Bharti Airtel - "India shines, Africa whines!" -LKP

Q3 results disappoint on higher costs below operating levels in Africa business

Bharti’s Q3 FY13 results were below our expectations due to lower than expected African metrics. On revenue front, the company reported numbers which were inline with our expectations. Consolidated revenues grew by 10% yoy, while remaining flattish qoq at Rs202 bn, while at EBITDA levels, margins declined by 80 bps qoq to 30.5% as network costs expanded to 23.9% of sales from 22.8% qoq, while SG&A expenses showed an improvement to 17.8% from 18.3%. Access charges also went down to 14.4% from 14.6% qoq. However, below the operating levels, depreciation and amortization costs went up by 9% yoy and 1% qoq as the company is expanding its network in Africa. Interest expenses also plummeted to Rs13.3bn, a growth of 30% qoq mainly driven by a derivative loss of Rs2.47 bn. Excluding this charge, interest expenses remained flattish qoq. Tax expenses also showed lumpiness as it included a one-time expense of Rs600 mn associated with tax credits recognized earlier. Excluding this charge as well, adjusted PAT came in at Rs 5.91bn, which was 18% down qoq and 41.5% yoy. Reported PAT came in at Rs2.84 bn which was grossly below our as well as market expectations.

Consol margins to improve

Domestic margins in the quarter came in at 30.3%, while African margins were 26.5%. All the other businesses showed a strong improvement in margins taking the consol margins at 30.5%. Management also mentioned that their Bangladesh business turned break even this quarter. Going forward, in India, tariff hikes and reduced competition will led to an improvement in margins. Lower SG&A along with control in network opex will led to margin improvement from next quarter. However, the extent of participation in upcoming 2G auctions remains a key to assumption. Africa may also post an improvement in profitability but at a lower pace than India as the business and the brand is still at a nascent stage. We also believe that reduction in capex outlay from US$2.5 bn this year to US$2.2 bnin FY 14 will improve the cash flow and ease pressure on the bottomline. Also the company has reduced its debt this quarter as net debt/EBITDA now stands at 2.58x from 2.71x qoq. This will also have a slight positive impact on interest costs.

Outlook and valuation

In line with improvement in regulatory scenario and competitive environment in India, we continue our positive stance on Bharti. Africa business reported a disappointing quarter in Q3while we believe the broad mid-long term picture to be strong. In line with a weak Q3, and pressure on bottomline via higher depreciation, interest expenses and tax rates in Africa, we have cut our estimates for Bharti below the operating levels. Above operating levels our estimates remain broadly constant. We therefore cut the target price on Bharti from Rs380 to Rs371. We maintain BUY on the stock factoring in the regulatory outgo of Rs32 in case Bharti participates in the upcoming 2G auctions.

LKP Research

LKP BYTES : Cummins India (Buy @Rs502 with a price target of Rs600)

The story so far ………..

Cummins India is the 51% subsidiary of Cummins Inc- US and has a dominant 35% market share in diesel engines. The company has quite clearly demonstrated its ability to leverage its strong brand equity and technology edge in a challenging business environment both globally and in India. We expect the company to maintain margins and end FY'13 with a growth of 12.5% in its domestic business and 6% in its international business (exports is close to 30% of revenues). Much of this growth is volume led as price increase this year was only 2% and in a scenario wherein diesel prices have been on an uptick the performance is quite creditable as the power shortage leaves consumers with little choice but to shift towards standby applications.

The story ahead ………..

With the new Power Gen facility going on stream in June this year we expect this business to grow at a CAGR of 20% and Cummins has stepped up capital expenditure significantly for next fiscal at around 550crs from 230crs this year. Going forward the plan is to move people to its new upcoming India office thereby freeing up land at its existing facility at Kothrud in Pune.

Industrial, Automotive, Distribution and Service contract businesses are growing at a steady pace despite the industrial slowdown. Exports are led primarily by high HP products but we believe that the low HP gensets is gaining significant traction this year and exports could in our view clock a higher growth of 8% next fiscal.

In our view the new emission norms from October this year would induce some amount of pre-buying in India as Cummins products could get costlier by close to 20% once the new norms are in place. Cummins is a debt-free company running a 30% ROE business and with cash of 1000crs on its balance sheet the valuation at 17x one-year forward earnings is unlikely to get cheaper. We recommend a BUY with a one-year price target of Rs600.

Thanks and Regards

LKP Advisory

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Q3FY13 Result Update Jagran Prakashan Buy:: - Centrum

Q3FY13 Result Update

Jagran Prakashan

Buy

Target Price: Rs125

CMP: Rs108

Upside: 14%

Healthy expectations ahead

Jagran Prakashan posted 7.7%YoY revenue growth on the back of 7.1% ad growth led by volumes and 12.2% circulation growth. Operating profit was up by 7% on the back of mere 3.9%YoY increase in raw material cost and higher than expected admin cost. Rs55mn forex loss muted PAT growth which was up 59% YoY on the back of lower taxes. Maintain BUY.

m  Q3FY13 results broadly in-line: Jagran Prakashan posted 7.7% topline growth in Q3FY13 to Rs3489mn on 7.1% growth in advertising. Circulation growth was at 12.2%. Operating profit was up by 7% as the company witnessed 16bps margin compression due to higher admin cost. PAT was higher by 59% as the company did not pay any tax during the quarter due to accumulated losses following Nai Dunia acquisition. Forex loss was at Rs55mn during the quarter due to depreciating Rupee.

m  Ad growth to bounce back in FY14E: The Company posted healthy 7.1% YoY ad growth on the back of festive season demand. Growth was slightly muted on the back of high base of Q3FY12 along with severe cold in the last week of December. The share of national ads continued to be at 40%, similar to the last quarter. Flanking papers like I-next and City Plus contributed to grow by 30% and 32% respectively. Hence we expect the company to post 7% YoY growth in FY13E and 14% in FY14E.

m  Reducing losses in acquisitions: Nai Dunia posted 21% YoY growth in ads on the back of strong synergies with Jagran. Operating losses during 9MFY13 was Rs42mn and for the full year we believe the losses would be under Rs75mn against Rs250mn in FY12. For Mid-Day, advertising growth was 3% with cash loss at Rs30mn for 9MFY13 and the management expects to break even in the next one year. We remain confident on turnaround of these publications with the uptick in economy from FY14 onwards.

m  Margins to expand: Margins during the quarter declined by 16bps on the back of high admin cost. Raw material expenses were under control due to lower newsprint cost, change in mix, lower pagination. We expect the margins to expand on the back of flat newsprint prices going ahead and turnaround of new acquisitions.    

m  Estimates lowered; Maintain BUY: We have marginally lowered our FY13E/FY14E estimates on the back of higher admin & other expenditure coupled with high interest cost. The stock is currently trading at 13.3x and 14.8x FY13E and FY14E respectively. We value the company at 15x Sept 2014 with our target price of Rs124 and maintain BUY rating on the stock. We believe that the ad growth has bottomed out and expect margin expansion ahead on the back of expectations of flat newsprint prices and turnaround in acquisitions of NaiDunia and Midday.

Thanks & Regards, 

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