The markets are expected to open in the green following positive opening across Asian markets, as optimism that European policy makers are making progress to tame the region’s debt crisis boosted the earnings outlook for Asian exporters.
US stocks put in a lackluster performance on Monday. The major averages finished the day near the unchanged mark, consolidating gains posted last week. European stocks finished the first day of the new trading week with a modest increase. European finance ministers balked at putting up more public money for Greece, calling on bondholders to provide greater debt relief in order to point the way out of the two-year-old debt crisis.
Indian shares moved sideways before ending on a flat note on Monday, as investors reacted to mixed quarterly results and lackluster global cues amid apprehensions over the outcome of Greece's talks with private creditors. Investors would be closely watching the RBI’s monetary policy review due today. We expect the RBI to maintain status quo on Repo and CRR.
Markets Today
The trend deciding level for the day is 16,732 / 5,042 levels. If NIFTY trades above this level during the first half-an-hour of trade then we may witness a further rally up to 16,804 – 16,856 / 5,063– 5,081 levels. However, if NIFTY trades below 16,732 / 5,042 levels for the first half-an-hour of trade then it may correct up to 16,679 – 16,607 / 5,004 – 5,025 levels
RBI Monetary Policy Preview – Reversal of rate cycle soon, but not just yet
In light of the considerable economic slowdown witnessed over the past year, the RBI’s policy tone turned more dovish in the last monetary policy review. However, the RBI has continually maintained that any easing of monetary stance will only follow a noteworthy decline in inflation levels. Positively, WPI figures, led by a substantial drop in food inflation, fell to a two-year low of 7.5% for December 2011. However, manufacturing products inflation continued to be relatively high at 7.4% (average of 6.3% over the past two years), which is above the RBI’s comfort levels. Also, considering the sequentially improved IIP (5.9% for November 2011 compared to contraction of 5.5% in October 2011) and the PMI data (54.2 for December 2011 compared to 51.0 for November 2011), the RBI may choose to maintain the repo rate in the upcoming monetary policy, rather than cutting it right away.
However, having said that, the manufacturing inflation, which came in higher than the primary inflation for December, possibly indicates that a large part of pass-through is already done with. Hence, in-line with food inflation, we expect manufacturing inflation to start cooling off as well in the coming few months, eventually leading to policy rate cuts by the RBI. Further, with GDP growth widely expected to be below 7% for FY2012, growth concerns are likely to increasingly influence the RBI’s policy rate stance going forward.
Hence, while we do not expect any rate cuts just yet, we do see a meaningful case for the RBI to start with the rate cut cycle soon in order to get growth back on track, provided inflation levels (particularly the core inflation levels) further moderate on expected lines.
Specifically for the upcoming monetary policy, of the 20 economists surveyed by Bloomberg, all expect a status quo on key policy rates. However, five of them expect a CRR cut (of which two expect a 25bp cut while three expect a 50bp cut). The RBI has been resorting to open market operations (OMO) for easing liquidity in the system (~Rs.73,000cr infused into the system over the past two months), however average LAF borrowing at Rs.1,17,700cr (over the past two months) is still way above the RBI’s comfort zone of +-1% of NDTL. With liquidity crunch persisting in the system and OMO not reaping the desired benefits, chances of a CRR cut in the monetary policy on January 24, 2011 cannot be ruled out, in our view.
To summarize, for the upcoming policy, we expect the RBI to maintain status quo on repo and CRR. Although we believe the RBI will continue with OMOs for liquidity infusion, chances of a CRR cut in the monetarily policy on January 24, 2011, cannot be ruled out.
KEC International secures orders worth Rs.371cr
KEC International (KEC) has secured orders totaling Rs.371cr for the construction of 400kV transmission lines in India. The orders are received from PGCIL (Rs.258cr) and Haldia Energy Limited, a subsidiary of CESC Ltd. (Rs.113cr). The completion period of these projects ranges from 18–26 months. The order book stands healthy at ~Rs.9,700cr (2.1x FY2011 revenue).
