|Ind-Ra: Gas Price Hike Negative for Key User Industries|
|The gas price hike by the Cabinet Committee on Economic Affairs (CCEA) could adversely affect the economics of the key user industries including power and fertiliser amid continued supply constraints, opines India Ratings & Research (Ind-Ra). Higher gas prices could increase input costs for both the sectors though gas supplies are unlikely to improve in the short-to-medium term. Gas-based power plants (GBPPs) have been suffering from low plant load factor (PLF) due to the non-availability of domestic fuel and unviable operations on imported LNG. Similarly, fertiliser plants have also seen gas supply constraints from domestic sources.Gas Price Hike Basis Modified: CCEAs approval on raising natural gas prices to USD5.61/mmbtu from USD4.2/mmbtu effective 1 November 2014 is lower than the price proposed on the basis of the formula outlined by the Rangarajan Committee. CCEA has modified the formula proposed by the Committee by removal of Japanese and Indian LNG import components in the formula which have led to the reduction in gas prices. On an adjusted gross calorific value basis, the gas prices have been increased 47% to USD6.17/mmbtu. However, they still remain lower than the USD8.4/mmbtu mark earlier sought by the government.
Electricity Generation Cost to Increase: The fuel cost for GBPPs is likely to increase 43% yoy as the gas price hike will lead to a rise in per unit fuel cost by around INR0.85/kwh. This could lower the competitiveness of GBPPs in relation to coal-based power plants. However, as GBPPs contributed a mere 4.4% to the overall generation in FY14 (FY13: 7.1%), its impact on the pan-India cost of generation is likely to be only around 4 paisa/kwh.
If the domestic prices, according to the revised formula, were to trend upwards due to the semi-annual revisions allowed, the operations of GBPPs could suffer as they would rank lower in the merit order dispatch schedule compared with coal-based power plants. In that case, the government could look at subsidising the cost of gas being paid by GBPPs. GBPPs with merchant capacities or selling power under fixed short-term arrangements are likely to be more impacted in terms of profitability as gas costs are not a pass through in tariff. However, given that the power sector ranks high in the gas priority allocation, increased domestic gas output over the long term could improve the PLF of stressed GBPPs.
Offshore Gas Could Cost Higher: Post the CCEAs decision, for discoveries in ultra-deep water areas, deep water areas and high pressure-high temperature areas, a premium would be paid on the gas price which will be determined according to the prescribed procedure. This could further increase input costs for power and fertiliser plants.
Results below expectations, main disappointments on sales and OPM front
Stock down ~2%
Dr Reddys Lab (CMP: `3080/`3964 TP:/ Upside:28.7)
For the quarter, the company, posted net sale of `3587.9cr V/s `3,900cr expected, a yoy growth of 7.0% yoy. The growth was subdued, as US its growth driver posted a growth of only 8%, on back of old products, with company launching only one product during the quarter. Other key geographies, namely Emerging and Indian markets posted a yoy 14%. On the operating front, the gross margin came in at 63.9% V/s 64.1%, expected, a yoy expansion of 115bps. In spite of the same, the operating margins came in at 22.7% V/s 25.2% expected, a dip of 209bps yoy, as the R&D expenditure during the quarter rose by 36.7% yoy. This along with, a higher taxation, which rose by 51.0% during the period along ( Tax as % of PBT was 17.4% V/s 10.3% in 2QFY2014) was with the 26.7% dip in the other income lead the, net profit to come in at `574cr V/s `715cr expected, a yoy dip of 16.8%. On back of valuations, we maintain our buy on the stock with a price target of `3964.
Dr Reddys Labs (CMP: `3080/ TP:`3964/ Upside :28.7)
Dr. Reddy’s announces the Launch of Sirolimus Tablets: Dr. Reddy’s Labs announced today that it has launched Sirolimus Tablets 1 mg and 2 mg, a therapeutic equivalent generic version of RAPAMUNE®(Sirolimus) tablets in the US market on October 27, 2014, following the approval by the United States Food & Drug Administration (USFDA).The RAPAMUNE ® tablets brand had U.S. sales of approximately US $206mn MAT for the most recent twelve months ending in August 2014 according to IMS Health. Dr. Reddy’s Sirolimus tablets in 1 mg and 2 mg are available in bottle counts of 100. Given a very low competition, for the product, the product can conservatively add around US $50mn to the sales and around US$15mn on the net profit front, on annualized basis. We maintain our buy with a revised price target of `3964.
