Phillip Capital Broker Research reports

because of government interventions, capacity restarts have also been slow, thereby supportinghigherprices.ThesehigherpricesareakeyrequisiteforChinesecompaniesto service their mountain of debt. Further, recent cost increases will deter capacity restarts...

Top takeaways from Q1FY17 : Gas sales volume fell 5% qoq to 5.14mmscmd (6% below our estimate of 5.50mmscmd) due to seasonal dip in domestic PNG volumes. Gross margin rose 3% qoq to Rs 7.0/scm (in line) due to decline in raw material gas price while clean EBITDA/scm increased 9% qoq to Rs 4.5 on 8% fall in opex/scm to Rs 2.5 9 Interest declined 11% qoq to Rs 534mn; ETR normalised at 30.1%; Net debt of Rs 22.8bn 8 PAT was up 30% yoy and 10% qoq at Rs 759mn, but 16% below our tax adjusted estimate due to lower than expected volumes. OCI was Rs 40mn loss in Q1FY17.

Outlook and valuation: They maintain positive view on GGL due to expected traction in existing markets like Morbi from 2HFY17 onwards. Longer term outlook is attractive with economic/industrial revival and development in new areas. We cut our FY17 EPS by 6% but raise our longer term estimates.Also lower WACC in DCF and hence revise their target price to Rs 700 (Rs 600 earlier). Maintain Buy 

Extremely high volatility in the stock over last two months: MBL Infra’s stock has been highly volatile over the last few months. The stock lost 49% of its value in the month of August 2016 – after having lost 48% over the preceding eleven months. However, over the last one week, the stock has gained 46%, on the back of five consecutive upper circuits – this was after the stock suffered three consecutive lower circuits. Amidst all this volatility, the stock is down 62% in the last twelve months. We believe deteriorating financials, corporate governance issues and high promoter pledging are responsible for this highly volatile stock price movement.

Outlook and valuation : Phillip Capital have been, and remain, concerned about the growth prospects of MBL, given its weak orderbook (1.8x book-to-sales), high working capital (debtor/inventory days of 113/116) and high leverage (1.2x). Its BOT portfolio too, with only 2/5 projects operational and two HAM projects recently won, will certainly add further strain to the balance sheet. Amidst the recent high volatility in the stock price, high promoter pledge leading to highly unstable state and deteriorating financials –  see multiple factors, other than fundamentals, impacting the stock price. Hence, we suspend our rating on the stock and put the stock “Under Review”. They will maintain passive coverage, keeping a keen eye on the developments and resume our coverage as soon as clarity emerges on the aforementioned issues.

Top takeaways from Q1FY17 : Alstom T&D’s (ATD) loss of Rs 176mn (vs Rs 102mn profit in 1Q16) was materially below our and consensus estimates of profit. Results were below estimates due to weak margins and high interest expenses.On reported basis losses were even higher at Rs 1.97bn on account of provisions for doubtful debts and tax disputes. These provisions were over and above IND?AS impact. In our view change in management (from Alstom to GE) led to these provisions. The pricing for power?transmission equipment, especially transformers and GIS, continues to remain under pressure due to intense competition from foreign manufacturers and further added by reverse auction process adopted by some utilities.Despite the weak market, order inflows grew 12% yoy to Rs 8bn led by government orders for transformers, reactors, GIS and AIS of 220?765kV range.

Outlook and valuation: ATD is still in the integration phase with GE, resulting in higher volatility in margins. Visibility on order inflows also remains low on weak T&D ordering in FY17?18 coupled with loss of opportunity in 765 KV GIS, HVDC and STATCOM orders. They cut their FY17/18 EPS estimate by 28/6% to factor in lower revenues and margins. Maintain Neutral rating with a revised target price of Rs 335 (earlier Rs 375). The stock currently trades at 43x FY18 EPS.

 

Implied’ profit warning: In a recent press release, TCS management has stated that at the end of August 2016, it sees holding back of discretionary spending from clients, particularly in US BFSI segment – leading to sequential loss of momentum in Q2FY17. We note that this ‘implied’ profit warning comes after a strong Q1FY17, where the company delivered results ahead of expectations, on almost all counts. Also, for long, the management had been denying any significant headwinds, particularly in the BFSI space.

