Dabur - Reclaiming growth; visit note; Buy ;Edelweiss

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Dabur (DABUR IN, INR 95, Buy)

Our recent interaction with Dabur management has infused us with confidence that volume growth is likely to revive in Q3FY12 (5% in Q2FY12), shampoo growth is expected to stabilize (versus decline in past few quarters) and gross margin pressure is likely to recede. However, it must be noted that the company, in a bid to regain volume growth, is launching new products and enhancing ad spending, which may offset gross margin gains. But, we believe investment in brands to be long term positive from Dabur’s perspective. Maintain ‘BUY’.

Volume growth on revival track; shampoos to stabilize

Dabur expects Q3FY12 volume growth to recover as: (a) restructuring of consumer health segment is largely complete; (b) toothpaste supply is back to normal; (c) ad spending has been increased; (d) new product launch (almond hair oil). Shampoo sales is likely to stabilize in Q3FY12 (against decline since past few quarters; sales had dipped by 25.4% YoY in Q2FY12).  It is setting up a plant in Sri Lanka which will improve supply to South India and also tap local market over longer term.

Gross margin compression easing off; ad spending to surge

Raw material costs have peaked out and Dabur expects gross margin compression to be lower in Q3FY12 vis-à-vis Q2FY12. However, we believe costs will remain volatile along with currency fluctuations. Also, the company has effected 7-8% YoY price hikes in Q2FY12 and Q3FY12. However, ad spending is likely to surge, hence, EBITDA margin may remain under pressure. In Q2FY12, it had spent just 10.1% of sales on ads (long-term average 12-13%).

Outlook and valuations: Growing strong; maintain ‘BUY’

Revival in demand, calibrated price hikes, new launches and long‐term benefits from international acquisitions Hobi and Namaste will act as long-term positives. At CMP the stock is trading at P/E of INR 25.6x and INR 21.3x on FY12E and FY13E, respectively. We maintain‘BUY’ with ‘Sector Performer’ rating.

Mundra Port & SEZ Ltd. Rec PAT +36%YoY on MAT credit claim; 2Q cargo surprise �� �� BofA Merrill Lynch

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Mundra Port & SEZ Ltd.
Rec PAT +36%YoY on MAT
credit claim; 2Q cargo surprise
�� Rec PAT +36%YoY on cargo +34%YoY & MAT credit; Neutral
MSEZ 2Q Rec. PAT +36%YoY (+8% consensus) on MAT credit, port income
+45%YoY led by +8%YoY tariffs and +34%YoY volume. ASP rose on high margin
cargo growth – Coal +70%YoY. SEZ continue to disappoint at a meager 1% of sales.
We up our EPS by ~25% for FY12-14E to factor-in co’s policy of claiming MAT credit
in same year as payment, which has no cash impact. Maintain Neutral despite a
compelling asset on lower returns on Abbott Point terminal acquisition, leveraged
consol. balance sheet post acquisition (net D/E 2.2x) and lower stock upside v/s other
developers in coverage. Raise PO on roll-forward. We think that its EPS CAGR of
47% over FY11-13E is reflected in its premium valuation at 21x our FY12E EPS.
Coal & container drive cargo +34% + MAT Credit drive PAT
Mundra Port 2Q cargo of 16.8mmT led by coal +70%YoY (50% of incremental
cargo), crude +63%YoY (25% of increment cargo) while high ASP container cargo
grew at muted 16%YoY (14% of incremental cargo). SEZ revenue was minuscule
at Rs60mn. 2Q12 Rec PAT +36%YoY on 8%YoY growth in port tariffs @Rs346/tn
and +34%YoY cargo volume led port income +45%YoY. MSEZ provided for MAT
but claimed equal (Rs551mn) credit to off-set tax burden. Excluding MAT credit,
Rec. PAT growth would have been muted at 10%. Rep. PAT came-in at Rs2.7bn
+29%YoY on Rs139mn derivative loss vs Rs11mn derivative gain 2Q11.
East port & APCT/Dudgeon Point +ves but to up capex/lower RoE
MSEZ is scaling-up its ports business – it has bagged ports at Goa & Hazira and
is working on a port in Orissa. Apart from 80mtpa Abbot Point Coal Terminal in
Australia, it is developing a 30-60mtpa coal terminal at Dudgeon Point and may
set-up 35-50mtpa port to evacuate coal from Tanjung Enim mines of PTBA for
ADE. Expect these capex to be lower RoCE v/s its core Mundra port. New project
concessions wins and SEZ land bank scale up to 32k acres are catalysts. Risks:
Global weakness impacting port traffic, reducing viability of imported coal in India
& slow recovery in private capex at SEZs.

