Tata Power Ltd. - Powerful margins, Coal slightly sluggish.

Tata Power's Q3 result has some positives & some negatives. The company's Total Income figure was flat Y-o-Y and 2.5% lower Q-o-Q. The reason being lower revenues from Coal business because of lower Coal prices. Tata Power did well on the EBITDA margin front where it managed over 450 bps improvement over that reported in Q3 of last fiscal. Even compared to previous quarter, the EBITDA margin was slightly better. The company has attributed this improvement to strong operating performance of it's Power subsidiaries. I think there is still scope for improvement in some of the company's Power subsidiaries, which should be seen over the next 3-4 quarters.

In the following charts I have shown the T-T-M progress of Tata Power's Total Income, EBITDA, Profit before Tax & Provisions and finally the Interest Cost. Have a look:

As we can see from the charts, Tata Power's Total Income has stagnated this quarter, but the EBITDA is still showing continued strong improvement Q-o-Q. I think we will see one more such strong Q-o-Q improvement in EBITDA and then the improvements will be much slower, though it will be positive. Tata Power's T-T-M EBITDA crossed the Rs.9000 crores mark this quarter and the company has been hitting a new Best-ever figure over the last 3 quarters. I am expecting Tata Power to even hit the Rs.10,000 crores in T-T-M EBITDA sometime in the next 3-4 quarters. This surge in EBITDA over the last 3 quarters is clearly the signal that the worst pain period for Tata Power is finally over, after having struggled ever since the company jumped into the UMPP bandwagon & few other projects, all of which have faced difficulties at some level or the other.

The sharp improvement in EBITDA will ultimately lead to improved Cash Flows from operations, which will ultimately help in reducing the Debt burden to some extent and hence reduce the Interest Cost load. Tata Power has reported a Q-o-Q and Y-o-Y dip in Quarterly Interest Cost over the last 2 quarters. As of now the dip is not big, but I am expecting a little bigger drop in Quarterly Interest Cost over the next few quarters, which should help boost the company's Cash Flows further. The improved Cash Flows from existing operations will help the company pursue it's projects under implementation with a new vigour. Tata Power has also created a new Renewable Energy subsidiary and is shifting all it's Solar, Wind & Hydro assets into that subsidiary. This restructuring should help streamline it's operations as the company has big plans for Renewable Energy space.

The Net Profit of the company continues to be impacted because of various Provisions. Some of these Provisions involve Cash Payouts, while some others are just Accounting measures. Nevertheless these Provisions do pull down the company's Net Profit figure, which looks bad on the P&L. In the charts above, we can see the sharp improvement in T-T-M Profit before Tax & Provisions for Tata Power over the last 3 quarters, but unfortunately a major portion of this gain was wiped out by the various Provisions the company undertook. Hopefully the Provisions will reduce in the coming quarters and then we will see sharp improvement in the company's reported Net Profit figure.

About Valuations, I had already discussed it in my previous report on Tata Power posted couple of months ago and the company continues to trade around the same Market Cap level as then. I am clearly bullish on the possibility of Tata Power stock getting re-rated in the coming months to the tune of 50-75% over the next 12 months or so.

Just Dial Ltd. - What an amazing Sell Call it was!! Is it time to be Contra now?

I had written a report on Just Dial Ltd about 10 months ago titled "

Just Dial Ltd. - Crazy e-commerce valuations!! Nothing else!!", where I had explained my simple logic on why Just Dial's financial performance does not deserve such high valuations, unless it shows some strong signs of much better growth. Click Here to read that report. The growth rates posted by Just Dial Ltd over the last 4 quarterly results seem to have been even more disappointing because of which the stock has dropped more than 50% over the last 10 months & is now available at a price even lower than it's Listing Price.

Let's do a performance check to see if Just Dial's financial performance over the recent 4 quarters was really that bad to warrant such a sharp drop in market capitalisation and it's corresponding valuations. Have a look at the T-T-M charts below, which will give us some idea:

As we can see from the T-T-M charts above, Just Dial's Total Income has been growing at a steady pace. At a Y-o-Y growth of just under 24%, this can only be said to be decent, though Not great. The company did show some handsome growth in EBITDA & Net Profit for the periods ending Mar'15, Jun'15 and Sept'15, but has reported a small Q-o-Q dip during Dec'15. The dip in EBITDA & Net Profit during the Dec'15 quarter can be attributed to the increased costs towards pushing it's recently launched 'Search Plus' platform of services. The company is heavily banking on this new platform to bring in some handsome growth for the company in the coming quarters & years.

