Research Notes – November 11, 2010

Maintain ‘buy’ on Nagarjuna Construction – TP Rs.186

 Company has reported 2QFY11 revenue of Rs.1200 crore, higher by 12.6% y-y and higher than market estimates.

 Operating profit at Rs.120 crore increased by 13.3% y-y and higher than market expectations.

 Operating profit margin has also improved by 10 bps over last year.

 Interest cost increased by 16.2% y-y due to higher debt for working capital requirement and coinsequently, PAT growth by 4.7% y-y is lower than market estimates.

 Order intake in 1HFY11 at Rs.3500 crore increased by 28% y-y. Order book stands at Rs.16080 crore.

 Company has maintained revenue guidance of Rs.7300 crore for FY11 and PAT is estimated at Rs.322.80 crore. To achive these targets, revenue and PAT have to increase by 28% each in the second half of FY11. It seems that these targets are achievable despite it is a little aggressive.

 Company has to win new orders worth Rs.6000 crore in the second half in order to achieve the estimated new order win of Rs.9500 crore in FY11. Rs.2000 – 2500 crore worth of orders are expected from highway development segment.

 All road BOT projects are expected to be operational by FY11. 100 MW Him Sorang Hydro Electric project is scheduled for completion by December 2011.

 Company is also focusing on execution of international projects. Orders in hand worth Rs.2700 crore.

‘Reduce’ BPCL – Expected price over 1 year is Rs.547

 Sell call on BPCL is reiterated with the same target price if Rs.547 over one year.

 Company could report 1HFY11 standalone profit of Rs.424 crore because of a cash subsidy of Rs.2948 crore by the government for the losses incurred for this period. For 1QFY11, the company had reported a huge loss of Rs.1718 crore.

 Lower than expected capex at Rs.1230 crore and sale of investment worth Rs.1500 crore during the first half indicate cash flow pressure.

 Delay in subsidy payment by the government of India results in working capital issues to oil marketing companies and makes quarterly earnings much volatile. Only positive thing on this issue is that the government is sticking on cash payout rather than oil bonds, which gives immediate relief to oil marketing companies (OMCs).

 It seems that under recoveries in 3Q and 4Q would be higher than 2Q due to rising crude oil prices and higher diesel consumption as the price is yet to decontrol. Moreover, shut down of Mumbai refinery in 3Q would impact utilization levels.

 Despite weakness in refining and marketing fronts as stated above, company’s E&P (exploration and production) business appears prospective especially in Mozambique, where the company has announced two discoveries, drilling in the fifth well is expected by end 2010.

 Despite a sell recommendation, BPCL appears better than HPCL because of the E&P business of the former.

Retain ‘buy’ on Bharti Airtel – TP Rs.440

 Second quarter revenue was slightly lower than market expectation due to seasonally weak average revenue per user (ARPU)

 Revenue from other segments like telemedia, enterprise and passive infrastructure are in line with market expectations.

 Operating profit missed market estimates by 5% because of increased employees cost in India, license and inter connect fees in Africa.

 Operating profit margin is slightly lower than expectations but PAT looked better than expectations because of forex gains.

 Africa revenue beats market estimates because of improving minutes use.

 Overall, the performance is improving and this would sustain. Generally, 2Q would not be good for telecom companies because of seasonal factors and performance would be better in 3Q.

 Company is expected to launch 3G services shortly on a pan India basis in alliance with other 3G operators.

 Africa operations also are expected to improve in the coming quarters due to positive efforts by the company like outsourcing, rebranding and innovative pricing.

 Considering the positives ahead, buy call is reiterated with a target price of Rs.440 over one year.

Source: Geojit

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