Research Reports

>INDIA STRATEGY: Deepak Parekh(CHAIRMAN OF HDFC LIMITED): India – At a Crossroads

2012-01-27T21:54:00.001+05:30

You know your company, now know its CEO: We present the fifth entry in this product series, which seeks to present India’s most famous and successful CEOs and their views on India, the industries in which they operate, and the companies they run – plus a bit of a perspective on what drives them in life.

Deepak Parekh is the Chairman of HDFC Ltd. This report is in the format of questions posed by Morgan Stanley, followed by Mr. Parekh’s responses. Among the key insights Mr. Parekh offered in our discussion are the following:

“Political uncertainty is slowing down economic decisions.”
“The Indian financial sector is strong and safe and it is well regulated. However, we may be running the risk of it becoming over-regulated in some places.”

“Why are Indians not buying equities? I think the answer is that we have not sold our equities well. We are not giving proper education to savers.”

“The NPL cycle is not showing up but restructuring will be needed in the power and civil aviation sectors.”

“I am also worried about too many businessmen going abroad to buy assets, particularly in the resources sector. I think we may be overpaying for these assets.”

“I do not think the investment cycle is dead. People who have started projects are not stalling them. Several foreign companies are queuing up to acquire assets.”

“My final point is that India is at a crossroads. The future looks good but the immediate period seems to have headwinds. We need to be more speedy in our decisions – otherwise we could be left behind.”

What is the key risk to the India story?
I think the long-term growth prospects are very promising. I am extremely optimistic. What is troubling me is politics. All these years, we always said that politics is not a deterrent to growth or to investments or for India to move forward.

This time, because of the fractionalization of politics and its regionalization, together with the lack of a single large party at the top, politics is becoming a concern. Can we have a fractured government? What happens if we get back to the old regime when every three or six months we have a new prime minister? We had that period in the past when we had alliances of small parties and such a government found it difficult to survive. If the two large parties, the Congress and the BJP, are not able to get a majority in the next elections, what is likely to happen? The way politics has moved in the UPA2 regime, with both the alliance as well as in the opposition, does not generate too much confidence. Things may become more troublesome. Political uncertainty is slowing down economic decisions. The larger the number of coalition members in a government, the more different are the views and the slower is the process.

For instance, we have seen opposition to fuel price hikes and FDI in retail, with parties threatening to leave the government if such policies are implemented. The current alliance has a thin majority, so if one party leaves, the government becomes vulnerable. How can such a government function and concentrate on economic goals? India’s long-term drivers are intact – it has favorable demographics, a growing middle class, more disposable incomes, flourishing entrepreneurship, young people with willingness to take risks and willingness to work hard. There has been an evolution with more people willing to start enterprises and the availability of finance has also improved. The management guru, C K Prahlad, used to say that India is no longer a pyramid. He used to say it is a diamond – it is bulging in the middle due to its growing middle class. If you have a weak government everything else suffers.

I am also worried about the lack of decision-making. Again, take for instance all these alleged corruption scandals – why don’t we have the capacity to get on with the investigation, get on with the trial, complete the delivery of sentences to the culprits and close the chapter? We seem to be dragging on. In 2009, there was a near celebratory mood in the country when elections were completed. It seemed that the structure of UPA2 was better than UPA1. The Left parties were out of UPA2. However, the pace of policy change remains less than satisfactory. What could have happened is that complacency may have crept in. UPA2 has very strong individuals but team work appears to be missing. Somewhere there has been a crack which has not been sorted out. The corruption scandals may have also distracted the government.

What are the critical reforms needed?
India's interest rates are very high versus the world. It makes Indian manufacturers uncompetitive. How can a manufacturer pay a 12% interest rate and be competitive when his global competitors pay 2% or lower. High rates have been in response to inflation. However, the inflation is coming from food and our dependence on imported crude. You cannot bring down inflation with high interest rates if you are importing 80% of your crude oil requirements and have shortages in food.

My point is that we need agriculture reforms to be pursued. We have capacity to feed 1.2 billion people and we cannot be importing food. This is not just an Agricultural Ministry issue. We need better transportation, better warehouses and better storage. I have been hearing that we have lost huge amounts of fruits and vegetables to decay. The farmer is getting un-remunerative prices and the consumer is paying an excessive price due to these losses. What it means is that the intermediates or middlemen are making the money. We have to change that.

The global average is that if the consumer pays 100, the farmer gets 66 and 33 is transportation, storage and redistribution. In India when the consumer pays 100, the farmer gets 33 and two-thirds is spent on distribution, storage and logistics. We have seen why this is happening. We have antiquated APMC laws and, because of vested interests, we are unable to dismantle these laws. We have to improve the farmer’s lot and bring down prices. We need higher production and better warehouses. We need better logistics. If we open up multi-brand retail we shall get better sourcing. I have seen what the cash and carry stores are doing with fishermen. They have to buy good quality fish at a cheap price. Only by educating farmers do they achieve this result. We need this to on a massive scale. Agriculture reforms are overdue.

The Indian financial sector is strong and safe and it is well regulated. In some areas we are micro-managing and hence instead of deregulation we are running the risk of overregulation. The clients of the regulatees are getting more attention and costs are rising. For example, we have deregulated savings rate but we have not touched the other side of the balance sheet. We continue to insist on 40% priority sector lending, 25% SLR and not paying interest on CRR balances. Why should SLR remain unchanged? The government's avenues to raise money have increased over the years. We have insurance companies, pension funds, mutual
funds who are all buying government bonds. On top of this we are not allowed to levy prepayment charges. The asset side of the balance sheet is not being liberalized at the same pace as liabilities. Are we getting in a situation where the profitability of banks will decline because avenues of income are being reduced or more opened up which means more competition and costs but the changes to other side are slow?

I am not against the consumer – the consumer must be protected. However, there must be some return on capital, otherwise we should nationalize all financial services businesses. India has followed US and Europe. The financial sector was in a very bad state in the US three years ago. Now Europe is struggling. Will India's financial sector suffer? I don’t think so but we have to be careful about how income generation is shaping up. India's financial sector has a very good history so we hope to keep that intact. We will need more capital to meet Basel 3 norms. Overall, I also feel consolidation is necessary. We have 41 insurance companies. That is not sustainable. Some life insurance companies are writing Rs200-Rs400 million of policies a month. How can you survive with an annual premium income of Rs2.5 billion to 5 billion? Distribution and establishment costs are high.

The other related question is: why are Indians not buying equities? Why are the capital markets dominated by foreign institutional investors? We have a large number of savers in the country. The household savings rate is high but people are comfortable with bank deposits and gold. Why are people not invested in equities? I think the answer is that we have not sold our equities well. People have not made money and lost faith in markets. When HDFC got listed, 90% of shareholding was domestic. Today, 74% of shareholding is foreign. We have not issued equity abroad but our Indian shareholders have sold out. The equity cult of the past has reversed. You can see the inflow into equity mutual funds is so small. For a growing economy, one needs equity. Where does a promoter raise money? The IPO markets have been dead. 95% of IPOs done in the last two years are quoting at a discount to issue price, not just a 2% or 5% discount but 30% and 40%. Everyone who has invested in such IPOs has lost money. The confidence will not come unless people make money. We are not giving proper education to savers.

Infrastructure is another issue. If you look at the 12th Five Year Plan, 45% of the investments in infrastructure are in energy. However, banks are overexposed to power and current projects are running behind schedule either due to lack of availability of land, coal linkages, transport or logistics. Something or the other is holding up the projects. Hence, execution in infrastructure is a worry.

Separately, I am also worried about too many businessmen going abroad to buy assets particularly in the resources sector. I think we may be overpaying for these assets. I cannot envisage a situation where a coal mine is up for auction and someone from abroad comes and pays a higher price than the Indian promoters who know the market, the process and the environment so well. Similarly, when something is sold in South Africa, Indonesia or Australia, Indian companies go and buy as if they know the local environment better than the local companies. Therefore, I think we are not getting a good deal and we may be overestimating the capacity of these resource assets. Only time will tell, though. I hope I am wrong but I am little worried about because significant amounts have gone out from India to buy these assets.

What about the NPL cycle?
The NPL cycle is not showing up but restructuring will be needed in the power and civil aviation sectors. Every airline is losing money. But you cannot shut down the sector because you cannot have a country without airlines. Fuel costs are high because of taxes. If you see the balance sheet of companies, and I was seeing one of them, the three-month fuel bill is up Rs6 billion over the previous quarter. Now how can one overcome such a steep rise in just fuel costs and make money? Out of the Rs6 billion, a significant portion is taxes. If you tax the airlines hard, then you cannot force them to have unviable flights to remote locations.

The regulator should be there to look after the companies it is regulating, to ensure that they remain viable and are able to provide reasonable service to customers. They should be to generate a reasonable ROE for their shareholders so when they grow they can raise more capital. We may be erring in this regard.

How do you view competition in the country?
Consolidation is needed in several sectors. I am not saying competition should not be there. Take the case of the banking sector. We are not seeing the number of nationalized banks reducing. Now, we are going to issue more bank licenses. We are unable to get the holding company structure moving. The RBI has done its job by issuing a paper but we cannot make progress because there are tax issues. The tax liabilities need to be grandfathered once. The coordination across agencies involved is missing and hence we may not be able to make this work and achieve consolidation.

And how do you view the investment cycle?
I have met senior people from a dozen large global companies over the past three months, after the mood has turned grey in India and overseas and interest in India has seemingly diminished as reported in the press. However, these people who I have met are still desperate to invest in India. That is why I said that the long-term view on India is very positive because we have the population, the savings and the system.

I do not think the investment cycle is dead. People who have started projects are not stalling them. They are only stalled if government approvals are pending. On their own, companies are still investing. We still have a market that is growing. I don’t think the investments will slow. I am seeing people who are willing to put US$2-5 billion in single ventures as investments. There is still concern around government approvals. However, several companies are looking to acquire businesses in India. Indian entrepreneurs who are in mining and infrastructure are feeling after their recent experience that if you are willing to take up a project in India, one should not set a time limit on completion and an estimate of total cost. You cannot say this project will be finished within this cost and within a stipulated time. If the project involves land, power, government approvals – you cannot put a time line. Foreign companies are not doing greenfield projects. They are petrified on how to get all approvals ready. They see several examples of greenfield projects that have been delayed.

However, the situation is a bit different in some states. These states are competing heavily with each other and states like Gujarat, Bihar, Tamil Nadu and even Rajasthan will take away a lion's share of investments.

What is the secret of HDFC’s success?
There is no secret. We have benefited from a fast-growing market. We were in an industry which needed a company like HDFC. Demand was almost insatiable with the old system of joint families breaking down. People were moving from renting to ownership of homes. Rented houses were not easily available. We were fortunate that we were in the market during this growth phase. We took advantage of the demand and the aspirations of individuals to own small homes. Please believe me that the homes of our clients are tiny, real tiny. We were born at the right time and right place.

We have also been fortunate with our people. There was no rocket science in hiring either. In the 70s and 80s, our recruitment policy was very simple – anyone who walked in got a job. Since we were growing so rapidly, we did not have time to go through interviews – we needed people quickly.

My final point is that India is at a crossroads. The future looks good but the immediate period seems to have headwinds. We need a change in the government’s approach. It has to take decisions. For several reasons, decision-making has slowed down. We need to reignite the confidence in the system. Everything is being referred to committees because individuals are scared of taking decisions. We need to be more speedy in our decisions – otherwise we could be left behind.

This interview was conducted in November 2011. HDFC Ltd. is rated Equal-weight by Morgan Stanley Indian Banks analyst Anil Agarwal. The share price closed at Rs665.15 on January 3,
2011.

RISH TRADER

>CAIRN INDIA: Started production from Bhagyam field; EOR pilot in the Mangala field, consisting of four injectors, one producer and three observation wells; & uPDATE ON Ravva & Cambay

2012-01-27T21:33:00.003+05:30

Q3 FY12 provided a glimpse of normalized revenues & profits after royalty was made cost recoverable; with reported net profit of Rs 22.6 bn in line with our estimate of Rs 22 bn.

■ Topline adjustments at $ 237 mn in Q3 FY12
The topline for Q3 FY12 was reduced by $ 237 mn on account of royalty being made cost recoverable and profit sharing with the Govt. of India on production from the Rajasthan block. Adjustment towards royalty for the quarter stood at Rs6,285 mn, 2% lower than our expectation of Rs 6,435 mn. Profit petroleum shared with the Govt. was Rs 5,727 mn, which has been calculated as 20% of profit petroleum for the quarter.

■ Topline at Rs 31 bn
In spite of blended realization jumping by 33% y-o-y from $ 76/boe in Q3 FY11 to $ 100.3/boe in Q3 FY12, revenue is flat y-o-y owing to royalty being made cost recoverable. The q-o-q rise of 17% in the topline is due to inclusion of one-off impact of royalty adjustment in Q2 FY12, inspite of stagnant production and marginally lower realization q-o-q.

■ Mangala production @ 125 kbpd, Bhagyam starts producing
Mangala production for the quarter stood at 124.9 kbpd whereas the Saraswati field is producing at its peak level of 0.25 kbpd. Production from Bhagyam field has started on Jan 19, 2012 and the management has guided for ramp up of output to the approved peak level of 40 kbpd by Mar 2012. The company has retained its guidance for FY12 exit production rate of 175 kbpd.

■ Other income boosted by forex gain of Rs 3 bn
The company reported a forex gain of Rs 3 bn in Q3 FY12 due to the swift depreciation of the rupee against the US dollar. DD&A expense during the quarter stood at $ 8/bbl, which is in line with management guidance. Tax rate came in at 5% during Q3 FY12, as against 9.2% in Q3 FY11. The management has
maintained its tax rate guidance at ~10%.

■ Net profit in line with estimates
Net profit for Q3 FY12 at Rs 22.6 bn was 2.8% higher than our estimate of Rs 22 bn. EPS for the quarter was Rs 11.9, 196% higher q-o-q & 12% y-o-y.

PERFORMANCE HIGHLIGHTS

■ Bhagyam to touch 40 kbpd by Mar 2012
Cairn India has started production from Bhagyam field on Jan 19, subsequent to receipt of Govt. approval for the same. Further work on the development of the Bhagyam field is ongoing. A total of 62 development wells have been drilled. Well results from the Bhagyam development drilling have been as per expectations. The reservoir and facilities will require some time for gradual and safe ramp up to reach the currently approved plateau of 40 kbpd. The company expects to receive approval soon for increasing output from Mangala to 150 kbpd. 148 development wells have been drilled in Mangala, of which 85 are currently producing and 30 injector wells are injecting water into the reservoirs. The company has retained its guidance of FY12 production exit rate of 175 kbpd.

■ Expansion of MPT facilities underway
The company is expanding its production facilities at the MPT to achieve processing capacity beyond the current level of 175 kbpd by end-2012. The current facility can handle higher volumes in line with the basin potential through incremental investments and augmentation of facilities, subject to JV & GoI approval. Further investments have been planned to augment processing capacity and pipeline infrastructure to deliver the envisaged basin potential. The management has guided for flat production of 175 kbpd (+/- 5-8%) for CY12.

■ Update on other exploratory activities
Mangala EOR: The first phase of the EOR pilot in the Mangala field, consisting of four injectors, one producer and three observation wells have been drilled, completed and hooked up to the facilities. After completion of baseline water flood for more than six months, polymer injection started in Aug 2011. Preparation for the commencement of the ASP phase is currently underway. The results to date are encouraging and based on these results, FDP for a full field application of polymer flood in the Mangala field is under preparation and is expected to be submitted by H1 CY12. This will be the start of the process for monetizing the full EOR potential of the block.

■ Ravva & Cambay: Recent infill drilling and workover campaigns have helped slow down the rate of production decline from the Ravva field. A 4D seismic survey was carried out previously to help identify bypassed oil zones in the reservoir along with prospects in the deeper zones. Interpretation of the seismic data is currently in progress. The spare gas processing capacity of the CB/OS-2 facilities is planned to be utilized by tolling and processing ONGC’s gas from its North Tapti field (adjacent to the Cambay field). ONGC has completed the North Tapti pipeline tie-in with the CB/OS-2 facilities. An infill drilling campaign is planned in the Cambay field to sustain production.

■ SL 2007-01-001: Cairn Lanka has successfully completed the first phase of the exploration campaign in Sri Lanka Block SL-2007- 01-001. The exploration programme involved the acquisition, processing and interpretation of 1,753 sq km of 3D seismic data and the drilling of three well deep water wells. This resulted in two successive gas and condensate discoveries: the CLPL-Dorado- 91H/1z well and, the CLPL-Barracuda-1G/1 well. The third well, CLPL-Dorado North 1- 82K/1 was plugged and abandoned as a dry hole on Dec 14, 2011. Following this success, Cairn Lanka has notified the government of Sri Lanka of its
intention to enter the second phase of exploration

Other blocks: In the KG-ONN-2003/1 block, an exploration well, Nagayalanka SE-1, is being drilled to test and appraise the Nagayalanka Discovery. Cairn India has decided to sell off its stake in the KG-DWN-98/2 block to its JV partner ONGC and focus on other areas of strategic interest elsewhere in its portfolio. 3D seismic data processing and interpretation has been completed in the KK-DWN-2004/1 block.

Outlook
The receipt of approval for production start from Bhagyam marks a return to constructive engagement between Cairn India, ONGC and the Govt. on the issues of ramping up production and realizing the full potential of the Barmer basin. We expect long pending approvals for higher peak production levels from the MBA fields to be given in a timely manner going ahead. We expect output from Rajasthan to reach the targeted level of 175 kbpd by end-FY12 and stay at these levels till end-2012. We expect production of 210 kbpd from the MBA fields from Jan 2013 onwards.

Valuation
As production from Rajasthan improves going forward, so would the profit sharing with the Govt., resulting in a higher portion of the operating cash flow being unavailable for the company. As the block is expected to produce at its peak level from FY14E-21E, revenues would be stagnant whereas profit shared with the Govt. would keep on increasing resulting in a lower topline y-o-y from FY14E onwards. On the other hand, operating costs would go up as opex/bbl for crude produced from EOR reserves is expected to be around $ 7/bbl as against $ 2.5/bbl currently. Hence, we expect the company to report its peak earnings in FY13E, and report lower earnings y-o-y going forward resulting in a series of lower cash flows going forward.

With the stock rallying over the previous 3 months, our previous price target of Rs 334 has been achieved. We introduce our FY14 estimates and roll forward our price target from Mar 2012 to Mar 2013. As a consequence of falling cash flows from FY14E onwards, our price target drops to Rs 318 and we rate the stock as UNDERPERFORMER.

To read the full report: CAIRN INDIA
RISH TRADER

>BHEL: Major Orders declared during Q3FY12 are Dainik Bhaskar Power Ltd, SCCL & Arcelor Mittal - Ukraine

2012-01-27T21:20:00.001+05:30

Weak Order inflows – Uncertain to meet its guidance
Order intake declared in 3QFY12 has been to the tune of `79bn as compared to `122bn declared in Q3FY11 down by ~35%, indicating a possibility of weak order inflows. We believe it to be a herculean task for BHEL to meet its order inflow guidance of `660bn as total order inflows declared till date has been `247bn in FY12, falling short of guidance by `413bn. More than 50% of its order inflow guidance will have to be met in Q4FY12.

Major Orders declared during Q3FY12 are

Average Revenue growth of around 22% & Pat growth of around 4%
With an order backlog of `1610bn as of Q2FY12, we expect an average growth of ~22% with an execution ratio of close to 31% & carrying a revenue visibility of more than 3yrs. With steel prices stabilizing at current market prices, we estimate reduction in consumption of its raw material as a % of sales. We expect an average PAT growth of around 4% with reduced PAT margins @13.5% as against 15.9% yoy.

