Result largely in-line; maintain Buy ACC :: Centrum

Result largely in-line; maintain Buy
ACC’s Q1CY13 result was largely in-line with our estimates on operational parameters with OPM of 15.3% (vs. est. 15.1%) and operating profit of Rs4.5bn (vs. est. 4.6bn). Though revenue of the company was 4.4% below our estimate, lower freight cost (Rs 960/tonne vs. est. Rs1,000/tonne) helped the company beat our margin estimate. However, higher other income (Rs1.5bn vs. est. Rs1.2bn) led to higher adjusted profit (adj. for Rs1.5bn tax adj. for earlier years) of Rs3bn (vs. est. Rs2.8bn). The numbers are not comparable with financials of Q1 and Q4CY12 due to the merger of two subsidiaries’ financials in Q4CY12. Going forward, we expect recovery in cement demand led by electoral spending (general elections are expected in May 2014), improvement in capex activities of industries and higher demand from the housing segment (due to our expectation of a decline in interest rate). Improvement in cement demand will aid pricing power of manufacturers and they will be able to pass on the rise in input cost to consumers. Cement price has remained subdued for last 3-4 months due to sluggish demand across India. We expect recovery in OPM and profitability of the company post Q2CY13E. We maintain Buy on the stock with a price target of Rs1,389 (earlier: Rs1,381) based on 8x CY14E EBITDA.

Sharp decline in margins: ACC reported revenues of Rs29.1bn (vs. est. Rs30.5bn), EBITDA of Rs4.5bn (vs. est. Rs4.6bn) and adjusted profit of Rs3bn (vs. est. Rs2.8bn). Reported numbers are not comparable due to the amalgamation of financials of two subsidiaries during Q4CY12. Operating profit declined 27.5% YoY to Rs4.5bn and OPM contracted 6.2pp YoY to 15.3%.

Cement business’ profitability under pressure on lower volume and higher opex: Revenue from cement business declined 2.6% YoY to Rs27.9bn primarily due to 4.5% YoY drop in sales volume to 6.42mt. Realization was up 3.2% YoY to Rs4,393/tonne. Operating cost increased 10.8% YoY to Rs3,700/tonne led by higher raw material, employee, freight and other costs. Operating profit of cement business declined 27.8% YoY to Rs4.4bn and OPM contracted 5.6pp YoY to 16%. EBITDA/tonne of cement declined 24.4% YoY to Rs693/tonne.

Consolidated results in-line; Standalone margin tad lower on low VSF realization- Grasim Industries :: Centrum

Consolidated results in-line; Standalone margin tad lower on low VSF realization
Grasim Industries’ Q4FY13 consolidated operating profit was at Rs14.6bn (vs. est. Rs15.3bn) and adjusted profit was at Rs6.74mn (est. Rs6.66bn). OPM at 19.2% was 1.2pp below our estimates led by lower margin in the standalone business (15.6% vs. est. 16.6%). In the standalone business, the company reported operating profit of Rs2.1bn (est. Rs2.3bn) and adjusted profit of Rs2.1bn (est. Rs2.2bn) primarily due to 2.5% QoQ fall in VSF realization. OPM in the standalone segment remained flat at 15.6% on a YoY basis. Despite near-term challenges in the VSF business due to pressure on global prices led by oversupply in the Chinese market and high cotton inventory globally, we remain positive on the company from a long-term perspective as we believe that capacity expansion in both key segments (cement and VSF) will aid volume growth and thus, better profits in future. We maintain Buy on the stock with a revised price target of Rs3,843 (earlier: Rs3,991).

Cement and Chemical business perform better; VSF performance subdued: Though, consolidated revenue increased 4.8% YoY, operating profit declined 3.4% YoY to Rs14.6bn primarily due to lower profitability of the VSF segment. In the VSF business, EBIT declined 27.7% YoY during the quarter. The chemical segment reported EBIT increase of 81.5% YoY, whereas, EBIT from the cement business was up 1.1% YoY. EBITDA margin was down 1.6pp YoY to 19.3%. Adjusted PAT (adjusted for Rs2bn income from sale of equity investment in subsidiaries) declined 16.7% YoY to Rs6.7bn.

Standalone OPM slightly below estimates, profit largely in-line: The company reported standalone revenue of Rs13.8bn (est. Rs13.7bn), operating profit of Rs2.1bn (est. Rs2.3bn) and OPM of 15.6% (est. 16.6%). Lower than estimated margin was primarily due to 2.5% QoQ decline in VSF realization. Adjusted profit (adjusted for Rs2bn in income from sale of equity investment in subsidiaries) during the quarter was at Rs2.1bn (est. Rs2.2bn).

