>JM FINANCIAL LIMITED: Q1FY11 result analysis

JM Financial Ltd’s revenues recorded an increase of 57.2% y-o-y to Rs 1.9 bn in Q1FY11,
backed by healthy growth in the investment banking and securities funding businesses.
However, PAT dipped by 2.4% to Rs 304 mn due to poor performance of the securities
broking business. Intense competition in the broking business and preference for lowyielding
options vis-a-vis the cash segment has put significant pressure on brokerage yields.
However, JM Financials’ diversified business model has buffered the impact and helped it
report stable earnings. We maintain our fundamental grade of ‘4/5’, indicating JM Financials’
fundamentals are ‘superior’ relative to other listed equity securities in India.

Q1FY11 result analysis
• The investment banking and securities businesses reported revenue growth of 44.1% y-oy
to Rs 1.1 bn in Q1FY11. The investment banking division completed six deals worth Rs
70.6 bn in Q1FY11. However, the performance of the broking business was impacted by a
dip in brokerage yields and an increase in costs related to scaling up of the institutional
desk. As a result, segmental profit declined by 50.6% y-o-y to Rs 94 mn in Q1FY11.
• Revenues from the securities funding business increased 156% y-o-y to Rs 651 mn in
Q1FY11. Earnings growth was lower at 10% y-o-y to Rs 198 mn due to a higher mix of
borrowed funds resulting in increased interest cost.
• The asset management (AMC) segment’s revenues increased by 17% y-o-y to Rs 91 mn
supported by higher average AUM at Rs 77.2 bn (14% y-o-y) in Q1FY11. This helped the
company cut losses from Rs 19.3 mn in Q1FY10 to Rs 11.7 mn in Q1FY11.

• The alternative investment segment registered a 73.6% y-o-y increase in revenues to Rs
176 mn while profit increased by 122.5% y-o-y to Rs 112 mn in Q1FY11. The alternative
AUM stands at Rs 17.2 bn and has recorded an increase in quality investment
opportunities, which will support good performance.

Scaling-up of institutional business to drive growth
During the quarter, JM Financial got empanelled with few more institutional clients. The
company’s research coverage has increased to 132 companies. We expect the business to
take around 12 -15 months to start contributing to the overall profitability.

Downward revision in FY11 and FY12 estimates
We have revised our top line forecast downward by ~3% each for FY11 and FY12 to reflect
the pressure on brokerage yields. The hardening in the yield curve will result in increased
funding cost to support the securities funding book. However, we expect the funding
business to do well and support JM Financials’ overall performance. Accordingly, we have
revised PAT estimates downwards by 18% and 14%, respectively, for FY11 and FY12 to
account for the pressure on brokerage yields and increased interest cost.

Valuations – strong upside from current levels
In line with the earnings revision, we have lowered our fair value estimate for JM Financials
from Rs 50 to Rs 45 per share. We maintain our valuation grade of ‘5/5’, indicating that the
stock has ‘strong upside’ from the current level of Rs 35.8 (as on August 11, 2010).

To read the full report: JM FINANCIAL

>INDIA EQUITY STRATEGY: Owning India Inc.: FIIs - Investing More, Owning Less

■ A lot of foreign flow, but less and less to show — A fair amount of foreign money flowed into India in the March–June quarter ($2.5b) while domestic MF flows were negative; but foreigners owned less of India Inc. at the end of the quarter (-40bps, 16.4%). This appears an extreme outcome - probably a combination of flow timing, underperformance (buying high selling low?), paper supply and insurance company buying. But a longer-term trend of foreign flows/market performance suggests that more and more foreign money is still moving the market, but by less
and less.

■ Staying bullish – foreigners more so than domestics — The market is up <5%>
and 21% yoy, but portfolio appearance suggests more bullishness than market performance so far. FII portfolios appear most bullish (financials, discretionary and industrials key over-weights), the domestic MFs a little less so but hugely overweight capital goods, and the insurers probably the only ones playing a little safe – but building up on their OW financials call. Energy, IT and Utilities are the consensus UWs. No big positioning/sectoral shifts within the quarter – with some marginal shifts toward the benchmark, across investors.

■ Ownership mix; settling down, or are domestic flows destined to dip? — CY10 has witnessed little change in key owner classes: Promoters at about 50%, FIIs 16- 18%, Domestics (MFs and insurers) sub 10%, and individuals about 8%. Is this here to stay or is it the lull before a massive (domestic) regulatory storm? With MFs already hurting due to new distribution regulations (-$2b YTD), insurers anxiously preparing for a sea change in distribution/product changes (effective Sep 1, 2010 – key risk to incremental growth/flows) and retail investors preparing for possible long-term capital gains tax from April 2011 (zero currently), will it be only foreign money hereon? Time will tell, but if that does happen, FIIs would probably need to invest less to own more – unlike the last quarter.

To read the full report: INDIA STRATEGY

>McNally Bharat Engineering

MBE declared its 1st qtr results which were below expectations, with a growth in net sales on standalone basis at 12%, operating profits degrew by 9% whereas PAT has grown by 15.8%.

1st Quarter Highlights

■ Order Book growth
Order book for the Projects business stands at 42000 mlns. Infrastructure forms 23% of the total order book, power comprises 37%, material & non ferrous segment forms 29% whereas steel mines & port forms the remaining 11% of the total. Order book for McNally Sayaji stands at 2480 mlns whereas for CMT & German Manufacturing business it stands at 3550 mlns. In May’10, MBE has bagged its first overseas order in Zambia of Rs. 1140 mlns. MBE also bagged its single largest BOP order of Rs. 8140 mlns in Apr’10.

