Airlines in India

Indian airline passenger traffic came in at 4.1 mn passengers for the month of Jan’2010 showing a strong 22.6% YoY growth broadly in line with our view. We expect Industry to show ~15% growth for FY10. Industry traffic witnessed a sequential decline of 9% in Jan’10 on account of (a) seasonality with December being the peak holiday season, and (b) cancellations due to poor weather conditions prevalent in the northern India. Seat factors for most airlines also showed a sequential decline for the same reason.


Strong traffic growth yet again

■ Jet’s loss of market share due to poor weather conditions
Jet along with JetLite was the most affected airline due to the poor weather conditions. JetLite had the highest cancellation rate of 12.6% followed by Jet at 9.2%. This has resulted in loss of market-share for Jet (including JetLite) by 1%. However, despite this one-time loss of traffic Jet Airways will be able to achieve estimated 8.3mn passengers for FY10 showing a modest growth of ~5%.

■ Demand supply growth rates remain favorable
In January’10, supply (ASKMs) increased by ~7% YoY while demand (RPKMs) increased by ~25% YoY. With most carriers maintaining fleet over next 12 mths, improving demand trends will continue to keep the demand-supply gap favorable. This strong demand has enabled the carriers to maintain good yields even after the peak holiday season as pricing power has returned to the carriers.

■ February expected to be strong as well
Seasonally February is a weak month for the airline traffic. However, based on our interactions with the management of the carriers on the demand situation, we expect February to be strong as well. This coupled with the current softening of crude prices would enable the industry including Jet Airways to post strong numbers for the month of February as well.

Elecon Engineering: Q3FY10 Result Update

Elecon’s revenues grew by 1.7% YoY during 3QFY10. The company was able to manage this growth largely due to growth in its material handling equipment (MHE) business (which recorded a 4.3% YoY growth during the year). On the other hand, its transmission equipment (TE) business saw a fall of almost 2% YoY. As such, the MHE business increased its share in the company’s total revenue to nearly 59% from 57% last year, while the TE business contributed to the balance 41% during the quarter (43% in 3QFY09).

Elecon’s operating margins contracted marginally by 0.1% during 3QFY10. The reason behind this was much higher raw martial costs (as percentage of sales). On the other hand, employee costs and other expenditure saw a fall as a percentage of sales during the quarter.

During the quarter, the company’s net profits grew by 59% YoY due to a Rs 77 m profit on sale of investments. Excluding this, profits recorded a fall of 3% YoY during the quarter. This is on the back of a contraction in operating margins as well as a substantial rise in depreciation charges.

At the current price of Rs 80, the stock is trading at a multiple of 10.1 times our FY12 earnings estimates. At this level, we hold a cautious view and would advise against taking fresh positions in the stock.

Alok Industries - Q3FY10 Result Update

Despite the pressure on export demand from developed economies, larger players in the Home Textile industry continue to derive the benefits of consolidation. After a few quarters of sluggish textile exports, Alok has been able to profitably capture the incremental growth in volumes and realizations during 9mFY10. While the growth in the company’s apparel business has been relatively slower, thanks to the heightened competition, home textile business continues to remain unaffected. The latter infact has managed to reap better realizations from its marquee clients in global retailing. The volume growth on the other hand was contributed by Alok’s expanded polyester yarn (POY) capacity that is the largest single location capacity in the country.

Alok will be attaining sizeable capacity across segments i.e., spinning, toweling, sheeting and garmenting once the phase-III of the capacity expansion gets fully commissioned by FY10. The incremental 14,000 TPA (tonnes per annum) of spinning capacity will make the company 60% self sufficient as far as its yarn requirement goes. The terry-towel, sheeting and garment capacities will lend the company operating leverage against its peers in the home textile and readymade garment industry.

As per the management, the entire process of converting cotton to finished fabric ensures gross operating margins of around 37%. The conversion of fabric to garment offers additional operating margin of 12%. Thus vertical integration is expected to play an important role in sustenance of the company's operating margins and improvement in net margins.

Although the TUF debt has kept the company's funding costs relatively moderate and most of the capacities have already been commissioned, extended period of lower capacity utilisation may force the company to bear interest costs longer than expected without deriving the benefit of growth in volumes and margins. Having said that the planned equity dilution will help the company lower its debt to equity ratio.

At the current price of Rs 24, the stock is trading at an EV/EBIDTA multiple of 6.2 times FY12 estimates. Synonymous to its chain of retail stores - 'Homes & Apparels', this company's business model is in contrast to most other single-product players in the textile sector. Its integrated structure makes it ideally poised to capture the upsides in terms of margins. Moreover, the higher profits are ploughed back for R&D to achieve better product mix and improved quality.

