Companies & Sectors
Indraprastha Gas reports in-line 4Q; SC decision key for re-rating, says Nomura
Price hikes of CNG and domestic PNG enabled blended EBITDA margins to remain resilient for Indraprastha Gas, says Nomura Equity Research in its Quick Note. A favourable Supreme Court decision on the PNGRB’s appeal against the Delhi High Court order is a must for restoring investor confidence again
 
Indraprastha Gas ( IGL) reported PAT (profit after tax) of Rs835 million (up 4% y-o-y, down 3% q-o-q), was in line with Nomura’s estimate of Rs841 million, but 4.5% below Bloomberg’s consensus estimates, said Nomura Equity Research in its Quick Note on the company’s performance. Similar to 3Q, volumes were expectedly weak. Price hikes (CNG - 4% in early January, 7% for domestic PNG in February) enabled blended EBITDA margins to remain resilient Rs5.5/scm (up 1% q-o-q, 5% y-o-y). Despite weak 2H, FY13 EPS at Rs25.3 increased 16% y-o-y.
Similar to 3Q, both CNG (down 1% q-o-q, up 4% y-o-y) and PNG (up 8% q-o-q, 14% y-o-y) were weak compared to historical trends. CNG weakness was due to reduced city bus consumption (several buses were grounded for mandatory checks; and new bus additions were delayed) and PNG growth was affected due to higher spot LNG prices leading to reduced competiveness with liquid fuels. The management indicated that double-digit growth rates are likely to resume from 1QFY14.
 
According to Nomura, a favourable Supreme Court decision (on the PNGRB’s appeal against the Delhi High Court order) is a must for restoring investor confidence again. The dispute is ongoing for over a year (tariff order 9 April 2012), and has seen fast track hearings in Supreme Court over last few weeks. The hearings are to commence from 16th July once court resumes after summer vacations. IGL has a strong case, and an early positive decision could lead to re-rating, said Nomura.
 
Nomura favours IGL for its secular city gas business in Delhi (India’s largest metro) and its ability to pass on costs (CNG prices up by around 90% over three years). With continued strong earnings growth (four-year CAGR 20%, 16% for FY13F) valuations, at 10.1x/9.1x FY14/15F P/E (EPS of Rs27.7 and Rs30.8, respectively), remain compelling, said Nomura. On expectations of an early decision by the Supreme Court, the stock had seen a decent run recently and was up 26% YTD until early May. However, with the hearing being postponed to July, the stock has seen correction of nearly 10% over the last two weeks. The recent correction provides investors with an opportunity to accumulate the shares, believes Nomura.
 

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Dish TV beats market expectations but ARPU remains subdued
Dish TV now is clearly focusing on profitability and cash flow over immediate market share, says Nomura Equity Research in its Quick Note
 
Dish TV’s standalone results were ahead of expectations but missed consensus expectations at the operating level, said Nomura Equity Research in its Quick Note on the company’s performance in 4QFY13. While ARPU (average revenue per user) came in lower than expectations, trends were significantly positive on all other metrics as SAC and churn trended down, content cost surprised on the upside and this turned out to be the first free cash flow positive year for the market. 
 
Dish now is clearly focusing on profitability and cash flow over immediate market share. The brokerage expects that high-single-digit percentage increase in ARPU will be visible in FY14 on the back of recent price increases and competition becoming more rational. “We would use any weakness in the stock price on the back of these results to accumulate the stock,” added Nomura.
 
Analysing the company’s results, Nomura Equity Research said that Q4FY13 consolidated sales came in at Rs5.54 billion (5.8% y-o-y growth) in line with its expectation of Rs5.65 billion but around 5% below consensus expectations of Rs5.82 billion owing largely to a subdued ARPU.
 
EBITDA came in at Rs1.2 billion, which was around 15% ahead of Nomura’s Rs1.04 billion estimate but nearly 9% below consensus expectation. The brokerage sees a 12% y-o-y increase in content cost as guided by the company, especially as part of the incremental cost from media pro negotiation was expected this quarter; however, the actual increase was around 5.1%, which was a positive surprise, said Nomura.
 
Profit after tax (PAT) came in at Rs436 million of loss compared to Nomura’s expectations of Rs875 million of loss. The lower loss versus Nomura’s expectation was on account of higher other income (Rs157 million against Nomura’s expectation of Rs90 million) and lower depreciation (Rs1.45 billion versus its expectation of Rs1.71 billion) due to a higher write-off of set-top box (STB) for subscribers who were inactive for more than 500 days. Adjusted for these, PAT would have been Rs760 million of loss compared to Nomura’s expectations of Rs875 million loss and consensus expectations of Rs530 million of loss.
 
