Posts in category All News
Rajasthan urges private solar developers to set up transmission lines (20-09-2015)
Jagmohan Dalmiya: The tactician who made business out of cricket (20-09-2015)
3 mn families gave up LPG subsidy: Modi (20-09-2015)
Are headline agricultural growth numbers misleading? (20-09-2015)
Hold rating on L&T; L&T may suffer but for some damage-control (20-09-2015)
At the crossroads, stock appears more like a market performer: The latest annual report shows management efforts for cash preservation are yielding results. However, due to our expectation of a demand pushback, we cut our estimates by 2%/16% for FY16/17 and our 12m target price to Rs 1560/share. Our estimates are 9/23% below Bloomberg consensus for FY16/17 and highlight the risk that consensus estimates may be pushed back by a year. Our valuation framework on twelve different scenarios shows that unless L&T manages to release capital by value unlocking and/or cuts NWC/sales sharply, the stock may suffer 4-55% value erosion from demand pushback or margin compression. We prefer Shree/Cummins India.
Annual report data show that, by and large, risk management is good: The annual report shows good risk management as: (a) NWC/sales shrank by 650 bps to 24% (vs. 31%); (b) debtors over six months are 7% of the total; (c) net un-hedged forex exposure is <9% of total net worth (vs. 17% in FY14).
However, performance/corporate guarantees for subsidiaries are at 48% of parent company net-worth (vs. 28% in FY14), which may limit medium-term upside, unless the subsidiaries turn around.
But management efforts are being stymied by the weak demand environment: New orders are being deferred/pushed back in both India and the Middle East – barring a few state segments such as Andhra.
Consequently, with rising competitive intensity and estimating the company to be selective in bidding, we cut our order inflow (core E&C) FY16E/17E EPS by 20/18%, leading to earnings cuts of 2%/16%. Our estimates build in a slow ramp-up in project execution in the infra segment and a higher margin from weak input cost.
Capital release could be a differentiator, at times of weak demand: Our valuation methodology remains the same—i.e., SOTP, with E&C business valued in line with the SP Capital Goods index and other divisions in line with their peers. With a 12m TP of INR1560, we downgrade the stock to Hold. Our scenario analysis suggests that demand uptick/value unlocking can have an upside risk of 6-13%. However, the stock could suffer value erosion of
4-45% from demand pushback/ weak execution and margin dip.
* We cut estimates on weak demand.
* Ordering growth showing signs of weakness.
* We agree that government has made good progress in approvals.
Experts suggest that the government has done well in providing approvals for projects. This is visible in sectors such as railways/DFC, where ordering has begun. On the water infrastructure, the government has set in motion an integrated Ganga conservation plan (Naman Ganga) as the DPR stage is over and ~18 projects have been submitted for approval. Also, the government is working on expediting the water linking projects, and order awards in projects such as Godawari (Andhra Pradesh) could become a reality. Even in Indian Railways, DPRs have been made for a large portion of 11000 kms of additional rail lines, but they await cabinet approval. The DFC awards for the western and eastern corridors are also likely to come in late Q4 or early Q1FY17.
So at the current pace there is risk of large orders likely spilling over to FY17 and beyond
However, we see a few of the large orders in the following areas as likely to get deferred:
Nuclear: This includes projects such as 9.9GW Jaitapur (Areva) and 6GW Mithivirdi (Gujarat), Gorakhpur (2*700MW) and Kudankulam expansion.
Defence: Although the government has renewed its emphasis on the domestic manufacturing of defence equipment, major defence orders are likely to spill over to next year and beyond, including Corvettes (worth Rs 120 bn), submarine orders (Rs 400 bn), gun orders (Rs 300 bn), and battlefield management systems (Rs 130 bn) which are in the pipeline.
The coastal roads project award worth Rs 130 bn in Maharashtra is likely to be delayed until next year given the recent suggestion by the Maharashtra environment department to build elevated roads through areas where mangroves are located.
