09 December 2011

Reliance Communications (RLCM.BO) 2Q – Weak Overall  Citi Research

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Reliance Communications (RLCM.BO)
2Q – Weak Overall
 2Q below — EBITDA at Rs16bn (flat qoq; -3.3%yoy) came in 8% below estimates with
sub-par performance across all three segments – 1) wireless rev was slightly ahead on
mins growth but margins declined on higher ad spend, 2) Global EBITDA remained flat
despite benefit of Rupee and 3 ) “others” losses widened. PAT at Rs3.2bn (+45%qoq)
was ahead on lower-than-expected net interest exp. FY12-14E EBITDA is cut by 4-5%.
Core business is benchmarked off Bharti at 15% disc to Sep-12E EV/EBITDA (6.6x vs
6.3 earlier). As a result, TP remains unchanged.
 Wireless topline benefits from mins growth; margins hit by ad spend — Overall
traffic grew 1.6%qoq despite seasonality. Rev/min at 45p too increased marginally with
the 0.2p increase coming from tariff hike. Mgmt expects an incremental 1p rise over the
next 2-3 qtrs. Wireless revs as a result grew 2%qoq, net revenue meanwhile grew
6%qoq (4% in 1Q) highlighting focus on on-net traffic. Margins declined 50bps primarily
on higher ad spend even as network opex remained broadly unchanged and employee
cost declined. The company disclosed 2.1m active 3G subs.
 Other businesses were lackluster – NLD volume growth at 4% qoq was healthy
while ILD volumes remained flat. Global and enterprise EBITDA (linked to global
macro) was up only 1% despite some benefit of Rupee movement. This segment could
get hit from the deteriorating global macro. Meanwhile losses in “Other” (primarily
relates to DTH) continue to remain high.
 B/S details – Net debt (ex-equip payables) at Rs319bn has fallen Rs5.4bn from the
peak. Equipment supplies payable is a further Rs10bn. Capex came in at Rs3.5bn (1H
at Rs7bn) with the full-year guidance maintained at Rs15bn. The company has
US$925m of FCCBs coming up for redemption in Feb 12.
 Attractive assets available below replacement cost — RCOM’s asset basket
consisting of CDMA/GSM/3G spectrum, fiber backhaul and tower portfolio is geared
toward mobile data growth. We estimate RCOM’s replacement cost at Rs118/share.
The stock provides decent risk adjusted returns at current levels. Maintain Buy.

09-Dec-2011: FII & DII trading activity across NSE and BSE

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Category
BuySellNet
ValueValueValue
FII1771.672020.24-248.57
DII985.02869.81115.21

 
 


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OnMobile Global Services: Buy :: Business Line

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Investors with a two-year horizon can buy the shares of OnMobile Global Services, given its expanding presence in high-growth international markets such as Latin America and Africa, in the mobile value-added services space.
Ongoing execution of large deals for top global customers such as Telefonica and Vodafone which enjoy higher revenues per user in international markets should translate into lucrative realisations for OnMobile.
At Rs 67.2, the share trades at seven times its likely per share earnings for FY12, which is much lower than the historic valuations that it has enjoyed. With the international pie of its revenue-mix increasing rapidly, margins too may expand significantly, giving scope for further upside.
In the first half of this fiscal, OnMobile's revenues grew by 14.2 percent over the same period last year to Rs 291.6 crore, while net profits rose 46 per cent to Rs 60.5 crore. After a difficult couple of years, due to slowing domestic telecom market and heavy costs incurred on rollout in new geographies, the company's turnaround seems to have gained pace from the second half of FY11 and in the current fiscal. In fact, on a trailing-four-quarters basis, revenues as well as operating and net profits have grown at a faster pace compared to the previous period.

