1- BHARAT FORGE: Below est.; Sharp decline across businesses hurts performance
(BHFC IN, Mkt Cap USD2.8b, CMP INR428, TP INR540, 26% Upside, Buy)
– 2QFY20 standalone (S/A) revenues declined 25% YoY to INR12.6b (v/s est. INR13.5b) due to lower tonnage (-23% YoY). Realizations declined 2.4% YoY to INR235.2k/t (v/s est. ~INR217.1k). EBITDA declined ~37% YoY to INR3b (v/s est. ~INR3.5b). EBITDA margins declined 450bp YoY (-230bp QoQ) to ~24% (v/s est. 26.2%) due to operating deleverage. PBT declined ~27% YoY. Lower tax boosted PAT to INR2.4b (v/s est. INR2.3b), a growth of ~8% YoY.
– 1HFY20 CFO grew ~151% to ~INR7.8b, benefiting from the reduction in working capital. Further, lower capex boosted FCFF to ~INR3.9b (v/s -INR4.5b in 1HFY19). 1HFY20 revenue/EBITDA/PAT declined ~17.5%/28%/9%.
– Key highlights from earnings call: (a) Expect 2HFY20 to be weaker than 1HFY20 due weakness in India, US and EU; (b) US Class 8 trucks should decline 20-25% in CY20; EU trucks are expected to decline 8-10%; (c) Focus is on cutting costs, improving productivity and new product development. Also, company will concentrate on strengthening its balance sheet, FCF generation and inorganic opportunities; (d) Current utilization is at ~50%; and (e) Company has transferred Nellore plant (CLWT) to wholly-owned subsidiary to avail ~17% tax rate for new manufacturing units.
– Valuation view: We cut our FY20/21 consol. EPS estimate by 8-9% to factor in the headwinds seen in all key businesses. Over the last two years, BHFC has witnessed strong performance in all core businesses and ramp-up in nascent businesses. However, the cycle has turned negative for its core businesses of CVs and Oil & Gas. While the near-term outlook is challenging, we believe that BHFC is much better placed now than in the previous cycles and would emerge stronger with more diversified revenue streams. Valuations are attractive at 24.2x/19.4x on downcycle FY20/21E consol. EPS. Maintain Buy.
2- OIL INDIA: EBITDA miss driven by employee cost provisioning
(OINL IN, Mkt Cap USD2.5b, CMP INR165, TP INR216, 31% Upside, Buy)
– 2QFY20 revenue was 5% higher than est. at INR32.1b (-14% YoY), led by higher gas sale and higher than expected net realization.
– EBITDA was 12% lower than est. at INR12.4b (-16% YoY) due to higher employee cost (+37% YoY, +21% QoQ). Till 1HFY20, a total provisioning of INR4.4b has been made toward pay revision of Unionized Employees due from 1st Jan’17. Total other expenditure was lower at USD5.9/boe v/s USD9.4/boe in 2QFY19.
– PBT for the quarter was down 23% YoY to INR9.7b, led by higher depreciation cost of INR4.2b. Depreciation cost was at USD5.0/boe v/s USD4.4/boe in 2QFY19.
– Tax rate for the quarter stood at 35.6%, as company has not yet exercised the option to shift to a lower tax rate. PAT was 27% lower YoY at INR6.3b.
– For 1HFY20, EBIDTA was down 10% YoY to INR26b and higher depreciation of INR8.1b (+16% YoY) resulted in PAT declining 20% YoY to INR12.5b.
– Production of crude oil was 5% lower YoY at 0.82mmt, while gas was 7% higher at 0.75bcm. Total production was up 1% at 1.56mmtoe.
– Oil sales were 5% YoY lower at 0.79mmt, while gas was 2% higher YoY at 0.66bcm. Total sales were down 2% YoY at 1.45mmtoe.
– Net realization for the quarter stood at USD61.3/bbl v/s USD73.4/bbl in 2QFY19, with no subsidy burden during the quarter.
– Valuation and view: We revise down our FY20/21 EPS estimate by 11%/10%, as the company is still in the process of evaluating the option of the lower tax rate.
– We model Brent price at ~USD67.7/USD70bbl and INR/USD at 71.3/73.8 for FY20/FY21. We expect EPS of INR28.2/INR30.1 in FY20/FY21. We believe USD60-70/bbl should not be a concern for return of the subsidy regime.
– The stock trades at 5.9x FY20E EPS of INR28.2. Dividend yield is attractive at 7.6%/8.1% for FY20/FY21. For OINL, we use SOTP-based fair value of 8x FY21E adj. EPS of INR26.8, and add investments of INR49 to arrive at a price target of INR216. Maintain Buy.