In a short span of time, KEC has registered strong order wins (Rs.1,970cr), from across the globe as well as various businesses verticals. Amidst strong order wins, the stock has witnessed a substantial rally in the past few days, gaining ~50%. We believe the latent potential of the company (globally diversified model) coupled with optimism surrounding the macro environment has clearly factored into the stock. At the CMP of Rs.53, the stock trades at reasonable valuations of 6.0x FY2013E EPS and further upside seems limited, in our view. Hence, we recommend Neutral on the stock.
IVRCL bags orders worth Rs.700cr
IVRCL has bagged orders aggregating to Rs.700cr across the water and buildings segments. The water and irrigation division bagged orders worth Rs.595.5cr and the buildings division received orders of Rs.106.0cr. With these orders, IVRCL’s order book stands at ~Rs.26,932cr (4.8x FY2011 revenue). We have valued IVRCL on an SOTP basis. The company’s core construction business is valued at P/E of 7x FY2013E EPS of 4.6 (Rs.32.4/share), whereas its stake in subsidiaries IVR Prime (Rs.15.5/share) and Hindustan Dorr-Oliver (Rs.3.8/share) has been valued on mcap basis, post assigning a 20% holding company discount.
At the CMP of Rs.45, the stock is trading at 9.8x FY2013E EPS and 0.6x FY2013E P/BV on a standalone basis. Therefore, on the back of the company’s robust order book-to-sales ratio (4.8x FY2011 revenue) and attractive valuations, we recommend Accumulate on the stock with a target price of Rs.52.
3QFY2012 Result Reviews
L&T
Larsen and Toubro (L&T) posted good set of numbers for 3QFY2012, which were above our and street expectations mainly on account of robust top-line growth and higher other income. L&T reported decent top-line growth of 22.7% yoy to Rs.13,999cr (Rs.11,413cr), above our estimates of 6.6% growth, mainly on account of pick-up in the E&C segment. We note that this performance was in spite of high base created in 3QFY2011 (L&T reported yoy top-line growth ~40.5%). On the EBITDA front, performance was below our expectations mainly on account of higher-than-anticipated MTM forex losses. L&T reported higher than anticipated other income, owing to higher income on its investments and dividend income from subsidiaries. Therefore, the bottom line came in at Rs.991.6cr (14.4% above our estimates).
As of 3QFY2012, L&T’s order backlog stands at Rs.1,45,768cr (Rs.1,14,882cr), 26.9% yoy growth, which is mainly on account of order inflow being higher than execution on absolute terms. Order inflow for the quarter grew by stunning 28.2% to Rs.17,129cr (Rs.13,366cr) covering some of the lost ground in 1HFY2012. For 9MFY2012, the order inflow stands at flat Rs.49,415cr (Rs.49,456). During the last quarter, management had significantly cut its order inflow guidance for FY2012, mainly to factor in the general slowdown faced by the sector, but this time they have refrained from the same and maintained their revised guidance (yoy 5% growth on order inflow and 25% on revenue front fo FY2012), which we believe factors in aggressive run rate for 4QFY2012 (yoy growth of 13.3% on order inflow and 32.0% on revenue front for 4QFY2012). We expect management to miss the guidance and pencil in 5% yoy de-growth in order inflow and 22.5% yoy growth in revenues for FY2012.
We believe L&T is best placed to benefit from the gradual recovery in the capex cycle, given its diverse exposure to sectors, strong balance sheet and cash flow generation as compared to peers. We maintain L&T as our top pick in the sector and maintain Buy on the stock with a Target Price of Rs.1,466.
