27 April 2014

DLF Limited (DLFU IN) Reported strong office leasing in FY14; reaffirms our positive outlook on office market ::JPMorgan

DLF Limited (DLFU IN)
Reported strong office leasing in FY14; reaffirms our positive outlook on office market

Overweight
Price: Rs152.35
23 Apr 2014
Price Target: Rs210.00
PT End Date: 30 Mar 2015

DLF reported FY14 leasing of 3msf (source: BSE leasing update), significantly ahead of the company’s full year guidance and last year’s level. This follows a strong leasing achieved by Unitech as well last month for its UCP office portfolio. Strong leasing traction reported by key commercial developers over the recent past reaffirms our positive outlook on the office market. Further, on-the-ground checks suggest that office rents have also started to increase in key markets. We think a five-year down cycle for office segment is now behind us. An improved demand supply balance and expected pick-up in economic activity in 2H could set the stage for a strong revival ahead.
· DLF’s FY14 office leasing surprises positively. DLF, in its leasing update today, reported 3msf of leasing for FY14 (vs. 1.1msf in 9M). This is significantly higher than its full year guidance of 1-1.5msf and FY13 leasing of 1.1msf. Of the total 3msf leased in FY14, 1.7msf of leasing was achieved in Gurgaon. This follows a strong office leasing registered by Unitech’s UCP portfolio, especially for its Gurgaon project. Incremental rentals in new leases have been largely stable to marginally higher, as per the company.
· Annuity portfolio has strong growth levers ahead. In addition to improvement in office leasing, DLF’s annuity portfolio has two big growth levers over the next 3-4 years: a) renewal of large office portfolio (50% of rentals) in its Cyber City Gurgaon from F16/17. Locked-in rentals are 40-50% below current spot rents. These renewals will also coincide with the roll out of its key infrastructure initiatives (mono rail, road work WIP) which could further push up the spot rents in the market; b)completion of ongoing retail portfolio – Opening of Mall of Noida, coupled with the completion of other high-end malls (Chankyapuri and Gurgaon), can add Rs3-4B to annuity income over the next 2-3 years. Noida mall is a 1.8msf mall which is already pre-leased and is expected to open in Oct-14 (Rs100psf avg rent).
· Office market recovery now firmly in sight with leasing activity witnessing improvement across key markets and rents starting to inch up at the margin, especially in prime markets. More importantly, we think demand supply balance is now falling in place in the office market, after being oversupplied for the last 4-5 years. Given the weak demand trends and tight liquidity, most developers scaled back on their commercial capex plans over the last few years, which should keep the new supply levels in check over the next 2-3 years. Correspondingly, vacancy levels should start coming down over the next 2-3 years.

 

Investment Thesis

We think DLF’s cash flows are poised for a turnaround. Markets have been focused on underperformance of core residential business whilst ignoring progress made on debt reduction and steady growth in the annuity portfolio (50% of value). Luxury launch in Delhi (Rs 100b pre sales value), peaking of annuity capex, increased rentals post Mall completion in 2H15 and return to positive FCF are key re-rating triggers, in our view.

Valuation

Maintain Overweight with a Mar-15 Price Target of Rs 210. Our PT is derived from a stabilized cash flow model valuing the development business at 10x and Rent co at 13x cash flow.

Risks to Rating and Price Target

Key downside risks – (a) Delay in launch of luxury Gurgaon projects; b) Increase in debt levels; (c) Sharp increase in policy rates; and (d) Material de-rating of overall macro fundamentals in India.


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Prestige Estate- Operating performance continues to beat guidance :JPMorgan

Prestige Estate Projects Limited (PEPL IN)
Operating performance continues to beat guidance

Overweight
Price: Rs169.75
21 Apr 2014
Price Target: Rs205.00
PT End Date: 30 Mar 2015

Prestige continues to deliver steady operating performance and has managed to meet/surpass its guidance levels across all operating metrics, despite a challenging macro. The company’s FY14 pre-sales and collections at Rs36B/Rs25B were up 16% Y/Y and 26% Y/Y, respectively. The pick-up in collections in Q4 is impressive at Rs6.6B (vs Rs5.9B last Q) and we believe this should continue to accelerate ahead (catch-up to pre-sales). Overall, the operating results reaffirm our hypothesis that over the next two years the company is poised to more than double its operating cash flows and earnings based on simple catch-up to pre-sales and locked-in rental growth (80%).