Uncertain Long-term growth
The long-term outlook for order inflow remains uncertain given the fuel pressure – the domestic coal shortage coupled with high imported coal prices and competition in the BTG space from both domestic and international peers.

RISH TRADER

>BAJAJ AUTO LIMITED: 3QFY12 Results

2012-01-26T23:58:00.002+05:30

Strong operating performance continues

Bajaj Auto’s (BAL) 3QFY12 results were better than our expectations with EBITDA margin at 21% (est. 20.7%). Revenues at Rs.50.6bn were higher by 2.3% compared to our estimate of Rs49.5bn, largely on account of better than expected export realizations (up 9.9% QoQ, driven by 3.5% price hike and rupee depreciation). Adjusted PAT stood at Rs.8.39bn higher by 6% compared to our estimate of Rs.7.93bn. We continue to remain positive on the stock and maintain Buy rating with a revised target price of Rs.1,759.

■ Better than expected operating performance driven by higher export realizations: Revenues at Rs.50.6bn stood higher than our estimate by 2.3% largely driven by higher export realizations (up 9.9% QoQ). Though the RMC per unit stood higher by 3% compared to our estimate, higher than expected revenues and marginally lower than expected other overheads helped margin expansion by 90bps QoQ and 60bps YoY at 21%.

■ Conference call highlights: 1) Against management commentary from Hero MotoCorp (expecting 10-11% YoY growth for the industry in 4QFY12E), BAL was conservative expecting the growth to moderate to 5-6% in the period. However, the company expects long term CAGR volume growth of 10-12% to continue for the industry over the next 3-5years 2) Export volume growth to remain strong and FY13E should see the repeat of FY12E (YTDFY12 export growth was 30%+) 3) KTM bike will be launched on 24 Feb 2012 and two new
products will be launched between Discover and Pulsar from BAL’s stable.

■ Valuations and Recommendations: At the CMP of Rs.1,561, the stock is currently trading at 14.7x FY12 EPS of Rs.106 and 13.1x FY13E EPS of Rs.119. We continue to remain positive on the stock and maintain BUY rating on the stock with a revised target price of Rs.1,759.

RISH TRADER

>JINDAL STEEL & POWER: Pellet and Steel sales volumes disappoints despite strong growth in steel production

2012-01-26T23:53:00.000+05:30

■ Consolidated adjusted PAT grew 4% YoY to INR10.2b, below our estimate of INR11b. Reported consolidated PAT was INR9.96b, which included an exceptional gain of INR259m and forex loss of INR500m. JSPL has not adopted the new guidelines for amortization of forex loss over a longer period.

■ Jindal Power's revenue and PAT for the quarter were higher than we had estimated - at INR8b and INR4.8b, respectively. Power generation was 2,255mkwh at PLF of 102%. Power rate is estimated at INR3.94/kwh.

■ Two captive units of 135MW have been commissioned at Dongamahua, Chhattisgarh in January 2012. Also, these units have received open access permissions to sell power at merchant rates. Merchant tariffs are likely to be >INR4/kwh, while the cost is ~INR2.2/kwh. The improved margins and higher volumes are likely to drive earnings.

■ Power rates on surplus power sales to Odisha state from the 270MW CPP have been revised upwards by INR0.3/kwh to INR3.05/kwh.

■ Steel production during the quarter was a record 757k tons although sales were down 1% QoQ to 591k tons. Steel inventories built as of December 2011 have since been liquidated at higher realizations. We expect steel sales volumes to be higher and margins to be superior in 4QFY12.

■ Earnings growth is likely to moderate post 4QFY12 due to delays in the Angul steel and coal mine projects. We are cutting our EPS estimate for FY13 by 9% to INR49.9. Earnings are likely to grow 12.6% in FY13. The stock trades at 10.4x FY13E EPS. Maintain Buy.

To read the full report: JINDAL STEEL & POWER

RISH TRADER

>EXIDE INDUSTRIES LIMITED: “Positive developments factored in”

2012-01-26T23:48:00.002+05:30

Q3 FY12 - Sequential improvement
On the back of strength shown from 2 wheeler segment, Exide was in a position to put up a sequential improvement in numbers. Total income increased by 6% qoq, while 19% yoy. At the EBITDA levels, there was an increase of 84% qoq and a 3% yoy. RM to sales came down significantly to 67.4% v/s 72.3% qoq while it was still up from 62.7% yoy. The reason for sequential dip was the exhaustion of high cost lead which impacted Q2 margins. EBITDA margins came in at 13.2% v/s 7.6% qoq and 15.2% yoy.PAT almost doubled to Rs1.04 mn on strong operational performance.

2W volumes strong, 4W subdued, industrial post a growth
The volume improvement in the quarter was on the back of strong 2W battery sales. The auto battery volumes grew 19% yoy and 3% qoq to 3.55mn while 4W volumes declined by 21% yoy, while grew by 6% qoq. On the industrial side, volume growth was 13% yoy and 3% qoq on harsh October summer and demand from telecom industry increasing. On the capacity side, the company is through with 4W capacity expansion at 12mn units, while is still in the process of increasing 2W capacity which is slated to move up to 21mn. The management is confident about 2W demand getting back on track quickly, while has pessimistic outlook on 4W demand. In Q3FY12, the company functioned at 82% utilization rate on the auto side while 81% on the industrial side, which was a sequential improvement of 72% and 62% respectively. The replacement: OEM ratio on the auto side was 1.24:1 which was an improvement qoq. Going forward, we believe that 2W demand on the OEM side will be slightly soft as the sector has seen some slowdown off late, while on the 4W side OEM demand, we believe softness will continue over a couple of quarters. On the replacement side, we believe that Q1 FY13 will see some turnaround emanating from the demand for automobiles 3 years ago, both on 2W as well as 4W.

Margin improvement may come in coming quarters
The improvement in margin performance was in line with our expectations as high cost lead was expected to get over this quarter. The composition of replacement in the total volumes also improved and is expected to improve even more from FY 13. This will assist margin performance.Softening of lead prices as seen in Q3 is expected to continue and help the margins going forward. We have already factored in about 400 bps improvement in margins in FY 13 to 15.7%.

Industrial segment to remain subdued
Going forward with improving power conditions,we see the demand for inverters going down from current levels in the long term. In Q3, inverter sales were up due to strong summer in October, while stronger winter in most parts of the country would be reducing the sales of inverters in Q4. We expect the contribution of inverter sales to reduce in the total topline from FY 13, though the company is planning to enter the inverter business. On the telecom side of the industrial batteries, winning of contract by rival Amara Raja for supplying batteries to Bharti’s Africa business may take some market share from Exide.

To read the full report: EXIDE INDUSTRIES
RISH TRADER

>SARDA ENERGY

2012-01-26T23:44:00.000+05:30

Sarda Energy and Mineral (SEML) posted standalone adjusted PAT of INR187m (up 35% QoQ) for 3QFY12.
Higher coal production, stabilization of pellet plant, and higher merchant power volumes and rates boosted earnings
Net sales increased 13% QoQ to INR2.8b (v/s our estimate of INR2.5b), driven by higher pellet and power sales, and increase in sponge iron prices.
EBITDA increased 34% QoQ to INR481m, driven by increase in production of pellets and coal, higher power
generation, and higher sponge iron prices. Pellets are currently enjoying superior margins due to shortage of DRI
grade iron ore and strong sponge iron prices.
Reported standalone PAT was INR278m. This includes INR137m MTM impact of forex loss reversal, as SEML has adopted new guidelines for amortization of forex loss over a longer period.

Valuation and view: After a couple of quarters of subdued performance, the pellet plant has stabilized. The coal washery, which was started in August 2011, is also ramping up well and mining production has increased. We are increasing our earnings estimate for FY13 to factor in stabilization of the pellet plant and coal washery, and rampup of coal mining. The stock trades at an EV of 5.3x FY12E EBITDA. Maintain Neutral.

To read the full report: SARDA ENERGY
RISH TRADER

>ACCOUNTING THEMATIC: Accounting quality drives investment returns

2012-01-24T21:14:00.001+05:30

Along with everything else, accounting quality in India seems to have stagnated at a low level. Our analysis of the last four years of consolidated accounts of the BSE500 (excl Financials) points to continuing divergence in accounting quality within the stock market. The silver lining is that the relationship between good accounting and positive investment performance seems to be tightening over time.

As one would expect, accounting quality varies by sector (see table on the right) with the usual suspects like Realty, Conglomerates and Construction bringing up the rear. More importantly, the change in a sector’s accounting scores over time seem to have a bearing on investment returns (see exhibit 6 on page 5). Ironically, this puts Realty companies in a nice position as, inspite of being the bottom of the class on a blended basis over FY08-11, Realty is one of the most improved sectors when it comes to change in accounting score across FY08-11. Media companies are also in a similar position.

Similarly, accounting scores vary across market cap buckets (see table below right & Section 3). Whilst the “top 50” stocks have the best blended scores across FY08-11, the improvement in accounting scores over FY08-11 has been the greatest in the midcap bucket (bucket 3: the 100 stocks with mkt cap between $0.2-0.6bn).

Most importantly, from an investors’ perspective accounting scores have a clear impact on stock level returns. Whilst this is not apparent when you look at the BSE500 as a whole, when you drill down to the sector level the relationship is clear (see Exhibits below and Section 5). In fact, if you drill down further into a specific market cap segment in a sector (see Exhibit on the right), the link between good accounting and positive investment performance becomes even clearer.

Whilst our analysis uses on an array of accounting ratios to detect financial manipulation by listed companies, the most powerful ratios are:

CFO/EBITDA or the “cash conversion ratio” fluctuates widely across time and across companies. It appears that whenever promoters want to boost profits (and do a QIP), working capital deteriorates and cash conversion suffers.
“Other Loans & Advances as a % of Networth” seems to be the most widely favoured route when it comes to pulling cash out of the company (to fund whatever else has caught the promoters’ fancy outside the listed entity).
“Provisioning for doubtful debtors as a % of gross debtors” also fluctuates significantly across time and widely across sectors and companies. A low score on this metric combined with poor cash conversion is arguably the defining signature of a dodgy set of accounts.

To read the full report: ACCOUNTING THEMATIC
RISH TRADER

>BASEL III: Global regulatory standard on bank capital adequacy, stress testing and market liquidity risk

2012-01-24T21:10:00.000+05:30

Highlights of Basel III:

Core equity tier-1 of 5.5% as against 4.5% for international banks
Capital conservation buffer of 2.5% by way of common equity
Leverage ratio introduced at a minimum 5% (without risk weighting) as against 3% for international banks
Early transition by March 2017, as compared to January 2019 as per international norms
Core equity fulcrum of CAR
Charges to core equity tier -1 as against total CAR
Dividend payout ratios relaxed, allowed upto 100%

For most private sector banks Basel III transition is likely to be smooth. High core-equity tier-1 capital along with room for increase in capital conservation ratios augur well for private sector banks. Select public sector banks are likely to face hiccups. Lesser room for capital conservation as PSU already operate on low dividend payout and low core equity are amongst the concerns for these PSU banks. For every 1% increase in core equity, RoEs are likely to moderate by about 200 bps on an average for the Indian banking industry.

■ Indian Private Sector banks well placed
Indian Private Sector banks are comfortably positioned to move towards Basel III guidelines. Banks would need to keep 11.5% as overall CAR with tier-1 capital at 9.5% (including capital conservation buffer of 2.5%). Core equity tier- 1 capital is the fulcrum of Basel III, and its impact extends into dividend payouts and computation of additional tier-1 capital and tier-2 capital. Leverage ratio has been introduced with core-equity as the capital base. Higher core-equity and CAR requirements are likely to moderate banks’ RoEs from current levels.

■ Select public sector banks, however, are on a sticky wicket
This list includes Bank of India, Central Bank of India, IDBI Bank, UCO Bank, United Bank of India and Vijaya Bank. Conversion of perpetual non-cumulative preference shares, however, may see UCO Bank, United Bank of India and Vijaya Bank sail through. With the Government of India holds bulk of the preference shares of these banks, such a conversion could be on the cards. Others in the list are likely to relook at their growth strategy, resort to dividend cuts or tap equity funding sources.

■ Higher core equity likely to moderate ROEs
Higher core equity are likely to curtail ROEs. Banks on average deliver about 15% ROE, and our estimates indicate that for every additional 100 bps of increase in core equity, ROEs are likely to dip ~200bps. An increase of 1% in tier-1 ratio would need an additional capital of ~Rs 470 bn (~US$10 bn) with the total RWA in the banking system at ~Rs 47 trillion. We believe private banks are well placed to strengthen their core equity through internal accruals.

To read the full report: BASEL III
RISH TRADER

>RELIANCE INDUSTRIES LIMITED: Comparison of RIL’s 3QFY12 results with 2QFY12 and 3QFY11 results

2012-01-24T21:01:00.000+05:30

Financial highlights
■ EBITDA and net income. RIL’s 3QFY12 EBITDA declined 26% qoq and 23.7% yoy to `72.9 bn led by (1) lower refining margins, (2) lower production from KG D-6 block and (3) weaker performance of the chemical segment. 3QFY12 net income declined 22.1% qoq and 13.6% yoy to `44.4 bn.

■ Other income. Other income increased 55.8% qoq to `17.2 bn reflecting higher cash balance in 3QFY12. RIL had cash and cash equivalents of `754 bn at end- December 2011 versus `615 bn at end-September 2011.

■ Interest expense. 3QFY12 interest expense increased to `6.9 bn compared to `6.6 bn in 2QFY12; gross interest expense including interest capitalized of `1.1 bn was `8.1 bn. RIL’s implied interest rate was 4.3% in 9MFY12 and 4.3% in FY2011.

■ DD&A charges. 3QFY12 DD&A declined 13.4% qoq and 23.5% yoy to `25.7 bn reflecting (1) the first full-quarter impact on depreciation from reduction in gross block by the amount received from BP and (2) lower depletion due to lower production from KG D-6 block. RIL has not provided breakdown of depreciation and depletion separately.

■ Taxation. RIL’s 3QFY12 effective tax rate was 22.6% compared to 22.1% in 2QFY12 and 19.5% in 3QFY11. We note that RIL continues to provide for tax at the MAT rate of 20% for gas produced from its KG D-6 block.

■ Net debt. RIL’s end-3QFY12 net debt stood at –`0.4 bn against `99 bn at end- 2QFY12 reflecting `72 bn of gross cash flow generation (net profit + DDA + deferred taxation) and receipt of `147 bn of cash received from BP in October 2011. Net capex (adjusted for foreign currency gains or losses on foreign currency loans) was `58 bn in the quarter. We note that net capex includes (1) actual cash capex (not disclosed for 3QFY12) and (2) increase in gross block due to capitalization of increase in foreign currency loans due to depreciation in the value of the Indian Rupee against the US Dollar. The company has disclosed cash capex of `48.4 bn for 9MFY12, significantly lower than reported net capex of `124.6 bn. However, we would note that the net debt figure would capture the movement in foreign currency loans also due to movement in currencies of foreign currency loans relative to the reporting currency. Exhibit 3 gives details of movement in net debt over the past few quarters and years.

To read the full report: RIL
RISH TRADER

>Impact: Third Quarter Review of the Monetary Policy(January 2012): Impact on Liquidity

2012-01-24T20:16:00.000+05:30

The Reserve Bank of India in its Q3 Monetary Policy Review retained key interest rates at the existing levels and reduced Cash Reserve Ratio (CRR) by 50 bps in order to ease the prolonged tight liquidity conditions in the banking system.

CRR, the proportion of the net demand and time liabilities (NDTL) that banks have to hold with the RBI, has been reduced by 50 bps to 5.5% effective from 28th January 2012. The 50 bps cut in the CRR would infuse approximately Rs. 320 bn into the banking system. With this change the RBI intends to permanently address the structural liquidity shortage in the banking system caused mainly due to the infusion of Dollar by the RBI since November.

On account of the increased government borrowings and the slowdown in private credit demand, the RBI has retained M3 growth projection for 2011-12 at 15.5%, while non-food credit growth has been scaled down to 16.0%.

Key Take-away:
1. Cut in Cash Reserve Ratio
In reducing the CRR by 50 bps the RBI wishes to address the liquidity pressure prevalent in the banking system since early November 2011.

Table 3 illustrates very clearly that the banks have been borrowing over the Rs. 600 bn comfort level of the RBI. Further, a CRR cut will end up giving money to even those banks that have surplus liquidity. Therefore, an infusion of Rs. 320 bn as induced by the 50 bps CRR cut would benefit the liquidity conditions to some extent. However to the extent that the liquidity crunch is due to bank investments in GSecs, these CRR released funds could flow mainly into government paper and support borrowing programme of government as commercial credit growth is sluggish due to demand and interest rate conditions.

2. Impact on Liquidity
Based on the RBI’s projections for growth in deposits (16% = Rs. 8,328 bn) and credit (16% = Rs. 6,301 bn) for FY12 along with the enlarged borrowing programme of the government (Rs. 5,099 bn), the following is the pattern of liquidity flows in the system.

Taking a closer look at the growth achieved so far in the financial year (Apr-Dec 2011-12), Table 3 shows that based on the RBI’s assumptions, there will be a net gap of Rs 1,324 bn in the system, of which Rs 320 bn would be addressed through the present CRR cut. Assuming that there are another Rs 200 bn of OMOs, there would be a gap of Rs 800 bn which will have to financed by other subscribers like PFs, Insurance companies, PDs, repos or CRR cut.

The mitigating factors would be:
- Deposits grow at a faster rate
- Credit growth slows down further

3. Inflation
Headline inflation, which averaged 9.7% for the Apr-Oct period of 2011-12 moderated to 9.1% in November and further to 7.5% in December. However, it is critical to note that the slowdown in inflation has been driven by the moderation in the prices of primary articles, especially vegetables while inflation continues to be high for the core sector. Further, the decline in food inflation is likely to reverse ahead with the base effect waning and seasonality factors sneaking in. Fuel inflation has also remained elevated at 14.9% in December 2011-12 on account of high Global crude prices and rupee depreciation.

RBI has maintained that the inflation target of 7% by the end of March would be attainable despite the slow improvement in core sector inflation and uncertainties in the global economies. This target appears to be reasonable. More importantly, core inflation should move down for any RBI action on this front.

4. Rate reduction
Further, speculation that CRR cut is guidance for interest reduction in the future, it is more likely that the RBI would be more cautious before reducing interest rates as it would be premature to begin reducing policy rates before a substantial and sustainable dip in overall inflation. We do not expect this before early FY13.

