COMPANY RESEARCH
Balrampur Chini Mills: Cane price hike: what's the risk? - BUY
CMP (Rs) 116, 12-mts Target (Rs) 140, Upside 20.3%
Media reports (BS: Oct 30, 2016, link) suggest UP government is mulling a 10% hike in cane price after a gap of three years during which SAP has been kept constant at Rs280/qtl. Given the backdrop of UP elections next year, the only uncertainty is on the extent of hike. In the prior election cycle, the then government had hiked prices by 17% though our sense is such a sharp raise is unlikely. Our thinking is driven by recent happenings in UP sugar industry wherein the state government offered cane subsidy linked to sugar realizations. Our base case estimates factor in a 10% hike to Rs320/qtl that translates in multiyear high margin of 25% in current fiscal. A 20% hike (unlikely) to Rs335/qtl cuts our FY17E EPS by 22% while 30% hike results in a deep 60% hit to FY17E earnings. Anything above a 10% hike can be viewed as negative for the sector and especially in light of the UP government efforts to rationalize the cane arrears through judicious use of cane price subsidy. We remain positive on demand as closing Oct' 17 inventory at 4.8mn tons results in lowest stock/use ratio at ~19%, in line with lows touched in 2009. We assign 1x EV/replacement cost to BRCM FY18E earnings and rate stock BUY with 1-year target of Rs140.
BPCL (Q2 FY17): Weak refining segment performance - BUY
CMP (Rs) 643, 12-mts Target (Rs) 740, Upside 15.1%
BPCL's Q2 FY17 performance was weaker than our and street estimates on the back of lower than expected GRMs and marketing margins. GRMs were at US$3.1/bbl which was much lower than our estimates. Going ahead, marketing margins are expected to be robust while GRMs are likely to recover from the recent lows as winter season kicks in leading to demand-supply balance tilting in favor of supplies. We maintain our BUY rating with a 1-year price target of Rs740.
GAIL (Q2 FY17): Strong all round performance - BUY
CMP (Rs) 436, 12-mts Target (Rs) 520, Upside 19.3%
During Q2 FY17, GAIL reported a strong performance backed by continued turnaround in the petrochemical segment and margin expansion in all other segments. While the petrochemical segment revived on the back of lower feedstock prices, benefits of operating leverage drove performance of the natural gas transmission and trading segments. PAT performance was buoyed by higher other income due dividend income from subsidiaries and JVs. Going ahead, gas volumes are expected to increase driven by higher capacity at Dahej's LNG terminal and scale up in production from Daman and Vasai fields of ONGC. Lower feedstock prices will keep the petrochemical performance on a strong footing. Earnings traction is likely to remain strong. We maintain our BUY recommendation.
Kalpataru Power (Q2 FY17): Strong execution to continue - BUY
CMP (Rs) 223, 12-mts Target (Rs) 300, Upside 34.6%
KPTL reported robust numbers on the back of strong execution in the4 doemstic T&D space. Topline growth of 19.6% yoy was quite higher than our estimate of 6% growth. However, strong execution was not reflected in OPM. Margins were lower than expected and also lower on a yoy basis. Order inflow was strong at Rs.19.5bn (after removing an African order of Rs.4.5bn). The company is also L1 in orders worth Rs.20bn. Order book at the end of Q2 FY17 stood at Rs.94bn and provides strong revenue visibility for the next 18 months. Management has revised its FY17 revenue growth guidance downwards to +20% due to delay in execution in international projects especially in Middle East region. PGCIL ordering would be on the watch list in H2 FY17. Domestic SEB spending is expected to surge with major capex expected in South and Central India. In addition to this, railway and pipe segment are likely to witness large ordering during the year. We maintain our Buy rating on the stock with a price target of Rs.300.
KNR Constructions Ltd (Q2 FY17): Robust performance continues - BUY
CMP (Rs) 696, 12-mts Target (Rs) 806, Upside 16%
KNR Constructions witnessed revenue growth of ~72% yoy during Q2 FY17, above our estimates on the back of strong execution. The order book of the Company continues to grow at a robust pace. The Operating Margins continues to remain healthy at ~ 15% levels during Q2 FY17. As on Sept 30, 2016, the order book stood at Rs.45.7 bn (~5x FY16 revenues). The Company expects orders worth Rs.10-15 bn during remaining part of FY17 which would further strengthen its position. KNR recently signed a share purchase agreement to sell entire equity stake in its two Road BOT assets to an Essel group company. This is in line with Company's strategy to focus on EPC projects. With the strong order book in place and execution picking up, we expect the Company to achieve topline in excess of Rs.12 bn and 15 bn during FY17 and FY18 respectively. With high margin orders in the unexecuted order book, the margins are expected to be strong at ~14% levels during the next few years. With better than expected Q2 FY17 performance and robust order book, we have revised over estimates higher. We believe with one of the strongest order books in the industry, topline is poised for robust growth during FY16-18. With tight cost control, high margin orders under execution and increasing scale of operations, we expect earnings growth to be strong. KNR's standalone EPC business is currently trading at a P/E of 13x FY18E EPS. In line with the strong performance and recent correction in stock price, we upgrade our rating to BUY with target price of Rs.806 (based on SOTP valuation).
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