Blue Star Limited (BSL’s) performance in 1QFY09 was slightly above our estimates. Given its order book of Rs14.1bn (up 43.3% yoy) and managements focus to improve business profitability makes us positive about its prospects. We trim our target PE multiple from 20x to 15x, however we maintain Buy with a lower target price of Rs427.
BSL’s 1QFY09 sales was marginally above our expectation, sales at Rs6.31bn up 36.5% YoY (expected Rs6.26bn). On account of strong order backlog the Central Air-Conditioning Systems (CAS) segment grew by 37.2% YoY to Rs3.8bn. Cooling Products (CP) grew by 36.4% YoY to Rs2.2bn largely driven higher sales of split airconditioner. Professional Electronics (PE) revenues at Rs349mn also showed a healthy growth of 29.8% YoY.
BSL’s EBITDA grew by 50.4% yoy to Rs570.5mn. EBITDA margin was higher by 80bps from 8.2% in 1QFY08 to 9% (8.8%) in 1QFY09. During the quarter BSL provided Rs74.6mn on account of accounting standard AS- 15 on ‘Employee Benefits’ which is included in employee expenses. Sans this expense, EBITDA would have been at Rs646.9mn and EBITDA margins would have been at 10.2% way above our estimate of 8.8%.
BSL’s reported PAT was 9.1% above our estimates at Rs364.3mn (333.8mn) from Rs223.2mn up 63.2% yoy. The higher growth in PAT was primarily on account of better operating performance, higher other income (up to Rs16.5mn from Rs.7mn yoy) and lower interest expense (down 10.7% yoy).
We remain sanguine about the prospects of BSL as segments such as telecom, multiplexes, hospitality, power and other infrastructure projects are showing demand growth and expected to offset the demand slowdown in IT/ITES and organized retail slowdown. Looking at the current market environment, we maintain buy, but we trim our target PE multiple from 20x to 15x. At our revised target price of Rs427, BSL would trade at 19.6x FY09F EPS of Rs21.8 and 15x FY10F EPS of Rs28.5. The key risk for the stock would be lower order booking and margin pressure due to higher raw
material price.
Wednesday, August 6, 2008
Bank of Baroda - Under a cloud due to high COE
BOB will likely find itself behind a cloud in the prevailing challenging environment. We raise our loan growth and fee income estimates but also increase our cost of equity estimate to 15.0%, leading to the cut in our target price. We retain our Buy recommendation.
Low profitability relative to peers is a liability in a challenging scenario
Bank of Baroda's (BOB) NIM declined from 2.83% in 4Q08 to 2.76% in 1Q09 and is now among the lowest in the peer group. The bank's FY08 return on average assets of 0.92% is also low relative to peers. We consider this a liability in a rising rate scenario, as reducing margins could lower profitability even further. Return on equity in 1Q09 was only 14.97%, even though leverage was high, represented by a low tier-1 CAR of 7.89% as of June 2008.
However, the performance in 1Q09 was generally encouraging
Except for the decline in net interest margins, BOB's performance in 1Q09 was encouraging. Core fee income grew strongly, with fees rising by 45% yoy, the cost-to-income ratio fell and the share of the low cost deposits in total deposits increased. These helped offset the rise in provisions due to mark-to-market losses. However, overall profitability (ROAs) came in at only 0.81%.
We raise loan growth and fee income estimates but margins concern us
BOB's loan growth of 42.1% appears exaggerated because of base effects - qoq growth in loans was 4.2% compared with the industry average of about 2.6%. We believe, however, that loan growth will sustain its momentum and we revise our FY09 loan growth estimate from 18.4% to 22.3%. We also increase our fee income estimate by 12.2% for FY09 and 12.5% for FY10. However, we believe a NIM of about 2.5% will not be materially different from that of FY08. The cut
in our net interest margin estimates leads us to cut our FY09 profit estimates by 6.8%.
A hike in the cost of equity reduces our target price to Rs281.50
The sensitivity of BOB's target price to changes in the cost of equity is high, given its low return on equity. The hike in cost of equity to 15.0% from 13.0% thus pulls down the target price-to-book multiple from 1.4x FY09F adjusted book value to about 1.04x. At our new target price, the stock would trade at 6.6x FY09F EPS.
Low profitability relative to peers is a liability in a challenging scenario
Bank of Baroda's (BOB) NIM declined from 2.83% in 4Q08 to 2.76% in 1Q09 and is now among the lowest in the peer group. The bank's FY08 return on average assets of 0.92% is also low relative to peers. We consider this a liability in a rising rate scenario, as reducing margins could lower profitability even further. Return on equity in 1Q09 was only 14.97%, even though leverage was high, represented by a low tier-1 CAR of 7.89% as of June 2008.
