Hindustan Zinc : BUY

Silver-Rich Quarter; Volume Growth In Zinc

Hindustan Zinc’s (HZL) 4QFY11 EBITDA at Rs 1,967 cr (+27% YoY) was significantly above consensus (Rs 1,610 cr) & our estimates (Rs 1,750 cr) due to better-than-expected contribution from silver.

Silver revenues doubled YoY to Rs 200 cr. In addition, lead concentrate revenue increased 4x YoY and 2.5x QoQ to Rs 260 cr due to higher levels of silver in the concentrate. Net profit was at Rs 1,770 cr (+43% YoY).

Key highlights

• Increase in reserve base: HZL added 22 mnt to its reserve base (primarily from the Rajpura Dariba belt which includes SK mine), thereby increasing its total reserves & resources to 313 mnt.  This contains 34.7 mnt of zinc/lead metal and 885 mn ounces of silver.
• The co. expects to commission the 100kt lead smelter in 1QFY12, post which the combined lead/zinc capacity will be 1,064kt.

Outlook

We expect zinc/lead volume growth of 19% in FY12. Ramp-up of silver-rich zinc/lead SK mine (currently operating at 85%) would enable HZL to achieve its target of exit capacity (of 500 tonnes) by end-FY12.  We estimate silver volumes of 350 tonnes and 450 tonnes in FY12E and FY13E respectively.

Key result highlights

• Silver: Silver revenues doubled YoY to Rs 220 cr due to higher silver prices. Average silver price during the quarter was USD 32/oz vs USD in 17/oz in 4QFY10. In addition, lead concentrate sales revenue increased 4x YoY and 2.5x QoQ to Rs 260 cr  due to higher levels of silver in the concentrate. (50% of concentrate sales during the quarter was from the silver-rich SK mine)
• Volume: 4QFY11 refined zinc output was up  29% YoY to 194 kt, post the commissioning of the 210 kt Rajpura Dariba smelter in March 2010 (which contributed 46kt during the quarter). Concentrate sales during the quarter was 48kt as compared to 25kt in 3QFY11 and 49kt in 4QFY10.
• Other income: Other income increased to Rs 3 bn during the quarter vs. Rs 200 cr in 3QFY11 and Rs 130 cr in 4QFY10. This was primarily due to better yields on investments. Avg. return on investment was at 8.2% during the quarter vs. 5.2% in 3QFY11 and 4.4% in 4QFY10.

Valuations

We raise our silver price estimates for FY12E and FY13E to USD30/oz each from USD 25 and USD 27 respectively, driven by the recent surge in silver prices (currently at USD 46/oz). We also reduce our tax rate for FY12E and FY13E to 18% and 20% respectively from the earlier 22%, as per mgmt guidance. Consequently, we increase our EPS estimates for FY12E and FY13E to Rs 16.8 (vs. Rs 15.5) & Rs 18.7 (vs. Rs 17.8) respectively.  We raise our TP to Rs 168 (vs. 162 earlier) – zinc business at Rs 135 (5.5x FY12 EV/EBITDA) and silver business at Rs 33 (9x FY12 EV/EBITDA). Maintain BUY on the stock.

Dish TV : BUY

DISH TV Benefitting From Digitization

The I&B Ministry has announced its intent to implement the Digital Addressable Cable System by December 2014. In order to understand its implications, we met with the mgmt of Hathway Cables (unrated).

The management is confident of a successful rollout this time around and believes that their co shall be a key beneficiary (82% of its 8.3 mn subscribers come under Phase 1 and Phase 2 of the mandatory CAS implementation). In our opinion, Dish TV too will gain significantly from this thrust on digitization, leading us to raise our TP on Dish TV.

Hathway mgmt meet: Key highlights

• Focus on digitization: Hathway is currently focusing on digitizing its existing ~8.3 mn subscriber base, rather than expanding its subscriber base through inorganic means. They expect  to  digitize  ~1  mn  subs  in  FY12E  with  digitizing  becoming mandatory.
• Funding in place to digitalize 6 mn subscribers: Required to pay only 30% of STB capex upfront with the rest due at the end of the third year. Hathway will be required to pay 7-8% interest on outstanding liabilities. The STB subsidy is currently at Rs 600 /subscriber.
• Consolidation likely post CAS implementation:  Cable industry likely to witness consolidation post mandatory digitization as many small MSO’s and LCO’s business would become unviable.
• Cable players are the likely beneficiaries of mandatory digitization: Hathway’s mgmt believes that the mandatory digitization is likely to benefit cable players more than DTH as they can provide similar services at a comparatively lower rate than DTH. However, carriage & placement fees could get negatively impacted for cable cos.

Outlook and Recommendation

Rapid build-up in digital subs base post mandatory digitization augurs well for Dish TV as it leads to a faster expansion of its subscriber base. While we maintain our earnings estimate for Dish TV, we revise our TP upwards to Rs 81 (previous Rs 69) based on a 12x EV/EBITDA multiple on FY13E (earlier disc. back to FY12E @ 16% WACC).  We maintain our  BUY rating  on  Dish  TV  with  an upside of 16% from CMP of Rs 70.