EMERGING MARKETS DELIVER

OnMobile has multi-year rollout deals with players such as Telefonica and Vodafone, and substantial investments in Latin America and Africa over the past 12-18 months are beginning to pay off. Implementation has been done in around 13 key Latin American countries. OnMobile now claims to have a reach of 94 per cent of addressable subscriber base in that region. Within months of launching value-added services, there has reportedly been a substantial increase in subscribers for these mobile operators, indicating OnMobile's sound execution capabilities. Telefonica's subscribers in countries such as Brazil, Uruguay, Mexico, Chile, Argentina and Venezuela, its key markets, generate high ARPU of $10-25, which is substantially higher than the $3-4 levels that the Indian market generates.
Financial reports of Telefonica in the current fiscal suggest that the company is witnessing rapid growth in Latin American countries, with expanding ARPUs, rising margins and increasing value-added services offtake. OnMobile would stand to take a lucrative share of those revenues. With its forays in Latin America, Africa and in Europe, the company derived over 37 per cent of its revenues from overseas geographies and appears on course to achieve its target of deriving half its revenues from international operations. In fact international revenues have grown at 87.5 per cent in the first half of this fiscal.

DOMESTIC MARKETS STAGNATE

While still accounting for a major share of OnMobile's revenues, the domestic share of the pie is decreasing steadily for the company. In the first half, domestic revenues fell 8 percent. The tariff wars which resulted with the entry of new operators resulted in lower share of revenues from value-added services. Also, regulatory issues such as restricting the number of SMS' played their part. In recent times, though the ceiling on the number of SMS' has been doubled and tariff wars have largely abated, ARPUs continue to decline for domestic operators. Launch of 3G services has also not seen significant traction until now. Over the next 12-18 months, as operators take tariff increases, have viable 3G roaming arrangements and see newer services launched, the growth curve may return. Till such time, there may not be significant expansion domestically.

RISKS

OnMobile has indicated that it has positive operating cash flows already in its Latin American operations in the first year of operations on a five-year contract. The danger, however, with increasing international revenues, including from geographies such as Europe is that if greater onsite deployment of manpower happens, the cost structure could increase significantly.

Buy HEG- target price of `238:: Angel Broking,

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HEG reported revenue growth of 6.5% yoy to `319cr during 2QFY2012. EBITDA
margin contracted by 987bp yoy to 10.2% due to a 27% yoy increase in
raw-material cost and forex loss of `11.6cr. On the profitability front, HEG
reported a decline of 54.5% yoy to `14cr in 2QFY2012 as compared to profit of
`30cr in 2QFY2011. We maintain our Buy recommendation on the stock.
OPM impacted by increased raw-material costs and forex losses: During
2QFY2012, HEG reported net sales growth of 6.5% yoy to `319cr. The
company’s EBITDA margin came in at 10.2% in 2QFY2012, down 987bp yoy
from 20.1% in 2QFY2011, on the back of higher raw-material costs and forex
loss. On the bottom-line front, HEG reported a 54.5% decline to `14cr from
`30cr in 2QFY2011.
Outlook and valuation: We expect HEG’s revenue to grow at a 25% CAGR over
FY2011-13E, aided by higher prices of graphite electrodes. The company’s
EBITDA margin is expected to witness a downward trend in FY2012E and
FY2013E due to higher raw-material prices and INR depreciation. However, PAT
is expected to rebound to `134cr in FY2013E from `123cr in FY2011 and `63cr
in FY2012E. At `195, HEG is trading at PE of 5.9x its FY2013E earnings and P/B
of 0.8x for FY2013E. We maintain our Buy recommendation on the stock with a
target price of `238, based on a target P/B of 1.0x for FY2013E.