However, the performance in 1Q09 was generally encouraging
Except for the decline in net interest margins, BOB's performance in 1Q09 was encouraging. Core fee income grew strongly, with fees rising by 45% yoy, the cost-to-income ratio fell and the share of the low cost deposits in total deposits increased. These helped offset the rise in provisions due to mark-to-market losses. However, overall profitability (ROAs) came in at only 0.81%.
We raise loan growth and fee income estimates but margins concern us
BOB's loan growth of 42.1% appears exaggerated because of base effects - qoq growth in loans was 4.2% compared with the industry average of about 2.6%. We believe, however, that loan growth will sustain its momentum and we revise our FY09 loan growth estimate from 18.4% to 22.3%. We also increase our fee income estimate by 12.2% for FY09 and 12.5% for FY10. However, we believe a NIM of about 2.5% will not be materially different from that of FY08. The cut
in our net interest margin estimates leads us to cut our FY09 profit estimates by 6.8%.
A hike in the cost of equity reduces our target price to Rs281.50
The sensitivity of BOB's target price to changes in the cost of equity is high, given its low return on equity. The hike in cost of equity to 15.0% from 13.0% thus pulls down the target price-to-book multiple from 1.4x FY09F adjusted book value to about 1.04x. At our new target price, the stock would trade at 6.6x FY09F EPS.
Indian Oil Corporation - Tougher environment ahead
Government policy on subsidy sharing remains ad hoc, while declining refining margins pose an additional risk to IOC's profits. We lower our P/B-based target price to Rs450 (from Rs680) and downgrade from Buy to Hold.
1QFY09 results: impact of rising oil prices
IOC reported 1QFY09 net profit of Rs4.15bn, largely on higher net under-recoveries of Rs73.2bn on retail products and a one-off Rs9.2bn provision for staff costs. Inventory gains boosted refinery margins and marketing profits. We now forecast a steep fall in under-recoveries in subsequent quarters as a result of declining crude prices, lower gross refining margins (GRMs) and the full impact of price hikes/duty cuts implemented on 4 June 2008.
Limited visibility on earnings
Final oil bonds quantum in FY08 turned out to be much lower than initial indications given by the government. The subsidy package for FY09 has been announced and it assumes gross underrecoveries of Rs2,035bn, but there is no clarity on what adjustments will be made if actual underrecovery is higher or lower than this figure. Liquidity at least is no longer an issue given the central bank is now willing to absorb oil bonds and provide forex for crude imports. We estimate GRMs will weaken and assume under-recoveries will drop in FY10-11 due to lower oil prices. Net/net, we have cut our FY09-10 EPS forecasts by 29-30%.
Downgraded to Hold; clarity after next elections?
Our previous positive view was based on our expectations that the subsidy package announced in February 2008 would be maintained. These expectations have been belied and there is no firm policy on future subsidy sharing. Short term, IOC's share price is likely to correlate with global oil prices. However, longer-term earnings and valuations are unlikely to improve unless there is clarity on government policy, and we believe this is unlikely till the next election (May 2009). The government has appointed a high-powered committee to look at the subsidy issue and its final report is expected soon. There is an outside chance of the government providing policy clarity based on this report. We downgrade our rating on IOC from Sell to Hold. We continue to value IOC's holdings in ONGC/GAIL (Rs118/IOC share) separately. Valuation for the core business is now down to 0.9x FY09F P/B (11% ROE) from 1.3x FY09F P/B earlier.
1QFY09 results: impact of rising oil prices
IOC reported 1QFY09 net profit of Rs4.15bn, largely on higher net under-recoveries of Rs73.2bn on retail products and a one-off Rs9.2bn provision for staff costs. Inventory gains boosted refinery margins and marketing profits. We now forecast a steep fall in under-recoveries in subsequent quarters as a result of declining crude prices, lower gross refining margins (GRMs) and the full impact of price hikes/duty cuts implemented on 4 June 2008.
Limited visibility on earnings
Final oil bonds quantum in FY08 turned out to be much lower than initial indications given by the government. The subsidy package for FY09 has been announced and it assumes gross underrecoveries of Rs2,035bn, but there is no clarity on what adjustments will be made if actual underrecovery is higher or lower than this figure. Liquidity at least is no longer an issue given the central bank is now willing to absorb oil bonds and provide forex for crude imports. We estimate GRMs will weaken and assume under-recoveries will drop in FY10-11 due to lower oil prices. Net/net, we have cut our FY09-10 EPS forecasts by 29-30%.