BGR Energy Systems (BGRE.BO) Downgrade to Sell: Significant Balance Sheet Deterioration   Citi Research

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BGR Energy Systems (BGRE.BO)
Downgrade to Sell: Significant Balance Sheet Deterioration
 Downgrade to Sell (3H) — Revise down our EPS for FY12-14E by 17-34% to factor in
(1) 8-14% lower sales and (2) higher interest costs. Our estimates are 27-35% below
consensus expectations. We cut our target price to Rs241 (Rs350 earlier) to factor in
our EPS revision and roll forward of target P/E multiple of 8x to Mar13E (from Dec12E).
 2Q12 PAT down 34% YoY — Despite a 267bps margin expansion, BGRL’s 2Q12 PAT
was down 34% YoY at Rs514mn, which was 29% below CIRA at Rs726mn on account
of (1) 32% YoY decline in sales and (2) 118% YoY increase in interest costs.
 Significant balance sheet deterioration — BGRL seems to be facing severe working
capital (WC) stress with debtor days ballooning up to 478 days of sales end 2Q12 from
258 days end 2Q11. WC intensity (NCA – Cash days of sales) is up to 289 days end
2Q12 from 119 days end 2Q11. Cash flow from operations (CFO) was -9.1bn in
1HFY12 vs. -5.4bn in 1HFY11. The debt equity ratio has ballooned to 2.2x end 2Q12
from 1.7x from end 2Q11. With more equity commitments for the BTG JV with Hitachi
over the next 12-18 months, we expect the balance sheet to deteriorate even further.
 Order drought adds to the pain — After winning a mere Rs29.4bn of orders in FY11,
BGRL has managed to cobble together Rs10.1bn of orders in 1H12. As of now the
company has visibility for an aggressive bid and won Rs29bn order for 4X800MW
turbines from NTPC. The RRVUNL Rs60bn+ EPC order for 2X660 is long delayed.
Even if orders rebound, we expect margins to decline structurally ahead and BGRL,
with its weak balance sheet, could find the going tough.
 BGR's NTPC tender win is aggressive — BGR’s L1 raw bid @ Rs8.8mn/MW is
aggressive and well below past bids in the Indian market by domestic equipment
suppliers and the industry benchmark (in the new competitive scenario). That
management claims they have received calls from other utilities if they could supply
turbines at these prices post the tender could be an indication of the same.

