>TATA CHEMICALS (PRABHUDAS LILLADHER)

Tax write-back improved the PAT

■ Q4FY09 Result: Tata Chemicals’ (TCL’s) consolidated net sales have indicated a growth of 29.7% YoY to Rs18.9bn (our expectation was Rs21.2bn) on the back of 29.0% and 30.3% growth in inorganic chemicals and fertilizers segment, respectively. Sales from inorganic chemicals grew due to contribution by General Chemical Industries Products (GCIP, Rs3.2bn). Fertiliser sales increased mainly on account of an increased contribution from urea, which has been partially set-off by the shut down of a phosphatic fertiliser plant for part of the quarter due to fertiliser price volatility. Urea production has shot up to 3.1lac tonnes (up 8% YoY) on account of additional production due to de-bottlenecking of the urea plant.

TCL’s adjusted consolidated PAT grew by 63.4% YoY to Rs1.9bn (against expectation of Rs1.3bn) mainly due to tax refund of Rs465m taken in GCIP and further tax credits taken in other operations. EBIT de-grew by 47.5% to Rs0.7bn due to losses in the fertiliser business due to the shut down of phosphatic fertiliser business and its fallen prices.

■ Outlook: TCL witnessed demand destruction in the soda ash business in H2FY09. Management expects that the soda ash market could recover from the beginning of 2HFY10. Domestic soda ash prices and demand is stable now due to introduction of anti-dumping duty and stable demand from detergent market. Global slowdown in the flat glass demand affected the demand in US and Europe. We have considered a 15% decline in the soda ash price and 12%
volume decline in our FY10E estimates. Urea business is expected to perform well. TCL is planning to shut down their operation of Netherland plant (Soda ash capacity of 3lac tonnes)

■ Valuation: Soda ash business outlook is weakening and also phosphatic fertiliser has not performed well due its fallen prices. Hence, we maintain our ‘Reduce’ rating on the stock.

To see full report: TATA CHEMICALS

>BHARAT FORGE (PRABHUDAS LILLADHER)

Industry slowdown hurts performance

■ Sharp decline in topline: Bharat Forge (BFL) reported a sharp 49.7% YoY degrowth in topline to Rs2.9bn, on account of a 48.3% YoY decline in the domestic revenues at Rs1.7bn. The company also witnessed a slowdown in their exports; exports declined by a whopping 51.6% YoY at Rs1.2bn. The general economic slowdown across the globe as well as production cuts, especially in the commercial vehicle (CV) segment, led to a severe decline in the revenues on a standalone basis. Operating profits declined by 70% YoY at Rs427m, whereas operating margins declined by 10% YoY to stand at 14.6%. The company reported a forex gain of Rs987m on account of adoption of the revised AS 11 accounting norms. As a result, the decline in PAT was restricted at 26.2% YoY (Rs611m). However, excluding the forex gain, BFL reported a loss of Rs377m.

■ Consolidated performance: On a consolidated basis, BFL reported a decline of 46.8% YoY in net sales at Rs6.1bn, while reported PAT was down 68% at Rs203m. EBITDA for the quarter stood at Rs176m, a decline of 90.5% YoY. 􀂄 Increasing focus on the non–auto business: The facilities at the Baramati plant and the open die forge facility in Pune have commenced operations. These plants have an annual forging capacity of 125,000 tpa and are expected to generate a revenue of Rs10bn-11bn at their full capacity utilization. However, in the medium term, the utilization of the new capacity might be impacted due to a slowdown in the user industries (construction, mining and marine).

■ Outlook & Valuation: With the auto industry in US and India facing tough times, we expect the non–auto business to be the key growth driver for BFL in the long term. However, we believe that the non-auto business will start contributing significantly to the revenues post FY10E. The stock is currently trading at 19.0x and 12.4x our FY10E and FY11E earnings. Given the uncertain economic environment in the US as well as European markets (which account for ~65% of BFL’s consolidated sales) for atleast the next two quarters, we rate the stock as ‘Reduce’.

To see full report: BHARAT FORGE

>CHAMBAL FERTILISERS & CHEMICALS (PRABHUDAS LILLADHER)

Results as per expectation

■ Standalone Q4FY09 results: Chambal Fertilisers and Chemicals’ (Chambal’s)
Q4FY09 net sales grew by 43.4% YoY to Rs8,708m (our expectation was Rs7,773m), on the back of higher trading sales and other income. Chambal’s adjusted PAT grew by 107.9% to Rs593m (Our expectation was Rs618m).

■ Q4FY09 highlights: Net sales of urea business grew by mere 8.8% to Rs4,853m since Chambal had shut down Gadepan-1 plant for 36 days during the quarter due to hook-up activities for de-bottlenecking of plant. Trading sales have grown by 831% to Rs1,535m (Our expectation was Rs1,175m). Company has added three ships in H1FY09, which resulted in a YoY growth of 61.7% in the shipping business revenue to Rs1,211m in Q4FY09. EBIT margins of all the segments were as per our expectation, except trading business. During the quarter, the company has changed the accounting treatment for interest to trading creditors by charging into operating cost instead of finance cost as earlier. Hence, Chambal has charged full year interest in Q4FY09 that resulted in lower finance cost and loss in trading business during the quarter.