Subscriber acquisition cost (SAC) decreased from Rs2,201 in Q3 to Rs1,996 in Q4 due to STB price increase in February 2013 for which the complete impact will be visible in Q1 of FY14, said Nomura.
 
The company has guided for an increase in content cost by 8%-10% y-o-y in FY14F against Nomura’s current expectations of 15%. The brokerage expects content and other cost growth of around 15% y-o-y in FY13 based on the management’s guidance of 12%-15% that was later reduced to 12%. But actual growth in content and other cost was around 7.5%, leading to lower base versus Nomura’s expectations. Thus, these two combined would lead to an around Rs 94 million reduction in content cost expectations for FY14F, said Nomura.
 
Company churn declined to around 0.8% in Q4 from 1% in Q3. While it’s too early to extrapolate 0.8% churn rate to subsequent quarters, decline in churn rate can be attributed to following reasons:
Set up box price increase by DTH players as well as some cable operators such as Den Networks in February 2013, which has increased subscriber switching cost. This can also been seen from the fact that Airtel DTH churn rate came down from 1.3% in Q3 to 1.1% in Q4.
Dish TV’s offer of 70 basic free channels (most Free to Air) for subscribers as a part of existing base package. This was a churn management strategy that became evident in Q4, said Nomura.
 
The company generated around Rs650 million of FCF (free cash flow) in FY13 and has guided for Rs2 billion of FCF in FY14. Nomura believes that this improvement in free cash flow trajectory is possible as:
Increase in STB price—the company intends to bring down subsidy from the current Rs1,450 to zero in the next 12–18 months, which would mean the company would reduce subsidy in FY14. Also, the full impact of STB price increase taken in February 2013 was not completely captured in Q4 but will be visible in FY14.
Improvement in operation performance led by subscriber addition, increase in package price that would lead to better EBITDA and cash flow from negative working capital days.
 
The company added around 0.4 million subscribers in Q4 (against Nomura’s expectation of 0.35 million). This expectedly, trended down as Dish TV, in particular (and the entire DTH industry in general), focused on “value focused customers”.  MSOs have seeded 4.45 million STBs compared to 0.38 million STBs seeded by DTH between 1 March 2013 and 12 April 2013 post STB price increase taken by DTH players. This can also be understood by the fact that Airtel also added around 0.21 million in Q4 (versus 0.44 million in Q3). Also, a few inactive subscribers, particularly in phase 2, became active in Q4.
 
Dish TV reported ARPU of Rs157 against Nomura’s expectations of Rs161.8 and Rs160 in Q3. As per company, this was on account of the lower number of days in Q4, down trading (% of subscribers on base pack has increased from run rate of 54% to 58% in Q4), increase time gap between package subscription getting over and recharge, lower churn rate that effectively means higher base, inactivity by some subscribers due to children exams, and Q3 having better ARPU due to festival season. Even Airtel DTH ARPU decreased from Rs186 in Q3 to Rs184 in Q4.
 
The company seems confident of high-single-digit increase (Rs12-Rs14) in ARPU in FY14F post 10% price hike taken in April 2013 and will be looking at further price increases in the next fiscal.
 
While digitization is mostly done in phase I & II and MSOs have seeded set up boxes, they have not started billing as per the digital package which is significantly higher than current prices they are charging subscribers. Once the billing as per the digital package starts, DTH players including Dish TV would have more headroom to increase ARPUs, says Nomura.
Additionally, given that one of the MSO’s revenue streams of carriage fees is trending down with the onset of digitization, they will have a bigger incentive to behave rationally on the ARPU front.
 
Dish TV’s gross and net debt increased by around Rs 1.5 billion in FY13, which Nomura expects to come down in FY14F on account of increased FCF generation as mentioned above. Also, short-term loans and advances increased from Rs1.98 billion to Rs3.06 billion on account of increases in advanced payment towards purchase of STBs.
 
On the back of Q4 numbers and the company’s guidance, Nomura’s FY14F estimates and price target are under review. The brokerage will be looking at a lower subscriber addition (as the DTH industry focuses on profitability rather than market share), lower content cost guidance, and lower subscriber addition cost.
 