Higher raw material costs and lower realization lead to decline in VSF margins: Revenue from the VSF segment declined 0.9% YoY to Rs12.1bn led by 1.5% YoY drop in realization to Rs119/kg. Sales volume of VSF was up 0.3% YoY (21.1% QoQ) to 95,161 tonnes. Led by lower realization and higher raw material cost (caustic soda and pulp price), EBITDA of this segment declined 6.9% YoY to Rs2,160mn and operating margin declined 1.2pp YoY to 17.7%.

Margins dip on high cost LNG; volume to improve Gujarat Gas Company :: SBI Caps

Margins dip on high cost LNG; volume to improve
Gujarat Gas Company Ltd’s (GGAS) 1QC13 results on operational front were in-line
with SSLe on lower volume and higher LNG cost. Net sales of the company
increased 18.9% YoY and 0.8% QoQ to Rs7.6bn (in-line with SSLe of Rs7.5bn) led
by improved realisation. On February 1, 2013, GGAS took ~4.2% price hike in
industrial segment and 8.5% in CNG. However, due to increased LNG cost, the
blended gas cost increased 34.8% YoY and 9.1% QoQ to Rs24.4/scm (LNG prices
were high up to US$20/mmbtu in January – February) leading gross margin to dip to
Rs4.5/scm compared to Rs5.7/scm in 4QC12 (SSLe Rs4.3/scm). EBITDA declined
35.6% QoQ to Rs672mn. With higher other income, decline in PAT was limited to
Rs595mn (declined 15.6% QoQ).
Gas sales volume declined 16.2% YoY and 2.2% QoQ to 264mmscm due to lower
volumes in industrial segment as gas cost was high.
Outlook and valuation: Rupee depreciation, steep rise in global LNG prices and
economic slowdown, impacted GGAS’s gas sales volume in C12. 1QC13 too
witnessed volume pressure due to high cost LNG. However, now the LNG prices
have softened and the company expects sales volume to pick up. Margins are also
expected to improve from hereon in view of price hikes. Bottom line of the company
is expected to remain sub-dued for next two years on lower sales volume; however, in
long term the company plans to improve volume to increase bottom line. We have
build in sales volume of 3/3.2mmscmd in C13/C14 respectively.
GGAS received authorization from the Petroleum and Natural Gas Regulatory Board
(PNGRB) for the city gas distribution areas of Surat, Bharuch and Ankleshwar. The
company has filed tariff application with PNGRB for its transmission pipeline.
However, due to high ROE of over 30%, the company is vulnerable to tariff reduction
from PNGRB, as was ordered for Indraprastha Gas.
At CMP, the stock seems to factor in all negatives. We expect better financial
performance of the company going forward with gas sales volume to pick up
gradually. We have valued the stock on 12xC14e earnings and recommend HOLD
rating on the stock with a revised target price of Rs272.

Jaiprakash Associates Results ‐ a mixed bag:: Prabhudas Liladhar

! Q4FY13 ‐ a better show in sales QoQ on all fronts: Cement and EPC business
revenues were up by 11% and 20% QoQ; however, YoY down by 3% and 13.4%,
respectively. Real Estate revenues were flat QoQ but grew by 14.3% on a YoY
basis. Overall, net revenues for JPA in Q4FY13 stood at Rs38.6bn, registering a
de-growth of 4%. Despatches in Q4FY13 de‐grew by 4.6% YoY to 4mt.
Realisations at Rs4,091/tonne were up 1.7% YoY. For FY13, revenues were up
by 3% YoY and PAT plunged by a 51.2%.
! Growth in Cement EBIT/tonne, Construction margins inching to normalcy:
Cement margins managed to improve by 110bps YoY for Q4FY13 due to cost
control measures and better realisations. For FY13, the margins remained flat at
11.6%. Construction, on account of lower sales, reported a 400bps YoY decline
in margins for Q4FY13 and 150bps decline for FY13. Real estate margins at
34.7% in FY13 were down from 46.9% in FY12.
! Interest costs mainly in control, depreciation costs higher: Interest cost
declined by 5.3% YoY in Q4FY13 but grew by 3.8% QoQ. For FY13, the interest
cost was up by 13%. Depreciation costs increased by 18.2% in FY13 on the back
of 13% increase in fixed assets. Current debt stands at Rs230bn (approx.). LT
loans increased by 23% YoY to Rs189bn. NWC rose by 6.3% YoY or Rs7.6bn on
account of higher loans & advances and receivables.
! Updates: JPA is targeting to pare down the debt by Rs20-30bn through stake
sale in Gujarat cement plant and land parcels in NCR region. The company is also
planning an investment holiday in the coming year.
! Valuation & Recommendations: We have reduced our FY14/15 PAT estimates
on the back of lower cement sales and low margins, taking into account the
current slack in the cement sector. For JPA, the overhang remains in terms of
higher debt. However, a potential stake sale in JCL is expected to re-rate the
stock. We maintain ‘Accumulate’ on the stock.

