>INDIA STRATEGY: FY11/12 Earnings: What do Analysts think?

Consensus downgrades moderating before Q2 season

Analysts are turning bullish for the first time in a year. Riding into the quarterly earnings season, we gauge consensus sentiment across sectors, and find that earnings revisions are no longer headed south. We aren’t seeing substantial upgrades just yet, but the trend of downward revisions is moderating. Economic growth is on track with a solid monsoon, robust consumption demand (and
perhaps, a booming market), leading analysts to take a second look at earnings. RCML’s Q2 PAT (ex-oil) estimate is 29% for the Sensex, and 21% for our broader 135-stock coverage universe.

■ Consensus signals a moderation in earnings downgrades: Earnings revisions
across the market have turned slightly positive in the last two months. The MSCI
India Earnings Revision Index*, a key measure of sentiment, which has been on a
downward trend (i.e., more downgrades than upgrades) since September ’09, has
now shown signs of a reversal before the quarterly earnings season commences.
Sentiments have been even more positive for the 600+ stock IBES India universe,
the set of all stocks under sell-side coverage. In the backdrop of prolonged global
weakness and the possibility of a double dip, analyst optimism is borne out of a
good monsoon season, strong consumption demand, and a resilient Indian
market post-crisis.

■ FY11 earnings growth at ~20%, but not on upgrades: Meanwhile, profit growth
for Sensex companies remains largely unchanged since the ‘Tata (Motors/Steel)’
spike in June, at 20% for FY11 and 18% for FY12 (Fig 2). Gross FY11 profits have
remained flat (-0.6%) during this period. In other words, analysts haven’t factored
in any rise in full-year profits post Q1FY11. Not yet anyway.

■ Autos remain the sector of choice, Telecom the least-liked: Sector-wise, Autos
(Fig 3) have seen the highest earnings growth since last year, riding on the strong
volume growth post-recovery. Telecom earnings in contrast have been pared
down by a third in this period. While the overhang of competitive intensity, 3GBWA,
and MNP (where in contrast to the costs, data-revenue estimates are still
hazy) explains the negative quarterly estimates, the latest round of downgrades is
largely due to consolidated (including Africa) figures for Bharti. High upgrades
also imply an increased risk of disappointment, with Autos, Metals, Health, and
Capital Goods seeing the highest upgrades in the last three months and remain as
sectors to watch this earnings season.

■ Earnings upgrades and market performance… may not go together: Ratings may
not always translate into performance, as we know. While Autos, Cement and
Metals outperformed the market in line with upward earnings revisions, Banks,
Telecom and Real Estate have seen outperformance despite flat or downward
earnings revisions.

■ Sectors to watch out for this earnings season: Sectors such as Real Estate and
Telecom are the ones to watch out for this earnings season as outperformance
ahead of earnings could well turn into sharp underperformance in case of any
negative earnings surprises.

To read the full report: FY 11/12 Earnings

>STERLITE INDUSTRIES: Project issues continue

■ Q2FY11 production numbers in line
Vedanta Group’s/Sterlite Industries’ (Sterlite) Q2FY11 declared production
numbers were largely in line with our estimates. Lead production, however, was
7% ahead of our expectations.

■ Copper, VAL, and BALCO expansions effectively on hold
The 100 ktpa lead capacity expansion has been delayed by a quarter and is now
expected to be completed in Q3FY11. The 400 ktpa brown field copper expansion
has been put on hold considering the high court order to shut the existing
smelter due to environmental/pollution issues and pending approval from the
State Pollution Control Board. The Supreme Court has currently issued a stay on
the above order and hearing on the matter is scheduled on October 18.
With the Ministry of Environment and Forests withholding clearance for Vedanta
Aluminium’s (VAL) bauxite mine and objecting to the alumina expansion, the
company has effectively put on hold the entire expansion—alumina expansion at
VAL to 5 mt from the current 1 mt, smelter expansions of 1.25 mtpa at
Jharsuguda and 325 kt at Korba—at VAL and BALCO.

■ Increased power available for merchant sales
The company had planned to source power from Sterlite Energy’s (SEL) 2,400
MW plant for its upcoming 1.25 mtpa aluminium smelter at Jharsuguda. With
that project being deferred, the power available now will be sold on merchant
basis. Similarly, the entire output from the 1,200 MW captive power plant at
BALCO (for 325 ktpa smelter III) will also be available for merchant sales.

■ Outlook and valuations: Project execution concerns; maintain ‘BUY’
We are revising down Sterlite’s FY11E and FY12E PAT 8% and 4%, respectively,
after factoring in lower volume growth in Hindustan Zinc (HZL) and project
delays in copper, VAL, SEL and BALCO. Cash costs at VAL are running higher
than expected at ~USD 1,900/t even after considering purchased bauxite. While
the various projects and environment related issues will be an overhang on the
stock, we believe this has been factored in the stock price. From a longer-term
perspective we see value in the business. We retain our ‘BUY/Sector
Performer’ recommendation/rating, but lower our fair valuation to INR 203
(earlier INR 214) considering the revision in estimates.