The 'Search Plus' platform is quite interesting & does have potential to ring in some decent revenues for the company going forward. But I think it might take some time for the concept to be widely accepted by the hundreds of Merchants & Vendors that the company is marketing it to. One point which goes against Just Dial's efforts to push Search Plus is the presence of several more e-commerce options in the market today, many of which are even dedicated to just certain specific fields. Many of these e-commerce services are currently well funded by various VC funds and hence are aggressively marketing their services. At the same time the Indian consumer is still pretty new to transacting online, though the percentage of population trying their hand at it is increasing with every passing month. There is no doubt that the market size is huge & many of these e-commerce players can develop their business models to become successful. But it will take a year or two more for things to mature & by then we could even see some players windup their businesses, especially the ones who are burning cash at a fast pace and not generating enough revenues to sustain themselves.

What goes in Just Dial's favour is that it is a Profit making company & is generating decent amount of Cash every quarter. Not many portals or e-commerce related companies can claim to be profitable currently in India. Just Dial also has a decent amount of Brand recognition in the market. Since Just Dial is not getting into directly selling any goods on it's own, it doesn't have to invest in any kind of inventory or warehousing. Under the Search Plus business model, it will be creating an e-commerce front end for many of it's Registered Merchants/Vendors, something like a 'Shop on the Internet', and Just Dial will be earning Fee Income based on the number of transactions or Visibility that the Merchant gets (Display Ads). These things will take some time to pick up and till then revenues from this new platform may not add much to the company's Topline.

Valuations: At a share price of around Rs.570/-, Just Dial Ltd. is currently valued at about Rs.4000 crores, sharply lower than the Rs.9000+ crores valuation the last time I had written about it 10 months ago. At this valuation it trades at about 26 times it's T-T-M Net Profit of Rs.154 crores and about 22 times it's T-T-M Cash Profit of about Rs.182 crores. These valuations now do not sound expensive for the 22-23% Y-o-Y growth it has reported on T-T-M numbers, despite a negative growth in Profit in Dec'15 quarter alone. At a Market Cap of Rs.4000 crores, Just Dial is no more over-valued. In fact, for those who currently don't have any exposure to Just Dial, it makes sense to add Just Dial to their portfolio. Though I won't recommend a big exposure as there are still good amount of risks involved in this business. Just Dial though gives you an opportunity to try & be a part of the e-commerce bandwagon and is surprisingly now available at a reasonable valuation. Any further correction from current levels will only make it more attractive. But remember that one might need to wait for some time for the 'Search Plus' platform to start building momentum, which in turn could drive Just Dial's share price in the future. The current positives are: Just Dial is a Debt-free company with a decent amount of Cash Reserve. And the business continues to generate decent amount of Free Cash every quarter. There is also the possibility of Just Dial using a part of it's Cash to do a Buy-Back of it's shares in the near future, which could help drive the valuations higher in the near term.

Indiabulls Housing Finance Ltd - Performance Check.

I had written a report on Indiabulls Housing Finance Ltd (IBullHFL) about 9 months ago, when I had simply compared it's certain important financial parameters with the corresponding figures of LIC Housing Finance Ltd. (Click Here for that report). I had recommended buying IBullHFL back then at a price of around Rs.560/- based purely on 4 important points:
1) Stronger growth in Total Income & Net Profit
2) Way superior Profit margins because of better Borrowing cost management
3) Much cheaper Valuations despite stronger performance
4) Amazing Dividend payout, which continues to grow with each passing year.

I was estimating a conservative sustainable growth rate of 15% Y-o-Y in both Topline & Bottomline for the company. Since it's been 3 quarters since that report, let's do a performance check for Indiabulls Housing Finance Ltd. In the following charts I have represented the progress of Trailing-Twelve-Months numbers for IBullHFL starting from the period ending Jun'13 to 12-months ending Dec'15. Have a look:

IBulHFL has clearly done much better than my expectations of Growth. The Y-o-Y growth rates have clearly improved from the March'15 quarter. At the end of Dec'14, the Y-o-Y growth in T-T-M Total Income was a little over 17%, which has now improved to little over 30%. This is despite the fact that there has been some bit of lowering of Interest Rates during these 4 quarters. The faster growth in Total Income was not accompanied with proportionate growth in Interest Costs for IBulHFL. This led to a substantial reduction in the Interest-to-Total Income % from levels of almost 56% in Dec'14 to less than 54% in Dec'15. IBulHFL has also raised about Rs.4000 crores via a QIP issue at a price of Rs.702 per share in the month of Sept'15. This should also help reduce the company's Interest Cost as a percentage of Total Income to some extent in the coming quarters.

