26 July 2013

Gold and Precious Metals When the going gets tough ::Morgan Stanley Research

Gold and Precious
Metals
When the going gets tough
Despite the pullback in gold equities, we see risk of
further de-rating triggered by reserve downgrades
and weak cash flows. Randgold (OW) looks well
positioned to continue to outperform in the current
environment, while ABG (EW) faces heightened
risks and has limited scope to raise returns.
Randgold well positioned to outperform in current
environment: RRS operates high-quality assets that
are still capable of generating substantial cash flows
(albeit diminished) in the current gold price environment.
We expect total all-in cash costs to be c.US$875/oz in
2013. The company conservatively maintains a solid
balance sheet and could sustain a net cash position
while fully funding its growth capex through 2014. We
expect an FCF yield of 7% in 2015 at current spot prices
and anticipate minimal changes to mine plans given the
conservative measurement of reserves at $1,000/oz.
ABG faces heightened downside risks: We expect
all-in cash costs to be c.$1,245/oz in 2013, which would
pose significant risks to cash generation if current prices
persist. Cash flow would not be sufficient to maintain
dividend payments at 2012 levels, capital spending
requirements (despite being optimized) would reverse
the company’s broad net cash position as early as this
year. Furthermore, ABG uses a $1,500/oz gold price to
measure reserves, so faces a higher likelihood of
reserve downgrade and life-of-mine reduction. That said,
ABG has the highest gearing to the gold price (we
estimate a 1% change = 1% improvement in FCF yield).
Valuation: modest upside for RRS, not enough
safety margin for ABG: RRS trades on 16x 2014e spot
P/E (vs. 3-year average of 17.5x) and an EV/Reserve
value (i.e. EV/(reserve ounces x spot gold price) of $0.3,
the lowest in the last 5 years. This compares to ABG,
which is trading on a 2014e spot P/E of >30x, which
does not reflect the higher risks of potential reserve and
life-of-mine downgrades. We remain EW on ABG, but
cut our PT to £1.0 (6% downside). We stay OW
Randgold, retaining it as our long-held relative gold pick.

RIL – Q1FY14 Result Update ::LKP

RIL – Q1FY14 Result Update

Q1 profitability supported by higher other income, petchem disappoints
RIL’s Q4FY13 net profit of Rs53.5bn was in line with our estimates. However operating profit of Rs70.8bn was marginally below our estimate on account of lower than expected performance of the petrochemical segment. GRM for the quarter at $8.4/bbl was in line with our estimate while RIL’s premium over Singapore GRM increased from $1.4 to $1.9/bbl. Petchem EBIT for the quarter declined marginally by 0.4% sequentially to Rs18.9bn which was 5% lower than our estimate on account of lower than expected polymer margins. Gas production from KG-D6 declined further to 15.5mmscmd (yoy/qoq -17.2/-3.7mmscmd). Other income increased to Rs25.4bn (38.1% of PBT). We maintain our NEUTRAL rating on the stock with a revised SOTP price target of Rs939.

Actual v/s Estimates
Y/E, Mar (Rs. m)
Q1FY14
Q4FY13
qoq (%)
Q1FY13
yoy (%)
LKP Estimates
Deviation (%/bps)
Revenue
876,450
841,980
4.1%
918,750
-4.6%
872,853
0.4%
EBITDA
70,750
78,250
-9.6%
67,470
4.9%
72,795
-2.8%
EBITDA (%)
8.1%
9.3%
-122 bps
7.3%
73 bps
8.3%
-27 bps
PAT
53,520
55,890
-4.2%
44,730
19.7%
52,535
1.9%

ACC- Now becomes a step-down sub; neutral to slightly positive if creeping acquisition materializes :: JPMorgan

We view the proposed ACC-Ambuja transaction as broadly neutral to
positive for ACC. In the event the creeping acquisition materializes, ACC
is likely to find support and possibly move higher in the near term.

IIFL : The Front Page: Strategy 26-JUL-2013 (good read)

Strategy (LIC – India’s largest financial institution): LIC is India’s largest financial institution with assets of more than US$200bn. It owns 15% of government securities and 5% of India’s market cap. However, a sharp decline in financial savings has resulted in a sharp slowdown in its premium income. This coupled with increased surrender of policies has resulted in a 20% decline in LIC’s net investments during FY10-12. However, despite the slowdown, LIC has largely maintained its market share in the life insurance market.