■ Balance sheet position: Chambal holds a fertiliser bond of Rs3,671.5m as on March 31, 2009. The company has booked MTM losses of Rs281m in Q4FY09. Chambal has consolidated gross debt of about Rs20,000m and cash of Rs7,000m as on the balance sheet date.

■ Valuation: Chambal’s 90% of the urea business is on cost plus 12% post tax ROE (i.e. fixed earning) basis and shipping business is on time contract till FY10. Hence, we believe that a downward pressure on earnings would be less. We expect PAT to grow at two year’s CAGR (FY09-11E) of 9.5%. While on the basis of historical rolling band chart of last ten years, Chambal has traded in the range of 4x-16x. We maintain our ‘Accumulate’ rating on the stock, on the basis of 9x at FY10E earnings.

To see full report: CHAMBAL FERTILISERS & CHEMICALS

>Rolta India (PRABHUDAS LILLADHER)

Disappointing performance

■ Overall performance - Disappointing: Rolta India (Rolta) reported weak numbers for Q3FY09. The revenues declined by 8.3% sequentially to Rs3.3bn and EBITDA declined sequentially by 15.5% to Rs1.0bn (without amortization of MTM losses, EBITDA would have declined by 11.4%). Reported net profit stands at Rs1,332m as against Rs490m in Q2FY09, primarily due to a write-back of MTM losses of Rs840m on outstanding FCCBs.

■ Weak performance across all segments: Performance across all the segments was weak. GIS grew by a meagre 0.9%, whereas Engineering and EICT segments declined sequentially by 17.7% and 11.2%, respectively. Even EBIT margin declined in all the three segments (GIS (-) 230bps, Engineering (-) 440bps and EICT (-) 360bps). The weak performance was also visible in the company’s orderbook which declined sequentially by 2.5% to Rs15.5bn. A downfall in the orderbook was led by the Engineering segment which saw a sequential decline of 10.1% and the EICT segment which declined by 5.4%. However, orderbook in GIS still managed to grow by 4.4% sequentially.

■ Reversal of MTM losses on outstanding FCCBs as per revised AS11: Rolta has opted to write-back MTM forex losses (of Rs840m) provided earlier in the first nine months of the current financial year. From the current quarter, the company has started amortizing the whole MTM liability spread over the next 12 quarters. Per quarter amortization amount would be close to Rs120m.

■ Outlook and Rating: We expect Rolta’s revenue to grow at a CAGR of just 5.3%, whereas its earnings are expected to show a 5.5% de-growth over FY09-11. Our numbers factor in interest (net of tax) on its FCCB bonds. We believe that the recent acquisitions done by the company (outside India), while good in the long run, has diluted its attractiveness as domestic (India) growth story. We downgrade the stock to ‘Reduce’ at the target price of Rs82.

To see full report: ROLTA INDIA

>Chambal Fertilisers and Chemicals (PRABHUDAS LILLADHER)

Expansion plan – On track

* De-bottlenecking of Gadepan-I urea plant completed: De-bottlenecking of the Gadepan-I urea plant has been completed and the commercial production has commenced from March 31, 2009. Post the de-bottlenecking, plant capacity has increased from 2850tpd (tonne per day) to 3100tpd. The de-bottlenecking of the Gadepan-II urea plant is on and expected to be completed during May 2009. It will increase the capacity from 2850tpd to 3000tpd. Total capex for the debottlenecking would be around Rs4,500m (Rs3,000m for Gadepan-I and Rs1,500m for Gadepan-II plant). Chambal Fertilisers and Chemicals (Chambal) is expected to get the KG basin gas from the current month. We believe that Chambal will add EBIT of Rs636m in FY10E on the back of de-bottlenecking of both the urea plants and use of the KG basin gas.

* Shipping business: Chambal has five Aframax ships in their portfolio (added three new ships during the year) at present. The company has a long-term time contract till the end of FY10 for all the ships, with an average freight of US$22,000 per day per ship. They will further add one more ship in Q4FY10. Chambal has taken a debt at an attractive rate of Libor plus 40bps to 90bps for the shipping business. All the ships are fully insured.

* Debt and bond position: At present, Chambal has total debt of Rs21,500m, which consists of a long-term debt of Rs18,000m and working-capital debt of Rs3,500m. The company has a fertiliser bond of Rs3,800m in their books. They could book a provision for MTM losses on such bonds. We have assumed 5%
discount i.e. Rs190m in our FY09E estimate.

* Valuation: Chambal’s 90% of the urea business is on cost plus 12% post tax ROE (i.e. fixed earning) basis and shipping business is on time contract till FY10E. Hence, we believe that a downward pressure on earnings would be less. We maintain an “Accumulate” rating on the stock.