The expansion in Equity Capital because of issue of about 5.7 crores new shares during the QIP is what led to the dip in the company's T-T-M EPS to Rs.50/- during the Sept'15 quarter. At the end of Dec'15, the T-T-M EPS of IBulHFL stands at Rs.52.80/-. The T-T-M Net Profit of the company continues to grow at the rate of 21 to 24% Y-o-Y, despite higher Tax payments during the recent quarters. So we can expect the company to continue growing it's Net Profit at a rate comfortably above my conservative sustainable estimate of 15% for sure for many more quarters.

At the current share price of around Rs.675 to 680, IBulHFL's stock trades at a trailing P/E of still less than 13. Eventhough the P/E Ratio has improved from the levels of 10 during my previous report, I think there is still some way to go for the P/E ratio to go higher. The Dividend Yield for this year too will be over 5% at the current price. What more does an investor want?? A company that is growing consistently at a rate of over 20% in a business that is relatively risk-free, offering a Dividend Yield of over 5% currently with a potential to increase in the coming years and still available at a low P/E ratio of less than 13!! I think this company certainly deserves premium valuations compared to Industry peers. Still on the conservative side, I think IBulHFL certainly deserves a P/E ratio of atleast 18 to 20, if not more. That leaves a huge scope for re-rating in the company's stock price in the coming months & quarters.

Reliance Industries Ltd. - Firing on 2 cylinders & 2 more to start firing soon!!

Reliance Industries Ltd positively surprised everyone with the kind of numbers it posted for Q3-FY'16. I was myself expecting a Net Profit number of between Rs.6800 to 7000 crores for the quarter, but the company delivered Rs.7290 crores!! The product prices continued to fall during Q3, thanks to further downward movement in Crude Oil prices. But Reliance Industries seems to have clearly managed to bring down it's raw material prices even more, which has led to a sharp improvement in it's margins. Reliance Industries reported an improvement in it's EBITDA margin of just over 250 bps in Q3 compared to Q2 of this fiscal. Some part of the benefit could also be due to the commissioning of certain projects both on Refining side as well as Petrochemicals side.

Amongst the two segments, the Refining business is clearly the brighter shining star in RIL's portfolio. The actual EBIT from Refining business has double in Q3 this fiscal compared to the same quarter in previous fiscal. This is a very very big thing, even overshadowing the fact that the Petrochemicals business too posted a near 30% growth in actual EBIT, which in itself is a very positive thing. The charts above show the T-T-M progress in EBITs of the two most important business segments for Reliance Industries.

With the mammoth Refining & Petchem CAPEX cycle coming to an end over the next 3-4 quarters, there is a possibility of further improvement in margins from these 2 businesses. But the Q3-FY'16 numbers itself were so good that even if the company manages to post same kind of numbers for the next few quarters, it will still seem to be very good performance. We could see some fluctuations in numbers depending on sharp Crude price movements & corresponding Crude sourcing for the company. But the company has done well till now to use the Crude price movements in it's favour. Another small factor that is boosting the company's margins slightly is the increased demand locally, leading to increased allocation for local markets. Reliance already has got 750 of it's own Fuel Retail centers operational and more are joining with every passing month. We can expect this number to double over the next 12 months or so.

Reliance Retail & upcoming Jio launch:

Reliance Retail did spring a small surprise during the Q3, having crossed the Rs.6000 crores turnover mark for the first time. It was a sharp Q-o-Q jump of 20%. At the end of Dec'15, the T-T-M Revenues from Reliance's Retail business also crossed the Rs.20,000 crores mark with a 7% Q-o-Q jump. All this even before the launch of e-commerce platform of the company, which is expected to happen over the next 2-3 quarters, alongwith Jio's commercial launch. Just last week Reliance Retail has started selling Jio LYF branded handsets through it's own outlets including Reliance Digital, Digital Express and Express Mini outlets. In the coming weeks, Reliance Retail will also start selling these handsets via 1.2 lakh small retailers spread across the country. The sale of handsets will only pick up speed only after Jio's commercial launch of 4G services. Reliance Retail will use these distribution channels to sell not just LYF branded handsets, but will also supply the small retailers with handsets of other popular brands. Reliance Retail could become the one-stop-supply-source for many of these small retailers & could also integrate them with it's upcoming e-commerce platform.

The best part about Reliance Retail's progress is that the handsome growth is not coming at the cost of profitability. Even though the EBIT numbers are not big, but the important point is that the EBIT number is positive, which many other large retail chains are struggling for. Even the large e-commerce platforms are still burning cash. Going forward there are many more growth avenues for Reliance Retail, some of which I have highlighted above. This is also one business which will grow much more in size in the coming years, though it may not add too much to the company's profits, but still will play an important role in increasing presence in Reliance's consumer-facing businesses.