Downgraded to Hold; clarity after next elections?
Our previous positive view was based on our expectations that the subsidy package announced in February 2008 would be maintained. These expectations have been belied and there is no firm policy on future subsidy sharing. Short term, IOC's share price is likely to correlate with global oil prices. However, longer-term earnings and valuations are unlikely to improve unless there is clarity on government policy, and we believe this is unlikely till the next election (May 2009). The government has appointed a high-powered committee to look at the subsidy issue and its final report is expected soon. There is an outside chance of the government providing policy clarity based on this report. We downgrade our rating on IOC from Sell to Hold. We continue to value IOC's holdings in ONGC/GAIL (Rs118/IOC share) separately. Valuation for the core business is now down to 0.9x FY09F P/B (11% ROE) from 1.3x FY09F P/B earlier.
Suzlon Energy - Margins, domestic orders grow
The 1Q09 result saw two positives: 1) domestic order book grew from 160MW at end-FY08 to 267MW, and 2) margins improved significantly (from 7% to 15%), giving credence to management's claim that FY08 margins were low due to capacity building up ahead of sales. Moreover, 1Q09 revenues included Rs4bn from the 'projects' part of orders for which WTG supply to the international market had already happened before 1Q09. This lowered COGS as a percent of sales. We believe negatives like lower orders from international markets and MTM losses from foreign currency borrowings are already factored in. We believe international orders will pick up once the US Senate approves the extension of PTCs. Management is confident of winning some big-ticket orders in the US and Europe, though it has not said when.
Valuation and target price
Adjusting for the revised value of holdings in Hansen Transmissions (Bloomberg: HSN LN) and REPower Systems (Bloomberg: RPW GR), Suzlon is currently trading at 14.7x FY09F and 11.8x FY10F EPS. These valuations are at a deep discount to those of global peers like Vestas (Bloomberg: VWS DC) and Gamesa (Bloomberg: GAM SM), based on Bloomberg estimates. In our view, the discount justifies the uncertainty about sales of the best-selling model, the 2.1MW S88, after cracks were detected in its blades. We maintain our earnings estimates, target price at Rs319.48 and Buy rating.
Valuation and target price
Adjusting for the revised value of holdings in Hansen Transmissions (Bloomberg: HSN LN) and REPower Systems (Bloomberg: RPW GR), Suzlon is currently trading at 14.7x FY09F and 11.8x FY10F EPS. These valuations are at a deep discount to those of global peers like Vestas (Bloomberg: VWS DC) and Gamesa (Bloomberg: GAM SM), based on Bloomberg estimates. In our view, the discount justifies the uncertainty about sales of the best-selling model, the 2.1MW S88, after cracks were detected in its blades. We maintain our earnings estimates, target price at Rs319.48 and Buy rating.
Castrol India - Case for a re-rating
Castrol's 2Q profit growth of 26% yoy indicates the company's strategy to raise prices in anticipation of surging base oil prices is proving succesful. Hence, we believe PEs should grow. We maintain our Buy rating and raise our target price to Rs360 (from Rs340).
2QCY08 net profit up 26% yoy
Castrol has reported 2QCY08 net profit of Rs828, up 26% yoy, and in line with our expectation. While costs of input lube base oil have been climbing fast, Castrol has raised prices by 20% since January 2008 to protect its margins. Despite price hikes, volumes for 1HCY08 were up 4% yoy, although we are forecasting a significant slowdown over next 18 months due to expectations of lower growth in auto fuels.
The new aggressive Castrol strategy
The surge in base oil prices in CY08 is similar to that in CY06, but Castrol's response is radically different. In CY06, it raised product prices after input costs rose. Thus absolute profits were maintained, but margins suffered. In CY08, Castrol has raised prices in anticipation of cost increases, thereby ensuring margins do not drop and profits grow. The potential success of this strategy is based on two key factors. First, Castrol's ability to position its brand in the premium segment, which is less price sensitive and more value conscious. Second, competition has no choice but to follow.
BikeZone medium-term impact is not significant
Ninety-six BikeZone outlets have been set up, but the rate of rollout has been below expectations due to rising real-estate costs. While BikeZone looks an exciting long-term prospect, we believe its earnings potential over at least the next three years will be limited in relation to Castrol's balance sheet. Our valuation does not assume any additional upside from BikeZone rollout.