3- TATA POWER: Mundra-Coal JV hedge fares better; Mundra PPA renegotiation can provide relief; Maintain Neutral
(TPWR IN, Mkt Cap USD2.3b, CMP INR60, TP INR66, 11% Upside, Neutral)
2QFY20 consol. adj. PAT was up 27% YoY to INR3.5b (in-line) on better performance of the Mundra-Coal JV hedge. PAT has been adjusted for INR1.6b impact of taxes on KPC and coal SPVs, INR0.7b of dividend from Cennergi (held for sale) and INR0.5b of one-time gains on other income. Operational performance (EBITDA and PAT of JV companies) was up 10% YoY to INR21.6b (v/s est. INR21.1b).
– Adjusting for INR0.6b prior period related taxes at KPC, Mundra (EBITDA) and coal JVs (PAT) increased 12% YoY to INR4b. Given the decline in coal prices, there was no significant impact of DMO obligation for its JVs. Fuel under recoveries at Mundra stood at INR0.5/kWh (v/s INR0.9/kWh in 2QFY19).
– RE (ex-standalone) EBITDA was up 1% YoY to INR4.6b on lower Wind PLFs. Capacity increased 23% YoY to 2.1GW.
– Maithon EBITDA stood at INR1.8b (v/s INR1.6b in 2QFY19) on account of favorable order for capex approval.
– Interest cost rose 9% YoY to INR11.3b. Reported tax at INR1.9b included INR1b of dividend distribution tax (current and future provisions) for its coal SPVs.
Debt remains elevated; Maintain Neutral
– Net debt remains elevated at INR476b due to continuing capex and stretched receivables for its renewable portfolio. Besides, the upcoming new regulations for Indonesian coal mines (concerning tax and royalty) could be an overhang over the stock. The amendment of Mundra PPA, on the other hand, still awaits state approval and we do not build in any benefit from this. Successful renegotiation of this PPA – based on HPC recommendations – would provide an upside to our estimates. Maintain Neutral with SOTP-based target price of INR66/share.
4- GUJARAT STATE PETRONET: Transmission volume growth continues
(GUJS IN, Mkt Cap USD1.7b, CMP INR213, TP INR256, 20% Upside, Buy)
Standalone net sales were 6% higher than our est. at INR5.4b (-10% YoY), led primarily by higher than expected transmission volume and marginal improvement in implied tariff. Revenue in 2QFY19 included one-time retrospective adjustment in tariff; resulting in gas transportation in the quarter declining 10% YoY at INR5.3b.
EBITDA was down 15% YoY at INR4.4b and PBT down 15% YoY (+16% est. led by lower interest cost) at INR3.9b. The company re-measured its DTL of INR12.8b, in line with adoption of the new lower tax rate. PAT was up 41% YoY to INR4.5b.
For 1HFY20, EBITDA was down 2% YoY at INR8.4b, while PBT was flat YoY at INR7.0b. With re-measurement of DTL during 2QFY20, resulting PAT was 41% higher YoY to INR6.6b.
Transmission volume for the quarter was 12% higher YoY at 39.2mmscmd (up 8% to 38.7mmscmd for 1HFY20).
Implied tariff has improved marginally QoQ to INR1,461/scm; however, the same has declined as against INR1,810/scm (includes one-time retrospective adjustment) in 2QFY19 (also down 2% YoY to INR1,440/scm in 1HFY20).
– GUJS will be awarding EPC soon for the Dahej-Bhadbhut pipeline, which will assist in the off-take of volumes at Dahej.
– Company has also received approvals from PNGRB for developing connectivity for an upcoming RLNG terminal at Chhara.
– PNGRB approval is awaited for the Anjar-Chotila pipeline for evacuation of entire RLNG quantity from the Mundra terminal.
Valuation and view
– The National Green Tribunal (NGT) in Jul’19 has directed the Central Pollution Control Board (and respective State PCBs) to fix the cost of damage done to the environment by critically and severely polluted industrial clusters within three months.
– As India flexes its muscle against industrial pollution, adoption of natural gas by industries bodes well for gas transporters like GUJS .
– Transmission volume growth in 1HFY20 was aided by higher off-take at Morbi industrial cluster (GUJGA volumes averaging ~5.2mmscmd) as well as higher volume for the power sector.
– We keep our transmission tariff unchanged at INR1,477/mscm for FY20/FY21 with transmission volume estimate at 37mmscmd/38.5mmscmd. However, since the company has adopted lower tax rate, its transmission tariffs are under consideration for reduction by PNGRB.
– The stock trades at 10.6x FY20E EPS of INR20.2, EV/EBITDA of 7.4x with EBITDA CAGR of ~6.5% over FY19-21 and ROE of 18.2% for FY20.
– We value the company at 8x FY21 EPS and add valuation of stake in GUJGA (TP: INR189) to arrive at a revised target price of INR256. We maintain Buy.