ULTRATECH CEMENT LTD: SHOULD BE INVESTORS CHOICE !!!

Scrip Code: 532538 / ULTRACEMCO

CMP:  Rs. 1368.70; Buy at current levels.
Medium to Long term Target: Rs. 1,566; STOP LOSS – Rs. 1260.00; Market Cap: Rs. 37,508.08 Cr; 52 Week High/Low: Rs. 1544.70 / Rs. 914.00

Total Shares: 27,40,65,301 shares; Promoters : 17,36,05,057 shares –63.35 %; Total Public holding : 10,04,60,244 shares – 36.65 %; Book Value: Rs. 478.25; Face Value: Rs. 10.00; EPS: Rs. 89.25; Div: 60 % ; P/E: 20.10 times; Ind. P/E: 15.33; EV/EBITDA: 14.96.

Total Debt: 4,144.60 Cr; Enterprise Value: Rs. 41,652.68 Cr.

ULTRATECH CEMENT LIMITED: ULTRACEMCO was incorporated in 2000 and is based in Mumbai, India. It was formerly known as Ultra Tech Cemco Limited and changed its name to ULTRATECH CEMENT Ltd on October 2004. It’s a subsidiary of Grasim Industries Ltd from Aditya Birla Group. The Company is engaged in the business of cement and cement related products. It manufactures and markets Ordinary Portland Cement, Portland Blast Furnace Slag Cement and Portland Pozzalana Cement. The Company also manufactures ready mix concrete (RMC). UltraTech Cement is an exporter of cement clinker. The Company has an annual capacity of 23.1 million tons. The Company has 11 integrated plants, one white cement plant, one clinkerisation plant in the United Arab Emirates, 15 grinding units - 11 in India, two in the United Arab Emirates, one in Bahrain and Bangladesh each and five terminals - four in India and one in Sri Lanka. In the 2011, its wholly owned subsidiary, UltraTech Cement Middle East Investments Limited (UCMEIL) acquired ETA Star Cement together with its operations in the United Arab Emirates, Bahrain and Bangladesh and acquired management control. On July 1, 2010, Samruddhi Cement Limited (Samruddhi) amalgamated with the Company.  The Company's subsidiaries include Dakshin Cement Limited, UltraTech Cement Lanka (Pvt.) Ltd. and UltraTech Cement Middle East Investments Limited. The company is compared to Ambuja Cements Ltd, ACC Limited and Rain Commodities Limited domestically.

Investment Rationale:

ULTRA TECH CEMENTS limited is in the process of setting up 4.8 MT plant at Raipur, Chhattisgarh and 4.4 MT plant at Malkhed, Karnataka along with a captive power plant of 75 MW and waste heat recovery plant of 45 MW. These new capacities are likely to get operational by Q1FY14. This will increase company's capacity by nearly 9.2 MT, taking it to a total capacity of 59 MT. Revenue growth of the company during Q4FY12 was boosted by improvement in cement prices as well as volume growth on a sequential basis. Costs remained high during the quarter but higher cement prices led to margin improvement on sequential and yearly basis. Revenues improved by 19 % for Q4FY12 and 37.5 % for the full year FY12 led by improvement in cement realizations and cement dispatches over last year. Operating margin for Q4FY12 and FY12 also witnessed an improvement due to higher prices. Margins stood at 23.7 % and 22 % for Q4FY12 and FY12 respectively as compared to 22.7 % seen during Q4FY11 and 19.2 % for full year FY11. Net profit performance was boosted by healthy revenue growth; lower than expected interest outgo and higher other income. UltraTech (UTCEM) delivered 40 % YoY and QoQ PAT growth to Rs. 860 Cr. EBITDA per MT stood at Rs. 1,018. White cement, wall care putty and RMC revenues, cement realizations for the company stood at Rs. 4,624 per tonne during Q4FY12 and Rs. 4,460 per tonne during FY12 as against Rs. 4,330 per tonne and Rs. 3,746 per tonne during Q4FY11 and FY11 respectively. Combined grey cement and clinker sales volume stood at 11.54MT during Q4FY12 as against 10.37 MT during Q4FY11.  Export cement volumes stood at 0.18MT approx. $55 per tonne and clinker export volumes stood at approximately 0.27MT approx. $45 per tonne. The full year volumes stood at 40.73 MT as against 35.26MT in FY11, registering an improvement of 15.5 % over last year. Volumes are expected to further improve to 44MT for FY13 due to improvement in demand going forward. Domestic cement volumes are expected to be nearly 44 MT for FY13 for the company. White cement volumes are also likely to remain robust going forward and thus revenues of Rs. 20,700 Cr for FY13 is expected also it is expected that the industry cement demand to grow to 8 % and 10 % respectively during FY13 - FY14 vs. 4.5 % and 6.5 % during FY11 - FY12 period led by continued retail demand as well as by pre - general election (in 2014) led infrastructure demand from the end of FY13E. However, industry’s utilization is expected to remain under 80 % until FY14E. It is expected that the pending CCI’s investigation report to remain an overhang on the stock in near term.  

