Power Sector - A Ray of Hope
Thursday, August 28, 2008
You have already that Foreign Institutions are bullish on the Indian Power sector. In this post, I am going to briefly touch upon the reforms [excluding Nuclear Power] and developments in the Global Energy that will impact the bottom-line of Indian companies. The following post will cover outlook of Individual power producing companies.The big producers of Power are NTPC, Tata Power, CESC, Neyveli Lignite, Reliance Energy, Gujarat Industries Power and state owned electricity corporations. The Ministry of Power has issued LoI to 64 different companies to meet the additional production target of 68,539 MW. Most of these are less than 1,000 MW in capacity powered by Coal [Ya I know its dirty energy, but we can't help it]. Tata, Reliance and NTPC are developing ultra mega power projects for which they have tied up with coal mines in Indonesia. However, even before they have started importing the Coal, the Indonesian Govt has asked the suppliers to re-negotiate the price of Coal and link it to International prices [Earlier deal was at fixed price]. This move directly affects Tata Power, Reliance Power and Lanco.
With this grandiose plan, I think more than the Power generating companies, it is the companies which are involved in manufacturing of Equipments [BHEL, ABB], Transformers [KEC International, BGR Energy] and EPC contractors [L&T, Punj Lloyd etc] who will directly benefit the most. Coverage of these companies is deferred or search through the archives on our site.
Tata Power Company Ltd:
Tata Power plans to source 8-12 m tonnes per annum (mtpa) of coal from Indonesia's Bumi Resources for its Mundra Ultra Mega Power Project (UMPP). The fuel purchase agreement has a mechanism to escalate the coal prices in line with market prices. Any variation in coal costs can be partially passed through to the UMPP's customers Partial pass-through of fuel costs means a downside to Mundra UMPP's valuation.
Mundra UMPP - Construction is on in full swing and work on boiler and turbine for Unit 1 and 2 has started; 2) Maithon - Ordering of equipment is complete and civil work has started; 3) 250MW Mumbai - CoD will be achieved by October 2008; and 4) Haldia expansion is being commissioned now.
Tata Power has started accounting for efficiency incentives and benefits to be passed onto customers, on a quarterly basis rather than in the last quarter of the fiscal year. This will reduce quarterly earnings volatility. 1QFY09 effective tax rate was higher at 29% v/s 17% in 1QFY08 as company's deferred tax liability fund was exhausted by loss on redemption of US64 bonds.
Tata Power is expected to report EPS of Rs 24.7, 28.8 and 34.9 over the next 3 years. Apart from Power, the company has stake in Tata groups Telecom business. Based on the above facts the Sum of Parts Valuation will turn out as follows,
Value of Power Generation, Transmission and Distribution Business - Rs 570
Value of Telecom Investments - Rs 220
Mundra and Maithon UMPP - Rs 270
Bumi Resources Mines - Rs 340
Value of Other Group Company Investments - Rs 100
Based on the above, analysts have set a target price of Rs 1,500 on the Tata Power stock.
Labels: Tata-Power
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Published by Komal M @ 12:00 AM IST.
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Infosys' Axon Bid for Stronger Bottomline
Tuesday, August 26, 2008
Infosys plans to acquire UK-based SAP consulting co. Axon Group plc (LSE:AXO) for US$753.1m at 19% premium to last closing price. Based on last 5yrs reported PATg of 68% & 08 consensus forecast EPS g 29%, deal likely fair at 15x CY08 consensus EPS. Axon could add 10% to Infy revs, take up Europe to ~30% of revs from 27% today & grow consulting /enterprise solutions to 30% from 24% today.The potential Axon acquisition should be EPS accretive and strengthens Infy's SAP consulting practice and client access in Europe. The deal is fairly valued at 19x 2007 PE & 5-yr PATg of 68% and 15x 2008 consensus EPS/EPSg of 29%. Assuming Infy's post-tax return on cash at 7%, the deal should be EPS neutral this year and potentially EPS accretive going forward as margins improve through offshoring, cross-sell and scale.
The Telegraph reports that Other parties maybe interested in a counter bid to Infosys.
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Published by Webmaster @ 11:51 AM IST.