Valuation yet to reflect pricing power
Castrol has shown its ability to grow earnings despite a very difficult operating environment. Obviously, outlook could improve substantially in the event of a decline in oil prices. Our CY08-10 EPS estimates have gone up by 2-23%. We maintain our Buy rating and raise our target price from Rs340 to Rs360, which would value the company at 16x CY08F EPS. This compares to our expectation of a 21% EPS CAGR over CY08-10.
2QCY08 net profit up 26% yoy
Castrol has reported 2QCY08 net profit of Rs828, up 26% yoy, and in line with our expectation. While costs of input lube base oil have been climbing fast, Castrol has raised prices by 20% since January 2008 to protect its margins. Despite price hikes, volumes for 1HCY08 were up 4% yoy, although we are forecasting a significant slowdown over next 18 months due to expectations of lower growth in auto fuels.
The new aggressive Castrol strategy
The surge in base oil prices in CY08 is similar to that in CY06, but Castrol's response is radically different. In CY06, it raised product prices after input costs rose. Thus absolute profits were maintained, but margins suffered. In CY08, Castrol has raised prices in anticipation of cost increases, thereby ensuring margins do not drop and profits grow. The potential success of this strategy is based on two key factors. First, Castrol's ability to position its brand in the premium segment, which is less price sensitive and more value conscious. Second, competition has no choice but to follow.
BikeZone medium-term impact is not significant
Ninety-six BikeZone outlets have been set up, but the rate of rollout has been below expectations due to rising real-estate costs. While BikeZone looks an exciting long-term prospect, we believe its earnings potential over at least the next three years will be limited in relation to Castrol's balance sheet. Our valuation does not assume any additional upside from BikeZone rollout.
Valuation yet to reflect pricing power
Castrol has shown its ability to grow earnings despite a very difficult operating environment. Obviously, outlook could improve substantially in the event of a decline in oil prices. Our CY08-10 EPS estimates have gone up by 2-23%. We maintain our Buy rating and raise our target price from Rs340 to Rs360, which would value the company at 16x CY08F EPS. This compares to our expectation of a 21% EPS CAGR over CY08-10.
ITC - Worst appears to be past
ITC's 4% drop in 1Q09 PAT was driven by weaker profit growth in cigarettes and losses in the FMCG business. There have certain one-off expenses in the cigarettes business, and thes migration from non-filters to filters has been strong. Upgrade to Buy.
FY1Q09 results were below our expectations
ITC reported a flat yoy EBITDA and a 4% drop in PAT. While its hotel, agri and paper businesses performed well, the higher losses in its FMCG businesses and lower EBIT growth in its core cigarette business impacted overall growth.
Performance of core cigarette business should improve through FY09
ITC reported a weak EBIT growth of 2.4% in 1Q as margins slipped by 90bps yoy. Owing to the discontinuation of the non-filter cigarette business, ITC has been proactive in the marketplace to drive migration of its consumers from non-filter cigarettes to filters. We believe this will result in an extraordinary, nonrecurring cost. ITC has also begun increasing prices of its key brands in the last few weeks, which should favourably impact its cigarette business for rest of the year. For FY09, we expect a 8.9% EBIT growth, improving further to 13% in FY10.
ITC's other FMCG businesses are reducing EBIT by 8%
ITC is currently focusing on creating brands in its other FMCG businesses. In food segments, its brands 'Aashirvaad' and 'Sunfeast' have become dominant in the staples and biscuits segments, respectively. It has now turned its attention to the snacking ( 'Bingo' brand) and personal care segments ( 'Vivek' and 'Fiama Di Wills'). Post the initial gestation period, ITC's other non-cigarette businesses like paper and hotels have become self-sustaining in terms of cash required to drive business growth. By the end of FY09, we believe the losses in the FMCG businesses will have peaked, and ITC's focus on brands in its other FMCG business should start positively impacting profits thereafter.
We upgrade to Buy. Earnings momentum should be back in FY2H09
We have marginally cut our EPS estimates for FY09 by 3% but retain our FY10 EPS estimates post the FY1Q09 results. The stock has corrected 10% since its budget announcement in early March 2008, and we believe most of the concerns on FY09 earnings are already reflected in the price. We marginally upgrade our DCF-based target price to Rs211 and upgrade the stock to Buy.
FY1Q09 results were below our expectations
ITC reported a flat yoy EBITDA and a 4% drop in PAT. While its hotel, agri and paper businesses performed well, the higher losses in its FMCG businesses and lower EBIT growth in its core cigarette business impacted overall growth.