To read the full report: STERLITE INDUSTRIES

>PUNJAB NATIONAL BANK: Out Performer

In a recent development, Punjab National Bank (PNB) and other seven banks'
exposure to Zoom developers (a Mumbai based project development company)
has come into light. The banks' total exposure to the account is close to Rs26
bn (non-fund based exposure), out of this PNB's (the lead banker) exposure is
close to Rs4.5 bn. In accordance with the media reporting, in Q1FY11, the bank
already recognized Rs3.0 bn as NPAs and made provisions. According to our
communication with other banks' managements some of the banks made
provisions in Q4FY10 itself. Around 76% of the banks' exposure is insured with
ECGC (Export Credit Guarantee Corporation).

Though, it appears that ECGC may not fulfill the banks' claim for the account,
and banks are pushing the matter for corporate debt restructuring (CDR). The
CDR package could provide short term relief to the borrower and to ECGC. The
borrower has been aggressively trying to raise short-term funds for fulfilling
liabilities on account of employees' costs and overheads. Given the status of
the borrower, CDR package might not revive the borrower and banks could have
to write off the entire exposure.

Central Bureau of Investigation (CBI) would be investigating the foreign currency
irregularities and the central bank would investigate huge amount of banks'
non-fund exposure to single account.

To read the full report: PNB

>KSK ENERGY VENTURES LIMITED: High Project Visibility coupled with Attractive Valuations (EQUIRUS)

We expect KSK Energy Ventures Limited (KSKEVL) to commission a total of 4644 MW by FY16 comprising operational capacity of 601 MW, capacity of 313 MW which is expected to be commissioned by FY11 and further capacity under construction of 3730 MW. KSKEVL has pioneered the group captive business model along with a focus on long term off take agreements and fuel security which lead to lower volatility in the tariffs and fuel costs. This provides higher visibility and scalability to its power generation capacity. We see 35% upside in KSKEVL by 30th Sep, 2011 and initiate coverage recommending LONG position and suggest an overweight within the power sector. Our FCFE based DCF Target Price (TP) of ` 242 is based on projections till FY17 and 20 years of growth.

■ Existing Capacity of 601 MW to be ramped up to 914 MW by FY11 and 4644 MW by
FY15 leading to 75% Revenue CAGR and 51% EPS CAGR from FY10 to FY15: KSKEVL has commissioned 601 MW across multiple locations in India including the first two units of
135 MW at the 540 (4*135) MW Warora plant. The further expansion of 313 MW includes 2
remaining units of the Warora Plant and a 43 MW expansion of Arasmeta Phase II. KSKEVL
has also achieved substantial progress on the 3600 MW KSK Mahanadi Project at
Chhatisgarh in terms of placement of BTG orders, commencement of construction works
at the site and recent financial closure for the entire debt requirement. It has incurred a
Project Cost of ` 33 bn and has already infused equity of ` 21 bn. It has also received
equity commitment of ` 2500 mn by IFCI and expects to commission the first unit of 600
MW in Q1FY12 vis-à-vis our conservative assumption of Q2FY12.

■ Predictability of business model and innovative capital structuring enabling higher
financial leverage: KSKEVL has focused on fuel security in the form of long term fuel
supply agreements and has tied up most of its off-take on a long term basis which provide
higher predictability to its business model. It has also set up power plants on captive
basis where in it receives partial equity contributions from its equity partners. These
factors have enabled KSKEVL to finance its projects at higher leverage than its peers.

■ Overcoming the Lehman Hangover with High Investor Interest due to Improved
Visibility of Projects, Scalability of Business and Attractive Valuations: KSKEVL has
entered into a lock up agreement with Lehman Brothers Subsidiaries (LB Entities) to not
sell 12.2% of the shareholding till Oct 30, 2011 and has a right of first refusal over sale of
6.5% of the shareholding. This reduces the uncertainty on the sale LB entities and we
expect that several long term investors will be interested in KSKEVL due to improved
visibility of its projects, scalability of business model and its attractive valuations. This is
evident in the recent commitments of ` 3.5 bn by IFCI and L&T Infra.

■ Attractive Valuations and High Sensitivity to Project Cost Overruns: KSKEVL is
attractively priced on FY10 and FY11 Price/Book to Forward RoE. The advanced stages of
its projects provide assurance regarding the implementation of the projected capacity of
4644 MW within the estimated project costs.

To read the full report: KSKEVL

>ING VYSYA BANK: Business and margin scaling up; initiate with Buy

We initiate coverage on ING Vysya Bank with Buy and price target of `445/share. We expect the Bank’s RoE and RoA to expand to 17.3% and 1% respectively by FY13e on the back of business scaling-up as well as improvement in margins and productivity.

■ Business growth scaling up; margin expansion. We expect ING Vysya Bank to witness improved business growth and higher market share FY11 onwards. Rising CASA share is likely to aid margin expansion to 3.1% in FY13e from 2.7% in FY10.

■ Rising productivity. Core Cost-to-income (excluding trading and extraordinary gains) sharply declined to 60 % in FY10, falling 690bps over FY09. Cost-to-assets at 2.5% in FY10, though higher than peers, shows significant scope for further improvement in productivity.

■ Adequate capitalisation. With strong backing of its international parent and current CRAR of 14.5% (tier 1 capital of 9.9%), the Bank is adequately capitalised to support future growth and
protect itself from additional loan defaults.

■ Valuation and risks. At our target price of `445, the stock would trade at 1.9x FY12e and 1.7x FY13e ABV. Our target price is based on the two-stage dividend-discount model (CoE: 13.2%;
beta: 0.87; Rf: 7.5%). Risks include slower-than-expected credit growth and higher slippages on account of NPAs.

To read the full report: ING VYSYA BANK