GAIL
GAIL’s 3QFY2012 top line came above our estimate, while its bottom line was inline with our estimate. The company’s top line grew by robust 34.6% yoy to Rs.11,260cr, above our estimate of Rs.9,587cr, mainly due to strong growth in the natural gas trading, petrochemical and LPG segments. The company’s fuel subsidy burden increased 28.0% yoy to Rs.536cr in 3QFY2012. Gross revenue of the natural gas trading, petrochemical and LPG segments grew by 35.5%, 53.7% and 32.6% yoy to Rs.9,150cr, Rs.878cr and Rs.965cr, respectively. GAIL’s pipeline throughput stood flat yoy to 119mmscmd; gas trading volume increased 1.9% yoy to 85mmscmd from 83mmscmd and petrochemical sales volume increased 40.0% yoy to 113kt in 3QFY2012. EBIT of the natural gas trading, petrochemical and LPG segments grew by 56.9%, 98.3% and 103.6% yoy to Rs.323cr, Rs.387cr and Rs.305cr, respectively. However, EBIT of the natural gas transmission and LPG transmission segments decreased by 6.7% and 8.2% yoy to Rs.621cr and Rs.78cr, respectively. Consequently, GAIL’s EBITDA increased by 30.9% yoy to Rs.1,745cr in 3QFY2012. However, EBITDA margin contracted by 44bp yoy to 15.5%. Other income decreased 88.8% yoy to Rs.21cr on account of lower cash balance. Tax rate increased to 32.7% in 3QFY2012 compared to 28.1% in 3QFY2011. Consequently, net profit grew by 7.7% yoy to Rs.1,042cr, slightly above our estimate of Rs.1,018cr. The company capitalized its forex loss of Rs.105cr in 3QFY2012. Consequently, there was no impact in the income statement due to foreign exchange fluctuation. We maintain our Buy recommendation on the stock, while we keep our target price under review.
Sterlite Industries
Sterlite Industries’ (Sterlite) results were above our expectations. Net sales increased by 23.5% yoy to Rs.10,246,cr above our estimate of Rs.8,798r. Net sales growth was driven by higher zinc sales volumes from the zinc segment and power segment. Revenue of the zinc and power segments grew by 36.9% and 346.7% yoy to Rs.3,755cr and Rs.591cr, respectively. Sterlite’s EBITDA grew by 17.2% yoy to Rs.2,318cr. EBIT of the copper and power segments grew by 67.8% and 178.3% yoy, respectively, to Rs.326cr and Rs.53cr, respectively. However, the aluminium segment reported an EBIT loss of Rs.23cr compared to EBIT of Rs.119cr in 3QFY2011. Aluminium cost of production at Balco increased by 22.0% yoy to Rs.98,234/tonne on account of increased prices of alumina and coal. Sterlite’s associate, Vedanta Aluminium also reported loss of Rs.893cr in 3QFY2012 (Sterlite’s share of loss - Rs.264cr) compared to loss of Rs.347cr in 3QFY2011. Other income grew by 83.6% yoy to Rs.877cr, significantly above our estimate. The company reported exceptional items related to forex loss of Rs.425cr in 3QFY2012 compared to Rs.29cr in 3QFY2011. Hence, adjusted net profit increased by 12.1% yoy to Rs.1,260cr in 3QFY2012, above our estimate of Rs.771cr. Reported net profit decreased by 16.4% yoy to Rs.920cr.
Balco is now nearing regulatory approvals for its 211mn tonne coal block. Approval of coal block by the regulatory authorities could potentially make Balco’s operations profitable.
We maintain our Buy recommendation on the stock, while we keep our target price under review.
Maruti Suzuki
Maruti Suzuki (MSIL) reported a mixed set of results for 3QFY2012, with the top line and bottom line coming in ahead of our estimates; however, the company’s operating margin continued to remain under pressure, largely on account of unfavorable currency movement. The top line registered a 17% yoy (flat qoq) decline to Rs.7,882cr, largely due to a 27.6% yoy (down 5.1% qoq) decline in volumes. Volume performance during the quarter was impacted on account of labor strike at Manesar plant and due to sluggish demand environment in domestic markets. Average net realization, however, improved by strong 14.1% yoy (7.1% qoq), led by better product mix, lower level of blended discounts and price increases carried out during the quarter. EBITDA margin witnessed a steep 421bp yoy (102bp qoq) contraction and stood at 5.3% due to lower volumes, mark-to-market (MTM) loss on commodity hedges and other expenditure. Higher other expenditure was on account of Yen appreciation versus the INR (MTM loss on royalty payments of ~Rs.78cr). As a result, net profit fell substantially by 63.6% yoy (14.5% qoq) to Rs.206cr. However, it was ahead of our estimates, led by higher other income and lower tax rate. At Rs.1,163, the stock is trading at 14.5x FY2013E earnings. The stock rating is currently under review.
