Research Notes – January 24, 2011

‘Buy reiterated on Bajaj Auto – TP Rs.1650
 Bajaj Auto has reported better than expected numbers for 3QFY11. Earnings increased 31.5% yoy, beating analysts’ estimates by 6.8%.
 Operating profit margin looked 70bps better than expectations on lower than expected operating expenses, accounting for half of the EPS beat.
 The company has been maintaining 20% or even higher operating profit margin for the last three quarters and would easily achieve operating profit margin guidance of 20% for the full year.
 Though the vehicle volume sales guidance of 4 million may miss by 3 -4% better than expected profit margin may offset the effect on earnings and the EPS estimate remains intact.
 The share underperformed the Sensex in recent days, possibly due to the seasonally weak volume sales in November and December. The stock is expected to do well in the coming days on the back of strong volume recently and the buy call is reiterated with the target price of Rs.1650 over one year.

Buy Reliance Communications – TP Rs.200
 Reliance Communications is recommended to buy with a one year target price of Rs.200. It seems that the company is now able to service its debt and its ability to meet debt obligations would prevent distress sale of its assets.
 One major concern about the company was its inability to meet debt its obligations that may possibly lead to sale of its assets significantly below the replacement value. But, a recent analysis suggests that the company is well positioned to meet its debt obligations and fund its future capital expenses.
 The company had to borrow Rs.8585 crore for 3G spectrum auctions and part of it has recently been refinanced from China Development Bank. The company has recently secured USD 600 million from China Development Bank to procure equipments from Chinese vendors.
 In addition, rollover of debt and cash balances of Rs.861 crore would enable the company to meet its funding needs.
 Adequate level of operating profit and lower interest cost would enable the company to meet its interest and debt repayment obligations and prevent distress sale of assets below the replacement value.
 The base case replacement value of assets net of debt is Rs.200.
 Asset valuation: 2G GSM spectrum at USD1 billion, CDMA spectrum at 75% of value ascribed to GSM spectrum, 3G at USD 1.5 billion or 75% of auction price. Telecom towers are valued at USD 100000 per tower and under – sea cable and domestic fiber network are valued at the current cost of construction. Wireless equipment is valued at USD 50 per subscriber and other assets like DTH are valued at book.

Hold on HCL Tech – TP Rs.500
 USD revenue for 2QFY11 increased at 7.5% qoq and it seems that the company has outperformed its peers.
 Operating profit margin for the quarter appeared flat but the management is confident of better margins in the second half of FY11.
 Operating cash flow has increased substantially in the second quarter as compared to the first quarter.
 A ramp up in revenue is expected from Kishanganga and the BOT project in West Bengal. Other large projects of the company are also progressing as per schedule and may contribute to company’s revenue.
 Out of the target price of Rs.70, standalone business of the company is expected to contribute Rs.34, Lavasa to contribute Rs.15 and the balance from other projects.

‘Reduce’ Dish TV – TP Rs.40
 ‘Reduce’ recommendation is due to lower than expected ARPU (average revenue per user) and higher program cost.
 Barring these two negative points, numbers reported by the company for 3QFY11 are encouraging.
 Revenue for the quarter increased by 14.4% qoq and 34.5% yoy driven by strong subscriber addition and minor ARPU improvement. The company has added 1.1 million customers during the quarter.
 ARPU improved from Rs.139 in 2QFY11 to Rs.142 in 3Q, as against the market expectation of Rs.144.
 Operating profit margin improved from 15.3% to 17.9% in the third quarter. Analysts’ estimate was 19.3%.
 Lower than expected operating margin is due to higher programming cost, which increased due to the addition of new channels like Neo Sports.
 Finance cost also increased by 72% during the quarter due to the Letter of Credit issued to procure higher number of set top boxes. Consequently, net loss has exceeded market expectations.
 Going ahead, sustained improvement in ARPU appears to be the key for better valuation. ARPU annual growth rate at 6% and low program cost may turn the outlook on the stock from negative to positive.