Competitive intensity has also gone up
On the power side, its competitor (BHEL) appears to have bid aggressively. As a result, L&T lost a few of its power orders and BHEL is L1 in many contracts. On the railway business too, during Q2FY16 L&T lost a civil contract order pertaining to DFC (Western) worth Rs 42bn to a consortium of Mitsui, Ircon and Tata. Meanwhile, on the road front, recent bids show intense competition as even the smaller players bagged orders.
MEED data suggests export orders, especially in Saudi, could be deferred
The plunge in oil prices is putting pressure on Middle East economies to maintain their fiscal balance. In countries such as Saudi Arabia, the government is working on cutting unnecessary expenses . The Saudi Arabian government’s plans to increase the size and scope of soccer stadiums have been scaled back, and a $201m contract to buy highspeed trains was also cancelled recently.
Our bottom-up data suggest overall all-India capex likely to pick up by 2HFY17 or early FY18
Our bottom-up analysis of key projects and important segments suggests capex spending from these could be $631bn over FY16-20—a 36% rise vs. FY11-15. A majority of the capex would be led by government spending, followed by state spending and PSUs. Private sector spending as of now is expected to remain muted at
$45 bn over the next five years vs. $153 bn in the last cycle (FY11-15). Excluding Reliance Industries/ auto companies, the amount from other private sector segments is 60-70% lower than in previous years. Overall, country capex spending as a whole could pick up in FY17 and will probably accelerate from FY18 onwards.
Reduce rating on Reliance Comm; Little for RCOM to cheer about (20-09-2015)
Spectrum trading rules could have a short-term marginal respite for RCOM, if 4G entrants find it appropriate to have a short-term coverage and capacity boost as Reliance Communication (RCOM) spectrum holdings in the 850 spectrum band come up for renewal in c5 years. RCOM 850 spectrum can allow 4G entrants to have 10MHz in the attractive 850 spectrum band, allowing them to have both capacity and coverage, which incumbents may find tough to replicate in a few markets. However benefits for 4G entrants will be short term, unless they renew these radio waves as and when they are put to auction. Separately, if the pending RCOM-SSTL merger is approved, 4G new entrants can access an additional 5MHz of spectrum in 850 in eight additional markets, and this could be used for coverage.
However, the spectrum trading arrangements will be complex as they will need to meet several conditions
(a) five-year validity: RCOM spectrum comes up for renewal in five years and, therefore, any sharing or trading arrangements will be short term;
(b) one-time fee: RCOM will need to pay a one-time fee of $400m to get spectrum liberalised before it can trade spectrum in overlapping circles with 4G players;
(c) CDMA is revenue generating: RCOM CDMA spectrum is presently being used for data cards and voice, and RCOM will need to be compensated for the loss in CDMA revenues by 4G entrants over and above the one-time fee. In other words, it is not a pure upside, as RCOM will have to sacrifice present CDMA revenues before it opts for trading the spectrum
(d) regulatory support: RCOM 850 spectrum band is not contiguous in four markets, and 4G entrants don’t have contiguous spectrum in five markets where they own 850. The regulator will need to help to harmonise this spectrum and get it contiguous;
(e) separately, RCOM will need to pay $600m to the government for the SSTL spectrum before it can trade spectrum. Further regulatory support will be required to get this spectrum contiguous and harmonised.
Reiterate Reduce rating with a TP of Rs 55. We believe the upside for RCOM will not be much and, therefore, we are not making any changes to our estimates. Complex short-term spectrum trading arrangement comes with several costs.
We highlight the costs 4G entrants may have to bear to benefit from RCOM 850 via spectrum trading in the short term.
(a) One-time fee to liberalise spectrum: As stated above, RCOM’s present spectrum in most markets is not liberalised, and there is a need to pay a one-time fee of $400m before the spectrum can be used for spectrum trading. Further, RCOM will need to pay $600m to the government for the SSTL spectrum before it can trade this spectrum, assuming the merger goes through. In other words, 4G players will need to compensate RCOM for such regulatory levies to use the RCOM 850 spectrum band.