ITC (Lower sales due to one-offs, BUY): ITC reported net profit growth of 18%, in line with our estimate. While net sales of cigarettes at 7.1% seems disappointing, it was due to one-off in the base; adjusted for this, cigarettes net sales growth would be 11.4%. Total expenses for the cigarettes division was down 8%, which enabled segment Ebit growth of 18%. In Q2, ITC will benefit from the increase in goldflake 69mm price, which would push up gross sales by 2%. Moreover, national rollout of 64mm would help improve volume growth from -2% in 1QFY14. Maintain BUY, target price Rs.375.

Maruti Suzuki (In-line quarter; outlook reasonably stable, BUY):
- Maruti’s 1Q operating results were in line with our estimates. Gross margin improved 180bp QoQ driven by currency. However, operating expenses rose 200bp due to deleverage (volumes down 22% QoQ). Ebitda margin dropped 20bp to 11.4% in line with our estimate. Other income almost doubled YoY and drove the 13% PAT beat.
- Maruti’s domestic dispatches fell 7% YoY but retail volumes were flat-to-up marginally. The management retained its FY14 growth guidance of 0-5%. We believe export momentum will pick up (12-15% growth in 2Q-4Q) after country-specific issues led to a 35% decline in 1Q.
- Given the recent sharp depreciation in INR, we do not expect incremental currency benefits from here on. We expect increase in discounts on diesel vehicles to be offset by benefits of operating leverage as volumes ramp up from the seasonal low of 1Q.
- We cut our EPS estimates by 5-6% due to a slight cut in volume and margin estimates and a higher tax rate. We cut our TP from Rs1,920 to Rs1,800, based on 14x FY15 EPS. Retain BUY.

GAIL (India) (Regulatory risks continue to weigh on earnings, REDUCE): GAIL’s Ebitda and PAT were significantly below estimates on a weak LPG business performance. GAIL faced a shortfall in KG D6 gas for its LPG business, which it replaced with LNG imports. With higher input cost and flat subsidy burden YoY, the LPG business recorded an EBIT loss. We maintain our view that regulatory uncertainty will continue to weigh on GAIL’s earnings amid risks of higher gas prices and cut in APM gas allocation. We expect GAIL to report flat EPS over FY14-15ii. Maintain REDUCE.

Sesa Sterlite (Sterlite 1Q: Soft quarter, REDUCE): Sterlite’s 1Q PAT at Rs9.3bn (-52% QoQ; -22% YoY) was 11% above our estimate on higher other income. Power sales volume is expected to improve in the coming quarters on increase in PLF and better evacuation. However, the impact on consolidated earnings would be meagre. The Madras HC has approved the merger of Sesa and Sterlite and the management awaits a verdict on the appeal filed by a shareholder against Bombay HC’s approval. Despite reasonable valuations, we retain our negative stance due to challenges in the aluminium business and non-fungibility of cash. Retain REDUCE.

ACC (Better-than-expected 2QCY13, REDUCE):
- ACC’s 2QCY13 results were above our estimates led by better-than-expected volumes and realisation.  Cement volumes increased 1% YoY against our expectation of 2% decline and reduction in cement realisation narrowed to 4.5% YoY against our expectation of 6% decline. These factors supported performance for the quarter.
- Net sales declined 4% YoY to Rs28bn against our expectation of Rs27bn. Although Ebitda was down 31% YoY to Rs4.3bn because the company lagged in passing on costs due to subdued industry volume growth, it was higher than our expectation of Rs3.6bn.
- Decline in PAT was lower than expected at 37% YoY to Rs2.62bn as against our expectation of 40% decline to Rs2.49bn owing to better operating performance during 2QCY13.
- We expect subdued profitability in 3QCY13 because a strong monsoon would result in reduced prices. We expect sequential improvement in profitability from 4QCY13 onwards for the industry and ACC; we maintain our REDUCE rating on the stock due to stretched valuations.

United Phosphorus (In-line results, stable outlook, ADD): United Phosphorus (UPL) reported overall in-line 1Q FY14 earnings, with a 23% sales decline in North America offset by double-digit growth across other regions. Ebitda margin increased 90 bps YoY and working capital and debt remained under control. We adjust our estimates slightly, upping FY14-15ii EPS by 5-6% to Rs19.0-20.5 on lower interest expense. Although longer-term risks remain, undemanding valuations, reasonable growth momentum, and an improved balance sheet should help support the stock in the near term.