RISH TRADER

>ULTRATECH CEMENT: Expansion at Chhattisgarh and Karnataka for 9.2mt cement capacity are on track

2012-01-24T20:02:00.002+05:30

Recommendation: Hold

Price target: Rs1,275
Current market price: Rs1,209

Price target revised to Rs1,275

Result highlights

Operating profit in line with estimate; PAT ahead of estimate: In Q3FY2012 UltraTech Cement (UltraTech) posted an operating profit of Rs964.9 crore (up 36.3%), which is in line with our estimate. However, on account of a surge in the other income and a decline in the interest cost (due to the subsidies received in the earlier years under the State Investment Promotion Scheme) the net profit of the company grew by 93.4% year on year (YoY) to Rs616.9 crore, which is ahead of our estimate.
Revenue growth largely driven by realisation growth: The revenue growth of 23.1% was supported by an increase of 16.2% in the average blended realisation YoY to Rs4,509 per tonne. On the volume front, the overall sales volume (including cement, clinker, export and white cement volumes) grew by 5.9% on a year-on-year (Y-o-Y) basis to 10.14 million tonne. On a sequential basis, the volume has witnessed sign of post monsoon recovery and grew by 7%. The blended realisation was higher by 9.3% on a quarter-on-quarter (Q-o-Q) basis. Going ahead in Q4FY2012 we believe cement prices will remain strong with a likely increase in the cement offtake.
Expansion in the OPM due to higher realisation: On the margin front, the operating profit margin (OPM) expanded by 205 basis points YoY to 21.1% on account of a 21.2% increase in the realisation. However, on the cost front the key cost elements like the raw material cost, the power & fuel cost and the freight charges continued their upward trend. This increased the overall cost of production by 18.1% to Rs3,618 per tonne. The operating profit increased by 36.3% YoY to Rs964.9 crore and the EBITDA per tonne increased by 28.7% YoY to Rs952.
Surge in other income and decline in interest cost: The other income increased by 156.4% to Rs155.4 crore (which included Rs66.6 crore for the subsidies related to the earlier years availed of under the State Investment Promotion Scheme). Further, the net interest cost declined by 63.9% YoY to Rs29.5 crore on account of the net subsidies of Rs38.4 crore received. Hence, the reported net profit of the company grew by 93.4% YoY to Rs616.9 crore.
Expansion at Chhattisgarh and Karnataka for 9.2mt cement capacity are on track: The company is setting up additional cement clinkerisation plants at Chhattisgarh and Karnataka. Work on both the plants is on track. The company has already placed the orders for the major equipment. The expansion will increase the total cement capacity by 9.2 million tonne and the additional capacities are expected to come on stream by Q1FY2014. After the commissioning of the aforesaid capacities the cement capacity of the company will enhance to 59 million tonne per annum (mtpa).
Oversupply to continue for three years, cost inflation to pressurise margin: As per the management, the oversupply scenario in the domestic cement industry is likely to continue in the coming three years which will have an adverse impact on the cement prices. Further, the sharp increase in the domestic and imported coal prices coupled with a likely increase in the freight cost will keep the margins under pressure.
Upgrading earnings estimates for FY2012 and FY2013: We are upgrading our earnings estimates for FY2012 and FY2013 mainly to factor in the higher than expected blended realisation in Q3FY2012. We are also factoring in some pressure on the power & fuel cost with the change in the pricing mechanism for domestic coal. The revised earnings per share (EPS) estimates work out to Rs72.8 for FY2012 and Rs82.3 for FY2013.
Maintain Hold with a revised price target of Rs1,275: We like UltraTech due to its diversified pan-India presence and strong balance sheet. Further, the company's footprint in the growing markets like Bangladesh, Dubai, Sudan and Bahrain augurs well for its business. However, on account of the pressure expected on the cement prices in the coming one year and the cost inflation in terms of the rising prices of coal (imported as well as domestic) we maintain our Hold recommendation on the stock with a revised price target of Rs1,275 (valued at enterprise value [EV]/tonne of $120). At the current market price the stock trades at a price/earnings (PE) of 14.7x, discounting the FY2013 estimates. On an EV/EBITDA basis, the stock trades at 7x FY2013E.

RISH TRADER

>MARUTI SUZUKI INDIA: Expect a Swift recovery

2012-01-24T19:55:00.002+05:30

Recommendation: Hold
Price target: Rs1,138
Current market price: Rs1,163

Realisation expansion a positive surprise in Q3FY2012
During Q3FY2012, Maruti Suzuki (Maruti) reported a 7.1% quarter on quarter (QoQ) increase in net realisations. Lower discounts, price hikes and an improved product mix took the realisation to an all time high. The contribution/vehicle also surprised and reached to its highest level in the last six quarters.

Worst for margins behind; expect gradual improvement from Q4FY2012
The company is expected to see a 100-150 basis points (bps) margin savings on account of favourable operating leverage as production ramps up in Q4FY2012. However, some hit is expected as vendors are compensated for higher costs with a lag. Vendor compensation is expected to have a positive effect of 100bps.

Foreign exchange (forex) related marked to market (MTM) losses in commodities and direct and indirect imports were to the tune of Rs75 crore, thereby impacting margins by 100bps.

In case the currency remains stable, the company may see a 100-250bps margin expansion from Q4FY2012 onwards. FY2013 may see further improvement once the benefit of vendor hedges comes through.

Open positions may cause margin volatility; 100bps Q-o-Q impact felt in Q3FY2012 Maruti saw a 100bps impact on margins on account of adverse forex movement. The company hedged its dollar/ yen as well as dollar/euro exposure for Q4FY2012 while FY2013 exposure is completely open. During Q3FY2012 the dollar appreciated 0.7% against the yen while it appreciated 4.5% against the euro.

While the company hedged stable currencies, it has kept the most volatile dollar/rupee exposure open. An adverse currency movement in the rupee can have a direct bearing on the margins. During Q3FY2012, the pure currency impact on royalty is to the tune of Rs75 crore which includes reinstatement of liabilities of Rs20 crore and Rs19 crore of royalty hit related to H1FY2012.

ValuationWe are marginally cutting our earnings per share (EPS) estimates for the company as we incorporate the management's expectations of the future. Since our last Buy recommendation, the stock has achieved our target price. Our revised target price of Rs1,138 discounts FY2013 expected EPS of Rs81.3 by 14x. We believe that the current price is factoring in the positives. We recommend a Hold on the stock.

RISH TRADER

>GODREJ CONSUMER PRODUCTS

2012-01-24T19:53:00.004+05:30

Recommendation: Buy
Price target: Rs497
Current market price: Rs418

Price target revised to Rs497

Key points

Q3FY2012 results-a blockbuster performance: For Q3FY2012 Godrej Consumer Products Ltd (GCPL) has reported a blockbuster performance with a sequential improvement of 214 basis points in the operating profit margins (OPMs) and a 50% growth in the bottom line for the quarter. The consolidated net sales grew by 36% year on year (YoY) to Rs1,344.1 crore (which was ahead of our estimate of Rs1,235.4 crore) during the quarter. This growth was driven by a 20.0% year-on-year (Y-o-Y) increase in the domestic business and a 68.2% Y-o-Y growth in the international business. Though the gross profit margin (GPM) remained almost flat but the OPM improved by 292 basis points YoY to 20.2%, largely on account of a 284-basis-point Y-o-Y decline in the advertisement and promotional spend during the quarter. The operating profit grew by 58.9% YoY to Rs272.1 crore and the adjusted profit after tax (PAT; before minority interest) grew by 54.3% YoY to Rs183.1 crore (which was ahead of our expectation of Rs143.2 crore). The foreign exchange (forex) loss due to the rupee's depreciation stood at Rs5.5 crore (in line with our expectation of Rs5 crore).
Raising Rs685 crore through preferential allotment: GCPL is planning to raise Rs685 crore by issuing around 1.67 crore equity shares of Re1 each of the company to Baytree Investments (Mauritius) Pte Ltd (an arm of Singapore-based investment firm Temasek) at a premium of Rs409 per equity share. With this preferential allotment the share capital of the company will go up to 34.0 crore from 32.4 crore currently. The funds thus raised will be utilised largely to reduce the debt on books and to fund acquisitions. The management expects the debt/equity ratio to come down to 0.7x by FY2013 from 1.1x at present.
To acquire 60% stake in Latin American Cosmetica: GCPL has entered into an agreement to acquire a 60% stake in Cosmetica Nacional (Cosmetica), a leading player in Chile's hair colorant and cosmetic markets. The acquisition is in line with GCPL's 3x3 strategy of enhancing presence in the emerging markets. GCPL is likely to pay close to Rs195 crore for its 60% stake in Cosmetica. The acquisition is valued at 9x its enterprise value (EV)/EBIDTA and 1.8x its sales, which is in line with some of the acquisitions done by GCPL recently. The acquisition will be funded through the mix of low cost foreign currency debt and the money raised from the preferential allotment to Temasek. The management of GCPL expects the acquisition to be earnings accretive from the first year of its consolidation. GCPL is planning to buy the remaining 40% stake in the company over a period of the next three to five years.
Revision in earnings estimates: We have factored in the higher than expected operating performance of Q3FY2012 in our estimates for FY2012 and FY2013 and this has resulted in an upward revision of 2.8% and 1.3% in the adjusted PAT estimates for the respective fiscals. However, the equity dilution to result from the preferential allotment to Temasek has caused us to reduce the earnings per share (EPS) estimates for FY2012 and FY2013 by 5% each. We have also not incorporated Cosmetica's numbers in our estimates due to the non-availability of the figures of the key balance sheet items. Nevertheless, a back-of-the-envelope calculation shows that the consolidation of Cosmetica would result in an increase of 5-6% in the FY2013 earnings estimate. However, we will wait for the balance sheet details of Cosmetica before revising our earning estimates.
Outlook and valuation: The integration of the recent acquisitions and the cross pollination strategy would help GCPL to achieve a strong growth in long run. We believe the company is comfortably positioned to achieve a growth of around 20% YoY in the bottom line in the coming years. In addition, the company is focusing on reducing the debt on books to improve the balance sheet at the consolidated level. Hence, we like GCPL in the mid-cap space and maintain our Buy recommendation on the stock. In line with the reduction in the earnings estimates due to the impending equity dilution, our price target for GCPL now stands reduced to Rs497. At the current market price the stock trades at 24.6x its FY2012E EPS of Rs17.0 and 19.4x its FY2013E EPS of Rs21.6.

RISH TRADER

>FEDERAL BANK: Q3FY2012 results: First-cut analysis

2012-01-24T19:52:00.000+05:30

Recommendation: Buy
Price target: Rs460
Current market price: Rs383

Result highlights

Federal Bank's Q3FY2012 results were ahead of our estimates as the net profit expanded by 41% year on year (YoY) to Rs202 crore on account of a strong growth in the net interest income (NII). However, the asset quality disappointed as the gross and the net non-performing assets (NPAs) increased on a sequential basis after showing some improvement in Q2FY2012.
The NII showed a strong growth of 18.1% YoY and that of 11% quarter on quarter (QoQ); the same was higher than our estimate. A growth of around 21% in the advances coupled with an expansion in the margins (calculated) supported the growth in the NII during the quarter.
In Q3FY2012 the non-interest income showed a growth of 13.3% YoY. On a sequential basis the non-interest income expanded by 18% QoQ.
The operating profit (pre-provisional profit [PPP]) increased by 17.4% YoY to Rs419 crore. The operating expenses increased by 16.5% YoY while the cost/income ratio was at 37% compared with 38.9% in Q2FY2012.
The asset quality of the bank deteriorated significantly as its gross and net NPAs increased to 3.97% and 0.74% from 3.61% and 0.58% respectively in Q2FY2012. In absolute terms, the gross NPAs increased 9.1% on a sequential basis.

Outlook: Though in Q3FY2012 the bank showed strength in the core income growth, the deterioration in its asset quality is a cause for concern. The management has shifted focus from growth in advances to improvement in risk management, efficiency and portfolio mix, which is positive for the bank in the medium term. Currently, the stock trades at 1.1x FY2013 book value and we have a Buy recommendation on it. We will come out with a detailed note after attending the bank's conference call scheduled on January 24, 2012.

RISH TRADER

>GLOBAL ECONOMIC OUTLOOK: Overview — Economic Divergence and Financial Repression

2012-01-23T22:37:00.004+05:30

We continue to expect a sizeable slowdown in global economic growth in 2012, with renewed recession in the euro area, growth of roughly 2% in the US, and slowing – albeit still strong – growth in Asia1. Within that broad outlook, we again make more forecast downgrades than upgrades, and we expect that overall global growth will slow from 3.0% in 2011 to 2.3% in 2012 (down from 2.5% in our previous forecast).

We are again cutting our 2012-13 growth forecasts for a range of European economies, with GDP downgrades for the euro area, UK, Sweden, Switzerland, the Czech Republic, Hungary and Norway2. We now expect that euro area real GDP will fall by 1.5% this year and will fall by 0.4% in 2013 (prior forecasts were minus 1.2% and minus 0.2%, respectively). In the euro area, these new downgrades chiefly reflect announced or expected extra fiscal tightening in Italy, Spain and the Netherlands, plus the continued drag from tight financial conditions and the weak banking system. Other European economies are being hit by adverse spillovers from the probable EMU recession and, especially in the UK, internal drag from high private debts. We do not expect that euro area real GDP will regain its prerecession peak until late 2016. Going the other way, the only significant upgrade is Russia, for which we are raising our 2012 GDP forecast to 3.5% from 2.5%.

Our forecasts imply a further marked rise in the GDP growth differentials between the US and Euro Area, with the gap in terms of YoY GDP growth likely to reach 3 ½%-4% in coming quarters, the highest in recent decades – even above the wide late 90s divergence. While the euro area probably already slipped into recession in the final quarter of 2011, we continue to expect sustained economic growth near 2% this year for the US despite unsettled financial conditions. Indeed, for the US, gradual improvement in the labor market and the resilience of activity in the face of negative shocks have introduced upside possibilities. We expect housing investment to rise this year, after six straight years of decline, and we have raised slightly our forecast for payroll employment growth to just shy of 2 million jobs in 2012 with unemployment now expected to dip to 8¼% by year end

Note that our forecast of continued US growth is relatively subdued compared to previous cyclical recoveries. It is consistent with the “Reinhart-Rogoff” (R-R) norm for countries in a post-crisis deleveraging phase, which is not for permanent stagnation, but a deep recession and modest recovery that leaves the actual path of real GDP about 10% below a simple extrapolation of the rising pre-crisis path. By contrast, the euro area and UK are likely to underperform the R-R pattern, mainly because of early fiscal tightening, EMU financial strains and the weaker condition of European banks. Of course, the durability of this wide growth gap rests in part on the US’s ability and willingness to defer significant fiscal consolidation near term, while private sector deleveraging is underway. There are risks that US fiscal policy may turn markedly more contractionary in 2013, depending on the outcome of the late-2012 Presidential election and the evolution of Treasury yields.

We continue to expect a long period of ultra-low policy interest rates across the advanced economies. The ECB is likely to cut its main policy rate to 0.5% by midyear and, flooding markets with extra liquidity, this probably will push overnight rates well below 0.5%. For the US, the Fed has signaled that it will pursue all means to support financial conditions with the immediate focus on communications strategies. New support for the mortgage market is possible in coming months but we think full-blown QE would require new signs that the outlook is deteriorating again (which is not our base case). At this stage, we tentatively forecast the first rate hike to come in 2014 for the US, 2015 for the UK and 2016 for the euro area: but the key point for all three is that withdrawal of monetary stimulus is distant.

We also expect the policy response to the current public and private debt crises will include some elements of financial repression, especially in Europe. Financial repression refers to various measures that seek to constrain the financial sector, in particular ‘Financial repression occurs when governments implement policies to channel to themselves funds that in a deregulated market environment would go elsewhere. Policies include directed lending to the government by captive domestic audiences (such as pension funds or domestic banks), explicit or implicit caps on interest rates, regulation of cross-border capital movements, and (generally) a tighter connection between government and banks, either explicitly through public ownership of some of the banks or through heavy “moral suasion.” Financial repression is also sometimes associated with relatively high reserve requirements (or liquidity requirements), securities transaction taxes, prohibition of gold purchases, or the placement of significant amounts of government debt that is
nonmarketable’.

Financial repression was the norm for many advanced economies and emerging markets during the post World War II decades, but diminished in significance in advanced economies with the financial deregulation and liberalization initiated by Thatcher and Reagan. It continues to be a routine instrument of economic policy and government funding tool in many emerging markets and developing countries. A key factor is the desire of governments to secure for themselves relatively cheap and stable funding. In addition, financial repression has been consistent with the general political preference for regulation and quantity restrictions as tools of economic management, a desire to reduce the riskiness of banks and to save consumers from the perils of over-indebtedness, plus the aim of extracting political advantage for the government as the arbiter of credit and financial allocation. And in many cases, the captive investor base then had to accept substantial erosion of the real value of their government debt holdings through negative real interest rates caused by controlled nominal interest rates and high inflation.

To read the full report: OUTLOOK & STRATEGY
RISH TRADER

>RELIANCE INDUSTRIES: Declared muted Q3FY12 results; Buyback is very negative; RIL’s GRM’s are quoting below Singapore GRM

2012-01-23T22:28:00.003+05:30

HIGHLIGHTS

• On 20th Jan 2012, RIL declared muted Q3FY12 results.
• Tried to cheer investors by announcing buyback of shares at a price of Rs.870.
• Buyback is very negative, it is a cover up for bad result and in bear phase market the stock will not move above buyback price.
• The surprise was the sharp slide in the profits, "Other Income" in the current quarter constitutes 30% of the Profit Before Tax.
• RIL’s refining margins fell to US$ 6.8/bbl a discount of US$ 1.1/bbl over benchmark Singapore GRM US$7.3-7.4/bbl. Lost its advantage of trading at a premium to Singapore GRM.
• Third quarter numbers indicate weakness across business segments and bleak future outlook for the company as a whole.

The BUYBACK

• On 20th Jan 2012, RIL declared its Q3FY12 results and tried to cheer investors by announcing buyback of shares.
• RIL has approved share buyback of Rs 10,440 cr at maximum price upto Rs 870/share.
• RIL will buyback up to 12 cr shares or 3.6% equity via open-market.
• The RIL buyback is happening after time span of 7 years (last announced in 2005).

What markets think…??

• We feel that maximum buyback priced fixed at Rs. 870/share which is at 10% premium to Friday’s closing price may not be that attractive to the investors who have entered the stock at much higher valuations.
• This surprise move of the buyback has rose questions of further company’s performance which has already shown some concerns on most of its segments and various issues surrounding the company.
• This is also questioning the huge cash of Rs. 74,539 crs for Dec 2011 end which the company holds in its books and its deployment.
• This could be also taken as just a move to compensate for the stock and company’s performance. As the stock has already underperformed the market over the past one year and would have continued to do so in the light of the latest results as well. The stock has corrected 26% v/s Nifty correction of 15% from their 52 week highs.
• As per SEBI norms, the company will have to mandatory buyback equity worth Rs 2,610 crore, or 25% of the intended buyback amount.
• According to the media reports - the whole process of the Buyback news is not addressed properly by the company. It is also seen that Reliance has treasury stake in two companies - Reliance Chemicals and Reliance Polyolefins. Since the 12 crore shares held in Reliance Chemicals counts as promoter stake, it cannot be bought back. But the stake in Reliance Polyolefins is non-promoter, so the market is going to question if this will be bought back by the company. So it is to see the prompt action by the management on this announcement.

To read the full report: RIL
RISH TRADER

>ABBOTT INDIA: Consolidation of Solvay Pharma India Ltd. (SPIL) with the company

2012-01-23T22:04:00.004+05:30

M&A, strategic alliance gives a headstart
Abbott India (AIL), a 50.44% subsidiary of Abbott Capital India Ltd., UK, is involved in the manufacture and marketing of pharmaceutical, diagnostic, nutritional and hospital products. Consolidation of Solvay Pharma India Ltd. (SPIL) with the company is expected to improve operating efficiencies, leading to expansion of EBITDA margin and an extended product portfolio with addition of brands from SPIL. We expect the company to post a 24% CAGR top-line over CY2010-13E on the back of continued focus on advertising, increased employee expenses, new therapeutic segments and its agreement with Zydus Cadila. At the current price of `1,434, the stock is trading at 13.9x CY2013E EPS, which we believe is attractive for an MNC. We Initiate Coverage on AIL with a Buy rating and a target price of `1,852.

■ Synergies with SPIL to improve the business model: Amalgamation of SPIL with AIL expanded the company’s product portfolio, giving access to untapped therapeutic segments, in addition to increasing exposure to its existing therapeutic segments. Besides increased revenue, the synergy between the two companies is expected to improve operating efficiencies, thus leading to margin expansion.

