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.

Titan Industries Ltd

Titan Industries Ltd


Titan Industries, a leading player in the branded jewellery segment, is likely to be the biggest beneficiary of changing lifestyles and consumer preferences. Though the company may face sales pressure in the short term because of volatile gold prices, the demand growth because of festival and marriage seasons may aid growth. Long-term investors stand to gain.

Business
Titan Industries is a joint venture between Tata India and Tamil Nadu Industrial Development Corporation. The company is the leader in watch, jewellery and eyewear retailing. It owns brands such as Titan, Tanishq and Fastrack. The jewellery business contributes around 75% to the company's revenues, while the watch business contributes 20% and the remaining comes from the eyewear and precision engineering.
Financials


Titan's net sales grew at a CAGR of 34.6% in the past five years. Its jewellery business increased at a CAGR of 45% and watch business grew at 14.6%. In FY11, the company posted revenue of 6,584.9 crore and net profit of 433.1 crore. The best part about the company's financials is its return on capital employed, with its earnings and margins improving year-on-year. The company is also a consistent dividend payer.

Titan's return on capital employed was 64% for FY11 against 45.5% in the year-ago period. The company's earnings growth during the period was 72.4% (53.3% in FY10) and operating margin was up 9.6% (8.5% in FY10).

The company has achieved this without dependence on external capital as strong brand ownership has allowed it to grow through the franchisee route unlike other retail players. It has consistently maintained strong cash flows. This has allowed the company to fund its working capital requirement and capital expenditure through internal accruals.

Titan is almost a debt-free company with cash of over 1,100 crore on its balance sheet.


Valuations

At the current market price of 208, Titan Industries is trading at a price to earning multiple of 37.5. The company cannot be compared with other industry players as they do not follow the same business model. Also, Titan Industries commands a premium over other jewellery players because of its unparalleled brand equity.

The best way to analyse the company is by considering its own historical valuations.

At the current valuation of 37, the company is trading close to its three-year average multiple of 35% and much below its three-year high valuation of 54%.

Investment Rationale


As per the World Gold Council, India is the world leader in gold consumption. With 90% of the retail market in India being unorganised, there is a significant growth opportunity for companies operating in the branded segment. The increasing awareness among consumers, mainly women, for branded jewellery in Tier I and Tier II segments is driving the market growth. Titan’s contemporary designs, higher transparency and better after-sales service will allow it to enjoy premium margins, which will in turn boost its growth further.

Also the company’s recent entry into optical eyewear, precision engineering and high-end luxury watches of other brands through its retail chain Helios provide a huge growth potential.

Concerns

The recent volatility in gold prices may put pressure on sales in the near term, but the momentum will pick up in the second half of the fiscal due to festival and marriage seasons.

Titan’s net sales grew at a CAGR of 34.6% in the past five years. Its jewellery business increased at a CAGR of 45% and watch business grew at 14.6%

Source - Economic Times

Infosys Ltd

As anticipated, Infosys reported a healthy sequential growth of 4.5% in dollar-denominated revenue for the September 2011 quarter. What took the market by surprise was the company’s sharp improvement in its annual revenue and profit guidance in rupee terms.


The country’s second-biggest IT exporter expects to grow earnings per share in rupee terms by as much as 21.6% for FY12, much higher than its earlier anticipation of a 9% growth. While the revision led to the stock rising as much as 6% on Wednesday, investors need to note that the revised guidance is mainly a function of the rupee-dollar movement rather than any major improvement in demand scenario.

This is visible from a less aggressive revision in its dollar-denominated guidance. In dollar terms, Infosys has improved its forecast of EPS growth to 16.8% for FY12 from earlier 11.5%. It has also reduced dollar-denominated revenue expectations. In addition, even though the management has denied any signs of budget cuts, it has yet not dropped the word caution from the commentary.

The management has stated currency movements as a major driver behind the strong rupee-term guidance. The rupee weakened by over 10% against the dollar during the quarter. Some economists feel that the rally in the dollar may not continue given the US central bank’s attempts to stimulate growth in the local economy. Any subsequent fall of the dollar will also impact Infosys’s projections adversely.
On a positive note, the company seems to have finally returned on the growth trajectory after reporting numbers in the past few quarters that were lacklustre by its own standards. During the quarter, it added 45 clients, the highest in any of the six quarters to September 2011. Also, the business growth was seen across all its verticals. Even for the banking and finance vertical, which is under pressure due to debt troubles in Western countries, the sequential growth was 4.8%. Infosys’s guidance suggests that it expects a growth of over 5% in each of the remaining two quarters of the current fiscal, which is higher than what it has achieved in the first two quarters. This could mean that the top IT players may continue to report demand buoyancy in the near term.

Source - Economic Times

Shares held by Rakesh Jhunjhunwala

What stocks do they hold?



Company   %Holding  No of Shares (in Lakhs)  Rs Crore



Bilcare 7.37    17.35    54

Titan Industries 7.15   635.09   1,423

Zen Technologies 5.06   4.50   4

Adinath Exim Resources Ltd 4.45   1.83   0

Titan Industries 2.49   221.16   495

Alphageo (India) 2.43   1.25   1

Lupin 2.02   90.25   426

Subex 1.80   12.50   5

Provogue (India) 1.66   19.00   6

Bilcare 1.14   2.68   8



* N.T Not Traded since last 15 days.

