CONSERVING CASH AMID SLOWDOWN

Wary India Inc to Cut Payouts

Some cos have trimmed interim dividends post Q3 to protect bottom line

Keen to conserve cash in an economic slowdown, Indian corporates are likely to slash interim dividends further this year. Interim dividends are the payouts to shareholders announced in the period between two annual results.
An ETIG analysis of interim dividends paid by Indian corporates over the last eight quarters shows that after increasing dividend payouts through 2012, companies started cutting them after the December 2012 quarter results. Although state-owned companies reported higher payouts, many private firms trimmed them, as focus on protecting corporate bottom lines increased.
The number of private companies that announced interim dividends in the January to March quarter declined to 94, compared with 116 for the same period last year. The aggregate of interim dividends declared during the period was . 2,852. The aggregate number was down by 23% when compared with . 3,704 crore ayear ago. This is in stark contrast to the trend in the period from June to December 2012, when the total interim dividends paid out by private sector firms rose 36.6% to . 8,235 crore year on year.
The analysis is based on data of 1,593 listed companies, which have announced at least one dividend in the last eight quarters. Analysts Expect Further Fall in Interim Dividends 
The dividend announced along with the year-end results is considered the final dividend; any other dividend is treated as interim dividend.
Analysts expect further fall in the amount of interim dividends. “An improvement in dividend payouts is unlikely in the near term unless there is a significant improvement in the liquidity situation,” Vikram Dhawan of Equentis, an investment company, said. Reduced interim dividend is a direct fallout of the economic slowdown, he said. “Overall, the EPS growth and EBIDTA margins of Indian corporates have been subdued and, due to very tight liquidity, there is a tendency towards shoring up balance sheets. Cash is king for now.”
The analysis shows 50 companies did away with interim dividends during the period, including Sesa Goa, United Phosphorous, Polaris Financial Technologies and Torrent Power; all these companies had paid an interim dividend a year ago. Against this, 26 companies such as Aurobindo Pharma, JM Financials, DCM Shriram Consolidated, OCL, India Glycols and Eros International announced interim dividends for the first time during the period.
State-owned companies raised their interim dividends by over 25% to . 18,298 crore after the December 2012 results from . 14,580 crore a year ago. This may have been to help the dominant shareholder — the government, which is struggling to contain its fiscal deficit — boost its non-tax revenues. In the June-December 2012 period, the interim dividends paid by these companies had fallen 9.7% from a year ago to . 5,732 crore.
Does this make PSU stocks more attractive for retail investors? “Not necessarily,” says G Chokkalingam, executive director, Centrum Wealth Management. “Investors shouldn’t buy them for the sake of higher dividend payout alone. They have to be selective in terms of the future prospects of such dividend yields,” he says. The BSE PSU index has lost over 13% so far in 2013, against the 3.6% drop in the BSE Sensex.
According to Chokkalingam, a secular reduction in interest rates will significantly help improve corporate profits from the third quarter of FY14 onwards. “A base effect, along with lower global growth in 2013, which will bring down commodity prices, will help moderate headline inflation. The risk could be any possible failure of the monsoon,” he said.

HPCL: High-cost Barmer Unit may Prove a Drag

Interpreting Numbers & Trends Oil marketer may be a key beneficiary of the recent diesel price decontrol which strengthens the case for a re-rating of company

The recent diesel pricing reforms have brought a renewed focus on oil marketing companies, with a buzz about a potential re-rating.
State-run Hindustan Petroleum’s performance being more skewed towards the domestic marketing business compared to its peers, the company could be a key beneficiary of the government’s subsidy reduction measures. It recently grabbed headlines by announcing a refinery project in Rajasthan. However, a re-rating could be some time away.
When it comes to diesel deregulation — the benefit accrues to oil marketing companies only indirectly — better cash flows will bring down working capital loans and, therefore, the interest burden. However, there are concerns whether heightened competition will negate this. A research report from Axis Securities says that total deregulation in diesel could actually harm the profitability of oil marketing companies since private firms such as RIL and Essar will find retailing in India lucrative. The report says that complete deregulation may push prices towards export parity; will result in $3.1 per barrel decline in GRMs. At present, the subsidies are calculated assuming trade parity pricing — 80% import parity and 20% export parity.
Against this backdrop, HPCL’s recently announced refinery project in Rajasthan may not be much to cheer about. The company’s announcement puts the estimated project cost of . 37,230 crore for the 9-million tonne per annum refinery-cum-petrochemical complex at Barmer, to be high compared to the refineries built in India so far. At this price target, the cost per million tonne capacity exceeds . 4,000 crore, which is more than double what other recent refineries have cost. For instance, IndianOil’s 15-million tonne per annum (MTPA) refinery at Paradip will come up at an investment of . 30,000 crore. Similarly, BPCL completed its 6-MTPA Bina refinery at around . 12,000 crore of capital expenditure, with the management saying that a . 1,000-crore debottlenecking will take it to 9 MTPA by 2015. Similarly, Essar Oil’s muchdelayed refinery at Vadinar was built at a capital cost of . 24,000 crore for 20-MTPA capacity. All these recent refineries have a capital expenditure of less than . 2,000 crore per million tonne capacity. “Even at the Nelson Complexity Index of 12, the capital cost of this project would be $3,000/bpd/complexity, which is on a very high side,” the head of research of a Mumbai-based brokerage house said while declining to be named.
However, many others would rather wait for more clarity. It is too premature to comment on the project at present, says Deepak Pareek, analyst - oil & gas, Prabhudas Lilladher. He says that they are unaware of the refinery configuration, the type of crude they will process and the type and capacity of the petrochemical complex. What is however clear is that the capital cost of setting up such facilities has grown by 15% over 2009 going by CERA IHS downstream capex index and that the trend is expected to continue, he says.
Till there is more clarity on these details, the planned refinery will have to be regarded as India’s costliest and may hold little promise for investors. 

