ENAM - >> Tata Steel | MphasiS | Ranbaxy | Dabur India | Oil & Gas
Deepak Vaishnav
Burgeoning under-recoveries coupled with government & OMCs’ inability to take significant hits would result in higher subsidy burden on upstream companies. We expect FY12 upstream subsidy burden at 54% versus historical and H1FY12 levels of 33%.
Upstream stocks under threat: We expect 17-44% YoY dip in FY12 EPS for ONGC & OIL due to higher subsidy burden. ONGC would receive partial reprieve due to higher profits from OVL and Rajasthan Block. Huge cash levels of ONGC & OIL would increase the risk of government pushing for cross-holding of PSU shares to adhere to its own divestment plans.
GAIL offers a good defensive bet as threat of higher subsidy burden on GAIL is negated by very low profitability of its LPG production business. Its recent stock price correction offers good entry opportunity for investors looking at safe havens.
OMCs’ valuations are attractive (especially BPCL) but fundamental concerns over cash crunch would remain in the interim. OMCs are trading near their lows of CY08.
Key Assumptions: Crude at USD 112/ bbl for FY12 & USD 105/ bbl FY13; USD/INR at 47.6 and 46.5 for FY12 & FY13.
We recently met with the senior management of Dabur India Ltd. to get an update on the future prospects of the co. Key takeaways from our interaction are furnished below:
q Growth to step up in H2FY12: Distribution realignment and competitive pricing pressure impacted the growth of consumer care business excluding foods (54% of revenue) in Q2. However, a combination of price hikes and increase in brand investments is expected to improve revenue growth to 16% in H2FY12.
q Competitive intensity in shampoo remains elevated with premium brands entering the popular price point (Dove being launched at Re 1 price point). Mgmt also commented that price hike in toothpaste category has been less than adequate given the cost inflation. The fruit juice category has been witnessing influx of new players (including MNCs), which could queer the pitch in this category as well. Together the three categories constitute ~30% of Dabur’s domestic revenues.
q Brand investment to rise: ASP spends are expected to rise owing to heightened competitive intensity and new product introduction. We are factoring in higher ASP spends at 12.3% of net sales in H2 as against 11.3% in H1.
q Operating margin likely to remain under pressure: We are factoring in a 110 bps YoY decline in the EBITDA margin in H2.
Considering the above factors, we have marginally lowered our earnings estimates by 2% each for FY12 (to Rs 3.7) and FY13 (to Rs 4.5). However, we believe Dabur continues to maintain its competitive position for over 3/4th of its portfolio and temporary shortfalls should be perceived as a BUY opportunity.
Dabur has underperformed the Sensex by 13% over the last three months and trades at 1-yr fw P/E of 22.5x, below its 5-yr historical median of 25x. Maintain BUY with a revised TP of Rs 109 (vs. Rs 112 earlier) based on 24xFY13E earnings. At CMP of Rs 95, the stock trades at 26xFY12E and 21xFY13E EPS. Our TP implies an upside of 15% from CMP.
Ranbaxy has finally put an end to the long drawn uncertainty around launch of generic Lipitor (Atorvastatin), as it launched the product in US on 30th Nov’11. Owing to its ongoing issue with the US FDA at Poanta Sahib (originally Atorvastatin was filed from this facility), Ranbaxy has done a site transfer to Ohm Labs, USA. Further, Ranbaxy has entered into a profit sharing agreement with Teva during its 180-day exclusivity.
Our assumptions
q Market share – We believe getting a high market share would be very difficult for Ranbaxy. Given Pfizer is targeting 40% market share and an aggressive AG, we assume Ranbaxy can get 30% market share (from earlier 40%).
q Price erosion – We are assuming a significant price erosion of 50% (from earlier 30%) in the near term.
q Agreement with Teva – We believe this is for marketing and distribution support (assuming a 50% profit sharing).