* The results displayed above are searched for the exact name match. It may not be including shares held by the particular entity in different name format.

Top 10 stocks picks by Mutual Funds

1. Jaiprakash Associates Ltd

Jaiprakash Associates is a diversified player operating in cement, real estate, construction, roadways and hospitality. Its listed subsidiary JP Power Ventures is into power generation.

Jaiprakash Associates' operating profit margin declined 420 basis points y-o-y to 21.4% in the March quarter despite net sales that rose 19%. Inthe cement division, the company's realisations grew an estimated 2% y-o-y on a per tonne basis in Q4 of FY11, but that was not sufficient to offset higher operational costs. The company's cement capacity is expected to grow to 33.6 million tonnes by March 2012 from 19.1 million tonnes at the end of March 2010.

2. ONGC Ltd

ONGC's March quarter results were weaker than expected thanks to a sudden jump in its subsidy burden. This impacted the company's valuations in the first half of June. But the government's move to reduce petroleum industry's under-recoveries by increasing prices and reducing taxes boosted the company. ONGC's net realisation for the rest of FY12 is expected to move up substantially as the industry’s under-recoveries come down. At the same time, there are strong indications that Cairn India would agree to make royalty on Rajasthan fields cost recoverable to obtain the government's approval for its acquisition by Vedanta. This too will boost ONGC’s earnings.

3. Rain Commodities Ltd

Rain Commodities, which is the global leader in calcined petroleum coke (CPC), posted strong results for the March and June quarters as profitability in the CPC business jumped. The company also has 3.5-million tonne of cement manufacturing capacity. The profitability of the business is stagnating due to an oversupply condition in the country. The company plans to demerge and list its CPC business separately. This can create substantial value for the shareholders. The company is currently trading at price-to-earnings multiple (P/E) of just 2.6 times based on consolidated earnings for the last four quarters.

 

4. ITC Ltd

June saw a rally in all FMCG and cigarette stocks listed on the bourses. ITC, being the market leader, has naturally had the highest buying interest from mutual funds. The company has gained from favourable taxation this fiscal and higher taxation on competing products like pan masala and chewing tobacco. Benign prices of tobacco have also helped the tobacco industry.

ITC has logged a strong performance for the June quarter, driven by a strong volume growth in cigarettes despite price increases. The outlook for the company continues to be positive.

5. NHPC AND SJVN

Mutual funds looking to take exposure to power utilities due to high demand for power in the economy have preferred NHPC and SJVN over other utility companies. There are two main reasons for this.

Firstly, these two companies are hydropower companies with no fuel cost involved. The only input that these companies need is water which is almost free. When thermal utilities are grappling with high fuel cost and fuel availability issues, these hydro companies provide a safer investment option. Secondly, these companies are trading at a price-to-book multiple of nearly one, which is inexpensive. Their latest quarterly numbers show a spurt in profits after stagnation for three quarters, which hints at a better show in the coming quarters. (Posted date - 14 Aug 2011) 6. Bharti Airtel Ltd

The counter of Bharti Airtel reported higher activity by fund houses in June. The number of shares holds by fund managers in Bharti increased sharply by 44.5% from the previous month.

The renewed institutional interest in the country's largest telecom operator looks opportune given the subsequent upward revision in prepaid mobile tariffs by leading operators including Bharti, Vodafone (not listed in India), and Idea Cellular in select telecom circles.

Though Bharti looks well-placed among its peers given its overseas expansion, its current P/E of 21.5 fully reflects its future growth potential. A further increase in its valuations looks limited.

7. United Phosphorous Ltd

The agrochemicals major passed through a tough phase in FY11, and underperformed the markets. The company's growth numbers were unable to support its high valuations. However, its three acquisitions in the last six months have boosted investor sentiment, while quarterly numbers have remained healthy.

The company is currently trading at a price-to-earnings multiple (P/E) of 12.5, which is inexpensive considering United Phosphorous is the largest domestic agrochemicals firm. The company's management also revised up its revenue growth guidance for FY12 to 25-30% from 12-14% earlier. However, maintaining margins will be the key challenge for the company to ensure strong profit growth.

8. Sterlite Industries Ltd

Sterlite Industries is the country's most diversified company from the non-ferrous sector. It is currently the strongest play in the metals and mining sector. The company has posted strong first-quarter earnings despite high raw material and fuel costs which dented margins of other companies. Improvement in treatment and refining margins, which are expected to sustain, helped the company increase revenue from its copper business. The division contributes half of its total revenue. Over the next few quarters, revenues from its silver, zinc and lead businesses are expected to drive earnings. The stock is currently trading near its 52-week low and with a low P/E of 9 times is a compelling buy.

9. Orient Paper Ltd

Orient Paper, a diversified player across various businesses, had recently decided to demerge its key cement business into a separate company -Orissa Cement. This will give it a focused entity, and help get better valuations. The demerger would be effective April 2012, and the existing businesses of paper & board, coupled with electrical consumer durables would remain with Orient Paper. In the June quarter, Orient Paper's operating profit margin rose 360 basis points y-o-y to 21.3%, while net profit improved 73.7% y-o-y to 59.4 crore. The company benefited from a strong improvement in its realisations on a per tonne basis in its key cement division. This improvement was helped partly by production discipline of large players in the southern region. In contrast, during FY11, the company grappled with a fall in operating margins on a y-o-y basis, coupled with a decline in its net profit.