Outlook and Valuation:

Cement sales in India grew by 4.5 % and 6.5 % YoY during FY11 - FY12 period and expected the same to improve to by 8 % and 10 % respectively during FY13 - FY14 vs. 4.5 % and 6.5 % during FY11 - FY12 period led by continued retail demand as well as by pre - general election (in 2014) led infrastructure demand from the end of FY13E. However, industry’s utilization is expected to remain under 80 % until FY14E. Demand in the southern region has buoyed over the last five months- which in turn has helped Ultra Tech Cement’s volume and realisation growth. However, with more than 60 MT of new capacities expected to get commissioned during FY12 - 14E period; it is believed that the industry utilisation to hover below 80 % until FY14E. Cement manufacturers have shown maturity in passing on the incremental cost pressure through supply discipline which is expected to continue over the next few quarters until demand recovers. An estimate EBITDA per MT of Rs. 898 and Rs. 944 during FY13 - 14E is expected. The on-going cement cartelization inquiry by Competition Commission of India (CCI) against about 40 cement companies including Ultra Tech Cements is expected to be completed by this month and CCI is expected to come out with its findings during April – May 2012 and if found guilty of cartelization, cement companies could be fined up to 50 % of their FY12E profits which for Ultra Tech Cements could be around Rs. 1200 to 1300 Crs which would be around 6.5 % to 7 % of its total sales. Ultra Tech Cements is expected to deliver strong EBITDA per MT performance similar to that posted during the current quarter & thereafter the seasonal weakness (monsoon driven weak demand and cement prices) would weigh on the stock performance for the subsequent two quarters. While, it is seen that profitability of Ultra Tech Cements to improve going forward, the current valuation multiples already discounts the same. The clarity on the CCI investigation report should be a major trigger for the stock. In line with the multiples ascribed to its peers ACC and Ambuja Cements, Ultra Tech Cements valuation comes at 9.5 x its FY13 – FY14E EBITDA thereby implying a target price of Rs. 1,566 per share. This price implies a replacement cost of US$ 165 per MT. EBITDA/tonne of Rs. 991 for FY13 translating into EBITDA margins of 22.5 % for FY13 is expected. At current price of Rs. 1368.70, the stock is trading at 15.95 x P/E and 8 x EV/EBITDA on FY13 estimates and one should ACCUMULATE the stock and should use declines in the stock to buy with a long term view with the key risk of the out come from CCI imposing fine on cement companies on alleged cartelization. One can buy Ultra Tech Cement Limited with a target price of Rs. 1,566.00 for Medium to Long term investment.

KEY FINANCIALS	FY11	FY12	FY13E	FY14E
SALES (Rs. Crs)	13,316.30	18,313.20	20,077.50	22,693.70
NET PROFIT (Rs. Crs)	1,406.00	2,446.80	2,350.30	2,489.30
EPS (Rs.)	51.30	89.30	85.80	90.80
PE (x)	28.60	16.40	17.10	16.10
P/BV (x)	3.80	3.10	2.70	2.30
EV/EBITDA (x)	14.80	9.40	9.40	8.50
ROE (%)	19.90	20.80	16.90	15.50
ROCE (%)	13.70	14.90	12.60	11.80

I would buy UltraTech Cements LTD with a price target of Rs. 1,566 for Medium to Long term. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 1259.20 on every purchase.

READ HERE TO KNOW MORE ON LONG TERM INVESTING - CLICK HERE

MARCH IIP -3.50 % v/s 4.10 % :IS THIS WE CALL THE GROWTH ????

IIP DATA COMES AS A SHOCK !!!

