CLSA conference: Strong belief in India’s consumption, infra stories   

November 23, 2010

Investors from around the world are particularly keen about the consumption and infrastructure sectors in India, CLSA found out at a conference in Gurgaon last week. While they have a positive outlook, they are conscious about some key challenges that remain—like managing human resources and delays in kicking off projects

CLSA held a conference for its institutional investors in Gurgaon from 15^th to 17^th November. The conference had as many as 200 investors from 20 countries interacting with senior managements of 62 leading Indian companies. According to CLSA, following are some stock ideas that elicited good interest at the conference.

·         ICICI Bank - on its improved asset quality, stronger business model, and growth revival.

·         IDFC - seen as a ‘safer’ infrastructure play, given its cross-sector exposure and private developer focus.

·         Jaiprakash Associates - for the value in its assets and as a multiple business poised for scaling up.

·         Voltas - for playing both the consumption and investment themes.

·         United Breweries - for huge growth potential with a new management in place.

·         Maruti - for its J-curve-like growth, strong strategy and near-term pressures in the stock price.

Here are some highlights from CLSA’s report on companies that made presentations at the conference.

Ashok Leyland

·         Growth of the commercial vehicles industry is expected to stay strong. Freight rates are moving up, except in the North and the demand from large truck operators is strong.

·         Buses should do well as most state governments have plans to expand their fleet of public transport buses.

·         The reason Ashok Leyland is set to grow faster than the industry average, is its higher exposure to multi-axle vehicles and the southern region—both of which have seen a late recovery.

·         It has set a target of 95,000 units for FY11. The production ramp-up at Uttarakhand will boost margins and reduce taxes.

·         It plans to expand its dealer network in the North.

·         Gave guidance for EBITDA margins of 10.5%+ in FY11; FY12 margins are expected to be 100-150 bps higher than that in FY11 on account of tax benefits from the Pantnagar plant.

Apar Industries

The company makes transformer oil (motor oil for turbines), high temperature conductors and cables.

·         One of two cans of turbine oil produced in India is made by Apar and it has done so since 1969.

·         Seeing good growth in conductors, but not so much in cables.

CESC

·         Licensed to supply electricity (generation and distribution) to Kolkata and parts of Howrah till 2019. It operates four thermal plants with total generation capacity of 1,225MW and plans to raise thermal capacity to 8,285MW by 2018. Two 600MW projects are expected to come online in 2013 and 2014 and three projects (total 3,240MW) targeted for 2015-2016.

·         The tariff at Rs4.73 per unit is among the lowest in the country, compared to Rs6 per unit in Delhi and Rs7-8 per unit in Mumbai.

·         Lower transmission and distribution losses, down from 22.8% to 13.3% over the last 10 years.

·         The company is in late-stage discussions with an Indonesian company for access to 10 million tonnes (mt) of coal over a seven-year period, with a 40% stake, and a possible adjacent 20mt greenfield site.

·         CESC Properties, its subsidiary, is developing a premium shopping mall on three acres of land in central Kolkata; it is expected to open in 2012-2013.

DLF

·         With commercial property/office lease demand picking up, it could beat the upper end of its FY11 leasing guidance of 4 million square feet.

·         Residential sales volume in the second half of FY11 is likely to be twice that in the first half of the year.

·         There could be shortage of unskilled labour in urban areas as rural economies strengthen.

Dr Reddy’s Laboratories

·         It is sticking to its long-term guidance of doubling revenues to $3 billion by FY13 and an ROCE at 25% – driven primarily by the US business and doubling of revenues from emerging markets.

·         A strategic alliance with GSK should help.

·         It has cash flow hedge options of $621 million in the range of Rs47-49/USD.

·         Expects settlements on some products such as omeprazole Mg OTC (for treatment of ulcers), Tacrolimus (used in transplants) and Fondaparinux (to clear clots).

HCL Technologies

·         The company has been on a massive hiring binge.

·         Given that 60% of its revenue comes from the US, it is of the view that the US will recover.

·         Utilisation has fallen as the new hires don’t generate any revenue for at least six months.

·         Margins are falling and will continue to fall in the next quarter.

HDFC

·         The near-to-medium-term demand looks robust.

·         Confident of 20-25% loan growth with stable spreads.

·         HDFC Standard Life plans to maintain margins around 20%.

·         Has plan to unlock value – listing HDFC Standard Life by June 2011 and transfer of strategic stakes in non-subsidiaries and associate companies to a separate company.

ICICI Bank

·         Expects to see 18-20% growth in credit and a healthy share of CASA deposits.

·         With fresh delinquencies falling to zero in 2QFY11 and improvement in coverage ratio, loan-loss charges are likely to decline soon and should help to improve ROA beyond 1.5%.

IDFC

·         Plans to triple balance sheet size in 3-4 years, implying a CAGR of 30-40%.

·         Status of infrastructure financing company will also help it to lend to larger projects and improve its access to funds from banks, ECBs and retail sources.

Infosys

·         The company has indicated that attrition has come down significantly over the past couple of months; it is addressing wage pressures by giving higher variable pay linked to the company’s performance. Infosys remains optimistic of managing the current margins trend despite supply-side headwinds.

Jaiprakash Associates

·         It expects cement capacity to increase from 23 million tonnes (mt) to 37 mt and power generation to go up from 700MW to 13,000MW. The Yamuna Expressway is scheduled to open to traffic by April 2011. Real estate sales to sustain at 16 million square feet.

·         The company would need equity of $500 million in its power and real estate businesses. The expressway business is fully funded and should start generating free cash from 2011. The cement business will need one more round of equity funding.