■ Multiple revenue drivers to facilitate 24% CAGR top-line growth: AIL’s expenditure on advertisement and employee as a percent of sales has been continuously increasing since CY2006. Continued focus on these factors is expected to drive revenues going forward. Moreover, AIL’s focus on therapeutic areas such as diagnostics and nutrition; and its agreement with Zydus Cadila (India) to market 25 products in emerging markets from CY2013E could further add to revenues. Debt-free, cash-rich with higher returns: We expect AIL’s cash reserves and RoIC to increase to `594cr and 114.3%, respectively, by CY2013E, aided by additional cash from SPIL, which was also a cash-rich company. Due to excess cash in the books, we believe it may be a potential delisting candidate.

To read the full report: ABBOTT INDIA
RISH TRADER

>AXIS BANK: Driven by Fx treasury gains and lower provisioning costs

2012-01-23T21:56:00.001+05:30

Ex-one offs, In line
Axis Bank reported a healthy set of numbers with a ~6% bottom-line bea driven by Fx treasury gains (Rs1300mn) and lower provisioning costs. Moreover, asset quality was largely stable and NIM compression was lower than expected. Excluding the fx related gains on prop book, the earnings performance was largely inline. We maintain Buy on lower valuations.

• NIM stable QoQ, Loan growth @ 22%: NII grew by a healthy 23.5% yoy (inline) to Rs21.4bn led by a moderate but healthy credit growth (20.4% yoy) while the reported NIM was stable sequentially at 3.75%. Blended yields benefitted from higher share of retail business and higher investment yields during the quarter. However, this was offset by 20 bps increase in cost of funds leading to QoQ flattish NIM. NIMs are likely to move lower in quarters to come from current levels.

• Healthy credit growth: The advances book grew by a healthy 20.4% yoy to Rs1,487bn primarily driven by the retail segment (32% YoY) and SME (21.3% YoY). Axis bank has been gradually increasing the share of retail business (from 20.3% a year ago to 22.4% now) and the trend is likely to continue during FY13. Deposits grew by a strong 34% yoy to Rs2,087bn led by current and time deposits, though growth in SB was healthy at ~21%.

• Slippage rate sustains at 1.5%: Slippage rate sustained at high level (1.5%) while recovery environment continues to remain tough. However, significant write-offs (Rs2.4bn) helped contain the rise in GNPA to ~10% to Rs19.2bn (%GNPA - 1.1% flattish QoQ). Additional restructuring of ~Rs3bn (likely from Petroleum sector) pushed the cumulative restructured assets to Rs27bn (1.8% of loans). Meanwhile, PCR witnessed some erosion (to 75.3% from 77.7% in previous quarter). We maintain our view that restructured portfolio is likely to increase further led by challenges faced by the infrastructure companies.

• Fee income surprises positively: Non-interest income surprised positively during the quarter led by 1) increased traction in third party distribution 2) strength in traditional products (debt syndication, guarantees etc) and 3) significant trading gains on prop forex book (Rs1300mn). The fx trading gains are result of increased currency volatility and hence should be viewed as oneoff and is unlikely to be sustained over quarters to come.

• Maintain Buy: We raise our earnings estimates (5% for FY12 & 1.7% for FY13) as we factor in additional information. At current market price of Rs1008, the stock trades at 8.7x FY2013E EPS and 1.6x FY2013E ABVPS. We believe that current valuations largely factor in the potential risks emanating from higher exposure to SME and power sector (funded & non-funded). Since our last sector update (dated 27th Sep’10), the stock had corrected and touched our stress value of Rs900 and has recovered since then. We maintain Buy with an
investment horizon of 12-15 months.

To read the full report: AXIS BANK
RISH TRADER

>How are Indian banks compared with global banks on ROA parameter...

2012-01-23T21:44:00.000+05:30

2010 and 2011 has been a difficult period for the global banking system, with challenges arising from the global financial system, eurozone trouble as well as the emerging fiscal and economic growth scenarios across countries. The Global Financial Stability Report in
September 2011 has cautioned that for the first time since October 2008, the risks to global financial stability have increased, signalling a partial reversal in the progress made over the past three years. The table below may indicate India in a better position compared to
advanced nations on ROA basis but the prudent policies of RBI may be insufficient to protect bank’s financial health in the coming fiscal year.

Have bank stocks bottomed out?

What happened over the past year.…
The Bank Nifty (index covering banking stocks) is at its lowest in last 18 months. Bank Nifty Index was quoting at 11,483.7 in the beginning of FY12. It has fallen 23% to 8,839.7 while the broader market has fallen just 15%. Performance of PSU sector banks was even worse and the CNX PSU Index fell nearly 35% in the last ten months. Stock such as IDBI Bank, Union Bank and SBI has plummeted 38.9%, 41.5% and 37.5% respectively in the last 10 months. Others like Axis Bank, ICICI Bank have plunged 27.4% and 30% during the same period.

The reasons besides the weak macro-economic have been low capital adequacy, high interest rates and fear of increasing NPAs. Banking shares were also under pressure after global credit rating agency Moody’s Investor Service cut the standalone rating of India’s largest public sector bank, SBI in October 2011 due to concerns over capital and rapid deterioration in asset quality. The agency cut its rating on SBI’s financial strength to D+ from C- and lowered its hybrid debt rating on the bank to Ba3 from Ba2, following the reduction in financial strength rating.

The repo rate, the rate at which banks borrow from the RBI for short duration, was increased by 375 bps between March 2010 and September 2011 to control inflation. In this rising interest rate scenario, the net interest margin (NIM) of nationalised banks, which account for 74% of the assets of the banking system, increased from 2.63 % in March 2010 to 3.2 % in March 2011. However, in the period between March and June 2011 when interest rates have continued to rise, the NIMs of nationalised banks shrunk to 2.9%.

Could this be the right time to enter into banking stocks or are there any downside risks left …
With Bank Nifty at 2-year lows leaves a possibility of strong recovery in the near future. The outcomes deduced in the current scenario are that the worst is over for most banking stocks and its time to buy. The main points being spoken are: The worst of inflation pressure is over, interest rates have peaked and stock prices have reached value zone and in some cases are at historic low. While prima facie, all of them look valid arguments, the current scenario is looking a bit like 2008, when we had the big inflation scare led by crude’s surge towards $140/bbl. The subprime crisis peaked in September 2008 following the collapse of Lehman Brothers. The global financial crisis which began in the fall of 2007 and progressively worsened in 2008, affected the Indian financial sector from 2008. The PBV of BSE Bankex fell from 3.99x on 14/11/2008 to 0.97x on 9/3/2009. It later moved up to 3.41x on 5/11/2010 and currently is at 1.84x.

To read the full report: BANKING SECTOR REVIEW
RISH TRADER

>The Financial System is a Farce: SPROTT ASSET MANAGEMENT

2012-01-22T23:29:00.004+05:30

2011 was a merry-go-round of more bailouts, more deferrals and more denial. Everyone is tired of the Eurozone. It’s not fixable. There’s too much debt. The politicians don’t know what’s going on. Nothing has structurally changed. We’re still on the wrong path. There’s more global debt than there was a year ago, and it’s the same old song: extend and pretend, extend and pretend,… around and around we go,… and it isn’t fun anymore.

Just as we wrote back in October 2007, and again in September 2008, we feel compelled to state the obvious: that the financial system is a farce. It’s a complete, cyclical farce that defies all efforts to right itself. This past year continued the farcical tradition with some notable scandals, deferrals and interventions that underscored the system’s continuing addiction to government interference. With the glaring exception of US Treasuries and the US dollar (which are admittedly two of our least favourite asset classes), it was not a year that rewarded stock picking or safe-haven assets. Many developments during the year bordered on the ridiculous, and despite some positive news out of the US, we saw little to test our bearish view. If anything, our view was continually re-affirmed.

Let’s start with MF Global. With more than two months passed since the scandal broke, federal officials are still unable to find the estimated US$1.2 billion of missing customer funds.1 The whole episode has been a disaster

for the CME, the self-regulatory body in charge of making sure the futures brokers play by the rules. Normally in instances of broker bankruptcy, the CME is supposed to backstop client accounts and keep them liquid – i.e., allow them to continue trading while the bankruptcy gets settled. It never happened in this case. Client accounts were frozen for weeks. Funds have remained missing for months – an eternity for clients who were caught short. The great shock was watching how inept and incapable the CME was in 1) preventing the fraud in the first place and

2) recovering client assets during the aftermath. The CME essentially copped out of their responsibility, offering little more than some perfunctory press releases along the way. They were also surprisingly quick to offer excuses for their non-action. According to CME, it really wasn’t their fault, since CME had “no control over the disposition of customer segregated funds that are held by MF Global and not by CME Clearing”.2 Their on-site review of MF Global’s operations the week before its bankruptcy suggested that the brokerage firm was in full compliance of all the rules, so it wasn’t really the CME’s problem. But of course it was their problem. That’s what the CME is there

for – to protect clients in cases of fraud or bankruptcy. To protect the “integrity of the exchange”.

In the weeks that have passed, a curious web of transactions have surfaced between MF Global, JP Morgan and Goldman Sachs. Before its bankruptcy, MF Global had been drawing down a $1.2 billion revolving line of credit with JP Morgan. In bankruptcy court, JP Morgan was able to negotiate a lien on some of MF Global’s assets in exchange for paying $8 million towards bankruptcy costs. According to Reuters, “The lien puts JPMorgan’s interests ahead of MF Global customers who have not yet received an estimated $900 million worth of money from their accounts, which remain frozen as regulators search for missing funds.”3 It is also alleged that JP Morgan accepted a roughly $200 million transfer from MF Global the day before its bankruptcy to cover an overdraft in MF Global’s trading account held with them (it still isn’t clear if JP Morgan has the cash).4 MF Global also appears to have sold hundreds of millions worth of securities to Goldman Sachs in the days leading up to its collapse, but did not immediately receive payment for them from the MF Global’s clearing firm, none other than JP Morgan.

To be fair, on November 22nd, the CME did offer to pledge $550 million as a guarantee to the SIPC Trustee in the event that they did not recover all of the missing client funds, but we cynically wonder if that pledge was made after they finally figured out where all the money had gone. The CME seems to have had a good idea by early December, based on comments made by Commodity Futures Trading Commission (CFTC) member, Jill Sommers.5 The bottom line is that MF Global’s client interests and security appear to have been side-stepped to buy time for bigger, more important players to cover their losses (asses), and that is not the way the regulatory system is supposed to function. We’re not naïve – we know the government will always protect the interests of the big banks over paltry retail investors, but do they have to be so brazen about it? The MF Global episode is basically shameless.

Then there’s Dodd-Frank. Remember Dodd-Frank? It’s the massive financial regulatory reform act that was signed into law by President Obama back in 2010. We are certainly not fans of cumbersome overregulation, but in its essence, Dodd-Frank was supposed to provide a new framework to address the potential failure of a too-big-to-fail bank. There’s nothing wrong with that. Given the sheer size of the off-balance sheet derivatives market, we don’t see a problem with at least attempting to prepare for another large scale banking failure in the US. But almost two years later, we have to laugh at how little of the Dodd-Frank framework has actually been implemented. According to law firm Davis Polk, a mere 21% of the act’s 400 rulemaking requirements have become finalized since the law passed in July 2010. Of the 200 Dodd-Frank rulemaking requirement deadlines that have already passed, 74.5% of them have been missed to date.6 The lawyers must be having a field day with all the paperwork.

One part of the Dodd-Frank story that interests us is the CFTC positions limits rule set to go into effect on January 17, 2012. The new position limits are aimed at preventing excessive speculation in the commodity markets which are believed by many, including ourselves, to have driven wild fluctuations in the gold and silver spot price over the past decade. Position limits are an obvious threat to large futures speculators like the big banks, so it was no surprise when two Wall Street lobby groups, the Securities Industry and Financial Markets Association (SIFMA) and the International Swaps and Derivatives Association (ISDA) launched a lawsuit against the CFTC demanding that the new rules on commodity trading be thrown out, or at the very least, delayed. The CFTC voted on the request to delay implementation and officially rebuffed it on January 4th, which is a heartening development in an otherwise cynical saga.7 Back in December, however, the CFTC had already quietly waived the position limit filing requirements on all CME participants until May 31, 2012.8 So even if the new rules go into effect this month, banks won’t have to report their position levels until May 31st either way. Given the lobby groups’ outstanding lawsuit against the new rules, combined with the CFTC’s apparent tendency to grant temporary reprieves, we don’t expect the new position

limit rules to be enforced any time soon. Once summer approaches, there will probably be more delays and more deferrals, granting the big players plenty of time to protect themselves. Extend and pretend. Delay and defer. That’s the song we sing on the merry-go-round. Then there’s Europe and the European Central Bank (ECB). Back in December, the mighty ECB had to step in with yet another massive liquidity injection to avert a total meltdown in the EU banking system. On December 21st, they flooded 523 separate EU banks with a “Long Term Refinancing Operation” (LTRO) program totaling €489.1 billion ($626 billion).9 The program consists of loans that are due in three years and will charge an accommodating 1% interest rate. The liquidity injection will allow the EU banks to participate in a delightfully convenient carry-trade whereby they can take the borrowed money at 1% interest and invest it in various sovereign debt auctions that will likely pay them 3% or higher. The banks will keep the difference in profit, and the EU PIIGS countries get to breathe easier knowing they’ll be able to sell their garbage paper to the EU banks at suppressed rates as long as the LTRO loan money lasts. And the best part? It doesn’t involve any money printing, so there’s really no risk of inflation, you see?

So just so we’re on the same page, if everything goes according to plan this year, European sovereign governments will fund their debt auctions with borrowed money lent to them by over 500 European banks who have themselves borrowed hundreds of billions of euros from the European Central Bank,… who as far as we can tell, borrowed those euros from the various EU sovereign states (or simply printed them). Do you get it? Do you see the circularity? Do you see the can being kicked down the road? And guess what? Since €489.1 billion is clearly not enough to avert disaster this year (most EU banks are so undercapitalized they’ve simply parked the borrowed LTRO money back with the ECB at 0.25% interest), the ECB has promised to launch another LTRO injection this coming February!

No wonder gold was down in December. They completely solved the European debt crisis! Last but not least, we must mention an alarming component of this year’s National Defense Authorization Act (NDAA) that was quietly signed into law by President Obama on December 31st, 2011. This year’s defense bill, officially known as Senate Bill 1867, includes a specific provision that seems to grant the US government the power to detain accused terrorists, including US citizens, indefinitely, without trial.11,12 There has been much uproar and confusion over the language used in the sections of the Bill related to the subject, and it’s still not clear how the Bill will change the existing laws related to terrorism detention in the US, but it doesn’t bode well for constitutional freedom within the country. There’s obviously no direct market impact to the legislation, but we mention it only to remind investors how quickly the rules can change when governments feel vulnerable. ‘Political risk’ should no longer only be applied to mining investments in third world countries. In 2012, it may apply to us all.

It’s very difficult to predict what lies in store for the stock market this year. Anything could happen. Government intervention in the financial system has never been more extreme. We hope the examples above have shed some light on that. As we enter 2012, there are significant debt-related financial risks festering within the three great economic theatres of the world: the US, Europe and China. The market may rally, it could crash, it could tread water, we just don’t know. A lot will depend on how the central banks react. But we are eager to maintain the positioning that we held in 2011. We will maintain our exposure to precious metals equities and bullion. We will maintain our large gross short weightings in our hedge funds. We are confident that they will protect us on this farcical merry-go-round that seems to spin faster and faster with every passing day.

RISH TRADER

>HERO MOTO CORP: “Margins weak, maintain Neutral”

2012-01-22T23:21:00.001+05:30

Volume expansion and price hikes leads to strong revenue growth
Hero MotoCorp has reported 11% yoy volume growth in Q3 FY12 and had taken a price hike of ~Rs700-1000 per vehicle in October resulting into 17% yoy and 4% qoq growth to Rs60.3 bn. The company has been consistently putting up a strong show by selling ~5.3-5.4 lakh units per month and has won ~2% market share in the quarter. Going forward, with domestic motorcycle industry showing signs of weakening, we expect Hero to feel the heat in the wake of strong competition from Honda, which is aggressively expanding its capacities. With three new launches expected this year from Hero in the form of 110cc Passion XPro, Ignitor 125cc and a scooter Maestro, and the recent launch of Impulse, we slightly increase our FY12E/FY13E volume expectations at 15%/10% respectively from 14%/9%. We do not see a significant scope for realizations to grow in wake of competition as market share retention will be the main aim.

Margins below our expectations as staff cost rise & rupee depreciates
In spite of commodity prices going down, Hero was unable to fetch the benefits of the same in this quarter, as rupee has depreciated significantly vis-à-vis Japanese yen. Since Hero imports ~17% of RM from Japan, this impact was felt a bit too much. Also, employee costs increased 11% qoq, due to wage hike taken in August getting reflected in this quarter. Excluding royalty, margins came in at 15.6%. However, we consider royalty in other expenses, due to which our EBITDA margins came in at 11.9% considering royalty outgo of Rs2280 mn which has increased over the previous quarters due to yen appreciation. Margins have come below our expectations. Going forward, we expect HMCL to post improving margins of 12.1%/13.2% in FY12E/13E as commodity prices start showing their impact as rupee has started showing some strength vis-à-vis foreign currencies.

Outlook and valuation
In view of good show in the domestic markets and increasing the market share, we have slightly increased our volume estimates. We believe new launches also will support the domestic growth of Hero. However, rapid expansion of Honda and overall slowdown in the 2wheeler market will arrest a strong growth in market share, due to which we believe the volumes will not grow above 10% in FY13E. On margin front, we are maintaining our margin estimates as we believe FY 13 will show margin improvement of up to 100bps as raw material prices are slowing down, but at the same time, low price new launches will lead to an adverse product mix, thus capping realization growth. We value the stock at 14x times FY 13E EPS of Rs142.5, due to its market leadership position and domestic strength. Due to expectations of slightly better domestic volume performance, we are increasing our target price to Rs 1996. At CMP of Rs1945 we see a very limited upside of 3%, due to which we reiterate our Neutral rating on the stock.

RISH TRADER

>SUZLON ENERGY- World’s 3rd largest wind turbine manufacturer : Indian Operations (Suzlon Wind) & REpower (Europe Operations)

2012-01-22T23:17:00.001+05:30

Suzlon Energy Ltd (SEL), with manufacturing capacity of 6GW in India, China, Germany and USA is the world’s 3rd largest wind turbine manufacturer. The company enjoys10% market share globally and more than 50% market share in India.

• SEL is the one of the low cost producer of wind turbine in the world, with cost of production of per MW of 1.32mn euro as compared to world average of 1.8mn euro in FY11.

• Due to the ongoing volatile growth in developed economics, the company has diverted its focus on emerging markets like BRICS countries. As on Q2FY12, the Suzlon Wind order book comprised of 96% of domestic order as compared to 80% in the same quarter last year. SEL through its fully owned subsidiary REpower, supplies wind turbine to Euro zone. As on Q2FY12, the subsidiary has an order book of USD 4.1bn, giving an earning visibility for the next two years.

• The management is confident of turning around the operating performance of the group by taking initiatives like focusing on high revenue and margin markets, reduction in COGS and lower CAPEX. For FY12, the management has given top line guidance of Rs. 240 – 260bn with EBIT margin of 7-8%.

• In Q2FY12, the company has fully acquired its German subsidiary REpower, which has cash and cash equivalent balance of Rs. 11bn as on FY11. This huge cash reserve will help in reducing the group leverage position in future.

• The concern for the company could be the highly leveraged balance sheet, lower order book from USA & Euro Zone, depreciating rupee against USD/ Euro and competition threat from Chinese manufactures.

RISK & CONCERN

• Leveraged balance sheet: The company is planning to deleverage its balance sheet by using cash from the 26% stake sale in Hansen Transmissions and also by using the cash from its wholly owned subsidiary REpower. As of H1FY12, the company had total debt of Rs. 134bn as compared to debt of Rs. 121bn in H1FY11. Due to high leverage, the company may find difficulties in raising funds.