Cairn Slides Despite Strong Fundamentals

The Cairn India scrip has been trading near its 52-week low for the past 2-3 weeks, reflecting the uncertainties surrounding global oil prices and concerns over the company’s ability to ramp up production.
The pessimism over the stock appears unjustified, as the company’s fundamentals are strong, with steadily increasing oil production. Analysts tracking the company have been the most bullish over the past three years. Cairn India’s scrip has lost nearly 15% over the past one year, although the company did well operationally. It reached its targeted production level above 170,000 barrels per day and posted the highest ever net profit in calendar year 2012, in addition to declaring a maiden dividend. However, the company had to revise its production target from 240,000 barrels per day to 210,000 barrels per day by FY14 end. “With the lower than expected productivity of Bhagyam, Cairn now believes that its existing MBA fields, EOR efforts and Barmer Hill discoveries will help it reach around 210kbpd by end of FY14. This is negative considering it is now short of reaching its earlier guidance of ‘significant part of 240kbpd’ in CY2013,” mentioned a recent Morgan Stanley report.
To its credit, the company is again focusing on exploration at the Rajasthan block to tap its full potential. The company spudded an exploratory well in the block recently. The company is cash rich, and its cash generation is likely to stay ahead of its capital expenditure. However, that raises the question how it will use the cash. The company had reported a net cash balance of over . 14,600 crore at the end of December 2012, or . 76 per share.
This could lead to higher dividend payouts, but there is a risk. “The next dividend announcement is expected in April. In the absence of a higher payout, investors are likely to value the cash at a discount to factor in cash allocation related risks,” noted the Morgan Stanley report.
The scrip’s current valuation at just 4.8 times its earnings for the past 12 months is significantly at a discount to those of its peers like ONGC and Oil India, which range between 9.5 and 11.5.
According to Bloomberg, the company is being tracked by over 60 analysts and threefourths of them are bullish on it. The average rating on a 5-point scale for the scrip has improved to a 3-year high of 4.3, while the average 1-year price target, at . 382, is 33% above the current market price. 

FIIs Hit Exit Button in Struggling Firms

Foreign institutional investors, or FIIs, who poured over $22 billion into Indian equities in 2012, have significantly reduced their holdings in struggling firms such as Moser Baer and Jindal Stainless, buying instead into companies that have fared well.
Take the case of Moser Baer. FII holding in the country’s second biggest solar equipment maker was as high as 22% at the end of December 2011. But by the end of December 2012, their holding had come down to just 0.1%.
The Moser Baer stock has shed over 72% of its value over the past one year, even as the Chinese government offered more incentives to private solar equipment manufacturers there, prompting even Indian institutional investors to head for the exit. The company has now clocked 11 consecutive quarters of net losses.
Similarly, overseas portfolio holding in Jindal Stainless has dropped from 21.58% to 1.27% between December 2011 and December 2012. That is hardly surprising given the fact that the company has incurred net losses in four out of the last five quarters because of subdued global economic conditions, exchange rate fluctuations and a mounting interest burden.
FIIs have also been paring holdings in companies such as integrated textiles firm Alok Industries, battery maker Eveready Industries and toothbrush maker JHS Svendgaard, in the face of a challenging business environment.
FII inflows into equities were Rs 1,27,736 crore in 2012, compared with an outflow of Rs 2,714 crore in 2011. However, the record inflows did not go into more companies; the FIIs rather chose to invest in large caps while paring their holdings in companies that fared badly.
An ETIG analysis of 3,229 companies listed for at least 18 months shows that FII holding was higher in 474 companies at the end of December 2012 than at the start of the year. FIIs shed their stakes in 664 companies over the year, while their holding remained unchanged in 2,091 companies.
G Chokkalingam, chief investment officer and executive director, Centrum Wealth Management, says that typically, FIIs consider the extent of loss in their original investments as well as the quantum of fall in market cap, apart from the change in fundamentals while taking investment decisions. “Many of them are not comfortable in holding on to stocks if prices fall substantially, pulling down the market cap below a certain threshold set by them,” he says.
It is not that such investment calls by foreign funds are always bang on. When IT firm Satyam Computer was battered after an accounting scam, foreign funds exited at very low prices. But interestingly, the same stock gave phenomenal returns after the Mahindra Group acquired it.
Chokkalingam says that retail investors should not be guided by the selling behaviour of FIIs or the low base price of stocks. “Investors should go by the quality of corporate governance and evaluate the current leveraging status and the business prospects of the companies before investing in them.” In most of the cases, the reasons for FIIs selling out were pretty clear – continued losses with no indication of a turnaround. Local institutions too were quick to exit such firms. 