MARCH 2012 Index of Industrial Production (IIP) which is declared by Ministry of Statistics & Programme Implementation came at SHOCKING -3.50 % which is complied by Central Statistic Office. The index is a composite indicator that measures the short term changes in the volumes of the industrial production.

Three sectors that constitute the index are Mining, Manufacturing and Electricity. The monthly growth rates of these three sectors for the month are for Mining (-)1.3%, Manufacturing (-)4.40% and for Electricity 2.70 %, the ministry added that as per “use – Based “ classification there has been negative growth in capital goods (-21.3%) and intermediate goods (-2.1 %) and positive growth has been achieved in basic goods (1.1%), consumer durables (0.2%) and consumer non-durables (1.0%).

The contraction was driven by particularly poor performance of the manufacturing sector, in line with weak exports that month. It is believed that April saw a turnaround, but until this is confirmed, sentiment will be weak. The data increases the odds of another rate cut, is negative for the INR, and should push INR OIS rates and bond yields down. IIP, will change the RBI (Reserve Bank of India) policy stance. RBI will not cut rates till July, but may have to start after that. Expect another 50-75 basis points rate cut in this year

BACKGROUND

• India's economy probably expanded 6.9 % in the 2011 - 12 fiscal year that ended in March, its slowest pace in three years.
• The RBI, which cut interest rates in April for the first time in three years, has forecast growth at 7.3 % in 2012 - 13.
• Expansion in manufacturing sector picked up pace in April, supported by bulging order books, but slower output growth and increasing price pressures dampened sentiment, a business survey showed.
• Growth in the services sector accelerated a touch in April thanks to a rise in new business, and optimism hit its highest level since June 2011, a survey showed last week.
• Headline inflation slowed marginally to 6.89 % in March helped by a softening in prices of manufactured goods, even as food inflation shot up. Analysts expect April inflation at 6.70 %.
• The Reserve Bank of India slashed its main lending rate - the Repo rate - by a sharper-than-expected 50 basis points in April to help revive growth. 

FACEBOOK : THE MUCH AWAITED IPO !!!

Facebook has released a revised S-1 filing which list additional information on IPO.

The IPO would value Facebook at $74.8 billion(Rs.3,96,440 Cr), based on total of 2.138 billion Class A & B shares outstanding after the offering, assuming a $35 share price.

Total shares offered will be 33,74,15,352 at a proposed price range of $28-$35. It is expected that they could fix price at $31.50/sh. 

Facebook estimates that the net proceeds from sale of the Class A common stock that are offered will be approximately $5.6 billion (Rs.29,680 Cr), assuming an IPO price of $31.50/sh.

Primary shares (proceeds going to company) will be $180 million (Rs.954 Cr), Selling stockholders shares will be getting $157.4 million (Rs.834.22 Cr) these proceeds will not go to the company.

Mark Zuckerberg (28) the founder of Facebook will as Chairman & CEO, exercise as outstanding stock option with respect to 6,00,00,000 shares of Class B common stock and will then offer 3,02,00,000 of those shares as Class A common stock in Initial Public Offering. Facebook expects that the substantial majority of the net proceeds Mr. Zuckerberg will receive upon such sale will be used to satisfy taxes that he will incur in connection with the option exercise.

Zuckerberg would control over 57.30% of the capital stock voting power following the IPO. In February Facebook reported Earnings of $1 billion (Rs.5,300 Cr) on the Sales of $3.71 billion (Rs. 19663 Cr), Facebook reported Earnings per share of $0.43 (Rs.22.79) Dec 2011. Facebook reported $381 million in Income from Operations; Net income of $137 million (Rs.726 Cr), Facebook reported Earnings per share of $0.09 (Rs.4.77) 31st March 2012.

Facebook says it has $3.91 billion (Rs.20,723 Cr) in cash as of March 31, 2012. It estimates it will have $9.511 billion (Rs.50,408.30 Cr) in cash assuming a $31.50 IPO prices.

Facebook debts are $1,587 million (Rs.8,411.1 Cr) which will remain same after IPO, Total Stockholder’s Equity is at $5,597 million (Rs.29,664.10 Cr) which will be $11,198 million (Rs.59,349.40 Cr) after IPO.