• Lower new order: Due to ongoing volatile economic position of developed world especially USA and Euro Zone, the company may find difficulties in getting new order. In Q2FY12, Suzlon Wind, the international orders fell by 65% Y-o-Y to 25MW. Thus the sustained economic downturn in developed countries can adversely affect the company’s performance.

• Increase in international competition: China has added wind energy capacity aggressively for the last three years. Because of better outlook of wind energy, various international players have ventured resulting into competition. SEL may be affected both in domestic and in international markets by losing its market share.

• Lower wind turbine realization: Due to increase in number of players in wind turbine manufacturing, the capital cost for per MW of wind energy has declined drastically from 1.2mn euro to less than 1mn euro in FY11. This may affect SEL in getting international orders as in most countries the orders are placed through competitive bidding process. SEL’s domestic market is not expected to be much affected because of various import duties.

• Foreign exchange risk: A significant part of SEL’s revenue, costs, assets and liabilities are denominated in foreign currency. Unhedged trade and financial exposure can adversely impact the company’s overall profitability. SEL’s presence across geographies helps in providing natural hedging by offsetting purchase and sales transactions amongst various currencies. Also the company is expected to repay FCCB worth USD 389mn by FY13 as the stock is trading at 70% discount to the conversion price.

To read the full report: SUZLON ENERGY
RISH TRADER

>Stock Market 2011 v/s 2008 Many similarities, but a few differences too and its impact

2012-01-22T23:02:00.000+05:30

2011 witnessed the second biggest fall in Indian markets (25%) after 2008, when markets fell 52%. We draw several interesting observations from a comparison of the years, 2008 and 2011. There are several similarities and also a few differences in key elements related to both, stock markets and the macro economy.

2011 v/s 2008 for economy: Slower downturn; sharp recovery unlikely
We compare 2011 macroeconomic situation with that of 2008 on 5 elements: Growth, Inflation & rates, Credit & liquidity, Fiscal scene and External situation. Essentially, 2008 was a period of a sharp economic downturn followed by an equally sharp recovery. In contrast, 2011 has been a slower downhill but signs of firm recovery yet to emerge. Interestingly, in 2008, we had both fiscal and monetary tools available to stimulate revival. Currently, however, we have only one – monetary tool to stimulate growth.

Element #1 Growth slowdown: Sharp then, more gradual now
Real sector indicators including GDP and IIP growth was on a downhill on both the occasions although the fall was sharper in the post-Lehman period.

Element #2 Inflation & rates: Yet to ease, unlike then

In 2008, inflation had risen quickly in the pre-Lehman period followed by a collapse towards the year-end. In 2011, inflation stayed higher through out the year and is showing some signs of easing only in Nov-Dec.
Repo rate saw a cycle in 2008, while in 2011, they have on risen so far. Yield curve is very flat in 2011 unlike 2008.

Element #3 Credit & liquidity: Still tight, unlike then

Bank credit growth was on an upswing pre-Lehman and collapsed subsequently. In 2011, bank credit gradually and continually slowed down.
Liquidity was moderately stressful followed by significant easing in CY08. In contrast, through out CY11 liquidity has been under severe stress with no signs of easing so far.

Element #4 Fiscal scene: No headroom for stimulus this time

Fiscal consolidation in 2008 left significant headroom for fiscal stimulus to counter slowdown impact of global crisis. But, unlike in 2008, there is no fiscal flexibility now.
While G-Sec yields were rising in both 2008 and 2011, higher deficit and stressed liquidity ensured that yields are currently at much higher levels than 2008.

Element #5 External sector: Trade worse, reserves better

In both CY08 and CY11 exports slowed down. However, deficit came down in the later half of CY08 as trade itself shrank and rupee depreciation helped restore trade balance.
Current account deficit worsened and forex reserves depleted in CY08. Early signs of the same are visible in CY11 too.
Indian rupee depreciated by 19% vs USD in 2011; in 2008, the depreciation was 24%.

To read full report: INVESTMENT STRATEGY
RISH TRADER

>Performance of Mutual Funds in CY 2011 & Toppers and Laggards during the year 2011

2012-01-21T22:59:00.000+05:30

Overview: Indian stock markets showed disappointed performance during the calendar year 2011 as major factors such as high inflation, growth slowdown, rising interest rates, weak rupee, foreign fund outflows, high commodity prices, emergence of various industry-related scams, euro zone debt crisis, etc dampened the sentiments. The key indices, BSE Sensex ended at 15,544 down 4,965 points or 24.71% while the Nifty ended at 4,646 down 1,488 points or 24.68% compared to the previous year. Consequently, the performance of Indian equity mutual funds was also poor where all the equity categories barring FMCG posted negative returns over the period. However, part of actively managed schemes managed to contain the losses well as their NAVs depreciated less compared to the benchmarks.

Debt: On the debt front, the Repo rate, an interest rate indicator of Indian economy, was increased by 225 bps by the RBI over the year to tame the persistent inflation, to 8.50% at the end of the year 2011. Such elevated level in the interest rates resulted in spike in the yields of short debt instruments like Call, CD and CP, benefiting debt mutual fund schemes which invest predominantly in such instruments. Further, the RBI’s reversal in monetary policy stance on the back of moderation in inflation later towards the end of the year softened the yields of government papers. With softening yields, gilt funds have emerged as the biggest beneficiaries in the last two months of the year. The 10 year G Sec benchmark yields moved to a high of 9%+ level in September and closed up the year by 65 bps at 8.56% on Dec 30, 2011 Vs. its close of 7.91% at the end of the previous year.

Gold: Gold had been one of the top performing assets during last year. Continuing its record-breaking spree, gold galloped to all time highs in 2011 (from USD 1400 levels in 2010 to USD 1900 levels in September 2011) on the back of strong demand in times of economic turmoil and rising inflation. Gold rose 11.65% in USD & 30.74% in INR during the year while brent Crude rose approx 15% and US Dollar Index rose by 1.85%. Nervous investors preferred to park their funds in gold as a safe investment instead of risky assets like equities. Internationally gold prices saw correction later from its all time highs. However, falling INR has acted as a cushion for gold prices in India.

Mutual Fund Industry: As far as Indian Mutual Fund industry is concerned, the Average Assets Under Management of overall mutual funds rose by 0.54% Y-o-Y as of 31st December 2011 to Rs. 6,81,708 crore (AMFI Data). The total net inflows into the industry for the calendar year 2011 period stood at Rs. 36,918 crore while the total net outflow was at Rs 32,164 crore in the corresponding previous year. The industry collected Rs. 1,23,341 crore via new fund offers during the period.

Toppers and Laggards during the year 2011:

Category: Within categories, Gold ETF outperformed others during the year 2011 and posted 30% return. The yellow metal rose 30.74% in INR during the year as investors preferred to invest in gold as a safe investment instead of risky assets like equities. Equity sector - FMCG was the second top performer as it registered 13% of compounded returns during the year 2011. The FMCG index gained 9.53 per cent in 2011. Most of the FMCG companies were able to maintain their margins despite higher raw material prices and a sales slowdown. Equity – Infrastructure was the worst performing category in 2011 where it registered a compound annualized return on -35%. The year 2011 saw Construction & Infrastructure stocks underperforming the broader indices on account of tightening policy rates, muted order inflows across segments (except roads) & rising commodity prices affecting execution and margins. The CNX realty fell by 52% during the last year.

Scheme: Apart from Gold ETFs, ICICI Pru FMCG Fund, Canara Robeco InDiGo Fund and Sahara Short Term Bond Fund were the top performing schemes in the mutual fund industry where they delivered commendable returns of 16%, 15% and 14% of CAGR returns respectively. Active call strategy coupled with trading opportunities in the short term debt instruments spectrum helped income and short term schemes to outperform other schemes. Escorts Infrastructure Fund, HSBC Small Cap Fund and Reliance Infrastructure Fund were the bottom performers among mutual fund schemes as they posted negative returns of 47%, 46% and 45% respectively. The poor performance by the infrastructure sector was primarily driven by a range of sector-specific issues, such as land acquisition, environmental clearances, high interest rate regime and macro-economic factors. On asset weighted average returns basis, Equity Diversified large cap category outperformed the equity diversified midcap category but underperformed the equity diversified multi-cap category on a Year on Year basis. The largecap category posted an average CAGR returns of -23% while the midcap and multi-cap registered -24% and -20% of compounded returns respectively. In 2011, the indices - BSE Midcap index and BSE small cap fell 34% and 43% respectively.

To read the full report: Performance of Mutual Funds
RISH TRADER

>MAGMA FINCORP: Trades at a significant discount to its peers and factors in potential risks amply

2012-01-21T22:29:00.000+05:30

Magma’s Q3FY12 numbers reflect significant pressure on profitability though disbursement growth remains strong and asset quality has held up well. It should be noted that the recent change in accounting policies renders YoY comparison inconclusive and misleading. We retain Buy rating on attractive valuations with a revised price target of Rs101 (based on 1.3x FY14 BVPS).

■ Strong disbursements growth momentum continues: Disbursements in Q3FY12 grew by a strong 50% Y-o-Y led by a jump in lending to the Cars & Utility segment and consistently strong growth in high yielding segments. The mix of the high-yielding assets increased to 25% in Q3FY12 vs 22% in Q3FY11. The strong growth in Cars & Utility segment, despite moderation in overall auto sales volumes in recent months, stems from Magma’s 1) rural and semirural focus where demand remains healthy and 2) new branch additions.

■ Spread remains under pressure: Reported NIM remained under pressure (at ~4.3% in Q3FY12) led by a sharp jump in cost of funds which largely offset the improvement in blended yields. Interest expenses include MTM forex losses of Rs50m on preference debt. From a funding source perspective, the management is making conscious effort to reduce reliance on the banking system, which remains the chief source of funds. Importantly, Magma’s credit ratings were upgraded recently and this should accrue benefit in terms of competitive cost of funds over the medium term.

■ Collection efficiency at 100.4%: Collection efficiency remains strong at 100.4% for Q3FY12 giving us significant comfort considering the challenging operating environment. Strong collection efficiency and healthy credit quality of the book helped contain the write offs (flattish QoQ). The write-off ratio for Q3FY12 stands at 0.23% on annualized basis. While the CV industry is facing immense challenges in terms of rising costs and declining margins, Magma continues to display strong collection efficiency (101.2%) in the segment.

■ Earnings Revision: We have lowered our earnings estimates for FY12 (by ~40%) and FY13 (by ~25%) to account for significant pressure on profitability and potential asset quality risks arising from increasing share of high yield loans as well as difficult operating environment over the medium term.

■ Cheap valuations, Reiterate Buy: We continue to like the stock due to cheap valuations, large potential for growth, and a seasoned senior management team that has seen multiple cycles and has a clear focus on containing risks. Moreover, Magma would be a key beneficiary of reversal in interest rates due to its reliance on whole-sale funding and large part of loan carrying fixed interest rate. At its current multiple of 0.8x FY13 BVPS, Magma trades at a significant discount to its peers and factors in potential risks amply. We reiterate Buy with a revised price target of Rs 101 (based on 1.3x FY14 BVPS).

To read the full report: MAGMA FINCORP
RISH TRADER

>ANDHRA SUGARS LIMITED: Deep value stock, an ideal play on soaring Caustic Soda prices

2012-01-21T22:20:00.000+05:30

Investment arguments
One of the strongest players in the caustic soda and sugar businesses: Andhra Sugar Ltd. (ASL), is a diversified company engaged in the production of more than 15 products, of which caustic soda and sugar account for more than 80% of consolidated sales (for H1FY2012, caustic soda accounted for more than 50% of the consolidated revenue and around 93% of the consolidated PBT). The company has rarely seen any labour unrest in the last 4 decades. In addition, the company also has 55% stake in a listed entity, JOCIL, which is one of the most efficient manufacturer of fatty acids and soaps, catering to prominent FMCG companies like HUL, ITC, Clariant and Asian Paints. ASL has a consistent track record for 43 years of distributing high dividends; dividends were Rs.5/per share for FY2010 and Rs.5.50/per share for FY2011. At the current market price, the dividend-yield is 5.2%. ASL’s strong performance is backed by the company‘s competitive positioning in the domestic chlor-alkali industry, which is attributable to its large scale chlor-alkali operations, decades of business experience, lean cost structure (considering its access to power at competitive rates) and relatively favorable demand-supply scenario in southern India.

Higher margin from caustic soda segment boosting the overall profitability: During FY2011, performance of the caustic soda and chemical division was affected. While turnover of caustic soda division increased by 6%, decline in realizations and steep increase in power tariff affected the profitability of the segment. Sales realizations declined from Rs.22,682 per tonne in FY2010 to Rs.18,461 per tonne in FY2011. However, domestic average price of caustic soda has increased by 39% YoY in Q1FY2012, 63% YoY in Q2FY2012 and 54% YoY in Q3FY2012, which has improved the segment EBDITA margins and the overall PAT margins for ASL in the current year. In H1FY2012, caustic soda accounted for more than 50% of the consolidated revenues and around 93% of the consolidated PBT. Going ahead, caustic soda prices being firm in Q3FY2012, we expect higher revenue and contribution from caustic soda segment. During FY2011, the 400 TPD Saggonda plant has been upgraded with energy efficient technology, which will bring down the power cost going forward.

ASL sugar division to benefit from favourable dynamics in Andhra Pradesh: ASL has been an efficient player in the sugar sector and has gradually diversified into chemicals and power generation. Over the last few years, there has been a rise of 11.5% in the area covered under\ sugarcane cultivation in Andhra Pradesh from 1.57 lakh hectare to 1.75 lakh hectare. The presence of its sugar operations in the fertile West Godavari belt of AP has resulted in healthy recovery rates of around 11% compared to 9.3% in UP, in a normal year of cane cultivation. This makes the cost of producing sugar cheaper in AP compared to UP. We expect cane cultivation to increase in the current season and cost of procurement to remain under control providing more stability. We expect the sugar cycle to turnaround in the next 12 months; hence the best strategy would be buy stocks before the spin of the cycle.

Rich assets and investments in listed and unlisted subsidiaries: The company holds rich assets & investments with diversified stakes in various listed and unlisted entities holding around 55% stake in the efficient caustic soda manufacturer, JOCIL Ltd. valued at Rs.50 crore (Market Cap of Rs.90 crore), around 28.98% stake in Andhra Petro which is valued at Rs.58 crore, and holds 1 crore shares in unlisted entity Andhra Pradesh Gas Power Corporation Ltd. (APGPCL), which is a gas based power generating company located at Vijjeswaram in West Godavari District for availing power that is about half the cost of power sourced from the state electricity board. Its value we believe would be close to the market capitalization of ASL.

Risk to our view:
Any natural calamity which will hamper the supply of sugarcane, and any adverse policy change on import duty of caustic soda could impact the profitability of the company.

Valuation and recommendation
Total investments of ASL are higher than the current market cap of Rs.280 of the company. Also, the value of investments and replacement cost of assets is estimated to be Rs.2,000 crore, which is 4 times the enterprise value (EV) of about Rs.480 crore. ASL is an investor friendly company, for 43 years consistently rewarding its shareholders with higher dividends; it gave a dividend of Rs.5.50/per share for FY2011. For FY2012, the dividend is expected to be around Rs.6, with a dividend yield of 5.2% at the current market price. We believe the present EV of ASL at Rs.480 crore, is 1/4th the total of Investments and replacements of assets and it does not capture the real intrinsic value of the assets of the company. Also ASL’s promoter holding is extremely fragmented with 118 individuals holding 53.27% in the company, so making it an easy takeover target. In case it becomes a target of M&A activity, the stock can become a multi-bagger. At the CMP of Rs.116, the stock is trading at a PE of 1.9x FY2012E EPS of Rs.60. Hence, we recommend a buy on the stock, for a target price of Rs.160, which translates to a PE of 2.7x FY2012E EPS (consolidated) of Rs.60

To read the full report: ANDHRA SUGARS
RISH TRADER

>GLOBAL ECONOMY: PROSPECTS: 2012 AND 2013

2012-01-21T22:04:00.000+05:30

Global economic prospects for 2012 and 2013 continue to remain downbeat as uncertainty and vulnerabilities of economies towards financial stress and real economy constraints continue to persist. The World Bank and the UN both have presented rather congruent outlooks for 2012 and 2013, highlights of which are presented in this report.

Prime Concern
Though region-centric to begin with, the financial turmoil in Europe has now spread to developing and other high-income countries and this contagion has

- increased borrowing costs in many parts of the world
- pushed down stock markets, and
- lowered capital flows to developing countries

Europe has entered a recessionary phase and growth in several major developing countries (Brazil, India and, to a lesser extent, Russia, South Africa and Turkey) is significantly slower than it was earlier in the recovery, mainly reflecting policy tightening initiated in late 2010 and early 2011 in order to combat rising inflationary pressures. Hence, despite a strengthening of activity in the United States and Japan, global growth and world trade have slowed down sharply.

What may be expected?
- The global economy is expected to expand 2.5 and 3.1% in 2012 and 2013 using purchasing power parity weights

- High-income country growth is to be 1.4% in 2012 and 2.0% in 2013,
- Developing country growth has been revised down to 5.4 and 6%
- World trade, which expanded by an estimated 6.6% in 2011, will grow only 4.7% in 2012, before strengthening to 6.8% in 2013.

Expectations on GDP growth as estimated by the UN are placed close at heels of forecasts by the World Bank as illustrated in table 1 below. A noteworthy difference in the two estimates pertains to the outlook towards the Euro area. While the World Bank presents a rather bleak outlook with negative growth of 0.3%, the UN maintains a near zero but positive growth rate for region in 2012.

Main challenges
- The medium-term challenge represented by high debts and slow trend growth in other high-income countries has not been resolved and additional risks to the outlook include the possibility that political tensions in the Middle East and North Africa disrupt oil supply, and the possibility of a hard landing in one or more important middle-income countries

- Developing countries simultaneously, have successively been subject to global financial and economic shocks that have resulted in banks deleveraging, thereby interrupting credit supplies (high borrowing costs have also impacted the demand-side for credit)

Mounting debt and widening budget deficits remain a challenge for fiscal austerity. Bulk effects of the European crisis, high commodity prices (especially oil) and slow down in manufacturing output weigh on the growth prospects of developing countries. Low investor and consumer confidence is depressing already subdued aggregate demand

- Capital flows would be governed by global financing conditions. Economies have been subject to worsening external financing conditions that could make short-term debt and bond financing unfeasible. Countries would then be forced into cutting reserves or reducing imports to maintain budget balances

- With economic activity projected to remain rather benign, a job shortage of 71 million is estimated, nearly 24% of which must be created in developed countries. The UN warns of that it might be difficult to return to pre-crisis levels far beyond 2015, in the event of slippages in improvement in economic activity in developed countries

Worst case scenario: How about the euro region?
While the situation in Europe is contained presently, if the crisis expands and markets deny financing to these European economies, global GDP can be 4% lower than in the baseline. Developing countries would feel its effects deeply, with their GDP declining by 4.2% by 2013. The downturn may well be longer than in 2008-09 because high-income countries do not have the fiscal or monetary resources to bail out the banking system or stimulate demand to the same extent as in 2008-09. A more ‘pronounced and synchronized’ downturn is a major impending threat. Although developing countries have some maneuverability on the monetary side, they could be forced to pro-cyclically cut spending – especially if financing for fiscal deficits dries up.