Corporate Front Page:
- Wockhardt has appointed a US-based consultant for its Waluj facility to address quality issues raised by the US Food and Drug and Administration. (BL)
GAIL (India) Ltd may abandon the Tamil Nadu portion of the Kochi-Koottanad-Bangalore-Mangalore natural gas pipeline if the State Government does not take a decision on the project within a month. (BL)
Jet Airways has responded to concerns raised by the Foreign Investment Promotion Board (FIPB) on its proposed stake sale to Etihad, in an attempt to persuade the apex inter-ministry to clear the proposal. The FIPB, which has circulated the response of Jet Airways to stakeholder ministries, will consider the proposal on Monday, along with Sebi’s views on the deal. (ET)
- Standard & Poor’s Ratings Services revised its outlook on Tata Motors to stable from positive and affirmed its BB long-term corporate credit rating. It also affirmed the BB long- term issue ratings on the company’s senior unsecured notes. (BS)
- The SEBI is examining the terms of the agreement between Ambuja Cements and Holcim to ensure that interests of minority shareholders are protected. (ET)
Dewan Housing Finance Corporation purchased DLF’s 74% stake in life insurer DLF Pramerica Life Insurance Company for Rs2.20bn. (ET)
Wipro Chairman Azim Premji said the US market seemed much better than what it was three to four months ago, reinforcing the positive outlook reported by information technology companies. He, however, said the Indian market continued to be a concern. (BS)
- Intensifying its drive against firms sitting idle on mines, an inter-ministerial group has recommended serving explanatory memos to allocatees of 21 captive coal blocks, including companies like Coal India, NTPC, Tata Steel and Reliance Power for slow progress in developing these mines. (ET)

Economy Front Page:
Domestic oil production in the April-June quarter declined 1.4% against the same period last year, while natural gas production dipped 17.6% year-on-year. In June, crude oil output dropped marginally by 0.6% year-on-year. (BL)
- The Reserve Bank of India conducted the auction of cash management bills, most of which got subscribed at high-cut off yields. (BS)
- Mauritius is mulling measures to allay India’s concerns over the misuse of the bilateral tax avoidance agreement between the two nations by third country investors. The measures could include listing in Mauritius bourses for companies that are using the country to invest in India. (ET)
- The government has instituted a committee to plug loopholes in the manufacturing practices of the auto industry to check the authenticity of its quality parameters following the increasing number of technical snags and recalls. (ET)

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Ambuja Cements - Q2CY13 result update - Centrum

Result a non-event; restructuring intent dubious
Ambuja Cements’ Q2CY13 result was marginally above our estimates with
operating profit at Rs4.9bn (vs. est. Rs4.8bn, Bloomberg consensus est. Rs5.3bn)
and operating margin at 21% (vs. est. 19.8%). Higher operating profit was led by
lower opex of Rs3,446/tonne (vs. est. Rs3,540/tonne). Sales volume during the
quarter was at 5.4mt (vs. est. 5.5mt) and realization/tonne was at Rs4,360 (vs. est.
Rs4,432). Higher operating profit and lower tax rate (29.2% vs. est. 32%) resulted
in higher than estimated profit of Rs3.2bn (vs. est. Rs3bn). The company has
announced the acquisition of Holcim’s 50.3% stake in ACC through cash and
allocation of shares to Holcim. We believe this acquisition will not benefit
Ambuja shareholders in the near-term and expect a de-rating in the company’s
valuation multiple. Also, the near-term growth outlook for cement demand
remains bleak as is evident from lower despatches growth during May and June
’13. We have revised our earnings estimates for the company by 9.8%/12.5% for
CY13E and CY14E considering lower volume and pressure on realization
(realization has been declining in the last three quarters). Though we are
hopeful of a recovery in cement demand in 2HFY14E, the current development
in the company leads us to downgrade the stock from Neutral to Sell (due to
the cash outgo of Rs35bn and potential dilution of 28% post completion of this
deal). We have assigned a multiple of 8x EBITDA (earlier 8.5x) for Ambuja and
Rs40/share (assigning 40% holding company discount on our target price of
Rs1,389) for its holding in ACC post-acquisition. We downgrade our rating on
the stock to Sell from Neutral with a revised price target of Rs156 (earlier: Rs207).
 Lower sales volume and realization impact revenue and operating profit:
Led by a decline of 2.9% YoY in sales volume and 5.9% YoY in realization, the
company reported 8.6% YoY decline in revenue to Rs23.5bn. Operating profit
was down 31.9% YoY to Rs4.9bn primarily due to the decline in sales volume
and realization.