Performance of core cigarette business should improve through FY09
ITC reported a weak EBIT growth of 2.4% in 1Q as margins slipped by 90bps yoy. Owing to the discontinuation of the non-filter cigarette business, ITC has been proactive in the marketplace to drive migration of its consumers from non-filter cigarettes to filters. We believe this will result in an extraordinary, nonrecurring cost. ITC has also begun increasing prices of its key brands in the last few weeks, which should favourably impact its cigarette business for rest of the year. For FY09, we expect a 8.9% EBIT growth, improving further to 13% in FY10.
ITC's other FMCG businesses are reducing EBIT by 8%
ITC is currently focusing on creating brands in its other FMCG businesses. In food segments, its brands 'Aashirvaad' and 'Sunfeast' have become dominant in the staples and biscuits segments, respectively. It has now turned its attention to the snacking ( 'Bingo' brand) and personal care segments ( 'Vivek' and 'Fiama Di Wills'). Post the initial gestation period, ITC's other non-cigarette businesses like paper and hotels have become self-sustaining in terms of cash required to drive business growth. By the end of FY09, we believe the losses in the FMCG businesses will have peaked, and ITC's focus on brands in its other FMCG business should start positively impacting profits thereafter.
We upgrade to Buy. Earnings momentum should be back in FY2H09
We have marginally cut our EPS estimates for FY09 by 3% but retain our FY10 EPS estimates post the FY1Q09 results. The stock has corrected 10% since its budget announcement in early March 2008, and we believe most of the concerns on FY09 earnings are already reflected in the price. We marginally upgrade our DCF-based target price to Rs211 and upgrade the stock to Buy.
Friday, August 1, 2008
Jyothi Structures
JSL’s 1QFY09 revenue numbers were inline with our estimates however EBITDA and PAT were below our expectation. Increase in raw material cost and higher interest expense drag down these numbers. We are revising FY09 and FY10 PAT forecasts downwards by -16.5% and -18.8% respectively and cutting our target PE multiple from 15x to 12x. We maintain Buy with a revised target price of Rs170.
JSL’s 1QFY09 sales were in line with expectation, Sales at Rs4bn up 35.4% yoy (expected Rs4bn). EBITDA margins stood at 12% down by 40bps yoy (12.7%) on account of higher raw material cost at 65.8% (64.9%) vs 59.4% in 1QFY08. PAT was below expectation at Rs205.4mn up 28% yoy (Rs237.5mn) due to increase interest expense. Interest expense stood at Rs133.7mn up 40% yoy (Rs107.8mn).
Order book stood at Rs35.6bn. JSL is L1 in another Rs4bn worth of orders. Management expects ~Rs16.6bn (Rs8.5bn in transmission line and Rs8.1bn in rural electrification) domestic jobs and ~Rs24bn of international jobs to be put for tendering in next couple of months.
Order book at the African subsidiary stands at Rs2.4bn and Gulf Jyoti has an order book of Rs1.6bn.
We keep our revenue target intact however revise downwards our EBITDA forecast for FY09 and FY10 by -5.9% and -5.2% respectively. We reduce our EBITDA margin forecast for FY09 and FY10 by -70bps each to 11.8% taking into account higher raw material prices. Even though 1QFY09 stood at 12%, we expect margins to remain under pressure for rest part of the year. Hence we expect full year EBITDA margins to be 11.8%. Our PAT forecast is significantly lower by -16.5% and -18.8% for FY09 and FY10 forecast on account of lower operating margins and incorporating higher interest cost. We retain our positive outlook on the company and maintain Buy. At our revised target price of Rs170, JSL would trade at 14.9x FY09F consolidated EPS of Rs11.3 and 12x FY10E consolidated EPS of Rs14.1. Higher order winning could likely see a re-rating in the stock. The key risk for the stock would be further margin pressure due to higher raw material price and high institutional holding.
JSL’s 1QFY09 sales were in line with expectation, Sales at Rs4bn up 35.4% yoy (expected Rs4bn). EBITDA margins stood at 12% down by 40bps yoy (12.7%) on account of higher raw material cost at 65.8% (64.9%) vs 59.4% in 1QFY08. PAT was below expectation at Rs205.4mn up 28% yoy (Rs237.5mn) due to increase interest expense. Interest expense stood at Rs133.7mn up 40% yoy (Rs107.8mn).
