Result Update on IRB for 4QFY2011

IRBInfrastructure’s (IRB) consolidated numbers were in line with our estimates as revenue and margins came as per our expectations, while slippage in earnings was due to one-off mark-to-market (MTM) loss of ~`54cr on the derivative contract (Mumbai Pune project). In recent times, NHAI has witnessed lot of activity and the momentum is expected to continue, which would benefit road developers as orders galore. IRB having one of the largest BOT project portfolios with an integrated business model is expected to be the key beneficiary of the same. Also, the stock has underperformed in the recent times on the bourses, which has brought the stock to attractive levels. Hence, we upgrade the stock to Buy from Accumulate.

In-line results; MTM loss finally booked: IRB reported robust top-line growth of 52.9% to `767.0cr (`501.7cr), in line with our estimate of `748.0cr. The C&EPC segment reported top line of `578.4cr against our expectations of `530.5cr. We believe the construction segment has posted robust numbers due to pick-up in execution of Amritsar Pathankot, Talegaon Amravati and Jaipur Deoli projects. On the operating front, IRB’s margins came at 41% (46%), exactly as per our estimate, reporting a dip of 500bp yoy, on account of increased contribution from the low-margin C&EPC segment as expected. The bottom line came at `102.8cr, lower than our estimates on account of a ~70% jump in interest cost (including `54cr of MTM loss) on a yoy as well as qoq basis.

Outlook and valuation: Award activity by NHAI has picked up in the last couple of months. Further, NHAI has targeted to award orders worth ~`57,000cr (~8,000km) till January 2012 and another 1,000km on Annuity/EPC basis, and 1,000km state highway projects are expected to be awarded in FY2012; this augurs well for the sector. We believe this presents abundant opportunities for road developers (read IRB). IRB has a robust order book (excluding O&M orders) of `9,652cr (5.8x FY2011 construction revenue), which lends high revenue visibility for the next two-three years. Further, the stock is trading at attractive valuations; hence, we recommend Buy on the stock with an SOTP target price of `215.

Result Update on Bajaj Auto for 4QFY2011

Bajaj Auto (BAL) reported its 4QFY2011 results, with revenue in line and earnings above our estimates. Performance was driven by strong sales of premium motorcycles, improved operating leverage and higher other income on account of prepayment of sales tax deferral incentive. We remain positive on BAL though the DEPB issue remains an area of concern. We recommend Buy on the stock.

In-line operating performance driven by favourable product mix: BAL reported a strong 23.5% yoy increase in net sales to `4,200cr (`3,399cr), which was in line with our expectations of `4,223cr. Revenue growth was driven by 17.2% yoy growth in volumes with high-margin motorcycles, Pulsar and Discover, contributing ~70% to total motorcycle sales. Favourable product mix along with price hikes helped the company to post ~5.05% yoy growth in average net realisation. EBITDA margin came in 105bp ahead of our estimate at 20.5%, posting a decline of 235bp yoy. However, better product mix and reduced staff and other expenditure limited the contraction in operating margin to a certain extent. As a result, net profit (adjusted for one-time extraordinary items) surged by 27.9% yoy to `676cr, better than our estimates of `630cr. There was an exceptional item related to sales tax deferral incentive/loan to the amount of `827cr, which boosted the bottom line by 165% to `1,401cr. For FY2011, the company posted strong top-line growth of 40%, mainly driven by strong volume growth. Adjusting for the exceptional items, the company’s bottom line grew by nearly 40%. 

Outlook and valuation: At `1,291, the stock is trading at 13.3x FY2012E and 12x FY2013E earnings. We remain positive on BAL in the two-wheeler segment, owing to its diversified business model and strong revenue and earnings visibility. Currently, the stock is available at reasonable valuations due to the recent decline in its price. Hence, we recommend Buy on the stock with a Target Price of `1,610, valuing it at 15x FY2013E earnings.

Result Update on DB Corp for 4QFY2011

DB Corp. (DBCL) reported strong set of numbers on both the revenue and earnings front. The top-line was driven by advertisement revenue; earnings were aided by lower interest expense and tax rate. We maintain our Buy recommendation on the stock.

Strong top-line growth led by ad revenue growth: As expected, DBCL reported strong top-line growth of 23.4% yoy, led by 30% yoy growth in print advertising revenue and 41.7% yoy growth in radio ad revenue. Circulation revenue was marginally higher by 1.3% yoy but dipped by 1.1% qoq (on account of cover price cuts in Chattisgarh and launching DB Star along with the main newspaper).