I have already highlighted the potential of Jio's 4G & Broadband business in my earlier posts related to Reliance Industries. Hence I won't repeat it again here. The media reports doing the rounds currently suggest a commercial launch in March/April period. Let's hope these reports finally do turn out to be true.

Wireless Data business - Idea Cellular vs Bharti Airtel.

A few days back, after checking Idea Cellular's Q3 numbers, I had highlighted the point that it's Wireless Data business is already facing competitive pressures with incremental growth rates tapering quite quickly over the last couple of quarters. Now that we have Bharti Airtel's Q3 numbers too with us, I thought of digging deeper to compare the performances of the two companies in the Indian market only. I have only considered Bharti Airtel's Wireless India business numbers for this comparison.

To get an idea of the recent trend, I have collated Trailing-Twelve-Months numbers for Data Revenues and Non-Data Revenues for the period ending Sept'14 to the 12-months ending Dec'15, for both Idea Cellular and Bharti Airtel (India). These numbers help us understand the trend that is developing over the most recent 5 quarters.

Idea Cellular: 

On a T-T-M basis, Idea Cellular's Data Revenues have doubled from Rs.3208 crores to Rs.6434 crores over the last 5 quarters. Data Revenues contributed 11.1% to Idea's Total Revenues in Sept'14. But the same has sharply increased to 18.2% by Dec'15. This is something that is already known. Now here is the interesting part.....have a look at the chart below:

The chart on the left shows the progress of the T-T-M Data and T-T-M Non-Data Revenues with every passing quarter. While the chart on the right is complimentary as it shows the Q-o-Q change in the T-T-M numbers for both Data & Non-Data Revenues. 

As we can see, the incremental growth in Non-Data Revenues peaked in Dec'14 and has been coming down since then. In fact the pace of fall has accelerated in the last 2 quarters. But the Non-Data Revenues growth is still positive for Idea Cellular. On the Data Revenues front, the incremental Q-o-Q growth seems to have peaked in the March'15 quarter, when it hit the Rs.710 crores mark. Since then over the last 3 quarters, the incremental Q-o-Q growth has tapered off gradually to a level of Rs.567 crores in Dec'15. This is the bit that got me worried. Sharp reduction in growth of incremental Non-Data Revenues is understandable, but a consistent drop in incremental growth of Data Revenues is definitely not good. I am sure that Idea Cellular's management too must be worried on this front and hence it is aggressively trying to launch it's own 4G network in 750 cities & towns by June'16 as relying on 3G alone is not going to help in the face of fresh new competition, in addition to existing competition.

A small point to note is that Data Revenues became the bigger contributor to incremental growth for Idea Cellular on a T-T-M basis from the June'15 quarter.

Bharti Airtel (India business):

Bharti Airtel has posted an almost-equally strong 85% growth in T-T-M Data Revenues over the last 5 quarters. The figure now stands at Rs.11,009 crores, a figure that is probably higher than Annual Total Revenues of almost all telecom operators in India other than Idea, Vodafone & BSNL. Still the Data Revenues are just 20.1% of Bharti Airtel's Total India Revenues. Have a look at the charts below for Q-o-Q progress of T-T-M numbers:

Even in case of Airtel, the growth in it's Non-Data Revenues has seen a sharp fall off post the Dec'14 quarter. Infact the T-T-M Non-Data Revenues have started posting negative incremental growth since June'15 quarter. This isn't too surprising to note as we all have been expecting degrowth in Voice Revenues for most operators in the coming quarters. What is heartening to note in case of Airtel's numbers is that the Q-o-Q growth in T-T-M Data Revenues has not started tapering off yet. The incremental growth figure has remained steady above the Rs.1050 crores mark for the last 3 quarters. Airtel's wider own 3G coverage across almost all circles and also a growing 4G coverage in about 7 or 8 circles currently has definitely helped Airtel to keep the growth momentum in Data volumes & revenues on it's networks.

With a good amount of 3G and 4G coverage across most of the circles in India, Airtel is expected to be relatively less impacted due to RelJio's upcoming 4G launch, compared to all other operators. Airtel has 3G spectrum for 21 circles out of the 22 that our country is distributed in. It also has 4G spectrum in 9 circles currently and is trying to take that number to 15 via acquisitions or auctions.

Summary:

From the numbers that I have collated for this study, I can say that Idea Cellular has done better than Bharti Airtel when it comes to Voice Revenues. But Bharti Airtel has clearly done better than Idea Cellular on the Data Revenues front. And the Data Revenues market is what is going to be the most important part going forward for all telecom operators. As of now Voice business contributes about 75% of the Industry's Total Revenues. But in about 3 or 4 years time from now, this proportion will drop to something like 35% or 40%.