Market signals: Post August 2011
- The heightened market volatility has differed qualitatively from earlier ones because this time the credit default swaps (CDS) spreads have increased by an average of 117 basis points (bps) between the end of July 2011 and early January 2012, as did those of almost all Euro Area countries, including France and Germany, and those of non-Euro Area countries, such as the United Kingdom

- Repeated sovereign credit rating downgrades of major advanced economies is acting as an impressionistic signal as well reinforcing the negative outlook on economic and financial stability

- For developing countries, the contagion has been broadly based

In addition to higher bond spreads and CDS rates, developing-country stock markets have lost 8.5% of their value since July-end
This, combined with the 4.2% drop in high-income stock-market valuations, has translated into $6.5 trillion, or 9.5% of global GDP, in wealth losses

- Capital flows to developing countries have weakened sharply as investors withdrew substantial sums from developing-country markets in the second half of the year. Overall, gross capital flows to developing countries plunged to $170 billion in the second half of 2011, only 55% of the $309 billion received during the like period of 2010

- Equity issuance plummeted 80% to $25 billion with exceptionally weak flows to China and Brazil accounting for much of the decline. Bond issuance almost halved to $55 billion, due to a large fall-off in East Asia and emerging Europe. The decline in syndicated bank loans was much less marked, largely because such activity remained very depressed following the 2008-09 crisis

- Activity in Europe and Central Asia, the United States and Japan has accelerated since August

- Trade data suggests a clearer impact from the post-August turmoil and weakness in Europe

Source of Relief
Global commodity prices are expected to moderate through 2012, on the back of improved supply prospects, monetary intervention and weak aggregate demand that prevails currently. A softening trend in inflation could help release pent up consumer and investor demand, thereby pushing forth economic activity. This would be a positive development for developing and lesser developed countries that are easily vulnerable to commodity price shocks. Commodity exporting economies could witness buoyancy in export volumes, against lower prices. Greater export earnings could change a government deficit of 2.3% of GDP in 2010 for resource-rich countries to a marginal surplus of 1.2% by 2013.

A pertinent risk in this context is the integration of commodity markets with financial markets. This could cause a spillover of volatility from financial markets onto the commodity space, especially as currency (exchange rate) uncertainty and volatility is expected to prevail through 2012-13.

What is clear now?
- Growth in high-income countries is going to be weak as they struggle to repair damaged financial sectors and badly stretched fiscal balance sheets

- Developing countries will have to search increasingly for growth within the developing world, a transition that has already begun but is likely to bring with it challenges of its own. Developing countries look to be more vulnerable if there is a sharp deterioration in global conditions. Post 2009 crisis, by 2010, 53% of developing countries had regained levels of activity close to, or even above, estimates of their potential output. Further, government balances have deteriorated in almost 44% of developing countries and some 27 developing countries have government deficits of 5 or more% of GDP

Both global financial stress and domestic economic conditions would have important implications for advanced and developing economies alike. Better monetary policies and deeper financial reforms are needed to curtail capital flow, exchange rate and commodity price volatility.

Impact on India

The Indian economy is largely a domestic oriented economy. However, as was seen in FY12, the global crisis has impacted us quite significantly through:

- Flow of capital through both FII and commercial borrowings
- Forex inflows through remittances and software receipts
- Volatility in the exchange rate
- Growth in exports as well as projects undertaken overseas
- Price inflation (in particular oil)
- Sentiment in stock market which in turn has a bearing on corporate earnings

Based on the projections made by the World Bank and UN, conditions may be expected on the whole to be better than that in 2011, with the caveat being that conditions do not deteriorate further in the euro region.

RISH TRADER

>Credit rating agency Standard and Poor’s downgrades several euro zone sovereigns: ONE NOTCH & TWO NOTCH DOWNGRADES COUNTRIES

2012-01-21T21:48:00.001+05:30

• Credit rating agency Standard and Poor’s (S&P’s) yesterday lowered the long-term sovereign ratings on Cyprus, Italy, Portugal, and Spain by two notches; lowered the long-term sovereign ratings on Austria, France, Malta, Slovakia, and Slovenia, by one notch; and affirmed the longterm sovereign ratings on Belgium, Estonia, Finland, Germany, Ireland, Luxembourg, and the Netherlands.

• The outlooks on the long-term ratings on Austria, Belgium, Cyprus, Estonia, Finland, France, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovenia, and Spain are negative. The negative outlook reflects S&P’s belief that there is at least a one-in-three chance that these ratings will be lowered in 2012 or 2013.

• The outlooks on the long-term ratings on Germany and Slovakia are stable.

• All ratings have been removed from CreditWatch, where they were placed with negative implications on Dec. 5, 2011 (except for Cyprus, which was first placed on CreditWatch on Aug. 12, 2011).

Key Implications
Immediate repercussions:
• In terms of collateral haircuts at the European Central Bank, S&P’s sovereign downgrades will have no impact because the ECB considers the best available credit assessment to assign haircuts. In other words, it would take downgrades by the remaining three credit rating agencies (i.e., Moody’s, Fitch, and DBRS) to put any of these sovereigns at risk of falling to a lower quality collateral category at the ECB. Even under that scenario, only Italy would have crossed the threshold and fallen into a higher haircut category. Therefore, regarding liquidity operations with the ECB, the additional costs for banks tapping the ECB liquidity lines will come in the form of larger margin calls due to rising yields, but not from higher haircuts.

• Regarding the immediate impact of yesterday’s downgrades on European banks balance sheets, it will again depend on the relative changes on sovereign yields as a result of the downgrades. Those institutions with large exposures to downgraded sovereigns will be under pressure when European stock markets re-open on Monday. However, we have to keep in mind a couple of mitigating factors. First, holdings of those sovereign bonds that have not been downgraded will likely see valuations rise, which will counter the negative impact of the downgrades. Second, sovereign bond holdings being marked by banks as hold-to-maturity are, for accounting purposes, shielded from the fall-out of the downgrade. Those positions will not suffer the erosion caused by higher yields.

• Another key element to monitor in the coming weeks will be S&P’s action on the credit rating of the European Financial Stability Facility (EFSF). At the time of announcing the credit review on December 5, S&P’s had signaled the EFSF would be downgraded by the same number of notches as France. John Chambers, chairman of S&;P's sovereign rating committee, yesterday said that preserving the EFSF triple-A status would require the four remaining AAA-rated guarantors to increase their commitments. Such a move will find a lot of resistance in those countries.

• If the EFSF loses its triple-A rating, its funding costs will rise, making the bail-out programs for Greece, Ireland, and Portugal more onerous. How sizeable this effect will be remains to be seen. A priori, one could speculate that eligibility rules similar to those utilized by the ECB to assign haircuts would still allow many institutional investors to keep their holdings of EFSF debt, and more importantly, to continue buying fresh EFSF issuance in the near future. Therefore, the impact on EFSF funding costs might not be very dramatic in the short term.

• In all, the immediate repercussions of today’s rating actions will end the lull induced by the Holidays’ break, but tensions in sovereign bond markets and the European banking system could still remain within the ranges recently observed. This would likely require the ECB stepping up its SMP purchases in secondary bond markets in the coming days to prevent a sharp escalation in yields.

Short-term
• Today’s S&;P’s rating action coincided with the temporary suspension of negotiations between Greece and private bondholders on the Greek debt swap. If the details on the debt exchange are not finalized by the end of this month, it will be very difficult to implement it before a large Greek debt redemption on March 20. This increases the risk of a unilateral Greek default. There is also the risk that a deal is finalized, but it achieves less than universal participation. In that case, it will be up to Greece’s euro zone partners to increase their contributions in order to prevent the second bail-out program from unraveling. Today’s downgrades make the latter a more remote possibility. It is hard to imagine political leaders in France, Italy and Spain (the larger EFSF guarantors after Germany) could secure domestic support for a larger Greek bail-out at the same time they will be calling for deeper fiscal adjustments at home.

• The continued escalation of the sovereign debt crisis will further complicate the challenges European banks are facing to comply with higher capital ratios by midyear. Raising fresh capital is proving extremely difficult for most European banks. This leaves shrinking bank assets as the only viable alternative, but one that will accelerate the economic slowdown across the euro zone.

• Against this backdrop, the common currency area is headed for a recession this year. Developments in the coming weeks will likely reaffirm our view that euro zone GDP will contract by around 1.2% in 2012.

• In short, be ready for rising financial volatility in the short term, and for things in Europe to get worse before they get better.

Martin Schwerdtfeger, Senior Economist

Country	To (Long Term / Outlook / Short Term)	From (Long Term / Outlook / Short Term)
Germany	AAA / Stable / A-1+	AAA / Watch Neg / A-1+
Finland	AAA / Negative / A-1+	AAA / Watch Neg / A-1+
Luxembourg	AAA / Negative / A-1+	AAA / Watch Neg / A-1+
Netherlands	AAA / Negative / A-1+	AAA / Watch Neg / A-1+
Belgium	AA / Negative / A-1+	AA / Watch Neg / A-1+
Estonia	AA- / Negative / A-1+	AA- / Watch Neg / A-1+
Ireland	BBB+ / Negative / A-2	BBB+ / Watch Neg / A-2

ONE-NOTCH DOWNGRADES

Country	To (Long Term / Outlook / Short Term)	From (Long Term / Outlook / Short Term)
Austria	AA+ / Negative / A-1+	AAA / Watch Neg / A-1+
France	AA+ / Negative / A-1+	AAA / Watch Neg / A-1+
Slovenia	A+ / Negative / A-1	AA- / Watch Neg / A-1+
Slovak Republic	A / Stable / A-1	A+ / Watch Neg / A-1
Malta	A- / Negative / A-2	A / Watch Neg / A-1

TWO-NOTCH DOWNGRADES

Country	To (Long Term / Outlook / Short Term)	From (Long Term / Outlook / Short Term)
Spain	A / Negative / A-1	AA- / Watch Neg / A-1+
Italy	BBB+ / Negative / A-2	A / Watch Neg / A-1
Cyprus	BB+ / Negative / B	BBB / Watch Neg / A-3
Portugal	BB / Negative / B	BBB - / Watch Neg / A-3

RISH TRADER

>PROBABLE DELISTING COMPANIES

2012-01-20T22:35:00.000+05:30

In June 2010, the Ministry of Finance, Government of India, had issued guidelines pertaining to minimum public shareholding for all listed corporates. The guidelines were later revised in August 2010. As per the guidelines, all private sector listed corporates must have at least 25% public holding while listed PSUs should maintain a minimum public holding of at least 10%. The corporates were given time of three years to abide by the guidelines. The deadline for companies to achieve the stated level of public holding is June 2013.

The corporates, particularly fundamentally strong multinational companies (MNC) may not have the inclination to increase their public holding and may resort to delisting to have better flexibility in taking business decisions. The case for delisting becomes stronger in the current weak trend prevailing in the equity markets, which has led to a substantial fall in stock prices providing an opportunity for such corporates to buy out the remaining stake with the public at lower valuations. The chances of a delisting offer succeeding also appears higher due to a moderation in return expected by the public shareholders and the enhanced willingness to exit the stock even at a marginal premium to current stock prices.

We have analysed and identified MNC companies, which would be probable delisting candidates. We have filtered the companies based on the criteria of a minimum promoter holding of 75% and return on capital employed (RoCE) higher than 10%. We have further looked into the availability of funds to buy back the public holding.

To read the list: DELISTING COMPANIES
RISH TRADER

>INDIA OIL & GAS: 2012- A Tough Year; Our Top Pick is Cairn India

2012-01-20T22:20:00.004+05:30

We downgrade our Industry View to Cautious due to 1) negative outlook for Refining and Petrochemical margins, and 2) higher subsidy burden due to a weaker rupee. Our top pick is Cairn India for its production growth and free cash flow. Avoid OMCs, Reliance and Essar due to their refining exposure.

Cairn India – the only star: Despite our sideways view on crude oil, Cairn should benefit from three key factors:
1) increase in production due to swifter approvals;
2) improved realization due to weakening of rupee, and
3) increasing free cash flow and attractive valuation.

Counter-consensus call – going UW on Reliance Industries on our negative outlook for Asian complex margins: We cut our earnings forecasts by 9-19% for F2012-14 and are now 11-20% below the Street. The stock price looks cheap close to its three-year low. Increasing contribution from non-core earnings, and diversification in non-core businesses could lead to a stock de-rating/conglomerate discount, despite a sound
balance sheet.

Downgrading Oil Marketing Companies (OMCs) (HPCL, BPCL) to Underweight: The 16% depreciation in the rupee against the dollar in the last six months has led us to increase our subsidy burden to US$26bn (Rs1.3trn). With five state elections in February, we think the earliest a moderate price hike could come is April. The path to petroleum decontrol, in our view, seems to be delayed due to upcoming elections, a high crude oil price environment, and a weaker rupee. Every Rs1/US$ depreciation increases the subsidy bill by US$550mn (Rs25.5bn). We downgrade GAIL to EW due to uncertainty on subsidy share as well as a lack of short-term gas supplies.

To read the full report: INDIA OIL & GAS
RISH TRADER

>KEY DEMAND DRIVERS IN THE CEMENT SECTOR(DHANLAXMI BANK)

2012-01-20T22:15:00.001+05:30

MAIN HIGHLIGHTS

► Cement Sales Growth Eases, But Prices Firm
► Surplus Capacity, Output Under Check
► Clinging On To High Prices
► Cost Pressures Remain
► Consumption To Rise At Slow Pace Despite Healthy Demand
► Cement Companies Hold Prices, But Excess Capacity A Worry

Demand in the current financial year slowed in April-December as major demand drivers grew at a moderate pace.Key demand drivers in the cement sector include:
■ Housing sector: It accounts for a large portion of domestic demand. Rise in urbanisation, an increasing number of house-holds and higher employment are primarily driving demand for housing. However, uncertainty about future incomes, rising interest rates and firm real estate prices have restrained conver-sion of latent demand into actual purchases. This has led to weakness in fresh investments in housing.

■ Infrastructure development: Emphasis of the government on development of dedicated freight corridors, upgrading and building of greenfield airport projects and ports were expected to drive consumption. But this has not happened because of slow pace of execution of infrastructure projects.

■ Industrial projects: Slowdown in the economy, policy uncertainty, high interest rates and weak global economic outlook have resulted in companies holding back their capital expenditure plans.

■ Commercial construction: Construction of retail outlets, office space, hotels, malls, hospitals and schools grows as the economy develops. Demand for consumer-centric sec-tors — such as, automobiles, consumer durables and fast-moving consumer goods — have been impacted due to high inflation, high interest rates and uncertainty in in-comes. This has led to fall in demand for retail space and malls. Rising costs are also affecting the hotel industry, thereby resulting in hotel expansion slowing down.

To read the full report: CEMENT SECTOR
RISH TRADER

>VST INDUSTRIES LIMITED: second largest player in Indian Cigarette industry by sales

2012-01-20T22:05:00.002+05:30

■ Second Largest Player : VST Industries is the second largest player in Indian Cigarette industry by sales. ITC has a market share of ~78% while VST Ind. and Godfrey Phillips account for ~8% each. Balance is made up by imports, unorganised sector &; smaller players. VST has positioned itself as the lowest cost filter cigarette provider with market presence in south, south central, UP, north-east states.

■ Shift from non-filtered to filtered stands complete: GoI increased excise on non - filter segment, which forced non - filter players to shift to filter segment.VST shifted its product portfolio in favour of filter cigarettes (95% of total volume) and grew volumes and price at CAGR of 8% and 12% respectively since 2009 vs flat volumes for ITC. Steep increase in excise duties on cigarette over the years has impacted volume growth but net realization of large players have continued to move up, which compensated for flat volumes over the last 5 years for the industry as a whole.

■ Increased traction in premium products will be margin accretive: The industry growth is faster in premium segment vs mass & mid segment. VST's premium brands witnessed volume growth of 30%+ in FY11 and now account for 33% of its volume resulting in higher realization besides giving phillip to volumes.

■ Exports present a promising opportunity: VST exports leaf tobacco from India and accounts for 26% of its sales. During 2005-10 peiod, tobacco export from India has shown CAGR of 30%.VST's export has also trebled in last 4 years to `150 Cr. It presents a promising opportunity and will be a good earnings driver.

■ Valuations and View: VST is quoting at a P/E of 13.7x /12.5x on FY12E/FY13E EPS. Its return ratios are ~50% with unleveraged Balance Sheet and ~5% dividend yield. There are upside risks to our conservative volume growth estimates of 2% in FY13E, which we have estimated due to expectation of excise duty hikes in budget. In the case of moderate or no hike volume growth may surprise positively. Recommend ACCUMULATE on VST Industries with a 1 Year target price of `1600 (16xFY13E EPS, discount of 30% to ITC's valuations)

To read the full report: VST INDUSTRIES LIMITED
RISH TRADER

>ALSTOM PROJECTS INDIA & ALSTOM (France): Collaboration with BHEL; Hydro - Global sourcing hub; Global engineering giant with focus on power and transport segments; Transferring boiler business to JV with Shanghai Electric

2012-01-20T22:00:00.000+05:30

Global slowdown necessitating consolidation; Alstom SA to form JV with SEC for boiler business: The Alstom Group is undergoing significant transformation globally. Alstom SA acquired the transmission business of Areva T&D recently and has entered into an agreement with Shanghai Electric Company (SEC) to create a 50:50 JV, which will own all boiler manufacturing assets of the two companies worldwide. The company sees China and India as two key markets over the next few years. The company is very optimistic on its JVs in India - with Bharat Forge for supercritical turbine generator and with NTPC for boiler servicing.

Collaboration with BHEL to remain unaffected by JV with SEC: BHEL has a longterm technology agreement with Alstom. The formation of Alstom-SEC JV has raised concerns on the future of this collaboration, given that SEC is an active player in India. The Alstom management reiterated that these concerns are unfounded. BHEL has exclusive rights on Alstom supercritical technology in India and will continue to enjoy that status.

Indian BTG manufacturing industry lost out to Chinese manufacturers due to unpreparedness: The Indian power equipment manufacturers were not prepared when demand surge occurred in 2005-08, leaving the field open to the Chinese manufacturers. The scenario has changed over time and India has built sufficient capacity to meet domestic demand. In India, however, projects are awarded on the basis of initial cost and not on life-cycle cost, which is detrimental to the growth of sector and puts companies like BHEL and Alstom at a disadvantage.

ABBAP's 1HFY12 margins fail to impress due to disappointing performance of boiler business: During 1HFY12, ABBAP's revenue increased 31% YoY. However PAT declined 49% YoY, mainly due to disappointing performance of the boiler business. The order book currently stands at INR58b, implying BTB of 3.2x FY11 revenue. We believe that while the opportunity in hydro and transportation sectors is large, near-term demand is subdued and it will not be able to compensate for loss of boiler business in the next few years. Recovery in the
hydropower and gas segments will be critical for stock outperformance. ABBAP trades at 25% premium to BHEL on FY11 P/E and lacks near-term catalysts.

Power market facing hurdles
■ In India, demand for power and power equipments is driven by regulatory changes and hence not predictable. Demand surged in 2005-8, following the Electricity Act 2003, which attracted a large number of first-time power developers to the sector. The Indian power equipment manufacturers were not prepared for this demand surge, leaving the field open to Chinese manufacturers.

■ Mr Sharma believes that, in India there is still little focus on efficiency. Projects are awarded on the basis of initial cost and not on life-cycle costs. A large number of thermal power projects based on imported equipment may see operational cost rising over next 5-7 years, thereby significantly impacting their returns.

■ Established power equipment manufacturers, including Alstom, do not believe in following predatory prices quoted by a few suppliers. Given the risks involved with quoting low, including losses and liquidation damages, most manufacturers will not be prepared to quote below their set price bands.

■ The installed capacity has little meaning. Indian manufacturers can produce not more than 20GW per annum as of now (Indian power equipment manufacturing capacity is expected to be 36GW by FY14-15).