The main purpose of IPO is to create a public market for the Class A common stock and thereby enable future access to the public equity markets by the company and its employees, and obtain additional capital, and facilitate an orderly distribution of shares for the selling stockholders. Facebook intends to use the net proceeds from IPO for working capital and other general corporate purposes, they may use some of the net proceeds to satisfy a portion of the anticipated tax withholding and remittance obligation related to the initial settlement of company’s outstanding RSU’s, they may also use a portion of the proceeds for acquisitions of complementary business, technologies or other assets. 

The shares are expected to be priced on May 17 evening, with trading beginning on May 18, 2012. Facebook to list its stock on Nasdaq under the ticker "FB", Facebook will be compared with GOOGLE, GROUPON, ZYNGA. At the assumed market capitalization of close to $100 billion (Rs.5,30,000 Cr) FB will be competing AMAZON.COM, CISCO SYSTEMS in terms of market capitalization.
Facebook would have Price to Earnings of about 80 times its 2011 earnings. Its valuation is 19 times its revenue, which is close to 21 times revenue valuation of its faster- growing competitor LinkedIn. Experts believe that these are nosebleed multiples and Facebook needs to good growth to support such absurd multiples.

TATA STEEL: CREATING A VALUE FOR NATION !!!

Scrip Code: 500470 / TATASTEEL

CMP:  Rs. 461.85; Buy at Rs.445 - Rs.455 levels.
6 month Target – Rs. 495; STOP LOSS – Rs. 418.60; Market Cap: Rs. 44,855.53 Cr; 52 Week High/Low: Rs. 619.00 / Rs. 332.10

Total Shares: 97,12,14,450 shares; Promoters : 30,45,14,362 shares –31.35 %; Total Public holding : 66,67,00,088 shares – 68.64 %; Book Value: Rs. 497.09; Face Value: Rs. 10.00; EPS: Rs. 70.46; Div: 120 % ; P/E: 6.55 times; Ind. P/E: 7.30; EV/EBITDA: 5.82.

Total Debt: 28,301.14 Cr; Enterprise Value: Rs. 80,273.78 Cr.

TATA STEEL LTD:  Tata Steel Limited was established by Mr. Jamsetji Nusserwanji Tata in 1907. It was formerly known as The Tata Iron and Steel Company Limited and changed its name to Tata Steel Limited in 2005. Tata Steel Limited is a diversified steel producer. It has a global presence in 50 markets and manufacturing operations in 26 countries. Tata Steel’s principals products include flat rolled products of Non-Alloy Steel of a width of 600 millimeter and hot rolled coils of thickness 1.66 millimeter; tubes/pipes of circular section with outer diameter up to 114.3 millimeter, not cold rolled & flat rolled products of iron or non alloy steel of width of 600 millimeter or more, cold rolled (cold-reduced), not clad, plated or coated of a thickness of 0.5 millimeter or more but less than 3 millimeter. Company also provides steel for different industries, which include construction, automotive, aerospace, consumer goods, materials handling, energy and power, rail, engineering, ship-building, packaging, and security and defense. Tata Steel manufactures and processes steel, which includes hot-rolled coil through to high-gloss, pre-painted perforated blanks, wire rod and wire, sections, plate, bearings and tubes.  Its major branded products are Tata Steelium, Tata Shaktee, Tata Tiscon, Tata Pipes, Tata Bearing and Tata Agrico. In 20 October 2009, TATA STEEL won bid to acquire Anglo – Dutch steelmaker CORUS at $7.6 billion. On January 30, 2007, Tata Steel purchased a 100 % stake in the Corus Group at 608 pence per share in an all cash deal, totally valued at USD 12.04 Billion. The deal is the largest Indian takeover of a foreign company and made Tata Steel the world's fifth-largest steel group. In September 27^th 2011, Tata Steel merged Centennial Steel Company Ltd with itself.  TATA STEEL’s production facilities include those in India, UK, Netherlands, Thailand, Singapore, China and Australia. TATA STEEL is compared with SAIL locally and with JFE Holdings Incorporated (Japan) & Angang Steel Company Ltd (Hong Kong) globally.