Hero MotoCorp - Margin expansion continues, volumes to grow on rural demand:: LKP

Operationally above expectations, high tax rate dampens the PAT
Hero Motocorp (Hero) reported a good set of numbers in Q1 mainly on the improvement in margin performance, which led to a better than expected performance till the PBT level. Hero’s 1Q volumes were down by 5% yoy, while were up by 2%qoq. Net revenues were up by 1% yoy and down 1% qoq. The net realizations improved by 3.7% yoy, while were down 1% qoq as product mix became adverse sequentially as the demand for premium segment bikes reduced, while executive segment and mass segment bike demand was high. The company took an average price hike of Rs 1000 price hike in May, which somewhat offset the qoq decline in realizations. The company benefited from softening of the commodities which brought down the RM/sales ratio to 72.3% from 74.1% yoy, while remaining stable qoq. However, staff costs and other expenses grew by 8% yoy (3.6% of sales, stable sequentially) and 13% yoy (9.2% of sales, down from 10.3% qoq) yoy respectively. Reduction in other expenses was the result of the cost cutting initiatives taken by the company on the admin and marketing side. In line with this, the overall impact on EBITDA margins was positive, which came at 14.9%, above 110 bps qoq and 40 bps yoy . Depreciation and interest costs came in more or less in line with our expectation, while there was a surprise element in tax terms of 10% additional surcharge, thus taking tax rate at 27%. This dampened the PAT below our expectations at Rs 5.49 bn, which was a 11% yoy and 4% qoq drop.
Outlook and valuation
Though demand scenario has not been very encouraging , with good monsoons, demand pick up in rural markets, 7-8 new launches (including variants and refreshes), expansion of dealership network will help the company to post good volume performance from Q2 onwards. High festive demand will enable the company to put up good growth number on a low base of last year when festive demand was not that high. Reduction in inventory levels is a good sign and expansion of scooters as well as overall capacities will take care of Honda’s growing capacities. The innovative measures taken by the company like the 5 year warranty scheme is playing a good role in helping Hero to post monthly run-rate of volumes in excess of 5 lakhs consistently. Margin uptrend will continue on the back of commodities softening, cost reduction initiatives, higher pie of scooters sales and price hike taken. In line with this we have increased our FY14as well as FY 15 margin estimates to 14.4% and 14.6% respectively. But at the bottomline, with the surprise coming in the form of 10% surcharge on existing tax rate, our FY 14E EPS stands slightly revised downwards at Rs109 from Rs 113. However, in FY 15, with the royalty outflow going out from Q2 FY15, volume growth expectations becoming higher and margins continuing to outperform, we believe the impact of higher tax rate of c.27% coming from Haridwar benefit going out and surcharge of 10% will not be able to hamper the earnings. Factoring these pros and cons, we have increased the FY 15E earnings estimates and thus target price to Rs2,090, thus continuing with our BUY rating on the stock

‘I have been a believer in Indian equities’ :Business Line

Given the restrictions of working in the financial services space, I invest in equities via growth-oriented mutual funds: Vibha Padalkar, Executive Director and Chief Financial Officer, HDFC Life
Be wary of investments that promise abnormally high returns, but look to invest in assets that can beat inflation.
This is just one of the lessons you learn from Vibha Padalkar, Executive Director and Chief Financial Officer, HDFC Life, as she shares her insights on investments in an interview with Business Line.
What was your first investment?
At my father’s insistence, I kick-started my investments by opening a Public Provident Fund (PPF) account. I kept investing regularly into this account.
I also bought an endowment policy with a life cover, which in hindsight, forced me to save regularly.
How much do you set aside for investments?
I keep aside 40-45 per cent of my income for investments.

‘Successful investing requires patience’ :HEAD-RESEARCH, UTI MUTUAL FUND: Business Line

Gold to me is an insurance against a meltdown in financial markets. LALIT NAMBIAR, FUND MANAGER AND HEAD-RESEARCH, UTI MUTUAL FUND
A post-graduate in management and a CFA charterholder, Lalit Nambiar began his career at a stock broking firm, before moving to the mutual fund business.
He is currently Fund Manager and Head – Research, UTI Mutual Fund. In an interview with Business Line, he shares his views on money, savings and investments.
What does money mean to you and how has it changed over the years?
Money for me is essentially an enabler, with economic goals as stepping stones to larger life goals. It is a means of providing my family with security and stability and creating an environment that nurtures their aspirations. This has been the value system passed onto me by my parents and this view has not changed much today.
It has only become more nuanced over time. A core belief is that one may not always be able to control the amount of money one has, but one can control one's attitude to it.
What was your first investment?
From what I can remember, I think it was in the stock of HDFC Ltd. I bought it for the management quality and the strong business franchise.
It was also the first stock I had helped research as a junior analyst. Unfortunately I did not hold it for long.