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Biomimicry: The science of learning from nature
Respect nature as your mother and learn from her; if you abuse nature, she will kick you in the teeth! Long live mankind learning from nature as our Indian scientists of yore did
 
“When one tugs at a single thing in nature, we find it attached to the rest of the world”— John Muir      
           
I keep reminding the readers about our wrong efforts at learning science by teaching nature a lesson or two. We could have a better science by understanding nature’s working better, as been my hypothesis. I was introduced to some work being done at the Karolinska Institute in this direction by an old student of mine, Dr Sunder. He wrote to tell me that my pet theory of learning from nature has now been taken up in the west and they also think it might yield better results. We shall discuss just one area for this write up.
 
Chronic kidney failure (CKF) has been a very lucrative medical business for the corporate lobby next only to cardiac interventions and keeping dying patients in the ICU for the last ten days.In the US there are many “dialysis only” facilities. They are like the hair cutting shops. Patients walk in and remain there for a few hours and get dialysed and go home to come back again at periodic intervals. They might have about a dozen beds at a given time used for dialysis. Reports say that this is such a good business that these doctors do not advice their patients a kidney transplant at the right time when it could be more beneficial to the patients. Instead they wait till the last minute when transplant could be more dangerous and less useful. All this is because they want their clients for longer time with the dialysis centres in order to make more money. This is the audit report. Kidney transplant is another big business which all of us know in great detail.
 
But look at nature. The American native bear (ursidae) is a good example here. These bears hibernate for months without any food or water. They do not pass any urine and have no exercise at all, they remain immobile for months. They sleep all the time. But when they wake up they are as fit as they were and might even attack their enemy with the same ferocity as they could do while they were ambulant. It is interesting to note that when they wake up they have very low urea nitrogen levels, healthy lean body mass, very strong bones, and no evidence of any thrombotic complications! If only our scientists could find out how and why these bears do not develop uraemia, muscle wasting, bone density loss (osteoporosis) and atherosclerosis and thrombotic complications we will have found out novel and easy methods of treating chronic kidney failure patients without dialysis and transplant as of now! 
Million dollar question here is who will fund this “rice bowl breaking” research effort? If successful this will demolish the very lucrative dialysis and kidney transplant businesses. Please understand that neither dialysis nor kidney transplant is a cure for chronic kidney failure. They are only quick-fix solutions of modern medical science, similar to many others like them. But the industry likes these quick fixes in place of permanent cures!
 
Contrast this with our science where we create disease models in animals, mostly rats, dogs and pigs. We try and study them to gain our present wisdom. What we do not realise is that they are in no way closer to human physiology and when we create human diseases in them they react, sometimes in a diametrically opposite direction. One example would do to explain. We produce heart failure in rats and then use our new chemical molecules on them to see if they work and if they do we use them in humans. Some years ago there was a wonder drug called, Milrinone, a cousin of amrinone. This showed wonderful results in rats in the treatment of heart failure, one of the biggest problems of old age. The company was so impressed that it convinced (lobbied) the FDA to pass it even without human studies. Indian ‘great’ cardiologists used to get the drug from USA for their rich patients, quite a lot of whom met their makers prematurely but the death was blamed on the bad heart failure. Soon enough the first human study PROMISE (Prospective randomised milrinone evaluation study) was started. Within six months into the study the preliminary report showed 37% extra unexplained deaths in the milrinone wing of the trial compared the placebo and the study was stopped and the drug withdrawn from the market. Lots of people had died by then. Later physiologic studies showed that the drug, in fact, helps a rat’s heart while it is dangerous for the failing human heart! We do not go into the details here.
 
Respect nature as your mother and learn from her; if you abuse nature she will kick you in the teeth! Scientists! Are you listening? Long live mankind learning from nature as our Indian scientists of yore did.
 
 “In all things in nature there is something of the marvellous”—Aristotle.
 
(Professor Dr BM Hegde, a Padma Bhushan awardee in 2010, is an MD, PhD, FRCP (London, Edinburgh, Glasgow & Dublin), FACC and FAMS. He is also Editor-in-Chief of the Journal of the Science of Healing Outcomes, chairman of the State Health Society's Expert Committee, Govt of Bihar, Patna. He is former Vice Chancellor of Manipal University at Mangalore and former professor for Cardiology of the Middlesex Hospital Medical School, University of London.)
 

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COMMENTS

MUTHURAJU p

4 years ago

This is very great message for mankind. Every human being must read the article if who read this no doubt them self become a nature Doctor Thank you Dr BM HEGDE

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