EDUCOMP SOLUTIONS Receding capex a positive :: Edelweiss

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Educomp’s Q2FY12 PAT of INR128mn (including MTM forex loss of
INR374mn) was significantly below expectation, on back of higher losses
in online and higher learning segments. Though SmartClass performed
well during the quarter, management’s FY12 guidance is aggressive, in
our view. We are 8‐13% below consensus on our FY12‐13 EPS estimates
and expect the earnings downgrade cycle to continue. While a dip in
capex in Q2FY12 is a key positive, sustaining it for a few more quarters is
important for any re‐rating of the stock. We maintain ’HOLD’ with a
target price of INR200/share.
SmartClass performs well, but most other segments disappoint
Educomp continued its good show in the SmartClass business with 6,818 classroom
additions (up 28% YoY) in Q2FY12. Management has maintained its FY12 guidance of
~ 40,000‐45,000 classroom additions (12,000 in H1FY12), which we believe is
aggressive. We have built in 34,000 additions in FY12, implying 45% YoY growth in
H2FY12. The INR38mn EBIDTA loss in its subsidiary Learning.com (INR88mn profit in
Q2FY11) was a negative surprise. Management indicated this was due to legislative
changes in key market, Texas (US). We believe these losses could continue for a few
more quarters. Higher learning also reported lower sales and higher losses.
Lower capex guidance for H2FY12
After incurring heavy capex in the past many quarters (and significantly higher than
Street expectations), it dipped during Q2FY12, as guided by management. No capex
was incurred in higher learning versus INR1,050mn in Q1FY12. Further, K‐12 capex was
INR480mn versus INR1,150mn in Q1FY12. Management has guided for even lower
capex in H2FY12, which is a positive.
Outlook and valuations: Concerns persist; maintain ‘HOLD’
At CMP of INR174, the stock is trading at lower P/E of 5.9x and 4.3x FY12E and FY13E
earnings, respectively, which looks attractive. Potential stake sale in subsidiaries or
some of the K‐12 schools could be a trigger for the stock. Our target price of INR200 is
based on 5x FY13 P/E. We maintain ‘HOLD’.

Construction - Competition shows signs of easing; :: Edelweiss

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NHAI recently awarded nine projects spread over ~1,050 km worth INR106bn. Our analysis of bids reveals a definite moderation in competitive intensity, which has been a major concern over the past year.  We believe the highway authority is on track to award ~7,000 km projects in FY12 with ~4,500 km already awarded. We reiterate Sadbhav Engineering (Sadbhav) and IL&FS Transportation (ITNL) as our top picks. 

NHAI awards ~1,050 km worth INR106bn

NHAI has awarded nine projects spread across ~1,050 km, worth INR106bn recently. Listed players have won six projects; their share in terms of length (km) and project cost stands at 68% and 63%, respectively.

Definite signs of receding competitive intensity …

We believe competition in NHAI projects has definitely moderated compared to bids submitted six-nine months ago. This is evident in the lesser number of bidders (10-15 in most cases and in single digits for some projects opposed to 18-20 players earlier). Also, the difference between L1 and L2 bids has dipped.

… due to concerns on project funding

The large number of projects already awarded and concerns over financial closure have forced developers to be more rational while bidding. With capital markets continuing to remain weak, there are concerns with regards to equity infusion for some companies. The government, concerned about high premiums promised by developers, is planning to meet banks to get their perspective on financial closure of the projects awarded. We expect banks to become more cautious going ahead with road projects funding; this will lead to developers being more circumspect while bidding.

Road projects spanning around 4,500 km awarded in FY12 till date

NHAI has so far awarded projects spread over ~4,500 km amounting to ~INR450bn. We believe it will award ~7,000 km of projects in FY12 (against 5,083 km in FY11 and 3,351 km in FY10).

Our top picks: Sadbhav Engineering and IL&FS Transportation

We like Sadbhav for its superior execution and working capital efficiency. We like ITNL as it is a high quality infra company with a well diversified project portfolio and remains one of the best plays on peaking interest rates.  Additionally, both companies have been cautious in bidding for new projects in the past few months given the aggressive bidding by peers. Both these companies stand a good chance to bag a few projects over the next four-five months as competition eases.