Investment Rationale:

Over the years, Tata Steel’s domestic operations have exhibited robust performance on the back of high raw material integration and superior product mix. Domestic steel product prices have increased by Rs. 1,500- Rs. 2,000/ton over the last three months, coupled with a decline in coking coal costs and higher volumes which would lead to margin expansion in Q4 FY12. The 2.9 metric ton per annum expansion is likely to be commissioned in April 2012 and would require some time to stabilize and integrate the whole complex. It is expected that the new capacity will contribute additional 1million tons of saleable steel each over the next two years. Stable steel prices, superior product mix coupled with lower coking coal prices YOY would lead to higher EBIDTA/ton in FY13. The standalone operation is expected to witness an EBIDTA CAGR of 20.6 % over FY12-14. This would generate nearly Rs. 16,200 Cr of operating cash flow over the same period and would fund major part of the capex for its Odisha steel project. The spot prices in Europe have recovered to US$70 - $80/ton since January. However, this would impact Tata Steel’s realisations only from March 2012, as any change in spot prices will impact Tata Steel’s realisation with a lag. It is expected that the realisations to increase by US$25/ton QoQ in Q4 FY12. And with an uptick in steel prices and a decline in raw material costs (both iron ore and coking coal), the company would post positive EBIDTA in Q4 FY12. However, the performance would be restricted by one-offs like impairment charges and restructuring costs. On the back of various restructuring process, revival in European demand and higher steel prices YoY, an EBIDTA/ton of US$50/ton in FY14 is accepted. After the stabilization in FY13, it is expected that the plant will add a further 1mtpa in FY14, leading to a volume CAGR of 15.8 % over the period FY12-14. Tata Steel India can deliver 1.73mn tons in Q4 FY12, 7.7mn tons in FY13 and 8.8mn tons in FY14. Besides exporting to few countries, the company targets to sell incremental steel in the domestic market. This would be in the niche market of value added products, where it is already among the leaders. Out of the total outlay of Rs. 16,000 Cr, the company has already spent Rs. 2,500 Cr of capex till date and is expected to spend Rs. 5,000 Cr in FY13E. The company has reduced its manpower from 7,223 to 6,683 at the end of December 2011 and is expected to reduce it further to 5,750 by FY12-end. It is expected that the EBIDTA/ton to be US$30/ton in Q4 FY12 and remain around this level for FY13. On the back of various restructuring processes initiated by the company in FY12 & revival in European demand and higher steel prices YOY, an EBIDTA/ton of US$50/ton in FY14 is accepted. Tata Steel recently reported its 4QFY2012 production and sales numbers; Company's 4QFY2012 crude steel production grew by 2.6 % YoY to 1.8mn tonnes and its sales volume grew by 3.3 % YoY to 1.7mn tonnes. For FY2012, the company's crude steel production and sales volume increased by 3.9 % and 3.4 % YoY to 7.1mn tonnes and 6.6mn tonnes, respectively. These numbers are broadly in-line with the market’s expectations. 

Outlook and Valuation:

Steel players in India had hiked flat steel product prices by Rs. 1,000/ton each since Jan 2012. However, due to subdued market conditions and some resistance from the consumers, the steel players have reduced prices over the last one month. In the case of long product category, the increase in steel prices has been steady and has been accepted by the market. Indian long steel prices has raised by Rs. 1,500 - 2,000/ton in Q4 FY12 due to improving demand from the infrastructure space and production cuts taken by the smaller players. On account of the high iron ore and coal costs, small steel players have taken production cuts as it has become unviable to them to operate. This would help the larger producers like Tata Steel in gaining market share and maintain prices at current levels. Steel prices will decline marginally during the year on the back of lower raw material costs and subdued demand. The impact of lower steel prices globally would be reduced due to the increase in import duty on HRC and the depreciation of the rupee against the dollar. The commissioning of new capacities during the year would also add to the pressure on steel prices in the domestic market. On an average, blended steel realization to decline 2 % YoY is expected in FY13 and then strengthens to 3 % YoY in FY14. The domestic operations would continue to be the earnings driver for Tata Steel over the next two years. Even though near term earnings in Corus would remain under pressure due to one-off items, it is expected that the Corus will deliver steady EBIDTA/ton over FY13-14. Tata Steel is expected to report strong earnings over the next two years due to the factors like the impact of new 2.9mtpa capacity, impact of restructuring exercise in Europe, like the benefits from overseas raw material projects. After the recent correction in the stock over the last six months, Tata Steel is trading at a discount to its peers. The Indian business of Tata Steel at a 6.5 x EV/EBITDA multiple and the European business at 4.5 x, is justified as the Indian operation is self-sufficient in terms of raw materials (100 % iron ore and 50 % coking) and deserves a decent premium vis-à-vis Corus, which is not self sufficient. Stock continues to offer an attractive opportunity given the distress valuations of European operations at EV/tone of US$200 & the strong domestic operations and increased raw material self-sufficiency from current 33  % to 50 % in iron ore and 18 % to 23 % in coking coal (by FY13 end). At the current market price of Rs. 461.85, the stock is trading at a PE of 17.83 x FY12E and 10.71 x FY13E respectively. The company can post Earnings per share (EPS) of Rs. 25.90 in FY12E and Rs. 43.10 in FY13E. One can buy TATA STEEL with a target price of Rs. 495.00 for Medium to Long term investment.