Outlook and valuation: We downgrade our FY17/18 earnings estimates by 6%, on the back of expected poor performance in Q2. We now see TCS reporting 7.8% USD revenue growth in FY17 – significantly below NASSCOM guidance (10-12%). Also, we believe that the company will find it difficult to maintain margins in its ‘comfort zone’ as most of the levers like utilization (at peak level when last reported) and attrition (lowest in last eight quarters) have already been utilized.They continue to value the company at 17x FY18 P/E. Our price target of Rs 2400 (Rs 2550 earlier), maintain NEUTRAL.

L&T; Technology Services (LTTS) is a mid-cap IT Services company, focussed on the Engineering Services segment. It reported revenue of US$ 468mn in FY16, with EBITDA margins of 17%. The company provides outsourcing services to engineering companies across the world, for their research and design activities. Its clientele includes marquee names like BMW, Caterpillar, John Deere and Intel. Transportation (30%) and Industrial (25%) constitute its main verticals while US/EU form 60%/20% of its revenues. While the company operates in a segment with huge growth potential, we find the asking valuations to be highly expensive. Assuming 10%/12% USD revenue growth over FY17/18 and...

Top takeaways from Q1FY17 : BHEL’s 1QFY17 Rec PAT (Rs 778mn; 54% yoy) was 5% below our estimate but was materially above consensus estimates, which were estimating a loss. Higher than expected execution and lower than expected impact of IND?AS on debtor provisioning (Expected credit loss) led to strong results. BHEL is favourably placed in 12GW of projects, 7GW of which are expected in FY17.

Outlook and valuation: We revise up our FY17/18 estimates by 21%/14% to factor in higher revenues and lower impact of debtor provisioning. Our estimates now bake in benefits of pick up in execution and operating leverage in FY18. Our FY18 earnings estimates are 30% above consensus. Despite this we find it difficult to justify current valuations (20x FY18 PE) for single digit RoE’s and no material business diversification. We maintain Sell with a revised price target of Rs 120 (Rs 105 earlier). We would revisit our rating on increased visibility on sustainability of order inflows and pick up in ordering for value add equipment for new emission norms.

GST implementation may lead to a levy of a sin tax of 40% on cigarettes in addition to the prevailing excise duty structure. The sin tax will replace the state VAT which is currently at 26.5% on a blended basis as per our estimates. This hike is significant and it will have a significant impact on the cigarettes business volume and profit growth. While the impact is significant, we find ITC is preparing ground for GST implementation by taking calibrated price hikes and steadily increasing the share of sub-65mm cigarettes. Post the implementation of GST, the profit growth trajectory for ITC will improve significantly as GST will remove various distribution inefficiencies. We maintain our Buy recommendation on ITC with a target price of Rs 300 after baking in the negative impact of GST implementation starting from FY18.

Yet another profit warning – twice in the last three quarters : MindTree (MTCL) management recently announced that it expects Q2FY17 revenue to be lower than Q1FY17, due to CC impact, project cancellations, slower ramp-ups in a few large clients and continued weakness in Bluefin. Q2 Margins, which already had salary hike as headwind, will be further impacted due to lower revenues – Bluefin is expected to report EBITDA loss. H2 margins are expected to be better than H1, and the management still expects to beat industry growth in FY17. Bluefin is expected to remain weak due to persistent weakness in EU.

Valuation: Phillip Capital have cut FY17/18 earnings estimates by 9%/6%, on the profit warning. They continue to value MTCL at 14x FY18 EPS (at par with HCL, highest in our mid-cap universe). Their price target of Rs 560 (earlier Rs 600) offers limited upside from current levels. But with the strongest growth profile in the industry and the sharp correction post profit warning, we don’t expect much downside either. We maintain NEUTRAL.

 

Top takeaways from Q1FY17 : SSSG at -3.2% entered negative territory after seven quarters of positive growth and was below our estimate of 3%. Gross margins expanded 110bps yoy and 30bps qoq on soft input prices. Employee expenses grew significantly on addition of new stores and wage inflation. EBITDA margin fell 230bps yoy and 200bps qoq on negative operating leverage. Network expansion for Dominos and Dunkin’ Donuts was slower at 23/6 restaurants.

Phillip Capital have cut their estimates for FY17/18 by 21%/26% on weak overall recovery and worsening per store economics. The overall and per store metrics of the company have deteriorated in past few quarters with no signs of sustainable recovery in sight. Also, we expect the EBITDA margins of the company to deteriorate further in FY17/18 as SSSG will be significantly below cost inflation. Based on DCF valuation and implied PE of 50x FY18, we value the stock at Rs 1065 and downgrade the stock to Neutral.