·         It said that all its land acquisition issues have been resolved and it is now looking for coal assets.

Jain Irrigation

·         It expects higher micro irrigation penetration in India going forward.

·         The company’s financials are improving. Cash conversion has shortened to 90 days from six months and net gearing has improved from 2.6x to 1.6x.

JSW Steel

·         It is focused on timely commissioning of the 3.2 million tonnes per annum (mtpa) expansion at the Vijaynagar plant by end-FY11, which will take the total capacity of the Vijaynagar plant to 10mtpa. JSW’s product mix will be 77% flats and 23% longs post-expansion.

·         It aims to begin production from its iron ore mines in Chile and the coking coal mines in the US by end-FY11.

·         It plans to set up a 4.5mtpa greenfield steel plant through its JSW Bengal subsidiary by the end of FY14.

·         Consolidated debt/equity has dropped to 0.8x after its recent equity issuance to JFE Steel; it intends to keep this below 1:1 going forward.

·         US subsidiaries are still reeling under weak demand conditions, operating at low 15-20% utilisation levels.

·         The company expects its India conversion costs to drop going forward, once its captive coke oven and captive power plant projects are commissioned by end FY11.

·         Flat steel prices have weakened recently.

Lupin

·         The company has registered 18 consecutive quarters of growth in sales and profits.

·         Oral contraceptives (in the US they have filed 22 ANDAs and expect to gain approval), and biosimilars will be key earnings growth drivers over the coming three years.

·         Revenues from emerging markets are likely to equal the revenue collection from the US and the EU now.

·         Has made a total of 132 filings in the US, of which 45 have gained approval; has made  82 filings in EU with 38 approved.

L&T

·         The initial public offer (IPO) for L&T Finance Holdings (L&T Finance and L&T Infrastructure Finance) is expected in a couple of months.

·         70% of private sector power projects in India are going for Chinese equipment.

·         A positive change is that private sector companies will be allowed to bid for Indian Navy vessel contracts from January 2011.

Max India

·         Max Healthcare has some 1,100 beds currently and plans to raise this to ~2,000 over next 18-24 months.

Mundra Port

·         Given its competitive strengths and long-term agreements with IOC, HPCL, Tata Power and Adani Power, the management expects traffic at the port to increase faster, from 40 million tonnes (mt) in FY10 to 100mt by FY13.

·         A highly mechanised coal jetty will become operational shortly. Mundra caters to 10% of India’s coal imports and this is forecast to increase to 20% over time.

·         It has planned two additional bulk terminals, capable of handling 15 million tonnes per annum (mtpa) of bulk cargo by 2013, a container terminal  (two million TEUs) by 2014, and an LNG terminal.

NTPC

·         The company is confident of adding over 4GW capacity this year and over 5GW in the next year.

·         The board has approved investment for the Pakri Barwadih mine last week. NTPC will invest Rs30 billion in mine infrastructure and expects substantially higher returns than power plants in this business.

ONGC

·         Production at Imperial, its UK-based subsidiary, has risen from 6 kbpd (thousand barrels per day) in January 2009 to 16.7kbpd now. The BC-10 field in Brazil is currently producing 80kbpd.

Reliance Infrastructure

·         From $1.5 billion of transmission projects currently, Reliance Infra anticipates opportunities to participate in $12.3 billion worth of projects over the next 2-3 years.

·         In road construction, it believes that it will have a revenue-generating road portfolio of $5.6 billion by FY12.

·         The company plans to participate in a further metro rail projects, worth about Rs4 trillion, in other major cities over the next two decades.

·         EPC margins may be narrower at 8-10%.

Sanghvi Movers

·         The company has successfully reduced its dependence on windmill customers (from 48% of revenues two years ago to 28% now). Power plant customers contribute 30% of revenue and this should increase to 50% in the coming years.

SAIL

·         The ongoing capacity expansion-cum-modernisation programme will drive 60% volume increase and a 20-30% drop in cost of production by FY14. Staff costs per tonne are expected to drop by 40% when the expansion is completed.

·         The company expects to raise 5% fresh equity and the government proposes to sell 5% of its stake by the end of FY11 and a similar tranche in FY12.

Sobha Developers

·         It is set to beat its 3 million square feet guidance (+50% y-o-y) for sales. IT-related customers are only 30% of its total customers.

·         Sales are predominantly in Bangalore where pricing outlook is strong.

·         The construction pipeline has been boosted with a record order of 6 million square feet by Infosys.

·         The company is on track to bring its gearing down to 0.5x thanks to operating cash flow and land sales, which are expected to be wrapped up with another Rs1 billion1.25 billion sales in the second half of the year.

·         Interestingly, Sobha has said that no new buildings in large cities in the south are getting water connections anymore. Sourcing water has become very expensive.

Shree Renuka Sugars

·         The company has completed the merger of its Brazilian acquisitions. It expects to grow its cane production capacity in Brazil to 15.5 million tonnes per annum in two years. Two-thirds of its cane requirements would come from leased farms in Brazil. The Brazilian operations have $900 million debt, which it expects to pay off in 3-4 years.

Unitech

·         Prices may have hit new highs in central Gurgaon, the company’s strongest market in the National Capital Region (accounting for 70% of sales and 80% of value). But areas around Gurgaon are still 20% below their 2006 peak.

·         The company will spin off its construction and infrastructure businesses as a separate listed equity (Unitech Infra) in which Unitech will own 35% after listing by the fourth quarter.

United Breweries

·         UBL believes that the current punitive beer duty (100%) and the fact that it is based on price and not alcohol content will eventually be restructured.

(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife).— Munira Dongre