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Change in Earnings + Price Target
Sunday, August 24, 2008
Here is a list for companies where earnings and price targets have been changed over the past one month depending on Q1FY09 by Kotak Institutional Equities.
The Earnings upgrade was led by Castrol and Hero Honda. Rest of the list as following,
IVR Prime and Hexaware were on the top of list where earnings was downgraded,
Upgrade in Target Prices
Downgrade in Target Prices
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Published by Webmaster @ 9:39 AM IST.
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Reliance Capital Downgraded to EqualWeight
Wednesday, August 20, 2008
In a report today, Morgan Stanley has downgraded Reliance Capital to Equal Weight and has also cut the target price citing near term pressures as all the businesses of the company are capital markets-linked.The sharp slowdown in market activity is likely to result in slower growth in RCap's businesses and contraction in multiples.RCap reported robust volume growth in 2007 as markets were strong, but growth has moderated in the last few months. The continued weakness in market activity can cause growth across businesses for RCap to be moderate, which can drag down valuations.
General Insurance:
RCap reported an accounting loss in F2008 due to higher claims and operating expenditures. The company showed some improvement in its combined ratio in F1Q09, although it continued to report a loss on the insurance business. The growth rates for general insurance should slow as the company is also focusing on better underwriting to minimize claims cost and operating expenditures.
Life Insurance:
RCap's new business premium on an APE basis has recorded a CAGR of around 375% in the last couple of years. This is significantly ahead of private players' growth of 93% and overall industry growth of 60% in the same period. RCap's market share increased from 1.1% in F2006 to around 6.6% in the same period.
AMC:
RCap is the largest player in the domestic asset management business with AUM of around US$22bn on June 2008. However, AUM growth for the industry will be under pressure in current market conditions: The growth in AUM is dependent on broader capital markets.
Sum of Parts Valuation:
Life Insurance 505
Asset Management 250
Brokerage & Distribution 45
Consumer Finance 95
General Insurance 25
Listed Equity - Unrealized Gains 120
Total Rs 1,040 - Near Term Price Target
However, in long term India is expected to report a fantastic GDP growth and financial sector will benefit from the same. RCap's presence in all the growth segments will be of tremendous advantage.
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Published by Webmaster @ 8:41 PM IST.
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Contrarian views on IT EoU
Tuesday, August 12, 2008
I thought of sharing this Contrarian Views on Indian IT Export Oriented Companies - Infosys Technologies, Wipro, TCS, Satyam, and HCL Technologies as released by Edelweiss Research. The environment is still difficult and any optimism on guidance outperformance that investors may have had in the middle of Q1FY08 has tempered, we see select Indian companies doing well reiterating their FY09 guidance after a not too enthusing Q1FY09.Optimists View:
FY10 could be a good year in terms of volumes even if incremental pricing trends downwards. This is because the slowdown is forcing offshore outsourcing. But delays and longer-than-usual deliberations in deal closure will mean that the bulk of what the slowdown will induce by way of outsourcing may not accrue in FY09 as much as in FY10. Moreover, companies across verticals will see this as a priority in their FY10 plans, given that they have already begun drawing/have drawn the contours of the impact the slowdown will exert on them. Thus, expect a broad-based thrust as regards offshore outsourcing beginning FY10 even though incremental pricing may not hold as steady.Pessimists Views:
The broader economic slowdown in the US could affect more than just the BFSI and retail sectors. Not only is the slowdown likely to be protracted, but with its broader impact, it can affect decision-making on tech spending across verticals. In such an evolving scenario, it becomes appropriate to draw a contrast with the earlier tech/telecom bust in 2001-02, which seemed shorter and more incisive. Then, there were excesses in the information technology industry which unwound (dotcom segment, e-commerce spending, and "bubble" spending in the telecom vertical). The slowdown was a direct consequence of the collapse of such sub-segments. It was swift and severe and the good aspect was that investors could look ahead no later than four quarters. It is worth pointing that Infosys's quarterly momentum slowed down for five quarters in succession (beginning Q4FY01 through Q4FY02) registering five quarter revenue CQGR of about 5%, before picking up again in Q1FY03 (12.4% revenue growth Q-o-Q over Q4FY02). Today, the situation, according to a growing number of observers/analysts (e.g. Forrester), is different as many believe the slowdown to be prolonged. That is bad news for Indian IT firms as far as FY10 goes.