Order book stood at Rs35.6bn. JSL is L1 in another Rs4bn worth of orders. Management expects ~Rs16.6bn (Rs8.5bn in transmission line and Rs8.1bn in rural electrification) domestic jobs and ~Rs24bn of international jobs to be put for tendering in next couple of months.
Order book at the African subsidiary stands at Rs2.4bn and Gulf Jyoti has an order book of Rs1.6bn.
We keep our revenue target intact however revise downwards our EBITDA forecast for FY09 and FY10 by -5.9% and -5.2% respectively. We reduce our EBITDA margin forecast for FY09 and FY10 by -70bps each to 11.8% taking into account higher raw material prices. Even though 1QFY09 stood at 12%, we expect margins to remain under pressure for rest part of the year. Hence we expect full year EBITDA margins to be 11.8%. Our PAT forecast is significantly lower by -16.5% and -18.8% for FY09 and FY10 forecast on account of lower operating margins and incorporating higher interest cost. We retain our positive outlook on the company and maintain Buy. At our revised target price of Rs170, JSL would trade at 14.9x FY09F consolidated EPS of Rs11.3 and 12x FY10E consolidated EPS of Rs14.1. Higher order winning could likely see a re-rating in the stock. The key risk for the stock would be further margin pressure due to higher raw material price and high institutional holding.
India Cements - Strong EBITDA performance
ICEM's PAT shows a drop of 22%, but EBITDA growth was 13% in 1QFY09, despite subdued volume growth. We expect volume momentum to recover and raise our EPS estimates marginally. Our target price remains Rs215 and we rate it a Buy.
EBITDA performance better than we expected
ICEM recorded EBITDA growth of 13% in the first quarter despite volumes being just 3.5% higher. Despite facing a cost escalation of Rs207/mt, it recorded an increase in yoy EBITDA/mt of Rs103/mt. Apart from better pricing, this was achieved by higher production of blended cements (65% to 71%) and optimum usage of low-cost power from its gas-based captive power units. ICEM's PAT declined 22% as its tax provisions were raised to 31.5% from 14.5%, and it recorded a translation FOREX loss of Rs217.5m. ICEM accounted for a marginal cash profit of Rs10m from its interest in India Premier League cricket.
India Cements is well funded for executing its growth plans
ICEM seems to be making good progress in all its committed brownfield expansion plans: the grinding unit in Chennai; the enhancement of capacity at Vishnupuran; additional 1.2mmt capacity in Malkapur; and an additional grinding unit at Parli. It expects to commission these new plants in 3QFY09. ICEM raised equity of Rs5.92bn in the last financial year for part-funding of its 4mmt greenfield expansion plans.
Cement prices could come under pressure in 2009
We forecast an incremental capacity addition of 75.6mmt over the next two years, compared with incremental demand of 39.8mmt. While most of the new capacity commissioned this year will go into full-stream production only in 2010, we forecast a surplus of 23.6mmt (which represents 9% of the cement industry's capacity) in FY2010. We have modelled a 5% drop in realisations in FY2010 and as a consequence expect the EBITDA/mt to fall by Rs176/mt to Rs1007/mt.
Maintain Buy with a target price of Rs215
We have raised our FY09F EPS by 1.7%, and for FY10F by 3.8% We have adjusted for slightly lower volumes in 1QFY09 and also the better EBITDA/mt in 1QFY09. ICEM trades at a EV/mt of US$84/mt which is at a 30% discount to its replacement cost, on our estimates. We value ICEM on an EV/EBITDA basis at a 10% discount to the average forward EV/EBITDA of Grasim and Ambuja Cements.
EBITDA performance better than we expected
ICEM recorded EBITDA growth of 13% in the first quarter despite volumes being just 3.5% higher. Despite facing a cost escalation of Rs207/mt, it recorded an increase in yoy EBITDA/mt of Rs103/mt. Apart from better pricing, this was achieved by higher production of blended cements (65% to 71%) and optimum usage of low-cost power from its gas-based captive power units. ICEM's PAT declined 22% as its tax provisions were raised to 31.5% from 14.5%, and it recorded a translation FOREX loss of Rs217.5m. ICEM accounted for a marginal cash profit of Rs10m from its interest in India Premier League cricket.
India Cements is well funded for executing its growth plans
ICEM seems to be making good progress in all its committed brownfield expansion plans: the grinding unit in Chennai; the enhancement of capacity at Vishnupuran; additional 1.2mmt capacity in Malkapur; and an additional grinding unit at Parli. It expects to commission these new plants in 3QFY09. ICEM raised equity of Rs5.92bn in the last financial year for part-funding of its 4mmt greenfield expansion plans.