KEY FINANCIALS	FY11	FY12E	FY13E	FY14E
SALES (Rs. Crs)	1,18,753.10	1,28,344.10	1,23,146.60	1,32,914.20
NET PROFIT (Rs. Crs)	5,933.70	2,512.60	4,185.50	6,710.50
EPS (Rs.)	61.90	25.90	43.10	69.10
PE (x)	7.40	17.80	10.70	6.70
P/BV (x)	1.20	1.10	1.10	1.00
EV/EBITDA (x)	5.80	7.20	6.00	5.10
ROE (%)	20.30	6.60	10.10	15.10
ROCE (%)	8.70	4.40	6.40	9.00

I would buy TATA STEEL LIMITED with a price target of Rs. 495 for Medium to Long. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 418.60 on every purchase.
READ HERE TO KNOW MORE ON LONG TERM INVESTING - CLICK HERE

IL&FS TRANSPORTATION NETWORKS LIMITED:CREATING INFRA BY HEART !!!

Scrip Code: 533177 / IL&FSTRANS

CMP:  Rs. 190.85; Buy at Rs.185-190.
Short term Target: Rs. 200, 6 month Target – Rs. 232; STOP LOSS – Rs. 175.58; Market Cap: Rs. 3,707.59 cr; 52 Week High/Low: Rs. 233.95 / Rs. 142.55

Total Shares: 19,42,67,732 shares; Promoters : 14,58,67,769 shares –75.09 %; Total Public holding : 4,83,99,963 shares – 10.00 %; Book Value: Rs. 91.87; Face Value: Rs. 10.00; EPS: Rs. 12.34; Div: 35 % ; P/E: 15.46 times; Ind. P/E: 14.14; EV/EBITDA: 8.99.

Total Debt: 1,894.09; Enterprise Value: Rs. 5,588.11 cr.

IL&FS TRANSPORTATION NETWORKS LIMITED: ITNL was incorporated in 2000 and is based in Mumbai, India. It was formerly known as Consolidated Transportation Networks Limited and changed its name to IL&FS Transportation Networks Limited in September 2005. IL&FS Transportation Networks Limited operates in the Highway and street construction sector. IL&FS Transportation Networks (ITNL) is a surface transportation infrastructure company. ITNL is the builder, operator and transfer (BOT) road operators engaged in developing, designing, operating, maintaining and facilitating surface transportation infrastructure projects. ITNL’s services include advisory and management services, supervisory services, operation and maintenance services, toll collection services for toll road projects. ITNL provides maintenance services primarily for highways and roads in Spain, Portugal and Latin America, and advisory and project management for BOT road projects, trades in materials used in the maintenance of roads & undertakes construction contracts. On May 31,2010, it acquired Area De Servicio Coiros S.L.U. On September 1, 2010, it acquired Conservacion De Infraestructuras De Mexico S.A. De C.V. On December 17, 2010, it acquired Alcantarilla Fotovoltaica, S.L.U. and Area De Servicio Punta Umbria, S.L.U. IL&FS Transportation Networks Limited is a subsidiary of Infrastructure Leasing & Financial Services Limited. The company is compared to NRW Holdings Limited globally & locally with Cummins India Limited and Walchandnagar Industries Limited.