Alstom (France) - Transferring boiler business to JV with Shanghai Electric
■ Alstom and Shanghai Electric Company have announced their intent to create Alstom-Shanghai Electric Boilers Company (ASEBC), a 50:50 JV combining activities of both the companies in the boiler market for power plants. However, the EPC and service businesses of respective companies will not be transferred to the JV. ASEBC would be world leader, with combined annual sales of about EUR2.5b.

■ By combining the complementary assets of the two companies, the joint company will benefit from both (1) Shanghai Electric's cost competitiveness as well as its very strong positioning in China, the largest market in the world for coal-fired power plant boilers, and (2) Alstom's relationships with utilities worldwide as well as its leadership in clean coal power plants and its technologies.

■ In India, the Durgapur facility of Alstom Projects India will be transferred to the JV. Durgapur facility currently is engaged in new and spare parts manufacturing. Currently Boiler business roughly contributes 30% of the sales.

■ BHEL has a long-term technology agreement with Alstom. The agreement was signed in 2005 and is valid for 15 years. The formation of ASEBC has raised concerns on the future of this collaboration, given that Shanghai Electric is an active player in India. It has also raised a question whether Alstom, through the JV, will enter the Indian power boiler market, thereby competing with BHEL directly.

■ Alstom management re-iterated that these concerns are unfounded. BHEL has exclusive right on Alstom supercritical technology in India. The new JV will not have access to Indian market for selling supercritical boilers, and ASEBC will not directly compete.

■ The management stated that negotiations are still going on between Alstom and SEC and actual scheme of merger has yet to evolve.

Alstom (France) - Global engineering giant with focus on power and transport segments
■ Alstom globally operates in two segments, namely, a) Power and b) Transport. Headquartered in France, the company is present in over 70 countries with EUR21b of revenues (including Areva's T&D business acquired in FY11). According to the company, Alstom has supplied ~25% of the global installed power generation capacity and has rolled out 1 in 4 metro rail and 1 in 3 tramway systems globally.

■ The company is an integrated power equipment manufacturer in thermal, gas, hydro and renewable energy sectors. The company also has strong product portfolio for emission control in power generation, petrochemical and industrial sectors. It also serves demand for upgrades and modernization of existing power plants. Similarly, transport segment provides equipment and systems for rail transportation activities, including passenger trains, locomotives, signaling equipments, rail components and services.

■ The recently acquired T&D business from Areva T&D in FY11 has been added to a new segment called the 'Alstom Grid' to its erstwhile operational segment of Power and Transport. Alstom Grid has an order backlog of EUR5b, annual revenues of EUR3.6b, and OPM of 5-6%.

■ The segment employs more than 20,000 people in over 90 manufacturing sites. Alstom Grid is among top three companies in electricity transmission along with ABB and Siemens. In FY11, geographical sales split was: Europe (30%), Africa- Middle East (20%), Asia-Pacific (31%) and Americas (9%).

Aggressively tapping Indian markets through JVs
■ In India, Alstom Group intends to focus on gaining traction in power equipment space through joint ventures with leading Indian companies. India is emerging as a key destination for Alstom. Globally the company is significantly ramping up its focus towards emerging countries

■ Alstom France has formed two joint ventures with Bharat Forge. The flagship JV is setting up a plant in Gujarat to manufacture supercritical steam turbine. Another JV will have facility for turbine components. The plant, being set up at the cost of INR20b, will have capacity of 5,000MW per annum.

■ Alstom France has also entered into technical collaboration with BHEL for supercritical boilers. The agreement is valid till 2020.

■ Alstom has also formed a 50:50 JV with NTPC for servicing and retrofitting aging steam generators.

Alstom Projects India: Hydro, gas and transportation sectors to drive growth post merger of boiler manufacturing assets of Alstom-SEC
■ Alstom Projects India (APIL) is the listed Indian subsidiary of Alstom France with FY11 revenues of INR18b. In India, it has presence across the power and transportation segments (mainly, railways), with four manufacturing sites employing 4,000 people. Power is the dominant business accounting for 95% of FY11 sales while transport accounts for remaining 5%.

■ However, there is strong growth expected in railways orders in next 4-5 months, particularly for Dedicated Freight Corridor, which will increase share of transport sector in revenues in FY12-13.

■ APIL has benefited from parent's partnership with BHEL. It has spent over ~INR2b over the last 2-3 years to ramp up and upgrade its supercritical capabilities in Durgapur and Shahabad. The company is key supplier of components (pressure parts for supercritical boilers) to BHEL, which is executing 11GW of supercritical power projects and is expected to get 6.5GW from NTPC bulk tenders. In turn, Alstom could execute a good portion of the work outsourced by BHEL (roughly INR2-4b / 800MW set). Post transfer of Durgapur facility to Alstom-SEC JV, the orders will get executed by JV. However, over a period of time, BHEL will indigenize technology, thereby lowering the quantum of boiler components outsourced from
APIL.

Hydro - Global sourcing hub for Alstom Group
■ APIL has established is one of the largest hydro-power equipment manufacturing hubs of the group at Vadodara facility, along with its locations in France, China, Brazil, Switzerland, Spain and Canada. The factory has a capacity of 4,000MW and meets demand from India and other regional emerging markets. Alstom has 38% market share in Hydro power ordering in the XIIth plan.

■ CEA has identified ~25,000MW of feasible hydro-power projects for the 12th Plan. Hydro-power occupies 25% share of the power generation mix and currently the installed base stands at 37,000MW. Of this, APIL (through Alstom) has contributed towards installation of ~6,000MW. The company stands to benefit from the opportunity, though the sector is mired in environmental and rehabilitation issues.

■ The company is executing NHPC's 2000MW (8 x 250MW) hydro power project, largest in India. The project has been significantly delayed and is now expected to be completed by December 2012. Alstom has completed over 70% of work.

To read the full report: ALSTOM PROJECTS
RISH TRADER

>INDIA STRATEGY: Preserving Capital- Best Risk - Reward Bets

2012-01-18T23:40:00.001+05:30

To read the report: INDIA STRATEGY

RISH TRADER

>PUNJ LLOYD LIMITED: Has ~Rs39bn worth of orders from Libya and set to start execution in 1-2 months

2012-01-18T23:36:00.002+05:30

■ Takeaways from Mumbai – Punj Lloyd presented at our India Infrastructure and Industrials Conference in Mumbai on 10-11 Jan. Below we highlight key takeaways.

■ Steady improvement in operations – Company has gone through a rough patch over the past one year, but says things are under control and improving. No new issues (auditor qualifications / customer disputes) have emerged in recent times, and losses in Simon Carves are over.

■ Libyan orders set to start execution in 1-2 months – Based on the situation on the ground, company believes that it will be able to start execution of Libyan orders in 1-2 months. PLL has ~Rs39bn worth of orders from Libya.

■ Orders and margins – PLL has won Rs120bn of orders in YTD FY12. Current order backlog at similar to those reported in 1HFY12 numbers. Company targets >10% margin at project level. 30% of projects have price variation clause for raw materials.

■ Outlook on different sectors – (1) Power BOP – Company has won orders from GVK, CESC and KSK, but order inflow is now slow given problems in the power sector. (2) Pipeline – Average annual market size is Rs25bn, of which PLL has 25% share. This market is likely to increase to Rs40bn/yr. (3) Oil and gas onshore EPC – Slow as of now, but some projects which had been deferred are now being revived. The
addressable market size is Rs40-50bn/yr. (4) Tanks and Terminals – There is substantial activity in tanks and terminal space. Over next two years, 8-10 strategic oil reserves projects (each of Rs8-10bn) are likely to be given out. There are a number of LNG terminals and tanks orders from these which could be in the Rs2-4bn range each.

■ Balance sheet and working capital – Current debt is ~Rs51.5bn with average interest cost of ~11%. ~29% of debt is denominated in foreign currency compared to ~70% of revenues in foreign currency. As a result, company is looking to substitute high-cost INR debt with foreign currency debt to reduce interest cost. Currently company has ~Rs15bn receivables pending due to various reasons (~Rs4.9bn from ONGC + Rs3bn in India from OMCs and others). Oil marketing companies (OMCs) have delayed payment due to stress on their financials, which has resulted in some pressure on working capital.

To read the full report: PUNJ LLOYD
RISH TRADER

>LARSEN & TOUBRO: High investments in non-core and long gestation businesses

2012-01-18T23:29:00.000+05:30

Best positioned to tide over the slowdown

■ Growth slowdown inevitable, but concerns exaggerated: L&T is one of the most diversified and the largest E&C player in India. It has far out-paced competition particularly on profitability thanks to 1) its highly integrated operations, 2) strong preference from private sector clients, 3) economies of scale, and 4) stringent risk management and controls. We believe that the concerns on slowdown, though not unfounded, but are exaggerated given 1) high order replacement ratio (>1.3x) despite sluggish environment, 2) superior cash flow generation and 3) strong long term potential.

■ Re-focus on globalisation – a step in the right direction: While L&T is considered one of the largest E&C players globally; it derives only c.10% revenues from international markets. However, with domestic outlook weakening substantially, the company has stepped up efforts in overseas markets, primarily Middle East. While this presents several near-term challenges, primarily stiff competition from Korean and European counterparts (much larger presence and are well entrenched in these markets), it will provide important geographical diversification, which is a step in the right direction in our view. The efforts have also started to pay off with some important break-through in the last year or so.

■ Near-term earning expectations need to be reset lower, but core returns healthy: Current earnings expectations need to be reset lower, in our view; we highlight that our standalone EPS estimates are c.11% below consensus as we have built in conservative set of assumptions on order inflows, margins, asset utilisation etc. While core business returns are set to decline from current levels (RoIC at 32.3% in FY11), they should remain enviable and healthy (we estimate c.22% in FY13-14E period).

■ Stock cheap by historical standards, opportunity to enter: After the recent correction, stock is trading at 11.7x FY13E EPS (adjusted for conservatively assigned values to non-standalone businesses), which is c.15% discount to Sensex (vs historic premiums of over 25-30%; the discount is similar to the ones during 2009 bottoms). We believe valuations have more than factored the impact of slowdown, while long-term fundamentals remain strong. We initiate coverage with BUY and Dec’12 TP of `1,275.

■ Key concerns: 1) High investments in non-core and long gestation businesses, 2) impending changes in business structure, 3) continuing deterioration in macro environment.

To read the full report: L&T
RISH TRADER

>MUTUAL FUNDS REVIEW: Institutional fund flow, Equity funds, Equity diversified funds, Equity Midcap Funds, Equity Infrastructure Fund, Equity Banking Funds, Arbitrage Funds, Exchange Traded Funds (ETF), Balanced Funds, Monthly Income Plans (MIP), Debt funds, Liquid funds etc..

2012-01-18T23:22:00.003+05:30

The year 2011 has been a volatile one where factors such as the ongoing Euro zone sovereign debt crisis, slowdown fears in the US and higher than anticipated jump in inflation in BRIC countries impinged on the global growth ecosystem

The one theme that is consistent across various asset classes is safety first. Risk aversion remained at elevated levels forcing investors to dump riskier assets(global equity markets, riskier bonds and commodities) and resort to perceived safe havens (US treasuries, gold)

Going into 2012, sentiments remain weak due to persisting European sovereign concerns and impact of any negative development

We expect more of a time based correction and expect the markets to oscillate in a broad trading range till the time reasonable clarity emerges from various local and global macro headwinds

In case of a negative outlier event, the markets may fall further in the wake of panic selling. However, we do not expect the markets to sustain at such levels. In such an environment, timing the markets would become extremely difficult. We believe that any sharp cuts should be bought into from a three to five years perspective. Currently, higher allocation should be made in large cap funds with some allocation to midcap funds depending upon risk appetite

We believe at least H1CY12 will be volatile as the markets would witness huge swings to the news emanating from the emerging and western world. Also, the markets will react sharply to any surprise coming from within the country on the political/economical front. Such bouts of volatility will provide a platform to accumulate equities in a staggered manner as we expect H2CY12 to be a more trending one as a lot of macro issues may subside

In the short term, the fortunes of equities are also tied to the relative attractiveness of fixed income, gold and real estate. Any deterioration in the risk-return trade-off in these asset classes would be a blessing in disguise for equities else equity markets may continue to be sidelined

We expect the year end target for BSE Sensex to be boxed in the range of 15442: 14x FY12 Sensex EPS of 1103 ((bear case)– 17822: 4x FY13 Sensex EPS of 1273 (base case) in line with earnings growth of 15% in FY13 and historical average multiples of 14x

Since we are currently trading at close to our bear case year end target, equity investors with an investment horizon of more than one year should start allocating fresh money as the long term case for investments in Indian equity markets still remains intact.

To read the full report: MUTUAL FUNDS
RISH TRADER

>SOBHA DEVELOPERS LIMITED (SDL): Has not launched any new project in 3QFY12 and has given muted new project launch

2012-01-18T23:17:00.002+05:30

Strong 3QFY12 pre-sales, but no new project launch a concern
Sobha Developers (SDL) reported strong pre-sales of Rs4.4bn (up 47% YoY) in 3QFY12, thanks to sales from Gurgaon project, but they were down 7.8% QoQ on lack of new project launch. Although reported pre-sales of Rs12.3bn and 2.4mn sq ft in 9MFY12 were ahead of our expectations, we believe higher net debt (net D/E ratio of 0.71x in 2QFY12) will remain an overhang on the stock. Further, SDL has not launched any new project in 3QFY12 and has given muted new project launch guidance of 1.6mn sq ft for 4QFY12, which will make sustainability of 3QFY12 pre-sales challenging. We maintain our Hold rating on SDL.

Strong pre-sales; likely to surpass its FY12 guidance: Volumes stood at 818,935 sq ft, up 16.2% YoY, but down 12.5% QoQ. Average realisation was Rs 5,475/sq ft, up 5.4% QoQ, aided by better product mix. The management has indicated that the company will surpass its pre-sales guidance of Rs15bn and volume guidance of 3mn sq ft for FY12, which, we believe, is achievable. However going forward, sustainability of strong pre-sales will be challenging, given the lack of new project launch in Bangalore.

No new project launched in 3QFY12: SDL had done 3.1mn sq ft of new project launch in 1HFY12 (across Bangalore, Gurgaon and Mysore) and had given muted guidance of only 1.6mn sq ft for 2HFY12 because of lack of new projects in Bangalore. Further, the ongoing delay in getting government approvals in Chennai resulted in no new project launch in 3QFY12. The management has given guidance of launching Sobha Serene (0.2mn sq ft) and Sobha Meritta (0.7mn sq ft) projects in Chennai and Hopefarm project (0.6mn sq ft) in Bangalore in 4QFY12.

Higher debt remains an overhang: SDL had reported positive operating cash flow of Rs891mn in 1HFY12, but adjusted for capex (Rs558mn) and interest payment (Rs1,230mn), debt reduction seems to be unlikely. Further 50% of its debt is front-ended, which makes it vulnerable in a scenario of high interest rates. Going forward, we expect muted debt reduction visibility (the management gave guidance of Rs3bn debt reduction in FY12) because of no land sales, stake purchase from PAN Atlantic for Rs600mn and high pre-launch expenses in markets other than Bangalore.

Outlook: At the current market price, SDL is trading at 0.9x P/BV and 8.8x P/E on FY13E earnings and at 36% discount to our one-year forward NAV. Muted visibility on debt reduction and higher new project launch in new cities offsets 30% discount to NAV. We maintain our Hold rating on SDL with a TP of Rs227, which is at a 30% discount to our one-year forward NAV.
RISH TRADER

>KEC International: Likely to continue to witness strong order growth in its new businesses (i.e., power systems, water, cables and telecoms) as the company ramps up from the current low base.

2012-01-18T23:11:00.003+05:30

Strong visibility on revenue growth. KEC today announced new orders totalling INR12.5bn, taking the total order book to INR90bn (c2x FY11 sales). The order book is likely to drive strong revenue growth of 20-25% in FY12-13e, as the majority of these orders are scheduled for delivery over the next 18-24 months. In addition, management noted that the tender pipeline remains strong, both in domestic and international markets. Other sector players have made similar comments and believe that there is strong visibility on at least domestic transmission orders, as Power Grid is likely to ramp up its ordering activity. In addition to transmission, KEC is likely to continue to witness strong order growth in its new businesses (i.e., power systems, water, cables and telecoms) as the company ramps up from the current low base. Overall, KEC now appears likely to outperform our sales growth forecasts of 23% for FY12 and 19% for FY13.

FY13 profitability likely to beat estimates. Management estimates the overall margin on the new orders announced today at c10%. While the margin on the transmission business is likely to remain stable, the margin on new businesses is expected to continue improving (as the new orders demonstrate). Our current estimates are for the overall margin to contract from 10.8% for FY11e to 9% in FY12e due to mark-to-market losses booked in Q2 before expanding slightly to c9.7% in FY13 (versus the consensus estimate of c9.6%).

The new orders, however, suggest that KEC may beat these estimates, registering a margin of c10% in FY13. Overall, we see potential upside to our estimates going into FY13, with the biggest, albeit unlikely, risk being a further depreciation in INR. Attractive value. Our current forecasts call for EPS to surge c43% in FY13e and 38% in FY14e after a decline of c8% in FY12e, driven by the normalisation of margins due to a reversal of mark-to-market losses, the risk to which remains low. With such strong, resilient growth and a large order book, the stock’s valuation looks attractive at a c3.5x FY13e PE; therefore, we reiterate our OW rating and target price of INR80. Our target price is derived from our preferred EVA valuation methodology and implies a 12-month forward target multiple of c6.4x PE on a 24-month forward PE of INR12.5. We believe that the quarterly growth in earnings, continued order announcements and peaking of the interest rate cycle could act as key catalysts for a stock re-rating.

Valuation and risks
Our target price of INR80 is derived from our preferred EVA valuation methodology, assuming target sales growth of c9%, through-the-cycle operating return margin of c9.5% and WACC of c12.3%. Our target price implies that 12 months from now the stock should be trading at a 12-month forward PE of 6.4x (compared to the current 12-month forward PE of 4.2x) on 24-month forward EPS of INR12.5. Under our research model, for stocks without a volatility indicator, the Neutral rating band is 5ppt above and below the hurdle rate for India stocks of 11%. Our target price implies a potential return of 122.5% (including a dividend yield of 3.3%), above the Neutral band; therefore, we are reiterating our Overweight rating. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated.

Risks
Key downside risks related to our investment case include:

Delay/cancellation of transmission projects
Excessive pricing pressure
INR depreciation or commodity hedging-related losses.

RISH TRADER

>INDRAPRASTHA GAS LIMITED: Prices charged for CNG & PNG by IGL include a marketing margin component

2012-01-18T23:03:00.000+05:30

Marketing margin to be capped?
Media reports indicate that the central government has entrusted PNGRB with the determination of quantum of marketing margin chargeable on sale of natural gas to end consumers by a marketing entity on the basis of marketing costs incurred by it. Currently, GAIL charges marketing margin of ~$ 0.18/mmbtu on PMT, ~$ 0.12/ mmbtu on APM gas and ~$ 0.7/mmbtu on non-APM gas and LNG. RIL charges $ 0.135/mmbtu for KG D6 gas. Petronet LNG charges ~$ 0.4/mmbtu as marketing margin for spot LNG cargoes. Prices charged for CNG & PNG by IGL also include a marketing margin component.

Scope of regulations limited to domestic gas
The primary target for capping marketing margins would be domestic gas producers & marketers since customers for domestic gas are earmarked & allocated by the Govt. Thus, there are no marketing costs incurred in the process. However, it is not clear whether the current set of rules & regulations are applicable on CGD & LNG terminals. Importing spot LNG from the global market requires an ability to source competitively priced LNG. Also, the company makes its own efforts for identifying customers and signing offtake agreements with the same, which involves considerable resources. CGD companies have to make investments in pipelines, CNG stations, spur lines to ensure last mile connectivity to reach out to new areas and add more customers. Hence, we believe that LNG terminals & CGD companies would not be treated similar to passive sellers of domestic gas.