Corporation Bank 2Q earnings beat; Maintain Buy on positive risk return 􀂄BofA Merrill Lynch,

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Corporation Bank
2Q earnings beat; Maintain Buy
on positive risk return
􀂄 2Q: +25% beat on treasury gains, offset by credit costs
Corp Bk’s 2Q earnings came in at Rs4.0bn, a 14% yoy growth and a +25% higher
than est. driven by a) treasury gains, partly offset by higher credit costs driven by
higher than estimated slippages (+2x qoq). Top-line growth modest (~4% yoy),
but ~3% ahead driven by 17% loan growth and margin decline by 45bps yoy (up
32bps qoq). Core fee growth strong (+30% yoy). CASA, while down yoy by
+320bps, is up qoq by 80bps, to ~22%.
Slippages rise +2x qoq, but asset quality is manageable
Corp Bank’s slippages increased by +2x qoq to Rs5bn driven by corporate / nonpriority
slippages. However, mgmt. is looking at corporate recovery in the ensuing
quarters. Resultantly, headline gross NPLs increased qoq by 27% (at 1.3%) and
net increased by 81% qoq (at 0.9%), provision cover at ~65% (vs. ~75% in 1Q).
We estimate FY12 slippages at ~Rs16/20bn (vs. Rs8.1bn in FY11) and credit
costs normalizing at +60/80bps in FY12/13.
Maintain Buy and PO on positive risk-return
While 2Q earnings beat was +25%, we more or less maintain our FY12/13
(earnings tweak by ~1%), as we normalize strong 2Q treasury gains and build in
higher credit costs. We maintain our Buy rating and PO, as risk-return remains
positive, with stock trading at 0.9x FY12E adj. book / 0.8x FY13E adj. book, with
RoEs of still +20%. Our PO is still at a +30% discount to Gordon theory multiples.
We believe the discount may remain owing to weak liability franchise, as also we
remain worried on its +55% SME loan growth that makes the loan profile riskier
and, low stock liquidity (Govt. & LIC own ~84% of stock).

Mahindra and Mahindra | Annual Report Analysis ::Edelweiss

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Mahindra & Mahindra (M&M) FY11 annual report analysis highlights issue
of shares to ESOP trust which may result in higher employee cost.
Exceptional income and direct debit to reserves improves profitability.
Operating cash flows remained subdued due to higher working capital
requirement.
Employee cost may surge on issue of ESOP
During Q4FY11, M&M issued ~17.2 mn shares to the ESOP trust at par. On issue of
shares by the trust to employees, difference between the market price and exercise
price will be amortised through P&L (over the period of grant), impacting P&L.
As at FY11 end, the percentage of shares under the promoter group category was
24.9% (Q3FY11: 22.8%) of which economic interest to the company was 13.3% (10.8%).
Direct debit to reserve and exceptional income lift profitability
M&M has adjusted provision for diminution of assets related to a product development
project worth INR 2.0 bn, ~4.6% of PBT (FY10: INR 0.7 bn) against the investment
fluctuation reserve. At FY11 end, the investment fluctuation reserve was INR 2.2 bn.
During FY11, the company recognised deemed divestiture gain of INR 2.0 bn (FY10: INR
2.5 bn); 4.7% of PBT (FY10: 6.6%) as exceptional income. As per conventional practice
deemed divesture gain are adjusted through reserves.
Higher working capital requirement subdues operating cash flows
On consolidated basis, M&M’s operating cash flows were negative at INR 23.3 bn vis‐àvis
PBT (before exceptional items) of INR 43.1 bn primarily due to increase in loans
against assets of INR 37.5 bn. Trade & other receivables increased by INR 17.5 bn and
inventories jumped by INR 9.5 bn.
Acquisition of subsidiaries bloats balance sheet
Capital reserve on consolidation jumped from INR 1.4 bn in FY10 to INR 12.8 bn in FY11.
Also, goodwill on consolidation surged from INR 14.8 bn in FY10 to INR 19.5 bn in FY11.
During FY11, M&M acquired Ssangyong Motor Company (Ssangyong) on which the
company is likely to have recognised capital reserve of INR 3.7 bn.
Auditor concerns on associate Satyam Computer Services
The auditors of Tech Mahindra (TML; 48.2% stake in JV) have qualified the financial
statements expressing their inability to ascertain the impact of the qualifications in
Satyam Computer Services (SCSL).