ITC Limited- Steady through the storm :: JPMorgan

ITC remains our preferred consumer pick. Tobacco is amongst few Indian
consumer businesses whose pricing power is intact given low competition,
high entry barriers, its habit forming nature and strong brand affinity. We
think tobacco is the most defensive of consumer staples sectors and ITC has
outperformed markets during difficult times. Aggressive price hikes this fiscal
will overshadow volume weakness and support mid-teens earnings growth in
our view. Steadily expanding margins for cigarettes, stable capex needs
coupled with improved profitability of other FMCG businesses would lead to
higher FCF generation and eventually higher dividend payout in our view. The
combination of reasonable valuations and relative security of earnings
estimates makes it our preferred pick in the staples space.
 A play on pricing power. While cigarette volume offtake is likely to remain
subdued in FY14 (we estimate -3% decline), ITC’s medium-term investment
case will depend on pricing power which drives earnings much more than
volumes. Price hike of ~18-20% for its cigarette portfolio likely over the
year would be substantially higher than c12-13% increase needed to offset
the excise/VAT hike and would drive at least mid-teens EBIT growth in our
view over FY14. Over last five years ITC’s cigarette revenue and EBIT have
grown at a CAGR of 16% and 18% despite cigarette vol CAGR of 2%.
Better offtake for 64mm cigarettes (where excise was kept unchanged) could
help offset some volume weakness in FY14.
 Non-tobacco business – Stable outlook. We expect better profitability for
other FMCG business supported by healthy sales growth, increased scale
and improved mix in FY14. Paper business expansion remains on track with
volume growth likely to pick up for this segment and product mix
improvement continuing to drive realisation/margin growth. Agri business is
expected to deliver steady mid-teens EBIT growth. Hotel business will
likely be an outlier with macro challenges impacting growth outlook here.
 FCF and dividend payout to maintain upward trend. Healthy cigarette
EBIT growth, steady growth for paper/agri businesses, improving
profitability for other FMCG business, stable capex requirements (18-20bn
p.a.) should lead to higher FCF and may lead to increased dividend payout
over time.

Results affected by supply constraints Glaxo SK Pharma’s (GSK) :: Centrum

Results affected by supply constraints
Glaxo SK Pharma’s (GSK) results for Q1CY13 were below our expectations for revenues and margin but in line for net profit. The company reported 1%YoY growth in revenues, 580bps decline in EBIDTA margin and 8%YoY decline in net profit before EO items. Sales during the quarter were affected by supply constraints. GSK is a debt-free company with cash/share of Rs244. We expect the growth momentum to be maintained from new products, vaccines and specialty products. We have lowered our CY13 and CY14 estimates by 7% each. We have changed GSK’s rating from Buy to Neutral with a revised target price of Rs2,364 (based on 24x June’14 EPS of Rs98.5).

Flat growth in core business: GSK reported 1%YoY growth in revenues from Rs6.29bn to Rs6.37bn. The core pharma business was flat during the quarter. Sales during the quarter were impacted by supply constraints at Nashik factory, sites for contract manufacturing and vaccines. The management expects supplies to normalise by the end of Q2CY13.

Overall increase in cost affects margin: GSK’s EBIDTA margin declined by 580bps YoY from 32.1% to 26.3% due to the increase in overall cost. The company’s material cost increased by 120bps from 41.7% to 42.9% of revenues due to the rise in imported raw material cost and depreciating rupee. GSK’s personnel cost grew by 210bps from 10.3% to 12.4% due to flat sales growth. Other expenses increased by 240bps from 15.9% to 18.3% of revenues due to lower sales growth.