Cement prices could come under pressure in 2009
We forecast an incremental capacity addition of 75.6mmt over the next two years, compared with incremental demand of 39.8mmt. While most of the new capacity commissioned this year will go into full-stream production only in 2010, we forecast a surplus of 23.6mmt (which represents 9% of the cement industry's capacity) in FY2010. We have modelled a 5% drop in realisations in FY2010 and as a consequence expect the EBITDA/mt to fall by Rs176/mt to Rs1007/mt.
Maintain Buy with a target price of Rs215
We have raised our FY09F EPS by 1.7%, and for FY10F by 3.8% We have adjusted for slightly lower volumes in 1QFY09 and also the better EBITDA/mt in 1QFY09. ICEM trades at a EV/mt of US$84/mt which is at a 30% discount to its replacement cost, on our estimates. We value ICEM on an EV/EBITDA basis at a 10% discount to the average forward EV/EBITDA of Grasim and Ambuja Cements.
Bank of India - Losing its charm?
BOI's loan growth came in better than we expected, but at the cost of margins. We cut our margin estimates to factor in the decline in low-cost deposits. However, the cut in target price is largely due to an increase in the cost of equity to 15%. We retain our Buy recommendation.
Strong loan growth comes as a negative surprise...
Loan growth in 1QFY09 accelerated from 32% in FY08 to 38.9%, much higher than the industry average of 25.9%. We believe loan growth will decelerate going forward and revise our loan growth estimate for FY09 to 20.0% from the earlier 22.5%. We believe firms with moderate loan growth will be able to maintain margins and asset quality as well as use capital efficiently.
... which was funded with high-cost deposits, leading to lower spreads
Reinforcing our view, the higher loan growth has come at the cost of margins. Spreads are down from 2.9% in 4QFY08 to 2.6% in 1QFY09. Low-cost domestic deposits declined from 35.5% at the end of March 2008 to 34.1% at the end of June 2008. With overseas loans continuing to outpace domestic loans, we now expect global low-cost deposits to decline from 30.5% of total deposits in FY08 to 29.9% in FY09. We also lower our FY09 net interest margin expectation for FY09 from 2.82% earlier to 2.72% now (2.71% in FY08).
Earnings momentum better than peers, but that seems at risk
Since FY06, the bank's high proportion of government securities in the held-to-maturity category and its focus on low-margin but profitable overseas business have helped it deal with a rising domestic rate environment. Earnings momentum and profitability were thus significantly better vs peers. We believe that momentum may be at risk due to the challenging macroeconomic environment. However, we largely retain our earlier net profit growth estimates for FY09 (7.5%) and FY10 (12.6%).
Maintain Buy recommendation; target price cut to Rs342.20
We maintain a Buy rating. The stock is trading at a premium to peers, but this seems justified considering the bank's superior profitability. We cut our core income estimates to factor in margin pressures, but lower loan-loss provisions offset this decline. The cut in target price is largely due to the increase in the cost of equity to 15%. At our target price, the stock would trade at 8.3x FY09F EPS and 1.8x FY09F adjusted book value.
Strong loan growth comes as a negative surprise...
Loan growth in 1QFY09 accelerated from 32% in FY08 to 38.9%, much higher than the industry average of 25.9%. We believe loan growth will decelerate going forward and revise our loan growth estimate for FY09 to 20.0% from the earlier 22.5%. We believe firms with moderate loan growth will be able to maintain margins and asset quality as well as use capital efficiently.
... which was funded with high-cost deposits, leading to lower spreads
Reinforcing our view, the higher loan growth has come at the cost of margins. Spreads are down from 2.9% in 4QFY08 to 2.6% in 1QFY09. Low-cost domestic deposits declined from 35.5% at the end of March 2008 to 34.1% at the end of June 2008. With overseas loans continuing to outpace domestic loans, we now expect global low-cost deposits to decline from 30.5% of total deposits in FY08 to 29.9% in FY09. We also lower our FY09 net interest margin expectation for FY09 from 2.82% earlier to 2.72% now (2.71% in FY08).
Earnings momentum better than peers, but that seems at risk
Since FY06, the bank's high proportion of government securities in the held-to-maturity category and its focus on low-margin but profitable overseas business have helped it deal with a rising domestic rate environment. Earnings momentum and profitability were thus significantly better vs peers. We believe that momentum may be at risk due to the challenging macroeconomic environment. However, we largely retain our earlier net profit growth estimates for FY09 (7.5%) and FY10 (12.6%).