Indian Cement Sector Price hikes not as large as believed by markets; JPMorgan

Indian Cement Sector
Price hikes not as large as believed by markets; Post results, stock prices should reverse given stretched valuations

· Cement stocks have been very strong on a combination of: a) production disruptions in Rajasthan which has buoyed cement prices; b) merger discussions around Holcim-Lafarge, which would lead to further consolidation in India; and c) expectations of a sharp pick up in cement demand post elections.
· Valuations for the large cap cement equities like Ambuja (15.7x CY14E, 11.9x CY15E EV/EBITDA) and Ultratech (12.8x FY15E, 10.6x FY16E EV/EBITDA) are at life-time highs and on EBITDA estimates 2 year forward, which are ~45-50% higher than FY14/CY13 earnings. Hence the 2-year forward earnings have already built in: a) demand recovery, and b) cement margin increase and on that elevated earnings estimates, the stocks are trading at peak multiples.
· On the ground pricing momentum not as strong as inferred by markets: Our channel checks with cement dealers indicate that pricing has been steady over the last 2-3 weeks in most parts of Northern and Western India, and discounts were given out in end March given year end. Cement prices have seen sharp increase in Feb and early March in parts of Northern and Western India given the shutdown of 6MT Binani Cement plant and this has also allowed large volume increases for incumbents, but post March, prices have been steady. Demand has been lackluster given elections.
· Medium term fundamentals could improve, but near term could have some headwinds: The March quarter earnings are likely to be among the strongest in recent times, particularly for Western and Northern India companies, but from here we see potential downside given expectation of operations resuming at the Binani plant over the next few months and hence the price increases should reverse. Valuations are stretched for the large caps even on 2 year forward estimates and even after building in large earnings growth. At current valuations we see little value in the large cap cement names (ACC, Ambuja, Ultratech) and expect some of the recent stock price momentum to reverse from here.
Figure 1: Indian Cement Stocks: YTD Performance
Source: Bloomberg.
Figure 2: Indian Cement: Historical EV/EBITDA chart
Source: Company reports, Bloomberg and J.P. Morgan estimates.
Figure 3: Indian Cement: Historical EV/Tonne chart
Source: Company reports, Bloomberg and J.P. Morgan estimates.
Figure 4: ACEM EV/EBITDA Chart
Source: Company reports, Bloomberg and J.P. Morgan estimates.
Figure 5: UTCEM EV/EBITDA Chart
Source: Company reports, Bloomberg and J.P. Morgan estimates.
Metals & Mining

JPMorgan: Sesa Sterlite - Zinc sub reports marginally lower EBITDA but PAT higher than estimates

Sesa Sterlite (SSLT IN)
Zinc sub reports marginally lower EBITDA but PAT higher than estimates

Overweight
Price: Rs192.70
17 Apr 2014
Price Target: Rs240.00
PT End Date: 31 Dec 2014

SSLT’s 65% owned zinc subsidiary, HZ, reported Q4 earnings with EBITDA below estimates at Rs17.3bn essentially driven by a slight miss in volumes. PAT at Rs18.9bn was ahead driven by sharply higher Other Income and lower tax rate. HZ declared total dividends of Rs3.5/share (slightly higher than JPM of Rs3.4/share), which implied total payout ratio (including dividend tax) of 25%. HZ reported total gross addition of 26.1MT to reserves and resources, prior to depletion of 9.1MT. Total reserves and resources stood at 365.1MT, implying mine life of +25 years. The guidance for FY15 is muted with mined metal and integrated metal production expected to be marginally higher from FY14 while cost of production is expected to remain stable.
· Result highlights- lower production leads to lower EBITDA: Against the company’s earlier guidance of a pick up in production in H2FY14, production was lower than expected, which the company blamed on slower than expected ramp up of underground mining and change in mining sequence, with preference given to mine development. Total mined metal production in Q4 stood at 200KT, down 23% y/y and 9% q/q (FY14 at 880kt, +1% y/y). Refined zinc production at 182KT was flat y/y in Q4, and down 7% q/q (FY14 at 749KT, +11% y/y), while lead stood at 36KT, +10% y/y (FY14 123KT, +4% y/y). Silver production was down 25% y/y on an integrated basis. Cost of production at $899/T was up 8% y/y and 7% q/q. This is surprising given that input prices have been broadly stable during the quarterand were likely driven by a relatively higher share of non integrated metal production in lead and silver. EBITDA stood at Rs17.5bn, -4% q/q and -17% y/y. Other Income increased sharply 43% y/y to Rs5.9bn with tax rate falling to 11.2%. PAT at Rs18.8bn, -13% y/y.
· Expansion projects update: As per the company, the Kayad and Rampura Agucha underground mine projects started commercial production during the year and are now ramping up. Total mine development increased by 75% as per HZ and marked the beginning of the transition to underground mining from open cast. HZ has guided to capex of ~$250mn in FY15.
· FY14 year ending cash balance stood at Rs255bn up 6% q/q.
Table 1: HZ 4QFY14 results summary