CASTROL INDIA

Interpreting Numbers & Trends Castrol is finding it tough to boost earnings in the face of rising input costs & dull demand, despite better operating efficiencies Lagging Volumes a Drag on Earnings 

For shareholders of automotive and industrial lubricant manufacturing firm Castrol India, the 10% profit growth the company posted in the quarter to December 31, 2012, after several quarters of decline in profits, may come as a relief. However, the company still has to overcome a few major challenges, and there is no indication that the year is going to be any better. Its current valuations certainly appear expensive.
Castrol India has been battling a combination of rising oil prices, a weak rupee and an economic slowdown — which led to profits sliding in the past two years. While the rise in oil prices and the weak rupee exerted upward pressure on raw material costs, the slowdown in domestic economy hampered demand from industrial users.
Ravi Kirpalani, automotive director & chief pperating officer, Castrol India, had told ET that the economic environment remained challenging for the company in 2012. The company managed its costs and working capital better. Although its post-tax profit in 2012 was about . 34 crore lower than in 2011, cash generation from operating activities was . 100 crore higher, he said.
The challenges listed above will weigh heavy on the company’s prospects. Data suggest that lubricant sales by volumes contracted marginally in India in 2012. Castrol increased its volumes by 7% in the automotive lubricants segment, and gained some market share as well, but lower volumes in industrial and infrastructure lubricants somewhat cancelled out the gains.
With growth difficult to come by, Castrol plans to expand its distribution network and make its brand stronger. According to Ravi Kirpalani, the company connected with 8,000 new outlets in 2012, against 1,000 to 2,000 in the previous years. This year, it plans to add 10,000 more outlets to its distribution network. It will continue to invest in its brand by increasing advertising spending, with an eye on long-term growth.
Equity analysts appear divided on how the Castrol stock will respond to the prolonged stagnation in earnings. A note from Kotak Institutional Equities reiterated its ‘sell’ recommendation with a target price of Rs 200, citing the difficult operating environment and expensive valuations.
In contrast, a report from brokerage firm Motilal Oswal maintained its ‘neutral’ outlook on the stock, with a price target of . 316, citing its pricing power and healthy demand from the replacement market. But there is a consensus that at 34.9 times its profits for the past 12 months, Castrol India’s current valuations are expensive relative to its prospects. 

KEY POINTS Castrol India has been battling a combination of rising oil prices, a weak rupee and economic slowdown
Castrol increased volumes by 7% in the automotive lubricants segment and gained some market share
But lower volumes in industrial and infrastructure lubricants somewhat cancelled out the gains

Crude Slide can Benefit India

After strengthening in early February, crude oil prices globally have corrected quite a bit with renewed uncertainty on global economic growth. Automatic spending cuts in the US, weak economic data in China and the Eurozone unemployment hitting a record high -- all contributed to this worry. Amidst this gloomy picture, the drop in crude oil prices is a significant positive for India, provided this trend continues. Brent crude oil prices – the most widely followed pricing benchmark – lost over 7.5% over the last three weeks to drop below $110 after touching a high of $119.2 in early February. This is the lowest level in 2013 so far due to concerns relating to oil demand amid a sluggish global economic growth.
A failure to strike a deal between US lawmakers triggered automatic spending cuts starting March 1, 2013, known as sequestration. The cuts estimated at $85 billion for the remaining months of the current year, are estimated to trim US government spending by $1.2 trillion over 9 years. This is a significant cut for the US and is going to shave off at least 0.5% from its economic growth, according to IMF estimates.
While the world’s largest economy is facing the prospects of a slower growth, the second biggest economy of China too could be heading towards a slowdown. The recent official Purchasing Managers' Index reading came at 50.1, much lower than expectations, and barely above the 50 mark, which denotes economic expansion. Similarly, the recently released data for Eurozone showed that the steadily growing unemployment crossed a record high of 11.9% for January 2013.
The fall in crude oil prices is a boon for India, which imports more than threefourths of its hydrocarbon needs. The rupee cost of the Indian crude oil basket has dropped a steep 6.1% in last 10 trading sessions to . 5,830 per barrel on February 28.
Of course, it is necessary for prices to continue the downtrend for the country to derive any meaningful benefit. The overall under-recovery for IndianOil, BPCL and HPCL put together stands at . 432 crore per day starting March 1, marginally down from . 454 crore per day of the preceding fortnight. For the country, which has lost nearly . 1.25 lakh crore on petroleum under-recoveries in the first nine months of the current fiscal, these numbers are still frighteningly high.