Investment Rationale:

IL&FS Transportation Network limited is India’s largest road developer (7,621 lane kms) and is poised for 18 % CAGR (FY08-14E) in operational portfolio with fair mix of toll & annuity projects and BOT stake adjusted with average daily toll collection of Rs. 70 lakhs per day in FY11 and is expected to clock around 49 % CAGR (FY11-16E). Company has order backlog at Rs. 8,900 Cr at 3.3X FY11 revenue excluding Rs. 2,500 Cr order inflow in Q4FY12 and the recent wins of Rs. 2,500 Cr could restrict ITNL’s participation in next round of bidding at NHAI. ITNL is already sitting on 2 projects which are yet to achieve its financial closure and its SOTP value comes at Rs. 222 it implies a 13 % upside, but ITNL is highly sensitive to interest rates so a cut of 100 bps (1 %) in interest rate (0.50% is cut already and 0.50% more is expected) will lead to 26 % increase in SOTP value. ITNL is the largest private sector Built Operate Transfer road operator from IL&FS Group , with a portfolio of 22 domestic road projects and 1 international projects aggregating to 7,621 stake adjusted lane in km (SALK) in its portfolio. ITNL has 11 operational projects with 3,281 SALK and remaining 12 projects or 4341 SALK under development.  After a long dry patch ITNL has won two projects over the last couple of months. Recently ITNL acquired 49 % stake in Yu He Expressway in China through its 100 % subsidiary International Pte Ltd (IIPL) based in Singapore. The balance 51 % stake is retained by Chinese state owned enterprise CEG. The total cost of acquiring 49 % stake is USD 160 million which is funded through mix of borrowing of USD 140 mn at cost of debt of 5 % and Equity of US$ 20 mn. The acquisition is priced at 1x the Book Value. The length of the expressway is 58.72 km of 4 lanes with 30 years of concession period. The residual period of concession agreement is 20.5 years. The company expects 16 % equity Internal Rate of Return in the project. The benefits for ITNL from the acquisition include sustained revenue from toll/annuity, improvement in EBITDA margin, enhancement in ITNL’s experience and qualification, etc.

Outlook and Valuation:

Recent wins could restrict ITNL’s participation in new projects, Although ITNL can win further projects but it is believed that with ITNL already sitting on two projects which are yet to achieve financial closure they would be extremely selective in bidding for the third project. Structurally ITNL would digest the two wins the Kiratpur Ner chowk & Kharagpur Baleshwar worth Rs. 2,500 Cr. Unlike past where ITNL use to recognize significant chunk of margins upfront as consulting fee, a larger proportion of 75 % is now recognized more rationally over the entire construction phase which also means lower internal surplus to fund new projects. Highly sensitive to interest rate, 100 basis points correction in the risk free interest rate (0.50% is cut already and 0.50% more is expected) will leads to 26 % increase in fair value of ITNL which remains a key beneficiary of reduction in risk free rate of project financing. ITNL has the highest leverage in the road sectors making it highly interest rate sensitive. High financial leverage as suggested by consolidated debt: equity of 3.5 x makes ITNL the prime beneficiary in the correcting interest rate scenario. The valuation of ITNL’s road BOT portfolio comes at Rs. 185/share with Cost of Equity of 12 % ; operational projects at 13 %, 14 % for under construction project & 15 % for under development projects, the valuation of E&C business comes at Rs. 140/share with 6 x FY13E EBITDA and valuation of other subsidiaries comes at Rs. 30/share. Net debt works out to Rs-123/share at parent level. At the current market price of Rs. 190.85, the stock is trading at a PE of 9.26 x FY12E and 9.68 x FY13E respectively. The company can post Earnings per share (EPS) of Rs. 20.60 in FY12E and Rs. 19.70 in FY13E. One can buy ITNL with a target price of Rs. 232.00 for Medium to Long term investment and for the SHORT TERM PLAYERS it should be Rs. 200.00

KEY FINANCIALS	FY10	FY11	FY12E	FY13E
SALES (Rs. Crs)	2,407.90	4,048.20	5,308.40	6,930.50
NET PROFIT (Rs. Crs)	353.60	457.90	400.20	382.10
EPS (Rs.)	18.20	23.60	20.60	19.70
PE (x)	11.70	9.00	10.30	10.80
P/BV (x)	2.50	1.80	1.80	1.50
EV/EBITDA (x)	8.60	7.80	9.80	9.80
ROE (%)	27.70	23.40	16.80	14.40

I would buy IL&FS TRANSPORTATION NETWORKS INDIA LTD with a price target of Rs. 232 for Medium to Long term and Rs. 200 for the Short term players. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 175.58 on every purchase.
READ HERE TO KNOW MORE ON LONG TERM INVESTING - CLICK HERE