■ Revenue Growth
MBE’s net sales stand at 2834.8 mlns out of which material & non ferrous segment contributed 54%, steel, mines & port contributed 26% power contributed 19% whereas the rest comes from the infrastructure sector. Operating margins have been lower at 5.5% due to completion of low end jobs in the 1st qtr. Outsourcing expenditure as a % of net sales have increased from 19% to 24% which has led to incremental expenditure from 93% to 95%. Employee cost has increased drastically by 70% from 5.7% to 8.7% yoy as a % on net sales. Interest cost has reduced by 24% yoy which could be due to partial repayment of high interest loan. Consequently PAT has
remained flat at 2.2% reflecting its dull performance for the qtr.

■ Bad performance from Subsidiaries
McNally Sayaji has delivered very poor results with an incremental growth of 17% in its net sales while its operating profits have degrown by 23% and and PAT has degrown by 66% mainly on account of lower volume growth, low margins jobs, higher interest outgo and higher depreciation on additional capacity created. Similarly for CMT business, revenue stands at 760 mlns, with operating profit margins at 4% and PAT margins at 3%.

■ Valuations
MBE has indicated plans to participate in a big way in the Steel sector modernization packages of SAIL , Balance of Plant(BOP) packages in Power sector, Port expansion programme of NMDP and capacity increase in nonferrous metal sector, as and when it picks up again.

At its CMP of Rs 286, the stock quotes at PE of 14x and 11x its FY11E and FY12E cons. earnings of Rs 20.7 and 26.9 respectively. We have reduced our earnings estimates based on weak Q1 performance but we remain bullish over its long term performance and give an Accumulate Rating on the stock, with a target price of Rs. 323 based on a PE of 12x consolidated FY12E EPS of Rs. 26.9 per share.

To read the full report: MCNALLY BHARAT

>SANGHVI MOVERS: Performance in line

Sanghvi Movers (SML) reported its performance for Q1FY11 that was in line with our expectations. The company reported a PAT of Rs 24.02 crore, in line with our expectation of Rs 23.2 crore. SML registered 4% YoY revenue growth of Rs 86.14 crore in Q1FY11. The EBITDA margin declined 140 bps YoY to 74.6% in Q1FY11 on the back of an increase in operating expenses and other expenditure. The subsequent EBIDTA stood at Rs 64.26 crore indicating a marginal increase of 2%. The company reported a 4% increase in net profit to Rs 24.02 crore in
Q1FY11 against Rs 23.1 crore in Q1FY10.

Highlights of the quarter
■ In terms of sector wise break up of revenues for Q1FY11, power contributed 29%, wind mill contributed 25%, refinery and gas contributed 13%, cement contributed 17%, steel and metal
contributed 9%, metros, roads, bridges, ports, etc. contributed 2% while other industries contributed 5%

■ During Q1FY11, the effective yield stood at 3.1% per month as compared to 3.6% during the previous year. The average utilisation for cranes in Q1FY11 stood at 81%

Valuation
We expect SML’s performance to improve in the next few quarters due to higher utilisation (~80% vis-à-vis ~74% last year) of its cranes. The company expects an improvement in capacity utilisation on account of increased capex from the power sector. At the current price of Rs 169, the stock is trading at 7.3x its FY11E EPS of Rs 23. We recommend BUY rating on the stock with a target price of Rs 195, 8x FY12E EPS of 24.4.

To read the full report: SANGHVI MOVERS

>Easun Reyrolle- Initiating Coverage

Easun Reyrolle is an acknowledged leader in the field of electrical power management. The company offers a "ONE TOUCH ACCESS" to power system solutions. It has 25% market share in the relay panel (a power system protection device) market in the country. It has diversified its offering to protection products, protection systems, energy meters, automation, communication & control products, turnkey projects business, and switchgears. ERL expects to sustain the growth of 50% CAGR for next 4 years. Easun is one of the leading players in power management – power
system protection, control and automation, would benefit from the investments in the power sector,
especially transmission and distribution space.

Recent Developments : Easun, recently, has been awarded for the Overall Best Product Displayed at ELECTRAMA 2010 (largest exhibition for the Electrical Power Transmission and Distribution products and solutions in the entire Asia and is among the largest in the world in this category) for its Solid Insulated Switchgear- ISIS. ISIS, which has smallest size in the world, is free from toxic green house gas SF6. ISIS has attracted keen interest from domestic as well as global player over GIS.

Financials : Net profit of Easun Reyrolle rose 229.17% to Rs 0.79 crore in Q1FY11 as against Rs 0.24 crore YoY. Sales rose 11.57% to Rs 40.60 crore in the quarter ended June 2010 as against Rs 36.39 crore during the previous quarter ended June 2009. In year 2009 company bought back FCCB at 50% discount. As on March 2010 the Company is Debt free having more than INR 110 crore cash and bank balance in balance sheet with a net worth around Rs 250 crore.

Valuations: Easun Reyrolle CMP provides an attractive entry point to long term investors. The
stock has been valued on P/E multiple basis to arrive at a price target of 290. At CMP, stock trades at 6 X FY11E and 4 X FY12E earnings with an EPS of Rs. 19.38 and Rs. 29.08 respectively. The stock looks attractive from a medium – to- long-term perspective and hence
we recommend Accumulate the stock.

To read the full report: EASUN REYROLLE