I&B Ministry’s recommendation on digitization

The Information and Broadcasting ministry (I&B) has come out with its views on implementation of digital addressable cable system in India, suggesting Dec 2014 as the sunset date for the analogue cable regime.

Maruti Suzuki India Ltd : BUY

Higher Realizations AID Margin Expansion

Maruti Suzuki India Ltd’s (MSIL) Q4 operating performance was inline with expectations with EBITDA margin at 10% (vs. 9.5% in Q3). Profitability has seen an up-tick sequentially on higher realizations (up 2.5% QoQ) and lower employee costs (lower by 35% QoQ due to one-time in Q3). MSIL reported revenues of Rs 9,906 cr (up 20% QoQ & 6% YoY), EBITDA (incl. operating other income) of ~Rs 1,000 cr (up 12% QoQ & dn 9% YoY), and adj. PAT of Rs 660 cr (up 1% QoQ & 17% YoY).

Other highlights

ü  MSIL’s Q4 overall realizations at Rs 2.8 lakhs (up 2.5% QoQ) have been aided by improvement of both domestic realizations (up 2.2% QoQ) and export realizations (up 4.4% QoQ), owing to a better sales mix.

ü  Maruti has taken ~1% price increase (upto Rs 9,000 across models) in April-11. Additionally, the co. also indicated that levels of discounts are lower currently than FY11 avg. of Rs 10,500/ unit.

ü  MSIL has re-started hedging (after Q1 stand of open Yen exposure) on the back of an improving Yen/ Dollar rate. The co. has hedged ~40% of its FY12E exposure. While the avg. rates are lower than FY11 levels of 87/dollar, the recent weakness in Yen is likely to benefit MSIL in the coming quarters.

ü  During the qtr, MSIL has changed its policy of amortization of tools (earlier expensed) resulting in higher depreciation charges (by Rs 50 cr) in Q4. On the other hand, MSIL has guided for a 26- 27% tax rate going forward (vs. our est of 30%) due to higher R&D set-off.

Profitability likely to improve. Maintain BUY rating

As per the mgmt guidance, we raise our deprecation est. by 12% but reduce our effective tax rate to 27% for FY12E (from 30% earlier), keeping our estimates intact. Our EBITDA margin for FY12E has been reduced marginally (~10 bps) on higher raw material costs. We believe that profitability for MSIL is near trough and will improve as the co. increases realizations. We maintain our BUY rating on the stock, with a revised TP of Rs 1,594 (8.5x FY12 EV/EBITDA).

Reliance Industries : Maintain BUY

E&P Blip Obscures Strong Cyclical Biz

RIL reported Q3FY11 EBITDA of Rs 9,545 cr and PAT of Rs 5,136 cr bang in-line with our estimates. The petchem biz reported best ever EBIT of Rs 2,429 cr aided by decade high margins in polyester chain, which we expect to sustain going forward. The R&M segment also reported strong results backed by a cyclical recovery in margins. However, there was a slight blip in the E&P biz, wherein lack of clarity over future outlook of business may delay monetization of E&P assets, in our view.

ü  Refining EBIT growth at 77% (YoY): RIL exhibited strong cyclical recovery in refining biz, reporting a GRM of USD 9.0/bbl (Sing. margins at USD 5.0/bbl) on the back of strong recovery in gasoline spread along with widening light-heavy differential. Mgmt has indicated that the improvement in product spreads, along with stricter environmental norms in Europe/Turkey, would also support complex refining margins.

ü  Petchem recorded decade high margins: Polyester margins remained strong on the back of: (a) spiraling domestic demand (15% growth in 9M-YoY); (b) lack of incremental global capacity addition; and (c) tightness in cotton market. Most of the polymer capacity additions are behind us, which would support polymer margins going forward.

ü  KG-D6 – lack of clarity an overhang: The mgmt has indicated that RIL is continuing discussions with govt. and DGH to understand the policy framework and its impact on RIL. In view of the sensitivities, mgmt has not provided any clarity on KG-D6 production, which could remain an overhang on valuations. Moreover, the company’s development/ exploratory plans in other blocks may get delayed, which would delay monetization of E&P assets further.

Maintain BUY with Target Price of Rs 1,145/ sh

Due to expected delay in exploratory plans in NEC-25, MN-D4 and lack of clarity on KG-D6, we have reduced RIL’s E&P business valuation by 10% leading to our fair value coming to Rs 1,145/share. Our TP still offers 18% upside to CMP. We retain our Buy rating on the stock and believe any weakness in the stock is an opportunity to BUY.