(b) Compensation for loss in CDMA revenues on subsidised migration: RCOM is using the 850 spectrum band today for voice and data cards, and once the spectrum is deployed for 4G, the 4G entrants will need to compensate RCOM for the loss in CDMA revenues or facilitate the migration of existing RCOM CDMA subscribers to 4G by subsidising devices.
(c) 10MHz spectrum will need fibre backhaul: That is not all; any network with 10MHz of spectrum will have to be backed by investment in fibre backhaul as well. This may not have been the case if it was a mere 5MHz but with 10MHz it becomes mandatory.
(d) Regulatory support to harmonise spectrum: A large part of the spectrum is with both 4G entrants, and RCOM is not contiguous in nature, so regulatory help will be needed to harmonise spectrum. This may take time as such activities require the cooperation of other telcos.
(e) Spectrum comes up for renewal in five years: RCOM spectrum in 850 markets will come up for renewal in five years and it is not necessary that 4G entrants will win the spectrum from auctions. Moreover, the current auction format allows everyone to participate in spectrum auctions and the competition will attempt to be disruptive or make the spectrum expensive for 4G entrants.
(f) Regulatory ambiguity: Present M&A norms suggest a spectrum cap at 10MHz for the 800 spectrum band.
However, the 2015 auction document published by the regulator suggests a spectrum cap as 50% of the total spectrum in the 800 band. We await more regulatory clarity on the issue. The pending RCOM SSTL merger meets the 10MHz rule in all markets but is not meeting the 50% cap in most markets (refer Figure 2).
Conclusion: The complexity of this aforesaid spectrum arrangement makes it expensive and time consuming and will leave little value in hand for 4G players to incentivise RCOM, in our view. Non-cash incentives could be easy, such as allowing RCOM to use the 4G network and allowing RCOM to sell 4G services. Such incentives may not help, as RCOM has been struggling with subscriber traction on one hand and on the other it needs to repay debt and reduce leverage. We don’t see much upside for RCOM in the current format.
How will such complex short-term spectrum sharing arrangement help 4G entrants?
We have been highlighting that 4G entrants need spectrum in the sub-1Ghz spectrum band to offset the coverage issues as in the present form they have too much dependence on the poor quality 2300 spectrum band. Even though temporary in nature, the access to the 850 spectrum band seems to be the only near-term solution available to 4G players, in our view. Access to good quality sub-1GHz spectrum on a long-term basis is not an option today. So, 4G entrants are faced with two options—either launch with a network of around 2,300, which may prevent them to have a good subscriber value proposition, or take a more short-term approach and leverage 850 using spectrum trading. That said, we highlight that access to 850.
Valuation and risks
We continue to value Reliance Communications on a DCF-based sum-of-the-parts approach. For our DCF valuation, we use a cost of equity of 14.5%, a cost of debt of 11% and a WACC of 13.6%, arriving at a fair value of Rs 40 per share for its core operations adjusted for regulatory levies. We value its real estate assets at Rs 15 per share (valuing them at a 20% discount to management estimates) as the company plans to unlock value in its real estate to cut debt. Our valuation leads to an unchanged target price of Rs 55. As this implies downside of c11% to the current share price, we reiterate our Reduce rating.
Key upside risks: ability to monetise non-core assets may allow the company to bring down leverage and will be positive for the stock price. Further approval of the merger with SSTL (which is pending now) may allow RCOM to consolidate spectrum in 800 and raise its ability to monetise overall spectrum holdings and boost near-term earnings.
Underperform rating on Motherson Sumi; Headwinds emerge in Motherson’s domestic business as well (20-09-2015)
While our negative thesis so far has primarily been based on aggressive street estimates for SMP (European subsidiary), we see some headwinds emerging in the domestic business also.