Long-term outlook positive for gold ::Business Line

Recent decline in gold prices were caused by a confluence of factors. Jewellery demand slackened with incessant rise in gold prices. India’s gold imports for 2012 fell by 4.6 per cent from the previous year. Similarly Chinese gold demand in 2012 too fell marginally to 817.5 tonnes from 821.5 tonnes in 2011.

FALLING ETF HOLDINGS

Bullion holdings of exchange-traded funds (ETFs) have been falling too and are down by 16 per cent in 2013. Investors sold 174 tonnes through ETFs in April, followed by another 13.2 tonnes in May, taking combined holdings to 2,262.7 tonnes valued at about $107.3 billion.

Gold prices continued to move higher until recently on uncertain equity markets and inflationary conditions. This bubble burst when Cyprus hinted at sale of its gold reserves, creating panic about further gold sales by Italy and other Euro Zone economies.

Positive economic data coming from US has boosted the risk appetite of investors making them move out of gold into riskier asset classes. However, over the medium-term, gold’s appeal as an inflation hedge or haven cannot be ignored.

UP FROM LOWS

Retail buying in Asian countries due to upcoming festivals and wedding season along with continued bond buying by Federal Reserve and European Central Bank has already helped gold bounce back from recent lows. To consumers looking to buy gold, there are many paper gold options available in the form of Gold Futures, Gold ETFs, E-Gold, along with physical gold in the form of coins. A systematic investment plan is a good way of buying gold, amid volatile prices.

We suggest that investors buy gold at Rs 25,000/ 10gm ($1,290/troy ounce) with further positions to be added at Rs 23,500 ($1,150/troy ounce) levels. Overall gold looks positive for long-term from the above given levels. Factors such as the Euro Zone slowdown and credit problems and sequester in US creating uncertainty, can support the prices. We expect gold prices to near its all-time high by mid next year.

(The author is CEO Emkay Commotrade Ltd. The views are personal.)

DLF Limited - Gauging the potential of a successful phase 5 launch :: JPMorgan

DLF’s operating plan of Rs83B pa cash EBITDA generation 3 years out is
primarily contingent on the successful launch of its luxury Gurgaon projects.
These developments are expected to contribute as much as Rs 25B, almost
45% of the Rs 55B planned cash generation from the development business.
Given the high value ticket size of these projects (US$600K-$3MM) and the
current macro environment, there is understandable skepticism on the
company’s ability to achieve its target sell-through rate. We believe market
response to this launch will be the key near term driver of stock price.
 Limited inventory, infrastructure improvement and proximity to South
Delhi imply a prime location – DLF’s phase V development (20 msf) has
over the last few years emerged as one of the most sought-after luxury
developments in Gurgaon, given the limited inventory in the market (last
launch was in 2007), proximity to South Delhi, presence of a large office
development and ongoing infrastructure projects (Monorail/6 laning of
roads). Secondary market rates in the location range from Rs 25-35K psf
(golf course) and Rs 15K psf levels (for Belair/ Park place projects) vs.
average rates of Rs 6-7K psf at launch 5 years back. Details on micro
market inventory and pricing trend on page 3 .
 Weak macro is an overhang, but recent experience from other luxury
launches in Gurgaon/Mumbai seems to be positive – With most macro
indicators weakening in the last 3 months, the ability of the company to
successfully push through a high value luxury launch is met with skepticism.
However, we note that other high value launches done by peers in Mumbai
(L&T, Lodha) and Gurgaon (Sobha) have met with good success. DLF’s
ability to replicate this will be an important catalyst, in our view.
 Asking rate in units is not high, although in value terms it could be big –
Phase V launch comprises a 6.1 msf launch with a potential turnover of
Rs100-130B and net pre-tax cash flow of Rs 70-90B over 4 years. This
launch comprises 2 sub projects with 3.6 msf of Camillia, which is approx
600 units (ticket price US$3MM+) and 2.5 msf Crest, approx 700 units
(ticket price ~US$1MM). Whilst not big in terms of absolute number of
units to be sold over 4 years, the ticket size in these developments is high.