Reduce estimates and TP; Maintain HOLD (8% upside from CMP of Rs 435)
Given the profit sharing agreement with Teva, we reduce our CY11E and CY12E EPS by 29% and 20% to Rs 37 and Rs 43 resp. Accordingly, we reduce our value of Lipitor to Rs 16/ share (Rs 43 earlier) and our TP to Rs 468 (Rs 418 for base biz at 20xCY12E EPS of Rs 21 and Rs 50 for settlements) from Rs 495 earlier. At CMP of Rs 435, the stock is trading at 12x CY11E and 10x CY12E EPS.
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· MPHL4Q11 - RU - 1 Dec 2011.pdf
Focus on client diversity increases: MphasiS’ (MPHL) Q4 results showed muted growth in the HP biz (62% of rev) but witnessed a pick-up in its Direct biz segment (38% of rev; up ~19% QoQ). A ~25% QoQ growth in the non-ES part of HP biz indicates MPHL’s efforts to capture growth outside of its traditional HP biz.
Volume growth driven largely by the ITO segment (~27% of rev; up ~10% QoQ) given Applications and BPO (61% & 12% of rev resp.) stayed flat. We have recently noted the parent’s (HP) increasing focus on infra Mgmt Svcs and believe MPHL (~70% of ITO biz is HP driven) to benefit as a result.
MPHL continued its focus on margins and we believe levers such as utilization & replacement of sub-contractors with own employees would provide further upside to EBIT margin from the current level of ~14% (FY11).
Valuations: We have upgraded our FY12 revenue / EPS estimates by ~6% / 1% to Rs 56.4 bn / Rs 36 respectively, largely to incorporate INR depreciation. We revise our TP to Rs 370 (vs. Rs 355 earlier) based on 10x FY12E EPS. Maintain BUY with an upside of 16% from CMP of Rs 315. The stock currently trades at 8.6x FY12E earnings.
Our estimates are based on INR/USD of Rs 46.5 for FY12E adjusted for Oct year-
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· Tata Steel - CU - 1 Dec 2011.pdf
We are revising our long standing negative stance on Tata Steel and upgrading the stock to BUY. Our earlier negative call was largely based on concerns regarding the European ops, which have played out over the last 1 year. Since current stock price factors in zero EBITDA from Corus, we believe valuations are compelling.
q Domestic steel prices firm: Domestic steel prices have not declined along with global prices on INR depreciation and production disruption due to iron ore mining issues in India. Tata Steel’s domestic ops are best placed to benefit from it as it has 100% captive iron ore. Though we do not rule out a slight correction in domestic steel prices, we expect the recovery in Chinese steel prices to support steel prices in India.
q Benga coking coal (Mozambique) to yield results soon: We are also bullish on the Benga coking coal project due to Rio Tinto’s focused development program (Tata steel holds 35% with 40% off-take rights). As per Rio Tinto, production will start from end FY12, which will support profitability of Corus to some extent in FY13.
q Domestic volumes to grow in FY13, driven by the 2.9 mnt brownfield expansion scheduled to be completed by end-FY12.
q Operating environment for Corus to remain challenging due to weak steel demand in Europe. Q3FY12 will particularly report very weak profitability, as decline in RM cost will come through with a lag. Our EBITDA per ton estimates for FY12 and FY13 are at USD 16 and USD 31 respectively.
Upgrade rating
Our EBITDA/ton estimates for domestic ops are at USD 420 in FY12 and USD 300 in FY13. We have factored in the impact of MMRD Bill (doubling of royalty and 26% tax on captive coal mining) for India ops in FY13. Without considering the impact of MMRD Bill, our FY13 EPS estimates would have been Rs 58 (vs. Rs 48 currently). We raise our FY13 EV/EBITDA target multiple to 5.5x from 5x earlier, in-line with recent rebound in valuations of comparable steel stocks. Upgrade the stock to BUY with a revised target price of Rs 481 (vs. Rs 420 earlier), 20% upside from CMP of Rs 403. The stock currently trades at 4.9x FY13 EV/EBITDA.
Key risk to our call – Further deterioration in European macro situation.