009. Project is 90% complete as on 31st March, 2009 and partial from the balance contractual payment due to Punj Lloyd during extension of this project is also possible. Company expects to Q3FY09 and we expect the remaining amount to be deducted on complete the remaining portion of the project post October, 2009. completion of the project.
RESEARCH REPORT - MAY 2009 Page 38 PUNJ lLOYD lTD
Maintain estimates for revenues but reduce operating margin assumptions going forward
We continue to maintain our revenue estimates for the company operating margin assumptions from FY10 onwards to 8% from going forward but reduce our operating margin assumptions going earlier assumptions of 9% going forward. For the fiscal FY09, we forward. Though we believe that completion of legacy orders by end expect full year operating margins to remain weak at 6% due to of FY09 may lead to margin expansion, but delays and cost overruns write offs related to cost overruns various projects as well as witnessed in other projects is likely to have an adverse impact on the exchange fluctuations. operating margins of the company. Based on this, we reduce our
Valuation and recommendation
At current market price of Rs 115, stock is currently factoring in most its FY10 estimates earnings and arrive at a target price of Rs 158 of the negatives and is trading at attractive valuations of 7.9x P/E and based on sum-of-the-parts methodology as against Rs 189 earlier. 5.8x EV/EBITDA multiples for FY10. We revise our estimates for We continue to maintain our ACCUMULATE rating on the stock till operating margins downwards for FY10 and correspondingly revise the time issues related to SABIC petrochemicals and other project our price target. We value the core business of the company at 10x delays are resolved.
Sum of the part valuation based on FY10 estimates Segment Rs/share Multiples Value of core business 146 At 10 x FY10 estimated earnings Value of Pipapav shipyard stake 12 At Rs 27 per share Total 158 Source: Kotak Securities - Private Client Research
Summary table
(Rs mn) FY08 FY09E FY10E Revenues 77,529 118,797 130,662 % change YoY 51.2 53.2 10.0 EBITDA 6,407 7,075 10,453 % change YoY 56.2 10.4 47.7 Other Income 811 650 500 Depreciation 1,462 1,672 1,987 EBIT 5,756 6,053 8,966 % change YoY 50.1 5.2 48.1 Net interest 1,292 2,107 2,807 Profit before tax 4,464 3,946 6,159 % change YoY 68.4 (12.0) 56.1 Tax 1,235 1,105 1,725 as % of PBT 27.7 28.0 28.0 Profit after tax 3,229 2,841 4,435 Share of Profits of JVs 355.5 - - Exceptional writeoffs 2,175 Net income 3,584 667 4,435 % change YoY 82.0 (81.4) 565.2 Shares (m) 303.4 303.4 303.4 EPS (reported) (Rs) 11.8 2.2 14.6 P/E (x) 9.7 52.3 7.9 EV/EBITDA (x) 6.9 8.0 5.8 RoE (%) 17.8 2.4 14.7 RoCE (%) 15.7 12.4 15.4
Source: Company, Kotak Securities - Private Client Research
RESEARCH REPORT - MAY 2009 Page 39 Disclaimer
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