Maintain Buy recommendation; target price cut to Rs342.20
We maintain a Buy rating. The stock is trading at a premium to peers, but this seems justified considering the bank's superior profitability. We cut our core income estimates to factor in margin pressures, but lower loan-loss provisions offset this decline. The cut in target price is largely due to the increase in the cost of equity to 15%. At our target price, the stock would trade at 8.3x FY09F EPS and 1.8x FY09F adjusted book value.
Hindustan Petroleum - Hostage to policy reforms
Government policy on subsidy sharing remains ad-hoc, while declining refining margins pose an additional risk to HPCL's profits. We lower our target price to Rs250 (from Rs380) and downgrade from Buy to Hold.
1QFY09 results: impact of rising oil prices
HPCL reported 1QFY09 net loss of Rs8.8bn largely on higher net under-recoveries of Rs27.6bn and one-off provision of Rs1.6bn for staff costs. Inventory gains boosted refinery margins as well as marketing profits. We now forecast a steep fall in under-recoveries in subsequent quarters on declining crude prices, lower GRMs (gross refining margins) and full impact of price hike/duty cuts implemented on 4 June 2008.
Limited visibility on earnings
Final oil bonds quantum in FY08 turned out to be much lower than initial indications given by the government. The subsidy package for FY09 has been announced and it assumes gross underrecoveries of Rs2035bn, but there is no clarity on what adjustments will be made if actual underrecovery is higher or lower than this figure. Liquidity at least is no longer an issue, given that the central bank is now willing to absorb oil bonds and provide forex for crude imports. We estimate that Singapore GRMs will weaken (though HPCL's GRMs may benefit from the implementation of its modernisation capex) and that under-recoveries will drop in FY10-11 due to lower oil prices. Net net, we have cut our FY09-10 EPS by 18-45%.
Downgraded to Hold, clarity after next elections?
Our earlier positive view was based on expectations that the subsidy package the government announced in February 2008 would be maintained. These expectations have been belied and there is no firm policy on future subsidy sharing. Short-term, HPCL's share price is likely to be correlated with global oil prices. However, longer-term earnings and valuations are unlikely to improve unless there is clarity on government policy, and we believe this is unlikely till the term of the current government ends in May 2009. The government has appointed a high-powered committee to look at the subsidy issue and its final report is expected soon. There is an outside chance that the government provides policy clarity based on this report. We downgrade the stock from Sell to Hold and cut our target price from Rs380 (1.1x FY09F P/B) to Rs250 (0.7x FY09F P/B on 7% ROE) to reflect higher government policy risk.
1QFY09 results: impact of rising oil prices
HPCL reported 1QFY09 net loss of Rs8.8bn largely on higher net under-recoveries of Rs27.6bn and one-off provision of Rs1.6bn for staff costs. Inventory gains boosted refinery margins as well as marketing profits. We now forecast a steep fall in under-recoveries in subsequent quarters on declining crude prices, lower GRMs (gross refining margins) and full impact of price hike/duty cuts implemented on 4 June 2008.
Limited visibility on earnings
Final oil bonds quantum in FY08 turned out to be much lower than initial indications given by the government. The subsidy package for FY09 has been announced and it assumes gross underrecoveries of Rs2035bn, but there is no clarity on what adjustments will be made if actual underrecovery is higher or lower than this figure. Liquidity at least is no longer an issue, given that the central bank is now willing to absorb oil bonds and provide forex for crude imports. We estimate that Singapore GRMs will weaken (though HPCL's GRMs may benefit from the implementation of its modernisation capex) and that under-recoveries will drop in FY10-11 due to lower oil prices. Net net, we have cut our FY09-10 EPS by 18-45%.
Downgraded to Hold, clarity after next elections?
Our earlier positive view was based on expectations that the subsidy package the government announced in February 2008 would be maintained. These expectations have been belied and there is no firm policy on future subsidy sharing. Short-term, HPCL's share price is likely to be correlated with global oil prices. However, longer-term earnings and valuations are unlikely to improve unless there is clarity on government policy, and we believe this is unlikely till the term of the current government ends in May 2009. The government has appointed a high-powered committee to look at the subsidy issue and its final report is expected soon. There is an outside chance that the government provides policy clarity based on this report. We downgrade the stock from Sell to Hold and cut our target price from Rs380 (1.1x FY09F P/B) to Rs250 (0.7x FY09F P/B on 7% ROE) to reflect higher government policy risk.
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