Idea Cellular

Investors with a two-three-year horizon can buy the shares of Idea Cellular, a mobile phone player aspiring to have a pan-India presence by December 2009, considering the continuing strength in its current circles of operation and. launches (both recent and impending) in more profitable circles.

These apart, there is also a strong technical advantage in the form of frequency allocations in the 900 MHz band and benefits from Indus Towers that are likely to kick in over the next few years.

At Rs 79, the stock trades at about 20 times its likely 2009-10 per share earnings. This is expensive compared to broader markets.

However, Idea Cellular has managed a 45 per cent-plus growth in revenues for the last two successive financial years.

Due to expansion to new circles from 11 to 17 through organic and inorganic means, it has had substantial increase in capital expenditure, which has affected margins.

But capital expenditure is expected to moderate from here on even as payoffs from these investments begin.

After the Mumbai and Bihar launches last year, Idea has seen an increase in EBITDA margins from 26.3 per cent to 28.9 per cent, over the last four quarters.

In fact the capital expenditure for FY10 has been scaled down from Rs 6,000 crore to Rs 5,500 crore.

Last year, Idea received Rs 7,294.9 crore from TMI for a 14.9 per cent stake sale, and Rs 2,748 crore from Providence Equity for a 20 per cent stake sale in Aditya Birla Telecom — its subsidiary.

This may ensure that the company is adequately funded for its expansion, with minimal borrowings.

In fact Idea’s interest costs have come down over the last couple of quarters.

Idea currently has operations in 17 circles.
Operational gains

Of these, the company has established operations in 11, recently launched them in four and acquired two through the buyout of Spice Communications last year.

The company has managed to add on an average 1.3 million subscribers a month over the last one year, 30 per cent more than its run-rate in 2007-08 and double that of 2006-07. In established circles such as Kerala, Maharashtra and Madhya Pradesh, Idea is the top mobile operator in terms of the subscriber base.

In most other established circles, it is a key player. Most of its recent launches have been in circles such as Mumbai (August 2008), Tamil Nadu and Chennai (May-July 2009), which are relatively higher (Average Revenue Per User, ARPU) revenue generating ones, thus making them lucrative for Idea and may ensure quicker break-even.

In circles such as Bihar and Mumbai, Idea’s monthly subscriber additions are bigger than Vodafone Essar’s.

Idea has had spectrum allocated in the 900 MHz band in nine of its circles of operation. Capex requirement towards building networks in the 900MHz band are much lower when compared to the 1,800 MHz band.

This is due to the fact that geographic coverage achieved is much higher (of the order of 50 per cent) in the 900 MHz band.

This is a key advantage vis-À-vis many competitors, especially new entrants.

This may also be helped by the fact that in many circles the company is building its own fibre network to carry National Long Distance traffic.

This plays a key role in optimising the cost of carrying traffic as well garnering roaming revenues. Scale advantages also ensure that price wars on tariffs can be fought against existing and new players.

Idea is also set to benefit from its association with Indus Towers, where it is a 16 per cent stake holder.

Indus Towers has over 1,00,000 towers pooled from Bharti Airtel, Vodafone Essar and Idea Cellular in 15 circles.

This ready availability of towers ensures a quicker rollout for Idea in many circles and reduction in capital expenditure.

Tamil Nadu, Mumbai and Chennai are examples of how the company has managed to go to market fairly quickly after spectrum allocation due to the association with Indus Towers.
Risks

From April 2009, the Telecom Regulatory Authority of India (TRAI) has decreased termination charges for incoming calls for both domestic and international calls by 10 paisa.

This could lower realisations for the company. Subscriber churn, as and when mobile number portability is introduced, and the possibility of stiff outlays for the 3G spectrum auction that is likely to be conducted at a later date are also key points to watch out for.

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Puravankara Projects

Shareholders can continue to stay invested in Puravankara Projects. For a mid-tier realty player, the company has done well to stay away from the debt trap that many of its peers were caught in, not too long ago. Puravankara has also been prudent in not launching any new projects over the past year under the parent company and has, instead, made a successful entry into mid-income housing through its subsidiary.

Premium valuations

Improvement in units sold in the March quarter over the preceding quarter did not hwoever reflect in any sequential improvement in sales, as revenues typically flow with a lag. The company performance on this score is similar to peers and slightly below the performance of larger developers which witnessed a sequential improvement in revenues even as early as the March quarter.

Given this background, Puravankara’s price-earnings multiple of about 15 times its likely per share earnings for FY-10 (at the current market price of Rs 97) appears steep compared with even larger players.