Earnings robust at 22.6% yoy, despite margin contraction: In terms of earnings, DBCL posted robust 29% yoy growth on a recurring basis and 22.6% yoy growth on a reported basis, aided by a  60.8% yoy decrease in interest expense to `3.4cr and lower tax rate (down 177bp yoy), despite a 197bp yoy margin contraction  (on account of higher raw-material price and increased circulation volumes resulting in gross margin contraction of 216bp yoy).

Outlook and valuation: We have marginally revised our earnings estimates downwards to factor the increase in newsprint price and higher number of
loss-making editions (due to the slew of new launches). At the CMP of `243, DBCL is trading at 14.5x FY2013E consolidated EPS of `16.8. We maintain our Buy rating on the stock with a revised target price of `335 (`358), based on 20x FY2013E earnings. Downside risks to our estimates include – 1) higher-than-anticipated rise in newsprint prices, 2) increased competition and 3) higher-than-expected losses/increase in the breakeven period of its new launches.

Impact Analysis of Higher Subsidy Burden on ONGC

ONGC - Higher Subsidy Burden - Impact Analysis

Subsidy burden of upstream companies raised: The government has raised the overall oil subsidy payout for public sector upstream companies to 38.7% of the under-recoveries for FY2011. ONGC’s subsidy burden for FY2011 would now stand at `24,892cr. Oil India and GAIL will have to shell out `3,293cr and `2,111cr as fuel subsidy. This development has surprised us negatively, as upstream companies have been sharing ~33.0% of the subsidy burden from the past three years.

Lower our estimates: We now expect lower realisations for 4QFY2011 on account of higher discounts to oil marketing companies. Overall, our net realisation estimates are lowered from US$60/barrel to US$55/barrel for FY2011 due to higher-than-expected subsidy. Also, we now model higher subsidy (38.7% of total under recoveries) for FY2012 and FY2013. Thus, our FY2011, FY2012 and FY2013 EPS estimates stands lowered by 8.2%, 4.4% and 3.8%, respectively.

Further delay in FPO not ruled out: The raising of the subsidy share of upstream companies to 38.7% for FY2011 by the government leaves lot of uncertainty over future subsidy-sharing arrangements. We believe this development could potentially delay the upcoming `12,000cr FPO (scheduled for July 2011).

Outlook and valuation: Going forward, incremental production from marginal fields is expected to more than offset any decline in production from the ageing fields. ONGC’s subsidiary, OVL is also expected to report a jump in volumes by 2013 at ~12mn tonnes on the back incremental productions from Myanmar, Sakhalin-1 and Venezuela coming on stream. Further, deregulation of diesel and resolution of the royalty issue with Cairn could be significantly earnings accretive for ONGC. Higher gas price from extant fields and mark-to-market prices from incremental production could accrete earnings further. Significant discoveries in high-potential Cambay, KG basin and Mahanadi fields (still under appraisal) could further boost valuations.  We believe the risk-reward ratio is now favourable as the current price level factors in the higher-than-expected subsidy payout for FY2011. Although, there is FPO overhang on the stock in the near term, we believe increased volumes and net realisation should offset these concerns.
We recommend Buy on the stock with an SOTP revised target price of `328 (`356 earlier).

Result Update on L&T for 4QFY2011

Larsen andToubro (L&T) posted mixed set of numbers for 4QFY2011. As of FY2011, L&T stands tall on an order backlog of `1,30,217cr. Order inflow for FY2011 stands at `79,769cr, up 15% yoy though lower than the earlier guidance of 25% but the slippage was much lower than expected. The company has given revenue guidance of 25% for FY2012, which we believe is aggressive considering that the headwinds are still plaguing the sector. On the order inflow front, the company has given guidance of 15–20%, which we believe is achievable considering L&T’s leadership position and diversification. L&T continues to be our top pick. We maintain our Buy rating on the stock. 

Top-line below estimates, margins surprise àbottom-line ahead of estimates: L&T reported subdued top-line growth of 13.2% yoy to `15,384cr (`13,585cr), below our estimates. EBITDA came in as a surprise, above our expectations, mainly on account of execution efficiency, risk management and opex control. Thus, EBITDA margin stood at 15.2% vs. our expectation of 13.3%. Adjusting for extraordinary income (`149.0cr net of tax) and dividend from subsidiaries, the bottom line grew by 13.0% yoy to `1,537.2cr and surpassed our estimate of `1,365.0cr.

Outlook and valuation: L&T has a healthy order book, which provides revenue visibility for the next few years. We believe even if the company misses its revenue guidance of 25% for the year, it will deliver >20% growth, which is better than most of its peers. On the order booking front, management also indicated delays rather than cancellation of orders, which it expects to achieve in the ensuing quarters. Thus, post the recent correction, we believe it is a good opportunity for long-term investors to enter the stock at current levels. We maintain our Buy rating on the stock with a target price of `2,033.