Index Outlook: Raring to go higher ::Business Line

Separating ‘scam’ from gate’ ::Business Line

Buy ACC: A good investment option ::Business Line

Technical Query-Central bank, Ambuja Cements, SpiceJet, RCom, Balkrishna Industries, Everest Industries, Gravita ::Business Line

 

Paper Products Ltd. (PPL) Result Update Q1CY13: Way2Wealth

Key Highlights
Paper Products Ltd. reported its Q1CY13 results recently. Net sales rose by 13.2%
and operating margins remaining stable.
Net sales increased by13. 2 % YOY to `235.2 crs. in Q1. Volumes growth
for the quarter was at 9.5% YOY & 7.8% QOQ. On a consolidated basis
(including its newly acquired Webtech Lables Pvt. Ltd.) grew by 12%
sequentially `254.7 crs. Consolidated topline stood at `254.7 crs. The
topline growth was supported by healthy demand from clients as well as
the phased expansion coming on stream. PPL’s topline growth strategy is
two pronged - growing business from existing clients as while as adding
new clients. The company is witnessing strong demand growth for
packaging coming in from beverages, food processing & personal care
manufacturers. Operating profit was up from `24 crs. to `27.3 crs.
EBIDTA margins were flat YOY at 11.6%. Raw material prices continued
to move up. RM cost was up by 19% vs. a 13% topline growth in implying
inability to pass on full cost escalation. Margins were maintained as new
capacities supported topline growth and kicking in of operating leverage.
On a consolidated basis operating profit was at `31.4 crs. Margins for
the subsidiary improve by 100 bps QOQ to 20.8%. Consolidated OPMs
were at 12.3%.
Net profit for the quarter was up by 16.8% YOY at `15.1crs. in Q1.
PAT margins expanded by 50 bps YOY to 6.4%. Consolidated PAT after
minority interest was at `15.6 crs in Q1 with margins at 6.1%.
Valuation:
We believe PPL’s business model provides a steady growth &
business visibility for investment in such times. At the CMP of
`62.8/- the stock trades at 7.2x its estimated EPS of `8.8 for
CY13E. With overall GDP growth for the economy slowing
down, we believe PPL to be a good value buy in such times and
hence recommend investors to HOLD the stock. A high cash
generating business will enable the company to fund its future
growth plans.

National Aluminium Co Ltd :High-grade large bauxite reserves, cash at 58% of mcap and at 0.7x P/BV: Too much pessimism being built in, in our view: JPMorgan

For investors with a slightly longer investment horizon, we believe NALCO offers
an attractive risk-reward play. A strong balance sheet (net cash at 58% of mcap
and increasing), large high-grade bauxite reserves (8th-largest globally), and stillcompetitive
alumina cost position (we estimate alumina CoP at ~$270/T even at
current multi-year high caustic soda prices) offer investors the possibility of
benefiting from any rebound in LME aluminum prices at attractive valuations.
 The under lying asset base has not declined in sync with the stock price and
LME aluminum price: Aluminum fundamentals are not strong, in our view,
and at $1900/T a significant part of global capacity would be loss-making (even
NALCO’s aluminum capacity at a full cost basis would be loss-making).
NALCO’s stock price is down ~32% YTD, one of the worst performers in
metals globally; we believe this is due to LME aluminum weakness, and the
weakness in Indian markets. NALCO still has access to some of the best bauxite
resources in the world. The alumina business remains highly profitable (we
estimate EBITDA margins to be 15-20% at current spot/linkage Alumina
prices) even now. The company’s asset base includes 2.3MT of alumina
capacity, 0.46MT of aluminum capacity, and a 1200MW power plant. We
estimate that the current EV/replacement value for NALCO stands at 0.2x (not
accounting for bauxite reserves).
 Aluminum - Not profitable at current prices, but LME prices are at
cyclical lows: On a full cost basis, admittedly NALCO’s aluminum operations
would not be making a profit. NALCO’s aluminum segment has been lossmaking
at the PBIT level for the last six quarters on a full cost basis (alumina
on a transfer price basis). We would highlight that, on an integrated basis,
NALCO should be profitable at current alumina and aluminum prices (we
forecast EPS of Rs3.2 in FY14). The production problems appear to be over,
with coal supplies stabilizing. On the variable cost front, other than caustic soda
prices, raw material costs are stable or declining. NALCO’s ability to export
alumina also allows the company to benefit from Rupee weakness. We would
highlight that current aluminum prices are at cyclical lows given that a relatively
decent share of global capacity is likely loss-making.
 Should one give any value to cash? Yes, at least book value: Investors we
have spoken to are not keen on giving any credit to the large (and increasing)
cash balance at the state-owned miners. In our view, cash should be at least
valued at book value (and hence we use EV/EBITDA). Key downside risks
include a sharp decline in alumina prices from the current level.