Idea
For 3QFY2012, Idea Cellular (Idea) reported a good set of results. Revenue came in at Rs.5,031cr, up 8.9% qoq, on the back of 1.4% qoq growth in ARPM to Rs.0.433/min and subscriber growth of 6.2% qoq with end-of-period (EOP) subscriber base standing at 106.4mn. MOU also grew by 1.4% qoq to 369min in 3QFY2012 from 364min in 2QFY2012. VAS share in revenue grew to 13.7% from 13.2% in 2QFY2012. All this led to a 2.6% qoq jump in ARPU to Rs.159/month. EBITDA margin increased by 104bp qoq to 26.7%. PAT came in at Rs.201cr. We maintain our Neutral view on the stock.
Colgate
Colgate reported its 3QFY2012 results yesterday. The company’s top line grew by 20% yoy to Rs.670cr, 4.2% above our estimates. Growth was driven by price hikes. Earnings for the quarter grew by robust 74% to Rs.116cr on account of low base (same quarter last year, the company reported a decline in profit). Operating margin expanded by 591bp yoy on account of a steep cut in ad spends (down by 555bp yoy) and cut in staff costs (down by 140bp yoy). The company’s operating margin came in at 19.3%, against our estimate of 13.4%. We maintain our Neutral rating on the stock.
Shree Cements
Shree Cements’ (SRCM) 3QFY2012 top line rose by 61% yoy during the quarter to Rs.1,259cr. The cement business posted 44.9% yoy growth in net sales to Rs.1,081cr on account of substantial growth in dispatches and realizations. The power division’s revenue more than quadrupled to Rs.178cr on a low base on account of higher volumes. OPM rose by 695bp to 26.5% on account of better cement realization. SRCM’s depreciation rose by 78.9% yoy to Rs.235cr on account of the commissioning of the new 150MW power plant. The company’s bottom line rose by 115% yoy to Rs.59cr. We maintain our Neutral view on the stock.
Federal Bank
For 3QFY2012, Federal Bank reported 41.1% yoy (5.6% qoq) growth in its net profit to Rs.202cr, in-line with our estimates. While the bank witnessed sequential healthy growth in its operating income (12.6% qoq), higher provisioning expenses (up by 59.6% qoq) dented profitability growth to 5.6% qoq.
The bank’s asset quality remained under pressure during 3QFY2012 as well, with absolute gross and net NPAs rising by 9.1% and 24.5% sequentially, respectively. Gross NPA ratio deteriorated by 36bp qoq to 4.0%, while net NPA ratio deteriorated by 16bp to 0.7%
At the CMP, the stock is trading at valuations of 1.0x FY2013E ABV. Considering the recent deregulation of NRE FD rates (NRE deposits comprise ~12% of its total deposits) and that mid-size PSU banks with similar earnings outlook are trading at valuations of 0.5-0.7x, we remain Neutral on the stock.
DB Corp
For 3QFY2012, DB Corp’s top line grew by 13.6% yoy and 11.8% qoq to Rs.396cr. Consolidated ad revenue for the quarter grew by 9% yoy to Rs.306cr. Circulation revenue grew by impressive 17% yoy and 5.8% qoq on account of new edition launches in Maharashtra. The company reported a weak set of numbers on the earnings front, primarily on account pre-operative expenses of Rs.2cr and operating losses on four editions in Maharashtra and two additions in Jharkhand. The company reported a 29% yoy decline and 39% qoq growth in its recurring earnings. Recurring PAT for the quarter stood at Rs.56cr. Operating margin during 3QFY2012 fell steeply by 724bp yoy, though it expanded by 394bp qoq on account of new edition losses as well as forex losses. The stock is under review.