Analyst meet highlights

Refining: GRMs exhibit cyclical uptrend

RIL’s GRM improved to USD 9.0/ bbl (Q2FY11- USD 7.9/ bbl) due to a strong recovery in gasoline spreads (up 25% QoQ) along with widening light-heavy crude differential (highest in last 2 years). Gasoil spreads remained firm as cold weather in Europe supported demand. Naphtha spreads turned positive, after a weak Q2FY11, primarily on the back of healthy demand from Saudi Arabia. RIL’s mgmt is expecting product cracks to widen going forward on the back of (a) strong recovery in global demand; (b) reduction in product inventories; and (c) widening light-heavy differential amidst the increasing demand for lighter product along with weakening FO cracks. Utilization rate was marginally lower at 104% compared to 109% in Q2FY11, primarily due to planned shutdown in the CDU unit, albeit remained significantly high when compared to other global peers.

Petrochem: margins are at decade high, to sustain going forward

RIL’s mgmt has indicated that despite rising feedstock costs (oil/naphtha), the company has managed to achieve significant growth in petchem profitability as spiraling demand along with high operating rates supported petchem margins. Polyester margins remained strong on the back of: (a) spiraling domestic demand (15% growth in 9M- YoY); (b) lack of incremental global capacity addition; and (c) tightness in cotton market. The Chemical profitability further improved as shortage of Benzene, Butadiene and SBR/PBR increased pricing power. Lastly, since most of ethylene cracking facilities are behind us, recovery in polymer spreads over the next two years is expected, which would support petrochemical margins for RIL.

E&P – lack of clarity mars outlook

The mgmt has indicated that they have initiated a discussion with GoI and DGH over interpretation of E&P policy framework. The mgmt has not provided any further details citing that the discussion is sensitive in- nature. We believe that the on-going discussion would not only impede production outlook of existing KG-D6 basin, but also likely to delay monetization of RIL’s other E&P blocks.

Earnings revision

We have marginally revised our FY11/12/13E estimates downward by 1.0-2.0%. The revised estimates have largely remained flat vis-à-vis our previous estimates as the upward revision in R&M/petchem business have been partly offset by weakness in upstream business (lower KG-D6 production and higher risk factor to incorporate the lack of visibility over future outlook of the business).

Valuation and assumptions

Building in delay in E&P asset monetization and strong cyclical recovery in R&M/petchem

E&P business: RIL’s upstream business has recently faced headwinds amidst the slower than- expected ramp-up of its KG-D6 gas production and a minor setback in its exploratory portfolio (D9 dry well). The company’s mgmt has not furnished any clarity over the future outlook of its upstream business. We believe that the current uncertainty would not only impede production outlook of existing KG-D6 basin, but also likely to delay monetization of RIL’s other E&P assets. We have incorporated the uncertainty over E&P business by: (a) moderating our production estimates for KG-D6 block; and (b) applying a risk discount of 20% on valuation of other reserves (NEC-25, CBM, contingent and future reserve accretions). We have reduced our fair value estimates for RIL’s E&P business to Rs 394/share from our earlier estimates of Rs 440/share.

Refining and petrochemicals biz: We have marginally raised our refining margin assumptions from USD 8.2/9.3/10 to USD 8.4/10/10.5 per bbl for FY11/12/13E respectively, owing to a strong recovery in global demand. Additionally, we are building in a substantial cyclical recovery in petrochemical margins, even higher than our previous estimates, on the back of an indication from RIL mgmt that the current healthy petchem margins are likely to sustain in future. We value the extant R&M and petchem biz at Rs 631/share.

26th April, 2011

The markets opened on a soft note but soon moved up touching the highest point in the early session post which they continued to trade in a narrow range and ended the day marginally lower. Among the Sectoral indices Consumer Durables & IT gained while Realty and Oil & Gas were among the losers. In the Sensex kitty Sterlite (4.40%), SBI (2.06%) & Maruti Suzuki (1.53%) were amongst the gainers while RIL (2.97%), DLF (2.25%) and RCom (1.41%) were among the losers. The Sensex lost 18 points or 0.09% to close at 19,584 while Nifty lost 10 points or 0.17% to close at 5,875.

Total traded turnover stood at Rs 1,25,171 cr. In equities FIIs were net sellers of (Rs 378 cr) while DIIs were net buyers (Rs 237 cr). On the derivatives side, FIIs were net buyers in Index Futures (Rs 33 cr), while they were net sellers in Index Options (Rs 262 cr) and Stock Futures (Rs 308 cr) Stock Options (Rs 16 cr).

The US markets ended mixed amidst light volumes and concerns over increasing inflation. The Dow Jones lost 26 points or 0.21% to close at 12,480 while NASDAQ gained 5 points or 0.20% to close at 2,826.

The Asian markets are trading lower. Nikkei is trading lower by 0.98% while Hang Seng is trading lower by 0.71%.

The markets closed marginally lower after trading in the tight range throughout. The declines outnumbered the advances. The markets may open on a soft tracking mixed global cues. Maintain a stock specific approach.

The trend deciding level for the day is 5880,If NIFTY trades above this level then we may witness a further rally up to 5900‐5930‐5965 levels. However, if NIFTY spot trades below 5880 levels then we may see some profit booking to initiate in market, it may correct up to 5850‐5830‐5802.