Maintain ‘buy’ on ITC – TP hiked to Rs.188
 Buy call on ITC is maintained with an increased target price of Rs.188 in view of better than expected quarterly performance and rollover of the target price to FY12.
 3QFY11 EPS at Rs.1.78 has increased 19% yoy and it has beaten analysts’ estimates.
 EPS beat is mainly due to higher than expected revenue and higher other income. Revenue at Rs.5550 crore increased by 18.6% yoy and better than market expectations.
 Operating profit margin at 34% has increased 30bps yoy, leading to operating profit beating market expectations by 4%.
 Cigarette revenue increased by 16% yoy beating analysts’ estimates and profit margin from this segment increased 70 bps on strong pricing power of the company.
 Revenue from FMCG segment increased by 24% yoy, driven by 24% increase in packaged foods and 50% increase in the stationary business. This segment’s losses have declined on yoy basis.
 In the paper and packaging segment, external revenue witnessed strong growth while captive revenue declined as the company reduced inventory due to the uncertainty over the change in graphic statutory warning on cigarette packs.
 Hotel business continues to recover. Revenue increased by 14% while operating profit increased by 16%.
 Operating profit from agriculture business increased by 34% yoy due to increased volume of soya, coffee and leaf tobacco.
 Based on better than expected performance of the company, EPS estimates have been hiked by 6% and
 7% respectively for FY12 and FY13 and the target price is increased to Rs.188 from Rs. 167 earlier.

Hold on BHEL – TP reduced to Rs.2086 over one year.
 The company has reported strong performance for 3QFY11.
 Revenue at Rs.8850 crore increased by 24.6% yoy and 6.3% qoq. Revenue growth is in line with market estimates. Strong topline growth was driven by 27.6% yoy growth in the power segment and 18.9% yoy growth in the industry segment. An accounting change to streamline revenue recognition and provisioning across several contracts has also contributed RS.444 crore to revenue.
 Operating profit margin at 21.4% increased 126 bps yoy and 380 bps qoq, driven by lower raw material cost and lower staff expenses. Operating profit margin of the company beats analysts’ estimates.
 EPS at Rs.28.7 is up by 30.8% yoy.
 Considering healthy order backlog, BHEL is expected to witness strong revenue and EPS growth for the medium term. Revenue is expected to increase 20.1 CAGR and EPS at 17.1 CAGR between FY10 – 13.
 However, the inflow of new orders in 3QFY11 appears weak. New orders at Rs.12600 crore during the quarter is down by 22% yoy and 7.6% qoq. It was estimated that order intake for FY11 would be at Rs.62640 crore, but this seems difficult to achieve due to the postponement of one major order from NTPC and increasing competitive intensity.
 It seems that order intake of the company is likely to peak in FY11 and may remain flat in the range of Rs.55000 crore – 60000 crore between FY12 -15. This implies flat sales growth to the company beyond FY16 due to competitive intensity, flat order intake and reduced pricing power. This gives a cautious outlook for the company in the long term despite a strong outlook for the medium term. This has factored in the reduced target price for the stock.

Hold on Reliance Industries – TP maintained at Rs.1077
 3QFY11 net profit at Rs. 5140 crore has increased 28% yoy and 4% qoq. PAT is in line with market expectations.
 The result is backed by strong petrochemicals margin at 15.2% and higher gross refining margin (GRM) of USD 9/ barrel.
 However, refining cash cost at USD 4.3/ barrel is higher than expected due to higher depreciation cost. But, this is offset by higher than expected other income.
 KG D6 gas production marked a decline qoq but Panna Mukta was reported to be back on production.
 Despite KG – D6 disappointment, the management is bullish on refining and petrochem and expects the fundamentals to keep on improving in the coming quarters.
 While refining and petrochemical segments are showing continued strength the E&P (exploration and production) segment is looking slightly weak and may offset the advantages from refining and petrochemicals. It also seems that the mid- term recovery in margins cannot be treated as a sign of structural recovery in the sector.
 Hence, the ‘hold’ recommendation on the stock is maintained with an unchanged target price of Rs.1077 over one year.

Source: Geojit

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