LMW
Lakshmi Machine Works Limited (LMW) announced its 3QFY2012 numbers. Net sales increased by 9.6% yoy to Rs.538cr (Rs.491cr). The textile machinery segment registered 11% yoy growth to Rs.471cr (Rs.425cr), while the other segments managed a 3.1% yoy increase to Rs.72 (Rs.70cr). EBITDA declined by 9.1% yoy to Rs.69cr (Rs.76cr), largely due to margin compression. EBITDA margin declined by 263bp yoy to 12.8% (15.4%), mainly due to higher raw-material cost, which increased to 63% of net sales vs. 58.2% in 3QFY2012. PAT declined by 13.5% yoy to Rs.40cr (Rs.46cr), while margin declined by 197bp yoy to 7.4% (9.3%). We will be coming out with a detailed report post management interaction. We continue to maintain our Buy rating on the stock with a target price of Rs.2,780.
KPIT
KPIT Cummins Infosystems (KPIT) reported better-than-expected 3QFY2012 results. Dollar revenue came in at US$73.4mn, up 4.3% qoq. In INR terms, revenue came in at Rs.379cr, up 16.6% qoq. EBITDA and EBIT margin of the company improved by 167bp and 171bp qoq to 15.3% and 11.8%, respectively, aided by ~300bp qoq due to INR depreciation. PAT stood at Rs.41cr. The company has revised its organic growth guidance of FY2012 USD revenue to 37-38% yoy from 25-29% yoy given previously. The stock is currently under review. We will be releasing a detailed result update shortly.
Ashoka Buildcon
For 3QFY2012, Ashoka Buildcon (ABL) reported a good set of numbers, in-line with our estimates. ABL’s top line witnessed robust growth of 49.3% to Rs.352.9cr (Rs.236.4cr), marginally lower than our estimate of Rs.360.6cr. ABL’s margins came at 19.6% (22.8%), lower than our estimate of 21.5%. On the earnings front as well, ABL reported decent growth of 17.5% to Rs.19.5cr (Rs.16.6cr), in-line with our estimate of Rs.21.0cr. Order book as of 3QFY2012 stood at Rs.3,912cr. We maintain our Buy view on the stock with target price of Rs.245.
3QFY2012 Result Previews
Cairn India
Cairn India is slated to report its results. The company’s net sales are expected to decrease by 5.8% yoy to Rs.2,917cr. However, its operating margin is expected to decline by 344bp yoy to 81.0%. Bottom line is expected to increase by 0.6% yoy to Rs.2,023cr. We maintain our Neutral view on the stock.
Lupin
Lupin is expected to announce its 3QFY2012 results. For the quarter, we expect the company to post a 39.0% yoy growth in its top-line to Rs.1,755cr. The company's OPM is expected to expand by 10bp yoy during the period to 19.7%. Earnings for the quarter are expected to register 62.9% yoy growth to Rs.261cr. We maintain Buy rating on the stock with a target price of Rs.593.
Yes Bank
Yes Bank is slated to announce its 3QFY2012 results. We expect the bank to report healthy NII growth of 26.6% yoy on the back of continuance of healthy balance sheet growth coupled with sequentially stable NIM. Non-interest income is expected to rise at healthy 24.4% yoy. Cost-to-income ratio is likely to deteriorate by ~150bp qoq as well as on a yoy basis to 37.2%. Pre-provision profit is expected to register reasonable growth of 23.1% yoy, while net profit is expected to increase by nearly similar (22.2% yoy) quantum at Rs.234cr. At the CMP, the stock is trading at 1.8x FY2013E ABV. We value the stock at 2.1x FY2013 ABV. Post the recent run-up in the stock, we recommend an Accumulate rating on the stock with a target price of Rs.330.
Economic and Political News
- RBI warns of persistent inflation, weaker growth
- Row over import duty on power equipment, PM action sought
- CEC team visits mining areas in Bellary district
Corporate News
- RIL assures SC of paying VAT on UP gas sale from Feb 1
- MMTC disinvestment may not happen in immediate future
- NTPC expects JV for Bangla project by month-end
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