 

Armed with sizeable capacity and strengthened overseas presence, the company is set to reap the benefits of higher sales and better realizations over the next 4-5 years. What is more, lower interest and depreciation cost will mean return ratios that will be nearly double of that at the end of FY09. We maintain our positive view on the stock

BILT Result Update

BILT’s revenues grew by a robust 37% YoY during 2QFY10 largely due to a boost in volumes as its capacity expansions at Ballarpur and Bhigwan came on stream. Unit Kamalapuram (which manufactures rayon grade pulp) also bounced back with revenues growing by 211% YoY. As a result, the company’s overall paper business logged in a healthy growth of 24% YoY. For the half year period too, while overall sales grew by 16% YoY, sales from the paper business logged in a growth of 17% YoY.

BILT’s operating margins contracted by 3.7% during the quarter, largely due to a rise in raw material costs from 21.2% of sales in 2QFY09 to 30.9% in 2QFY10. Raw material prices were higher on account of a substantial increase in pulp prices. Further, a correction in realisations also had an impact on overall margins during the quarter. D


Despite the 18% YoY growth in operating profits, higher interest costs and depreciation charges dented BILT’s bottomline, which fell by 1% YoY during the quarter. Increased tax expenses also played a role in impacting bottomline. Depreciation was higher during the quarter due to the expanded capacities at Bhigwan and Ballarpur coming on stream.

At the current price of Rs 25, the stock is trading at a price to earnings multiple of 3.2 times our estimated FY11 earnings. With the capacity expansion at Bhigwan and Ballarpur coming on stream, volumes and consequently sales are expected to ramp up going forward. Near term pressures are likely to persist in terms of higher raw material costs as pulp prices remain firm. Also, given that Bhigwan imports pulp, the additional capacity coming on stream means that pulp requirements will increase putting further pressure on margins. However, in the longer term, the Sabah acquisition will be beneficial as pulp from the forests in Malaysia would be used at the Indian plants thereby lowering raw material costs. Overall, we maintain our positive view on the stock from a long term perspective.

Titan Industries Q3FY10

Titan Industries report 30.3% YoY growth in revenues in 3QFY10, backed by festive season and new store openings.

Operating profits report robust growth of 81.4% YoY as costs grow at a slower pace compared to growth in topline.

Good show at the operating level, lower interest costs and tax expenses leads to more than five-fold growth in net profits.

 

In 3QFY10, Titan Industries’ revenues grew by 30% YoY on account growth across its mature business segments – time products and jewelry. The jewelry segment that accounts for more than 75% of the total revenues reported 33.7% YoY growth in revenues. The growth in revenues of time products (contributes over 15% to total revenues) stood at 24.8% YoY. The remaining 3% to 5% of revenues come from the other business that includes that include eyewear, precision engineering, etc. This segment reported decline in revenues of 6.8% during the 3QFY10 on account of postponement / cancellation of orders from overseas customers in the Precision Engineering division.

Thus, the growth in revenues was driven by its mature business segments – jewellery and time products. The growth of the Titan’s business is linked to discretionary spending by consumers. The recovering economic scenario, new store openings and festive boosted consumer spending. Additionally, Titan Industries’ ability to understand changing consumer preferences and accordingly streamline its products enabled to push sales in an increasing competitive scenario.

The operating profits operating have reported robust growth of 81% YoY during the 3QFY10. Apart from double digit growth in net sales, cost control initiatives implemented by the company supported growth in profits. The operating margins have expanded by 2.3% in 3QFY10 to 8%. As a percentage of sales, the cost of raw materials remained stable at around 76%, while the staff costs and advertising expenses were lower. All of this resulted in higher profitability.

On account of good show at the operating level and lower interest costs, the company has reported more than two-fold growth in profit before tax. The interest expenses in 3QFY09 were on a higher side as it includes nearly Rs 67 m relating to interest on income tax of earlier years.

Apart from the whopping growth at the PBT level, incidence of lower tax expenses led to more than five-fold growth in net profits. During the same quarter last year, tax expenses were on a higher side as it includes income related to earlier years.

Titan, on account of its strong brand portfolio, its ability to understand changing consumer preferences and ability to accordingly streamline its products has been able to withstand the difficult situation better than others. In future too we expect the company to continue to grow on the back of its strong position and its new initiatives. The sector provides immense potential on account of low penetration levels and on account of rising aspiration levels of Indian consumers. The company’s new initiatives, (prescription eyewear and precision engineering) taken with a view to sweat assets and sustain profitability are expected to improve shareholder returns in the future. While these two segments are not expected to contribute significantly to the topline in the coming two to three years, it will help the company sustain profitability going forward.

At the current price of Rs 1,499, the stock is trading at a multiple of 18.4 times our estimated FY12 earnings and leaves limited scope for upside potential