Innoventive Industries Ltd. Result Update

Key Highlights

·      IIL’s standalone revenue grew 5.0% YoY and declined 5.9% QoQ to `1.7bn. The YoY growth was mainly on account of a 13.8% YoY growth in the motor vehicles parts business.

·      IIL’s standalone adjusted EBITDA for the quarter declined 3.2% YoY and 11.9% QoQ to `407.5mn on account of (1) margin pressure in the tubes & products segment due to slowing demand both domestically and overseas and (2) higher employee costs. Of the QoQ increase of ~31mn in employee costs, about `20-21mn pertained to H1FY13 as the increase in wages were given effect from April1, 2012. Standalone adjusted PAT declined 10.9% YoY and 19.2% QoQ to `189.9mn on account of lower EBITDA and higher depreciation.

·      Industrial promotion subsidy booked during the quarter was ~`70mn.

·      During the quarter, IIL’s OCTG business’ revenues declined 15.5% QoQ to `297.2mn on account of slower global economic growth.

·      During the quarter, sales volume of CEW tubes and membrane strips grew 20.8% YoY and 32% YoY to 7,685 tonnes and 3,761 tonnes respectively. Sales volume of the low-margin ERW tubes declined 51.6% YoY to 3,850 tonnes. Although the fall was primarily due to higher captive consumption for increased production of the high-margin CEW tubes, sales of ERW tubes were lower than our expectations.

·      For the quarter, Innoventive consolidated PAT declined 13.1% YoY and 27.1% QoQ to `172.9mn.

Outlook and valuations – IIL’s cost competitiveness and ability to do high product customisation through product and process engineering makes it well placed to drive exports in CEW tubes and volume growth in membrane panel strips. However, the weak global economy might lead to lower-than-expected growth in export volumes in CEW tubes for IIL. We reduce our volume assumptions for CEW tubes and ERW tubes for FY13E and FY14E (Refer Table-1 on Page-2). Factoring in lower sales volume, slight margin weakness and higher employee costs, we decrease our EPS estimates for FY13E and FY14E by 13.8% and 6.4% to `14.1 and `18.8 respectively.

Coal India Ltd. Result Update

Key Highlights

·         CIL’s consolidated net sales grew 2.5% YoY to `199.0bn primarily on account of a 5.7% YoY growth in sales volume to 129.9mn tonnes. Production declined 0.9% YoY to 143.3mn tonnes. E-Auction coal realisations declined 19.1% YoY to `2308 per tonne while FSA sales realisation grew 3.3% to `1273 per tonne. Beneficiated non-coking coal sales volume declined 41.6% YoY to 2.95mn tonnes. E-auction sales volume grew 1.2% YoY to 14.9mn tonnes.

·         CIL’s consolidated adjusted EBITDA declined 2.6% YoY to `61.2bn, down 2.6% YoY on account of higher contractual expenses and employee costs. EBITDA margin declined ~163bps YoY to 30.7%.

·         CIL’s consolidated adjusted PAT declined 5.7% YoY to `54.0bn on account of lower non-operating income at `22.1bn, down 5.2% YoY, higher depreciation and higher tax rate at 31.2%, up 114bps YoY.

Outlook and Valuations

·         Deferring the incorporating of the proposed 26% profit sharing clause in the MMDR bill to FY15E from FY14E: Given the delay in the MMDR (Mines and Minerals Development & Regulation) Bill, we further postpone the impact of the 26% profit sharing mining clause to FY15E from FY14E. Recently, the Parliamentary Standing Committee on coal and steel has recommended dropping the 26% profit sharing in mining clause and replacing it with an additional royalty equivalent to the regular royalty paid, to compensate people affected by coal projects. The Ministry of Mines, in response, has constituted a five member committee chaired by the Special Secretary of Mines to look into the matter. If the 26% profit sharing provision is changed into an additional royalty to be paid by coal mining companies, which would be a pass-through for CIL as per its pricing formula, there would major upside for Coal India, other things remaining the same. In the event of the above materialising, our target price would increase by 23.0%. However, on a conservative basis, we model for 26% profit sharing from FY15E onwards.

·         Price hikes likely to just maintain profitability in FY14E: Post the Q4FY13 results, CIL has announced price hikes on lower grade coal (below GCV of 5800/kg) by 10-11% and lowered prices of higher grade coal (above GCV of 5800/kg) by 10-11%. On a net basis, this is expected to raise revenues by Rs21bn for FY14 and Rs25bn on an annualised basis. However, increase in costs, particularly employee expenses and contractual expenses, would offset the benefits from the price rise. CIL is likely to just about maintain FY14E profitability at FY13 levels. On account of coal pricing adjustments (below our expectations due to reduction in higher grade coal prices), higher costs and lower non- operating income, we reduce our adjusted FY14E EPS by 9.5% to `27.4

 

Valuations; scrapping of the 26% profit sharing in mining clause could provide big upside: With the revision of our earnings estimates downwards, reduction in higher grade coal prices and quarterly rollover of our 1 year forward DCF value, our 1 year target price decreases by 7.5% to `370 from `400 earlier.

Why Rupee is depreciating?

The rupee has plunged by around 2% in just a week. Ironically, during the same period, markets saw inflows of up to $2.4 billion. This brings us to the riddle - What is driving the rupee lower to nearly its 8 1/2-month low???

1.       Dollar On A Horse Ride

The main reason causing the rupee to fall is the immense strength of the Dollar Index, which has touched its three-year high level of 84.30. The record setting performance of US equities and the improvement in the labour market has made Americans more optimistic about the outlook for the US economy, thereby spurring greater hopes of narrowing the Quantitative easing program. The Federal Reserve is in a very different position versus the ECB, BoJ and the RBA (Australia). The Federal Reserve is talking about tapering asset purchases at a time when European officials are considering more aggressive monetary easing measures such as negative deposit rates. The thought of dollar being a 'safe haven' is again into the limelight.

2.       Recession in the Euro Zone Is Back On the Table

The rupee is also feeling the pinch of the recession in the Euro zone. The euro, which was seen holding the key level of 1.30 (against the dollar), has dropped lower to 1.28 levels on the back of deterioration in the local economic data. For the past month, investors have been selling Euros and buying dollars on the premise that the Euro zone is in a recession; and the ECB is considering more stimulus at a time when the Fed is considering less. If the data shows a deeper contraction in Europe, the EUR/USD could extend its losses.

3.       High Imports

The country with high exports will be happier with a depreciating currency; the same does not apply for India. India, on the other hand, does not enjoy this luxury, mainly because of increasing demand for oil, which constitutes a major portion of its import basket. The fall of the oil price to US$90/barrel has helped India to fight the depreciating rupee up to some extent but at the same time the Euro zone, one of India's major trading partners is under a severe economic crisis. This has significantly impacted Indian exports because of reduced demand. Thus India continues to record a current account deficit of around 4.3%, depleting its Forex reserves in the bargain and thus depreciating the rupee.

4.      Balance Of Payments

The Government was relaxed with respect to the CAD issue as there was a sharp fall in the commodity prices (of gold and crude oil). A large part of the import bill is driven by other resources as well. The facts show that fertilizer imports surged by 30% in the last two years and coal imports have doubled. Therefore, the problem of CAD continues to persist. With the reduction in exports and an increase in imports, on one side the current account deficit has increased while on the other, the fiscal deficit is also expected to be above the comfort levels due to increased subsidy. Therefore the imbalance between payments and receipts have increased resulting in greater deterioration of Balance of Payments.