A clear sign of revival in the sale of projects in the parent company and subsequent successful launches through the subsidiary could be tangible reasons for premium valuations. Any steep decline of 15-20 per cent in the price could be a good opportunity to accumulate the stock. Investors may have to hold the stock with a two-three year perspective to fully benefit from a real-estate demand revival as well as a possible value unlocking from its subsidiary, Provident Housing & Infrastructure, once its execution record is established.
Affordable housing

Puravankara’s antidote to beat the realty slump appears to have come in the form of Provident Housing’s first project in Chennai. This subsidiary was fashioned to cater exclusively to the mid-income housing needs, ranging from Rs 10-20 lakh.

Unlike other developers which launched affordable housing after the slowdown set in and which may well rollback this strategy on a revival, Puravankara is likely to carry on with this business through its subsidiary.

This, over the long term, may provide the group with a good business mix between premium and affordable housing — that may combine better realisations with high volumes.

The project launches under this subsidiary clearly appeared well-timed to revive the group’s slumping sales. In March 2009, Provident Housing launched the first phase of the total 2.23 million sq ft (over 2100 units) of saleable area, selling 518 units within weeks; prompting it to launch the second phase as well.

These units, expected to be completed in two years, could well be the launch pad for the group to replicate similar projects in Bangalore and Hyderabad and later in other cities . However, it may be too early to ascribe a value to this fully-owned subsidiary, for two reasons: One, it has so far proven successful in only one city. Two, the newly-formed subsidiary, although an off-shoot of Puravankara, is yet to pave itself a track record in the affordable housing segment, in which the parent’s experience too is limited.
Residential focus helps

The parent company’s focus on residential projects has helped; unlike many developers which had to shelve plans or even abandon partly constructed commercial/retailing projects as a result of the slowdown, Puravankara went ahead with its execution as over 95 per cent of it was residential.

The company, did not have to divert/lock up capital on planned and then deferred projects. This could also be one of the reasons for the company managing the liquidity crunch better than a few others.

Hence, with perhaps a superior execution rate, the company may have more properties readily available for sale than its peers when a clear revival happens.

Recent trends suggest that projects nearing completion receive a premium from customers . The company had recently stated that it has completed on an average 60 per cent of construction in projects across its spectrum. The company has 8.4 million sq ft of saleable area under development across four cities. It plans to refrain from taking any new projects, until the completion of the above.

While the Bangalore real-estate market has shown marginal signs of revival ahead of other cities (barring Mumbai), much of the volume growth appears to have been a result of deep discounts.

While it is not clear if Puravankara resorted to this strategy, the company’s operating profit margins took a hit over the December and March quarters. OPMs dwindled to the 20 per cent levels from 35 per cent a year ago.

While relief from decline raw material costs may be visible in the June quarter, revival in volumes may hold the key to profitability. Puravankara’s revenue for the year-ended March 2009 of Rs 445 crore and net profits of Rs 144 crore are unlikely to see much growth in FY-10 as an improvement in demand is likely only by end-2010.

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Greenply Industries

Investors with medium-term perspective can consider buying the shares of Greenply Industries. A prolonged divergence in the weekly relative strength index (RSI) triggered the stock’s trend reversal in the first quarter of this year. It bottomed in March around Rs 40 and has been on an intermediate-term uptrend since then. On July 31, the stock conclusively broke through an important resistance at Rs 120.

Both daily and weekly momentum indicators are implying strength. We believe that in the medium-term, the stock can trend up to Rs 180. Investors can buy it with stop-loss at Rs 107. Short-term traders can buy the stock with a target of Rs 143 and stop at Rs 122.

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Lupin

Investors with a long-term perspective can consider adding the stock of Lupin to their portfolio. Sustained traction in formulation exports in the key markets of the US and Japan, a strong footing in the domestic market, and an attractive pipeline of products make a strong case for investing in this stock. At the current market price of Rs 945, the stock trades at about 14 times its likely FY10 per share earnings.

While this isn’t cheap, Lupin’s consistent performance on the earnings front, helped by its well-timed acquisitions across geographies, does justify premium valuations.

In terms of geographic segments, the company’s US sales are likely to remain healthy helped by its front-end marketing presence and the focus on niche products. What may also help is the recent acquisition of the worldwide marketing rights for the intra-nasal steroid (INS), AllerNase Nasal Spray from Collegium Pharmaceutical, Inc. This appears strategic given the likely fall in revenues from its anti-infective branded product Suprax (contributes to over 10 per cent of its overall revenues), which is expected to go generic by next fiscal year. This deal will also help Lupin leverage on its existing paediatric franchise network. Entry into high-margin oral contraceptive segment may also add to its strength. Lupin’s performance in the domestic market too has been impressive.

It also enjoys an edge over most of its Indian peers in terms of its presence in the Japanese market. Lupin’s presence in the region by way of its earlier acquisition of Kyowa will help it stay ahead of competition. In contrast to most of its peers that are still grappling with large acquisitions, its strategy to gain entry into newer markets (in the EU, Australia and South Africa) through small-size acquisitions has proved to be quite a success.