* Motherson has underperformed the domestic PV (passenger vehicle) industry for two straight quarters now, which we believe is on account of two main factors: First, the sharp fall in copper—although a pass-through, it has an impact on both revenue and Ebitda growth (costs other than commodities do see inflation). With copper falling further ~10% in last two months, the next few quarters will be subdued.
* The second factor, which is a deeper concern, is the loss in market share. Our channel checks indicate that Motherson’s near dominance with Maruti is reducing, with Maruti decreasing its single vendor concentration. Players such as Yazaki and Furukawa (>50% revenue growth in 1Q) are starting to gain share.
* The stock has underperformed the market by ~10% past month with ~10% cut in consensus estimates, but we see further cuts ahead. It trades at 21x FY17e earnings (~50% premium to global peers). We stay UNDERPERFORM and prefer Bharat Forge to MSS.
For the last two quarters, domestic revenue growth at ~1% y-o-y has underperformed the PV industry growth (5% y-o-y). Historically, the company’s outperformance has had a strong correlation with the copper price. Even though copper is largely a pass-through, given some expenses are fixed—an inflationary commodity environment is better for profit growth. Copper was down 4% q-o-q in Q3FY15 and 11% in Q4FY15, which led to growth slowdown (assuming a lag of a quarter).
With copper prices recently declining a further ~10%, top-line growth could be further impacted (especially in Q3FY16). The fact that the company has had to pass on the entire benefit also partially reflects the loss of pricing power with the increasing competitive intensity.
Our channel checks indicate that Maruti is now in the process of strictly enforcing its single-vendor not having a 70%+ share policy, and hence Motherson, which currently has a 85% share, is expected to suffer. Other Japanese wiring harness majors—Yazaki and Furukawa (in JV with Minda corp)—are becoming more aggressive. Minda Furukawa has a target of growing revenues by ~70% in FY16 and cornering 30% of Maruti’s wallet in two years from ~10% at the start of the year. Yazaki is the No. 1 wiring harness company globally and has a one-third share of business with Suzuki. Motherson had a cost advantage over others because of its localisation of applicators (a third of the imported cost) but now other players too are in the process of localising the same.
We have all along maintained that street estimates are just too high; FY16 consensus earnings have already seen a ~10% cut in the last three months. Our FY16/17 estimates are still 8%/14% below consensus and we see a risk to our numbers too, as we haven’t built in the rising competitive intensity on the domestic side in our numbers yet. The recent euro appreciation versus the rupee helps in the translation and hence should help numbers.
Jagmohan Dalmiya: The man who made business out of cricket (20-09-2015)
Varun 2020 portfolio – 2 strategies (20-09-2015)
Arun - Tata Motors has a great history. JLR is a recent addition to their business. It has a wealth creating chart and has made several investors who are holding it for decades quite wealthy. Even with Zero sales in China the stock is a clear buy. The big structural change and disruption acc to me is not wrt China now but shift in future to driver less cars for all premium car makers. That's a bigger threat than a small issue like China.
Varun 2020 portfolio – 2 strategies (20-09-2015)
Vivek - Kaveri seems to be making a base between 400-500. Make take a little longer time due to weak market conditions. There was a lot of selling happened by IDFC and promoters in range of 800-1000 making chart patterns weak. Add to it below expectation results and not a good forecast for rest of year. It remains to be seen whether IDFC has fully exited the counter or not by now. The change of guard at IDFC has spelt some bad times for this stock.
Anyways going through their quarterly presentation and annual report gives me enough confidence that the stock will bounce back sooner than most people expect it to. Its in a very niche business with high profit margins and huge entry barriers. The cash on books gives a comfort as well. I guess promoter's haven't done anything wrong. They are just undecided and being cautious considering the outlook in distributing the cash to shareholders. Give business the time. Time is a wonderful friend of good business and a enemy for a bad business.
In case I will have spare cash in future I will avg down my positions - currently my avg is 783. This stock has given me huge profits thrice. I have entered at near around 800 and sold at 950-1000 thrice in my trading portfolio before finally deciding to invest as core stock when it again came down.