Results marginally better than expected on net profit front
Stock down 2.2%
Lupin (CMP: `1388/ TP:/ Upside)
For the quarter, the company posted results marginally above on the net profit front, while net sales came in a tad lower than expected. The company posted sales of `3116.8cr V/s `3360.4cr expected, posting a growth of 18.4% yoy. The growth was driven by its key markets US and India, which grew by 23% and 20.0% respectively, while the Europe and Japan posted a yoy growth of 11% and 12% respectively. On the operating front, the gross margin came in at 65.7% V/s 68.0% in 2QFY2014; however a lower rise of around 4.2% yoy in other expenditure, lead the operating margins to come in at 24.9% V/s 23.7% in 2QFY2014. This along with a 56.4% dip in interest expenditure, 25.4% decline in tax expenditure and 46.6% rise in the other income aided, the net profit to come in at `630cr V/s `406cr in 2QFY2014; a yoy growth of 55.1%. On back of valuations, we maintain our neutral rating on the stock.
|Indias Diesel Deregulation Positive For Oil Companies-Fitch Ratings|
|The Indian governments 18 October decision to deregulate diesel prices will have a positive effect on the national oil marketing companies that are the principal retailers of petroleum products, says Fitch Ratings. The decision is also likely to lead to more private firms entering the diesel market in the medium term, resulting in greater competition.The decision to deregulate diesel prices is well-timed in light of the recent decline in international energy prices. The expected direct impact of both the diesel reform and natural gas price hike on Fitchs headline fiscal forecasts is limited; but the fiscal balances will be more robust to future oil shocks, since both diesel and petrol prices are now determined by the market. Furthermore, implementation of these politically sensitive reforms demonstrates that the government continues to roll out structural reforms gradually, and suggests that more far-reaching structural reforms may be in the pipeline.
The national oil marketing companies – Indian Oil, Bharat Petroleum and Hindustan Petroleum – will be the principal direct beneficiaries of deregulation, and the decision is positive for these companies standalone credit profiles. Under the previous rules, these retailers had to sell diesel (accounting for 40% of fuel sold) below market prices, and were partially compensated for the losses through the federal budget. Furthermore, the price control and subsidy system affected the working-capital positions of these companies, as there was a timing mismatch between the recognition of losses on sales and compensation from government – leading to higher debt.
The other beneficiaries are likely to be upstream oil companies such as Oil and Natural Gas Ltd and Oil India Ltd, which also bore a large part of the subsidy burden. These companies offered a USD56 per barrel discount to the national oil marketing companies – especially challenging when considering the fall in crude prices to around USD85. Fitch expects that the discount is likely to come down.
Fitch anticipates that deregulation will result in heightened competition for the existing dominant national retailers, and could hurt their profitability over the medium to long term. By allowing diesel to be marketed profitably, the sector will once again be attractive for private companies that had left when price restrictions were put in place. A large portion of the output of private refiners is exported, due in part to the restrictions placed on domestic sales. Private firms such as Reliance Industries and Essar Oil are likely to restart idled diesel retail operations, and should ultimately become more significant players. Their impact on the sector would not be seen immediately, though, as they would have to play catch-up to restart and establish retail infrastructure.
Results marginally below expectations
Stock up 3.4%
Alembic Pharma (CMP: `387/ TP:/ Upside
For the quarter, the company posted sales and profit, below expectations. The sales and net profit came in at `539cr V/s `568cr expected and `84cr V/s `88cr expected respectively, thus posting a yoy growth of 11.7% yoy and 31.7% respectively. The growth in the sales was lead by the domestic formulation business, which posted a yoy growth of 18.0%. Other segment, which did well, was API, which posted a yoy growth of 20.0%. The international generic posted a growth of 9% yoy, while Indian generics de-grew by 12% yoy. The international branded segment posted flat sales. On the operating front, the gross margins came in at 64.8% V/s 60.8% in 2QFY2014; consequently taking the operating margins to 21.2% V/s 19.6% in 2QFY2014. This along with the lower interest expenditure, which dipped by 31.9% yoy, aided the PAT to come in at `84.1cr V/s `63.8cr in 2QFY2014, a growth of 31.7%. We maintain our neutral rating on the stock.