Federal Bank – BUY:: Target price (Rs): 440 ::IIFL

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SME and corporate segments to drive healthy loan growth
After being flat in Q1 FY12 due to organizational restructuring and
employee issues, Federal Bank’s loan book expanded by healthy 5% qoq in
Q2 FY12. With substantial SME and corporate exposure, bank’s credit
growth typically accelerates in H2. The loan mix has been shifting towards
corporate segment off-late with the bank lapping-up better-quality
opportunities. Within the retail segment, mortgages and gold loans are
likely to be the key drivers. We estimate a healthy 18% CAGR in advances
over FY11-13. Regional loan mix is expected to become more diversified in
the medium term with reduction in Kerala concentration.
NIM to remain stable; adverse liquidity conditions is the only risk
During H1 FY12 Federal Bank’s NIM moderated to 3.8% from higher levels
of 4%+ in FY11 impacted by tight liquidity, unfavorable shift in deposit mix
and decline in C/D ratio. H2 FY12 outlook for NIM is sanguine as the
favorable impact of recent lending rate hikes (more effective for bank as
90%+ advances are floating), improvement in C/D ratio would comfortably
offset the headwinds of higher deposits cost (mainly from retail TDs) and
shift in loan mix towards lower-yielding corporate segment. Justifiably, the
bank has given a NIM guidance of 3.75-3.8%.
Sharp spike in NPLs unlikely; credit cost to be modest
Driven by substantial slippages in the SME segment, delinquency ratio was
high in H1 at 3.5%. As macro credit environment continues to weaken, we
don’t foresee notable improvement here. However, strong recoveries and
acceleration in loan growth would drive marginal improvement in GNPL
ratio. Federal Bank’s perturbing exposure to Kingfisher, Air India and SEBs
(combined ~4%) is currently standard with restructuring not requested by
borrowers. Bank’s high PCR at 83% lends strength to the balance sheet
and provides some leeway for commensurately lower LLP. We therefore
expect credit cost at relatively modest 1.1-1.2% in H2. With net NPL ratio
to be sustained at 0.6%, NNPL/Networth ratio (NPL risk) would continue to
be one of the lowest in the industry at near 4%.
Provides comfort on multiple parameters; preferred mid-cap bank
Federal Bank’s strong pricing and lean operating structure enabled it to
earn respectable RoA even during tough times of 2008-09 despite higher
LLP. RoA is estimated to sustain near 1.2% aided by lower credit cost and
stable NIM. With Tier-1 capital at 14%, capitalization level is high and
reassuring in current environment. Bank has underperformed most peers
in past 3/6 months and valuation has corrected significantly to 1x rolling 1-
yr fwd P/adj.BV. In our view, Federal Bank provides comfort on multiple
fronts - diversified loan profile, robust provisioning cover, high
capitalization, low NPL risk and attractive valuation vis-à-vis estimated
RoA. Initiate coverage with BUY rating and 9-month target of Rs440.

BHARAT HEAVY ELECTRICALS Depleting quality of earnings :: Edelweiss

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Bharat Heavy Electricals (BHEL) reported strong revenue for the quarter,
driven by healthy execution and 1QFY12 spillage. Adjusting for the
change in accounting policy (with regards to leave encashment), EBIDTA
is higher by only 10% YoY while PAT is higher by 13% YoY. The company
also provided for higher LDs on two large projects which led to a sharp
rise in other expenditure. The management hinted at continued deferral
in power sector ordering, which is denting its overall order inflow
impetus.
Execution improves, but higher cost, provisioning impact OPMs
Led by a healthy execution during the quarter and the impact of slippages from
1QFY12, BHEL reported a better than expected sales growth at 24% YoY. It changed the
accounting policy regarding leave encashment from 26 days to 30 days a month due to
which the EBIDTA was higher by INR1.66bn. Adjusted for this, EBIDTA margins fell
sharply by 220bps YoY to 17%, largely due to higher LD provisioning (in Mejia and
Barsinghpur projects), power, fuel, freight and repairs and maintenance.
Flattish order intake, working capital deteriorates
BHEL currently has an order book of INR1610bn (flattish QoQ, up 5% YoY) with the
order intake at INR143bn (up 6% YoY). It reported two utility orders worth INR79bn
(INR40.7bn from Singrauni for 2x600MW and INR37.8bn from Dainik Bhaskar for
2x660MW). However, the company has reported a sharp jump in net working capital
from INR32bn to INR108bn due to a spike in inventory and debtors. Lower order intake
also affected customer advances which further dented the overall working capital for
BHEL.
Outlook and valuations: Structural concerns; maintain ‘HOLD’
We continue to remain concerned over BHEL’s overall business profitability in the long
term given the high base coupled with increasing domestic competition and pricing
pressures in the BTG space. We continue to bear in mind that BHEL will find it difficult
to build its non‐BTG revenue base and thus will not be able to effectively utilize its
unlevered Balance Sheet. We continue to maintain our HOLD/SP rating on BHEL with
TP of INR323 at which the stock trades at 12x and 11x for FY12E & FY13E respectively.