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Published by Webmaster @ 2:10 PM IST.
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Patel Engineering - SBI Caps
Monday, August 11, 2008
SBI Caps Equity Research has initiated coverage on Patel Engineering with a BUY Rating. Patel Engineering has retained its focus on high margin sectors such as hydropower plant construction. Assuming an implementation rate of 50 percent and 7 crore per MW to be the cost of hydropower generation, there is a demand of 43,750 crore on an annual basis. Hence PEL hydropower segment is geared for immense growth in the years to come.Power Plant and Real Estate Foray:
Patel engineering is in the process of setting up a 1,200 MW thermal power plant. PEL will monetize its historical land bank and channel the revenues back into asset ownership. PEL has more then 1,000 acres of land bank situated in Maharashtra, Bangalore, Chennai and Hyderabad. Nearly 200 acres of land are situated in etropolitan cities like Mumbai, Chennai and Bangalore etc. The company plans to develop 12.10 million sq. ft. in its first phase with available FSI on land bank.
Patel engineering is expected to report and EPS of Rs 29.5 and Rs 32.3 for FY09 and FY10 respectively. SBI Caps retails a BUy with a Target price of Rs 575.
Sum of the parts valuation:
Multipurpose Engineering - Rs 253
Irrigation Projects - Rs 75
Transport - Rs 64
Land Bank - Rs 131
Subsidiaries - Rs 70
Kotak has a BUY recommendation with a Target of Rs 727.
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Published by Webmaster @ 9:06 PM IST.
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Reliance Petroleum Weak Refining Margins - Merrill
Thursday, August 07, 2008
Reliance Petroleum, which is likely to add 1% to global gasoline and diesel capacity, is facing one of the biggest risks that refining margins may weaken further. Problems in stabilizing refinery cannot be ruled out despite the past impeccable track record. The refinery may well start in September 2008 but commercial operations are likely just for 3-4 months at best in FY09E.
RPL exporting more to Asian countries than originally envisaged is a threat to
Asian refining margins. RPL's exports to US may be lower than the originally envisaged 30-40%. However, RPL's exports to the US should still be significantly higher than 7%.
Commercial operations from April 2009 not ruled out due to the way the tax holiday works in India, is that if commercial operations start in January, the tax holiday will effectively be for four years and three months.
Additionally their are rumors that a MAT will be levied on RPL's project, we don't think Mukesh Ambani will like it and will keep quiet but will retaliate against the Government, if it moves to impose any tax on RPL.
Merill has rated RPL an underperformer with EPS expectations of Rs 3.6 and Rs 19 for FY09 and FY10 respectively. RPL's DCF based fair value based on long term refining margin of US$12.3/bbl is Rs142/share.
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Published by Webmaster @ 1:34 PM IST.
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Shoppers Stop - Retail Trouble Evident
Monday, August 04, 2008
Shoppers Stop reported net sales of Rs. 289.19 crore for Q1 FY09 against Rs. 225 crore in Q1 FY08, an increase of 28.5%. Gross profit rose by only 26.3% to Rs. 104.37 crore for 1Q FY09 as compared to Rs. 82.59 crore in 1Q FY08 on account of decline in share of private labels (20.4% against 20.9%). The company reported operating loss of Rs. 0.59 crore for the Q1 FY09 as against operating profit of Rs. 13.55 crore for Q1 FY08 on account of increase in expenditure (37% growth) primarily attributable to service tax paid (Rs. 4 crore), expenses incurred on re-branding (Rs. 7 crore) and higher overheads of new stores.New store takes 5-6 quarters to break even; space estimated to increase 51% in FY09e and 37% in FY10e, which will likely pressure the bottom line. Store rollout target for FY11e revised from 4.6m to 3.8m on the back of slowdown in mall developers industry.
HSBC is undderweight on Shoppers Stop as the company is expected to be in RED for FY09 expecting a loss of Rs 1.24. For FY10, the company is expected to report an EPS of Rs 1.61. HSBC has a target of Rs 260.
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Published by Webmaster @ 1:05 AM IST.
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