It has not only helped keep debt in check, but also accorded better control over operations.

For the quarter ended June 2009, Lupin’s consolidated revenues grew a healthy 26 per cent driven by growth in domestic formulations and that in the US and Japan. Growth would have been higher but for the decline in its API (Active Pharmaceutical Ingredients) sales.

Pricing pressure and de-stocking by global majors stunted the segment’s growth. Despite that, Lupin’s earnings registered a 25 per cent growth.

The key risk to prospects arises from the USFDA warning letter which sought clarifications on issues related to its facility at Mandideep (which makes Suprax). Any adverse development on this front would be a risk to our recommendation.

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Everest Kanto Cylinders

Long-term investments can be retained in the stock of Everest Kanto Cylinders (EKC), which makes high-pressure CNG (compressed natural gas) and industrial cylinders. Though the stock is up 77 per cent from our earlier ‘Buy’ recommendation in March at Rs 102, shareholders can remain invested in the stock, given the uptick in the company’s order enquiries in the quarter just ended.

Though EKC’s recent quarterly numbers were far from impressive, the addition of Maruti Suzuki to its OEM client list and the possibility of improving margins in the coming quarters helped by lower material cost promises upside potential in future. At the current market price of Rs 181, the stock trades at about 13 times its likely FY10 per share earnings.

This appears reasonable, given that EKC holds the lion’s share of the cylinder market in India (80 per cent share) and operates on capacities far superior to its peers.
Growth story intact

While in the last two quarters, the company’s growth was capped due to the slowdown in auto sales, the management has indicated at improving demand undercurrents in the coming quarters. Led by the overall improvement in the macro-economic scenario, EKC has seen an upturn in order enquiries and demand for its cylinders from both the retrofit and OEM segments in the last quarter.

That EKC added Maruti Suzuki as its OEM client last quarter may also help drive growth, given the carmaker’s wide popularity and distribution reach in the country. Besides, it merits attention that Maruti Suzuki has recently launched the CNG version of its highest selling small car, Alto.

While this new CNG variant of the car would initially be available only in Delhi and the National Capital Region (NCR), the company after gauging the response to the Alto CNG plans to launch CNG versions of all its models by the first quarter of next year.

EKC may see a ripple effect from Maruti’s demand for CNG variants, as it may prompt other OEMs (such as Bajaj Auto, Tata Motors, Ashok Leyland, Swaraj Mazda and Hindustan Motors, which are EKC’s clients) to press ahead with similar models. The lack of proper CNG distribution infrastructure in the country, however, can impede growth.

The company’s high-margin jumbo cylinders too are likely to enjoy better demand. Driven by export orders (to begin supply from end of the current quarter), the jumbo cylinder segment is likely to better its performance by the second half of the current fiscal.

And if the management’s indication of a possibility of export orders becoming repeat orders fructifies, it would lend further strength to its growth prospects. These cylinders, used specifically in the transportation of large quantities of gases, may also come in much demand with the availability of surplus gas supply for transportation from the KG Basin; EKC though is yet to strike a formal deal.

Over the long-term, the setting up of city gas distribution (CGD) networks in many cities may also help the demand for CNG cylinders. The Petroleum & Natural Gas Regulatory Board expects the city gas distribution network to spread to 100 cities by the end of the Eleventh Five-Year Plan (2012). Besides, industry estimates expect the CGD sector in India’s consumption of gas to quadruple, from the 5-6 per cent of the total available gas, in a few years.
Results disappoint

Led by lower sales, high raw material cost and depreciation, EKC’s earnings numbers for the June quarter were below expectations.

The company reported 19 per cent fall in overall sales, while profits declined by 52 per cent. For the quarter, while its India and Dubai sales fell by 28 per cent and 47 per cent respectively; it China sales grew by seven times (albeit on a low base) and that of US improved by 55 per cent.

While bulk of the fall in revenue was driven by drop in volumes, the quarter also witnessed a decline in blended realisations per cylinder (due to higher mix of low-priced industrial cylinder sales). This, in addition to the high cost of inventory, led to a margin slippage of over 12 percentage points to 21.7 per cent.

Sale of low-value cylinders by its US subsidiary, CP Industries also led to the margin contraction. The coming quarters however may witness an improvement in margins as the company reaps the benefit of low raw material cost on the new purchases made at current price levels.
Triggers to watch

While political uncertainties in Iran and delay in dispatch of consignment led to the poor performance of the company’s Dubai unit, improvement in the political climate will help better sales. But in the event of continued uncertainty on the political front, EKC may be forced to look for newer markets.

Besides, developments in the form of EKC’s entry into city gas distribution in Kolkata by way of a joint venture with a local company which holds gas distribution rights, though presents a perfect synergy to its existing line of business, may need to be monitored.

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