Results below expectations, on sales and net profit front, margins robust
Stock marginally up
Indoco Remedies (CMP: `287/ TP:/ Upside
For the quarter, the company posted results much below expectations on the net sales and profit front. The sales came in at `226cr V/s `257cr expected, posting a yoy growth of 16.1%. The sales growth was mainly driven by the exports, which rose by 21.1% yoy, while domestic sales rose only by 13.3% yoy. The domestic formulations grew by 13.9% yoy, while formulation exports grew by 21.2% yoy. On the operating front, the gross margin came in at 64.8% V/s 61.2% in 2QFY2014; consequently taking the operating margins to 20.6% V/s 13.2% in 2QFY2014. This along with the lower interest expenditure, which dipped by 49.0% yoy, aided the PBT, to register a yoy of 148.3%. However, a 148.3% yoy rise in the tax expense during the quarter, lead the net profit to come in at`20cr V/s `30cr expected, a yoy growth of 23.7%. We maintain our neutral rating on the stock.
Results, robust on top line
Stock dips marginally
United Phosphorus (CMP: `331/ TP:424/ Upside :28%)
United Phosphorus Limited (UPL), posted a good set of numbers. For the quarter, the company posted sales of `2618cr V/s `2,269cr in 2QFY2014, registering a yoy growth of 15.4%. On the operating front, the company posted OPM’s of 16.7% V/s 16.0% in 2QFY2014, mainly driven by the GPM’s of 50.5% V/s 48.7% in 2QFY2014. The expansion in the OPM was lower than expansion in the GPM, on back of the 24.4% rise in other expenditure. This along with the lower other income during the period, which dipped by 32.2% yoy, lead the Adj. net profit to come in at `178cr V/s `171cr in 2QFY2014, a yoy growth of 4.3%. The reported net profit during the quarter was `166cr V/s `155, a yoy growth of 7.1%.We maintain our buy with a target price of `424.
|Indian Railways Freight Loading up by 4.20 per cent during April-September 2014|
|Indian Railways carried 532.44 million tonnes of revenue earning freight traffic during 1st April- 30th September 2014. The freight carried shows an increase of 21.44 million tonnes over the freight traffic of 511.00 million tonnes actually carried during the corresponding period last year, registering an increase of 4.20 per cent.During the month of September 2014, the revenue earning freight traffic carried by Indian Railways was 86.71 million tonnes. There is an increase of 1.85 million tonnes over the actual freight traffic of 84.86 million tonnes carried by the Indian Railways during the same period last year, showing an increase of 2.18 per cent.
Results below expected on net profit levels
Stock down ~7.0%
TCS (CMP: `2,700/ TP:/ Upside:)
TCS announced its 2QFY2015 results. While the dollar revenue was much higher than expected on sales front, the net profit came in lower than expected, on back of lower than expected EBDITA margins. On the sales front, the company posted a 6.4% sequential growth in USD revenues to US$3,929mn V/s US $3,859mn expected, with volume growth of 6.1% qoq. On constant currency (CC) terms the company posted a 7.4% qoq growth, of which organic growth during the period was 4.6% qoq on constant currency. In rupee terms, revenues came in at `23,816cr V/s `23,495cr, up 7.7% qoq.
The growth in the INR sales was equally driven by the key geographies, USA (5.3% qoq), Europe (3.8% qoq) and India and Asia Pacific, which grew by 9.0% qoq and 43.2% qoq respectively. In terms of verticals, the BFSI (4.3% qoq), Telecom (1.7% qoq), Retail & Distribution (5.9% qoq) and Manufacturing ( 26.7% qoq).
EBITDA margin came in at 28.5%, lower than expected 30.2% and a dip of ~29bps qoq. Consequently, PAT came in at `5,288cr V/s `5,414cr expected, an up-tick of 4.6% qoq. On the operational front, the company had the highest utilizations, which stood at 86.2% (ex-trainee), while including the trainee it was 81.3%. As per outlook, the company expects to post a growth higher than the NASSCOM growth target of 13-15%.
In terms of development, the TCS announced its merger with CMC wherein in the shareholders of CMC will receive 79 equity shares of Rs.1 each of TCS for every 100 equity shares of Rs.10 each of CMC held by them. The appointed date for the proposed scheme is 1 April 2015. We maintain our neutral rating on the stock.