To see full report: CHAMBAL FERTILISERS & CHEMICALS

>CROMPTON GREAVES (PRABHUDAS LILLADHER)

Investment in a promoter group company – a negative surprise

· Acquisition of stake in APIL: Crompton Greaves (CRG) board has given approval to buy a stake of 41% for Rs2.3bn at book value in Avantha Power and Infrastructure (APIL), a promoter group company. These funds are to be utilized for the Korba 1x600mw power plant for which a debt of Rs21bn has already been underwritten, 80% of land acquisition has been completed, water allocation has been done and coal linkage are in place. Another Rs1.6bn worth of equity will have to be raised either by private equity or through group companies, which will result in dilution of CRGs stake (but will not go lower than 26%). APIL is a power generation company having 165MW capacity (by June 2009), expandable to 1365mw (2 plants of 1x600mw each) in various stages. The other stake holders of APIL are BILT, BILT paper and Solaris (all are Avantha group companies).

· Buy-back offer: CRG board has approved a buy-back of shares for Rs2.2bn upto a price of Rs170 per share. Keeping in mind that the APIL stake will be paid in cash and the current cash balance is just about Rs3.0bn, CRG will have to utilize internal cash generation over the next 9-12 months if it wants to complete the buy-back. We believe that only a part of this buy-back will be completed and in the current situation, this offer is largely there to just act as a check on the declining stock price.

· Valuation: At the CMP of Rs106, the stock is trading at 6.9x FY09E and 5.9x FY10E earnings of Rs13.7 and Rs15.3, respectively. The diversification into power generation could yield lucrative cash flows post 2013. However, in the near term this diversification would have a negative impact as the future cash flow commitments to this segment are not known. Also, to maintain its stake in the venture, CRG will have to commit larger sums of money, going ahead. Our Reduce rating stays.

To see full report: CROMPTON GREAVES

>Bharti Airtel (PRABHUDAS LILLADHER)

Focus is to sustain realizations

■ “Just a matter of time when new rollouts withdraw their promo/launch schemes” - Bharti not reacting with any tariff reductions : Bharti highlighted the pullout of freebies by Rcom in the first 90 days of their launch & sighted reasons that such freebies is not a sustainable model to lure subscribers over the long term. Engagement of such freebies over the longer term would impact the profitability of operator employing such schemes more than the incumbents.

■ Interconnection usage charge (IUC) cut may impact profitability marginally: The recent IUC cut from Rs 0.3 to Rs 0.2 effective 1st April 2009, would have a marginal impact in FY10 (~Rs 500m) which can be easily absorbed. However, the effect of such pass through’s by new rollouts in their aggressive schemes is yet to be seen.

■ Network operating costs (NOC) to stabilize with traction built up in Indus & Bharti Infratel: NOC has risen from 11.6 % of revenues in Q1FY08 to 16.3% in Q3FY09. This rise is attributed to higher energy costs and incremental rural rollouts. Management believes the NOC would start stabilizing or marginally come down in the next couple of quarters with increase in sharing of Indus & Bharti Infratel.

■ 3G auctions would be on top radar of new Govt., expects rollout in 3-6 months post spectrum allotment: Bharti expects the 3G auction by July 2009 with the new Govt. taking over. We believe that sooner the 3G spectrum auction concludes, better it would be for incumbents like Bharti (whose VAS revenues are close to mere 10% of ARPU).

■ Valuations: Bharti is expected to report revenue & EBIDTA CAGR of ~15% over FY09-FY11 period. Superior subscriber profile, healthy balance sheet, higher visibility of cash flows and absence of Mobile Number Portability (MNP) regime places Bharti as our top pick in the sector. Moreover, with ~91m wirelesssubscribers, Bharti would continue to demonstrate leadership in plans innovation and leverage the scale benefits.

To see full report: BHARTI AIRTEL

>Oil & Gas Industry (PRABHUDAS LILLADHER)

Oil – unlikely to stay much above US$55

■ Crude oil prices trebled from about US$50/bbl in early 2007 to over US$150/bbl during mid 2008, further nose-diving to US$30/bbl.

■ Hedge funds interest pushed up oil prices, though now expecting a decline in their activity

■ Extraneous factors like geopolitical tensions across oil-producing countries, aid by governments to propel their economies etc. will swing the crude prices sharply

■ Expect oil prices to broadly hover between US$45-55/bbl over next year

■ In contrast to the crude prices, natural gas prices moved up, albeit slowly

■ A sudden drop in the economic activity has put pressure on the natural gas prices

■ Natural gas prices to remain quite subdued in the near term due to an expected surge in LNG
supplies

■ Long-term crude futures remain in a contango, with sharp recovery in crude prices towards end of 2010

■ Long-term natural gas futures depict a sharper price recovery and much earlier by end of 2009

To see full report: OIL & GAS INDUSTRY

>Earnings Guide MARCH 2009 (PRABHUDAS LILLADHAER)

TOP PICKS

Large Caps

• BHEL
• Hero Honda
• Axis Bank
• HDFC Bank
• Bajaj Auto
• Bharti Airtel
• Infosys Technologies
• BPCL
• Sun Pharma
• IDFC
• Maruti Suzuki
  

Mid Caps

• Shree Renuka Sugars
• Zee News
• Bombay Rayon Fashions
• Bank of Baroda
• Chambal Fertilisers
• Tulip Telecom
• Lupin
• KEC International
• Bharati Shipyard

To see full report: EARNINGS GUIDE