4QFY13
3QFY14
4QFY14
% y/y
% q/q
Net Sales
39,087
34,501
36,427
-7%
6%
EBITDA
21,160
18,238
17,552
-17%
-4%
PBT
23,951
20,280
21,195
-12%
5%
PAT
21,658
17,227
18,812
-13%
9%






EBITDA Margin
54.1%
52.9%
48.2%


Tax rate
8.8%
15.1%
11.2%








Production





Mined Metal
260,000
220,126
200,000
-23%
-9%
Refined Zinc
182,000
196,000
182,000
0%
-7%
Integrated zinc
181,000
196,000
179,000
-1%
-9%
Refined Lead
35,000
24,984
36,000
3%
44%
Integrated lead
32,000
25,000
29,000
-9%
16%
Integrated silver
100,000
72,000
68,000
-32%
-6%






Other details





CoP (Rs/MT)
44,901
52,014
55,467
24%
7%
CoP ($/MT)
829
840
899
8%
7%
Cash balance
214,790
240,950
255,350
19%
6%
Source: Company reports

Investment Thesis

While the stock has moved 60%+ from Aug'13 lows (vs. SENSEX +14% over same period), we think the re-rating is likely to continue over the next year as: a) SSLT delivers consolidated EBITDA of ~$1.2-1.4bn on a quarterly run rate with volume growth in key oil and zinc subs; b) Net debt continues to fall with strong cash generation at subs and limited capex; c) Diversified resource base providing earnings stability; and d) Regulatory environment continues to improve. We expect SSLT to emerge as a key holding across MM/Industrials, given size, cash flow strength and embedded option values from power and ally investments.

Valuation

Our Dec-14 PT of Rs240 is based on a sum-of-the-parts (SOTP) valuation where we assign EV/EBITDA multiples to underlying FY15E EBITDA. We do not use a DCF approach, given most of businesses are currently not in steady state, and for the key ones such as aluminum and power, it remains difficult to predict when they will achieve steady state.
Table 4: SOTP Summary

FY15E EBITDA
Multiple
FY15E
Explanation
Zinc-India
56,784
5.5
312,311
Valued at the lower end of its historical trading range
Zinc Int
12,827
4.0
51,308
Valued at a 30% discount to India zinc assets given limited mine life
BALCO
4,791
7.0
33,534
Given that LME aluminum is currently below marginal cost, and the investments made by the company are yet to be fully operational, valued at the higher end of historical global aluminum company valuations
VAL
20,961
7.0
146,730
Given that LME aluminum is currently below marginal cost, and the investments made by the company are yet to be fully operational, valued at the higher end of historical global aluminum company valuations
Copper
15,793
6.0
94,757
The copper smelter earnings are relatively steady state and less volatile, hence valued at the higher end of commodity company valuations
Power
14,986
5.5
82,425
Valued at higher end of earnings range as most of the assets yet to be fully operational
Iron ore
12,805
5.5
70,428
Valued at the lower end of its historical trading range, as volume growth outlook remains hazy
Oil
89,479
3.0
268,436
Valued at the mid range of commodity companies given volume growth prospects


Total EV
1,059,930



Net debt
352,937



Equity
706,993



Per Share
240

Source: J.P. Morgan estimates.

Risks to Rating and Price Target

Key risks include: 1) no start to Goa mining; 2) copper smelter remains shut; and
3) power segment ramp up gets delayed


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