Implementation to take time
The PNGRB is yet to be fully constituted only after which it can pursue long pending issues related to authorization of transmission networks, transmission tariffs (GSPL), CGD rollout; besides the latest issue of linking marketing margins to marketing costs. PNGRB would also likely invite the various companies to present their case and evaluate the same. Meanwhile, it would also obtain opinions from other Govt. agencies on the scope and ambit of the current regulatory structure. Ultimately, the whole process would take a lot of time.

IGL looks attractive
We had initiated coverage on IGL in Oct 2011 with a contra-consensus SELL call, citing risks to continuance of the past rosy growth & margin scenario. Subsequently, the stock has corrected from Rs 426 at the time of our initiation to Rs 327 currently. Prior to the news flow regarding clamping down on marketing margins, the stock had fallen due to margin pressure resulting from increased dependence on spot LNG and steep rupee depreciation. Price hikes by the company have proved to be insufficient to protect margins. Accordingly, we have revised our estimates downward with FY12E & FY13E EPS going from Rs 25.2 & Rs 27.8 to Rs 19.8 & Rs 22.4 respectively. At the current market price, the stock looks attractively valued @ FY13E P/E of 14.6x and we upgrade our recommendation to a trading BUY at current levels and on dips with a target price of Rs 366.

RISH TRADER

>Tough Times = 12 Tough Tasks to Sustain Growth in 2012

2012-01-17T23:09:00.001+05:30

Presentation Path

GDP – 12 Tough Tasks To Sustain Growth at ~7%
■ FX Vulnerabilities Increase

► External Debt – Short-term Debt Worries; Redemption Pressures Key to Monitor
► BOP – Flows Lower, But Sufficient to Finance the Deficit

■ Fiscal – Fiscal Consolidation on the Backburner: Assessing Debt Concerns
■ WPI Inflation – Determined by Interplay Between Currencies and Commodities
■ Rates – Easing cycle likely to be advanced to 1Q 2012
■ Politics – Will the Policy Gridlock Ease

To see full presentation: INDIA MACRO OUTLOOK

>EDUCATION SECTOR: Price performance of Career point, Everonn Education, Educomp & NIIT

2012-01-17T23:05:00.000+05:30

Growth momentum intact

We expect the companies to register strong growth during Q3FY12 on the back of seasonality . We believe the growth in topline would be largely driven by multimedia solutions to private schools, vocational courses and IT training segments. We expect Educomp Solutions to register strong growth in sales in Q3 driven by the school segment. NIIT is expected to report a decline in topline as it sold the Element K business. Within the space, we like NIIT considering attarctive valuation and better prospects of improving its margin profile in FY13E.

■ Topline growth to continue: We expect the growth momentum to continue for companies given the opportunity in the space and also because Q3 is seasonally a better quarter. Segments including multimedia solutions to private schools and vocational business would be key drivers.

■ Operating margin to improve: Better topline would result in improvement in margin during Q3. NIIT would witness better margin on a like to like basis, though the individual learning segment is in the process of integration. We believe that NIIT would see margin expansion in FY13E on the back of better sales mix in favour of individual learning solutions and school
learning solutions.

■ Prefer NIIT in the space: We prefer NIIT in the space considering attractive valuations and prospects of margin expansion in FY13E. Our belief is that NIIT rerating is contingent upon FY12E financial performance i.e growth with margin expansion. Hence, NIIT becomes a long-term bet. Also, we believe that stock price of Educomp factors in all the concerns including FCCB payout, high capex in formal education and free cash flow generation. Some of the triggers for the stock would be: 1) monetization of subsidiary(s) and 2) further announcement of securitization deal with 20% recourse.

Career Point (Rating – Under Review)

We expect Career Point to post Rs189mn in revenue in Q3FY12 on the back of an increase in realisation per student. We expect student enrollment to be flat or marginally decline this year.
We expect the operating margin to be 30% in the quarter on higher salary expense.
We expect net profit at Rs61mn on the back of higher other income. As the company has IPO proceeds in its books which are unutilized, it has invested surplus funds in tax saving schemes which reduces effective tax rate.

Educomp Solutions (Rating – Hold; Target Price – Rs220)

We expect Educomp to register 20% YoY revenue growth in Q3FY12 on the back of strong growth in School Learning and Higher Learning segments.
We expect the company to report an operating margin of 43.7% at the consolidated level driven by better sales mix.
We expect net profit to decline by 11.4% to Rs856mn. We assumed full tax rate as against effective tax rate of 20% in Q3FY11.

NIIT (Rating – Buy; Target Price – Rs81)

We expect NIIT to register 17.7% YoY revenue decline mainly due to sale of Element K business. We expect the company to post 14.8% growth (ex-corporate learning solution).
Operating margin is expected to expand marginally by ~30bp mainly due to better sales mix which results from the sale of Element K business. The margin profile is not going to change in FY12E and margin expansion would be more visible in FY13E.
We expect net profit to grow by 26.6% YoY on the back of savings from interest expenses and higher other income from the sale of Element K business.

RISH TRADER

>Pharma Q3FY12 Preview: Large caps Ranbaxy, Dr Reddy’s, Sun Pharma, Cipla, Lupin and Cadila expected to outperform

2012-01-17T22:49:00.002+05:30

BIGGIES TO OUTPERFORM

Large Caps to post robust growth: Large caps (Ranbaxy, Dr Reddy’s, Sun Pharma, Cipla, Lupin and Cadila) under our coverage are expected to cumulatively post a topline growth of 19.3% & Ebitda growth of 44.5% driven by strong domestic market, currency depreciation & launch of blockbuster drugs by Ranbaxy and Dr Reddy’s. We expect Dr Reddy’s to post strong earnings growth led by launch of key products like Zyprexa & Fondaparinux. Ranbaxy’s performance will be driven by launch of one time exclusivities like Lipitor & Caduet contributing to higher margins and growth respectively. Excluding Dr Reddy’s and Ranbaxy EBITDA will grow by 38.4%. We are expecting the base business by both the companies to improve in this quarter.

Lupin’s performance will be driven by strong growth in branded generics & better traction in US generics business led by launch of key products like Ultram, Lo Seasonique. Sun Pharma & Cipla will show a strong growth due to favourable currency movement. Both the companies have not taken any forward covers which we believe will have positive impact on EBITDA margins. We expect Cipla to show strong domestic performance as it has higher exposure to acute segment which is growing around 20%. Cadila will show a modest growth due to slowdown in its consumer business & Europe formulation segment. Traction in US business will be driven by Nesher acquisition & its domestic business will perform on account of Biochem acquisition that has huge exposure to anti infective segment which has shown growth above 15% in this quarter.

Mid caps to report subdued growth: Mid caps under our coverage (Strides, Biocon, and Unichem) will post cumulative topline growth of 4.2% y-o-y. Biocon’s topline growth will be affected due to selling off of Axicorp in Q4FY11. Unichem will show strong performance in export segment on account of commencement of contract manufacturing business from Ghaziabad facility. Domestic formulation business will continue to show degrowth due to ongoing restructuring exercise by the company to improve working capital cycle. Strides will perform in Q3FY12 on account of traction in specialty segment and significant product launches.

Top Picks: Lupin & Sun Pharma are our preferred picks in the large cap space. We believe Lupin has an excellent oral contraceptive (OC) pipeline which will drive the performance as it will be able to garner strong market share. The overall market size of OCs in USA is around 5bn$. Sun Pharma will benefit from key product launches in international markets & huge exposure to chronic segment in domestic market.

In the mid cap space we like Strides Arcolab as its presence in niche sterile space provides long-term growth visibility.

To read the full report: PHARMACEUTICAL
RISH TRADER

>GMR INFRA: A consultation paper on the framework for determining the tariff for DIAL (Delhi International Airport) released by the Airports Economic Regulatory Authority (AERA).

2012-01-17T22:41:00.003+05:30

AERA proposes tariff hike for DIAL in two phases
A consultation paper on the framework for determining the tariff for DIAL (Delhi International Airport) released by the Airports Economic Regulatory Authority (AERA) has proposed the shared-till method for revenue calculation, weighted average cost of capital (WACC) of 10.33%, cost of equity of 16%, project cost of Rs12.5bn and disallowance of refundable interest-free security deposit (RSD) as equity. The airports regulator has also recommended tariff hike by 148% in FY13 and FY14 each at DIAL, effective from 1 April 2012 to 31 March 2014. We believe this is a positive development that will eliminate the overhang on DIAL’s valuation and therefore retain our Buy rating on GMR Infrastructure with a target price of Rs39.

Key highlights:

AERA has proposed that the first regulatory period may be taken as 1 April 2009 to 31 March 2014 and recovery of the revised tariff may be contemplated during 1 April 2012 to 31 March 2014.

The regulator has proposed WACC of 10.33% as compared to bid WACC of 11.6% for the purpose of calculation of the returns on regulatory asset base (RAB). The reduction in WACC is primarily because of lower CoE of 16% against the projected CoE of 22%.

AERA has proposed that the targeted revenue be calculated on the basis of the shared-till method, which includes reduction of 30% of non-aeronautical revenue. The regulator has proposed allowable project cost of Rs125bn, which is as per its order in respect of the development fee.

Proposed average RAB for the first regulatory period would be lower by Rs12.7bn than what was submitted by DIAL because of lower hypothetical asset base and disallowance of future capex.

AERA has proposed that refundable interest-free security deposit (RSD) of Rs 14.5bn, which was used for financing of the project, should not be considered as equity.

AERA has not clarified on the issue of monetisation of remaining land bank at DIAL and usage of the funds generated. We believe this uncertainty would keep the hangover on valuation of DIAL’s land parcel.

Valuation: We have not revised our earnings estimates for DIAL based on the consultation paper and prefer to wait for the final order which is due in 4QFY12. However, we believe that based on the revised tariff the DIAL project is likely to report net profit of Rs0.6bn in FY13 and Rs7bn in FY13. Clarity on land monetisation and usage of the funds raised from it would be the next trigger for the GMR Infrastructure stock. We maintain our Buy rating on it with a SOTP-based target price of Rs39.

To read the full report: GMR INFRA
RISH TRADER

>GREED & FEAR: Reformulated Outlook (CLSA)

2012-01-17T22:32:00.002+05:30

Verbier

Stock markets opened the New Year on a strong note despite the seemingly concerning news from the Strait of Hormuz. Still GREED & fear remains fundamentally cautious. This is also the view propagated in the new reformulated Asia Maxima quarterly which now includes Australia (see Asia Maxima – Pain suspended and extended, 1Q12). The past year ended to GREED &; fear in a kind of truce in the sense that investors were relieved to see the European Central Bank (ECB) make increasing efforts to ease the liquidity situation of European banks, which remain the epicentre of systemic risk globally. Yet, markets had not yet been given what they really wanted in order to celebrate the hoped-for end of the European crisis. That was,
unsterilised monetisation by the ECB and fiscal union.

The result for GREED & fear is that the fault line which has been the cause of the European crisis, itself a nasty mixture of both sovereign debt crisis and banking crisis, still festers. That is, of course, the unsustainable combination of monetary union without fiscal union. So long as this is the case, there remains the likelihood of more euro-tremors and potentially a “euroquake”, to which risk assets globally will continue to be correlated. As a result, this crisis continues to exacerbate the debt deflationary dynamic which has been in play in the Western world since the so-called “global financial crisis” hit in 2008. In truth, of course, the crisis has never really ended with the symptom of that continuing deflationary dynamic the continuing Japanese style correlation of American or German bank stocks with long-term government bond yields (see Figure 1). Thus, the correlation between the German banks index and the 10- year bund yield is 0.96 since the start of 2011.

Still if this is the “big picture”, the New Year begins again with the focus very much on Europe. The issue facing investors is that markets have become used in the last 20 years to celebrating moral hazard-intensifying bailout trades, with most of these policies hailing from Washington. On this occasion, investors have had to contend with German psychology. This provided an abrupt wake-up call for markets in 2011. The first point is that the German political establishment does not like to make policy in response to immediate market pressures. The
second point is that the Germans do not easily accept that a debt problem can be solved by
simply adding more debt, most particularly if it involves the central bank “printing money”.

To read the full report: GREED & FEAR
RISH TRADER

>STRATEGY: Avendus advise cuts in allocations to Two‐wheelers and Consumer, and increases in Commercial vehicles, Passenger vehicles, Cement, Pharmaceuticals, Telecom, Metals and IT Services

2012-01-16T23:05:00.001+05:30

Amidst the pervasive gloom, a few signs are pointing to better times returning sooner rather than later. The rapid fall of the Nifty PEG has brought it to within 10% of the band where it stabilized in 2009, before the next rally began. A ‘time‐correction’ could pull down the PEG to
0.7x in 1Q2012. The yield‐gap is down to near its three‐year mean. In the real economy, two lead indicators – Electricity generation and LCVs – are pointing to a rebound in Manufacturing. The missing element – lower interest rates – may be back soon, as seen in the recent fall in
bond yields. Shifts in earnings momentum suggest that sectors with strong links to the recovery are more likely to outperform in 2012. We advise cuts in allocations to Two‐wheelers and Consumer, and increases in Commercial vehicles, Passenger vehicles, Cement, Pharmaceuticals, Telecom, Metals and IT Services.

Steep fall in valuation; Nifty within 10%, three months of stable level
After falling from 2.0x to 0.8x in nine months, the Nifty PEG is within 10% of the range where the Nifty stabilized in 2009, before the next rally began. If prices and FY13 earnings forecasts stay at end‐Dec11 levels, the ‘time‐correction’ could push down the PEG to that range within three months. The yield‐gap to the 1‐year government bond too has fallen close to its three‐year mean, partly due to the fall in the Nifty, but more due to the large fall in the bond yield itself.

Latent signs suggest manufacturing recovery may be impending
Previous cycles saw the Electricity segment of the IIP rebound about six months before Manufacturing. A strong rebound in Electricity has now been under way for 14 months. Another similar lead indicator has been growth in sales of LCVs. Despite the leading indicators being flashed, the rebound in Manufacturing has not commenced. We believe the missing element in this cycle, that was active in the previous economic cycle, is a low interest rate regime. The fall in food inflation in Dec11 is significant as the food segment contributed over half the rise in wholesale inflation during 2011. The fall in the one‐year government bond yield has been a strong indicator of the fall in the Repo.

Tilt away from defensives may have begun
Late 2011 saw sectoral performances begin to shift from previous trends. There is a tilt away from ‘defensive’ sectors and towards stocks with stronger linkages to the next rebound. These changes are linked to the shifts in earnings momentum and have signaled the revival of ‘normal’ sectors such as Cement and Commercial vehicles. For 2012, we advise cuts in allocations to Twowheelers and Consumer and increases in Commercial vehicles, Passenger vehicles, Cement, Pharmaceuticals, Telecom, Metals and IT Services. Our top 10 stocks for 2012 are Bharti Airtel (BHARTI IN, Buy), Hindalco Industries (HNDL IN, Buy), HCL Technologies (HCLT IN, Buy), ICICI Bank (ICICIBC IN, Buy), Larsen and Toubro (LT IN, Hold), LIC Housing Finance (LICHF IN, NR), Maruti Suzuki (MSIL IN, NR), State Bank of India (SBIN IN, Buy), Sun Pharmaceuticals (SUNP IN, Add) and UltraTech Cement (UTCEM IN, Add).

To read the full report: STRATEGY
RISH TRADER

>ITC: Gold Flake Kings sets the direction of potential price increases in the near term

2012-01-16T22:57:00.001+05:30

What’s new: ITC ended last year with a 70 paisa per stick price hike on Gold Flake (GF)
Kings cigarettes (c10% of overall volume). This move will add c1.5% additional EPS for fullyear FY12, with overall volume remaining unchanged. The hike was not surprising as ITC
continues to shape the price of its overall cigarette portfolio to manage the positioning and
price points of its various brands and prepare for punitive taxation the sector is subjected to.
What should we read from this price hike?

What to expect: This price hike in our view creates the cushion and sets the direction of price
increases in the near term. With this change, ITC Classic (INR5.50 per stick), which has a
relatively premium positioning, is the same price as GF Kings. In our view, Classic’s price can
be tweaked upward, should the situation require ITC to do so. Classic and GF Kings are part of the volume mix (c20% of total volume) that is relatively price inelastic and we observe that
consumers of these cigarettes have ‘sticky’ preferences; hence we see limited volume risk.
Nearly three-quarters of ITC’s cigarette volume comes from the lower priced regular segment
(e.g., GF Regular, Navy Cut) and the direction of price increases in this segment will be
relatively more cautious.

Earnings and taxation: Future tax increases on the cigarette business are a common concern. We model c12% excise hike affecting FY13, and in our assessment this single price hike in GF Kings and an additional increase of 50 paisa per stick of ITC Classic can nearly offset the impact of this excise duty hike assumption. We estimate there will still be room for 5-7% hikes across 75% of cigarette volume. We increase our earnings estimate by 1.5% for FY12 to reflect this price hike, but keep FY13-14 earnings almost unchanged as ITC on balance should increase prices selectively and just enough to negate the impact of additional taxation.

Valuation and risks: With risk aversion on the rise, we see ITC at 22x FY13x PE as
attractively valued. Its defensive business and FY11-15e earnings CAGR of 16% will likely
help it outperform the peer group on the next one-year perspective. We maintain our SOTPbased target price of INR242 and reiterate our Overweight rating. Key downside risks are slower than anticipated progress or loss of market share in growing categories in other FMCG and ITC’s stock price’s sensitivity to excessive taxation shocks.

To read the full report: ITC
RISH TRADER

>SLOWDOWN IN CHINA: Major driving forces of the Chinese economy are investment, consumption, imports and exports

2012-01-16T22:52:00.003+05:30

China, the manufacturing giant of Asia is expected to witness a slowdown in its growth trajectory. Its growth may lose momentum due to the lack of demand from the developed nations. It can partly be blamed on Euro zone’s deteriorating fundamentals. China, the fastest growing economy moderated to its lowest pace in more than two years. China has always been the main source of optimism in the global economy and signs of a slowdown in China, coupled with trouble in Europe, show that industrial commodities are in for a bumpy
ride.

The demand for Chinese goods is continuously worsening due to the economic woes in Europe. Exports rose at the slowest pace in almost two years in October as worsening situation in Europe crumbled demand. The weakness in export demand is expected to continue in the near future due to the economic slowdown across the globe.

The Chinese economy is expected to register a second year of below-trend growth because of the headwinds from the global slowdown, domestic housing market weakness and limited room for policy stimulus.

A pause in the growth of China:
The Gross Domestic Product (GDP) of China started decelerating in early 2010 from 11.9% to 9.1% for the latest quarter. The GDP growth rate of the third quarter of 2011 decreased to 9.1% compared to 9.7% and 9.5% growth rates recorded in the first and second quarters, respectively. China's economic growth rate has declined for three successive quarters and further it is expected to be around 8.7% for the final quarter.

The four major driving forces of the Chinese economy are investment, consumption, imports and exports. Let us look at the constituents of the GDP:-

Industry sector contributes 47% to the total GDP (inclusive of Investment, Real Estate, Manufacturing, Mining etc)
Services sector contributes to 43% of the total GDP, and
Agriculture’s contribution to the GDP is 10%

This indicates that China’s economy is heavily relying on the industrial activity and any slowdown in industrial activity will be a pain for the entire economy. China, as an export-oriented economy is dependent on the developed nations (EU, US, UK and Japan). So, if these economies are witnessing a slower growth, then the dependent economies are more likely to face a ripple effect. The global GDP growth has been revised lower to 1-1.5% from 2.5%, this gives a clear indication that all the major contributors to world GDP will face a slowdown. In 2007, the last year before the international financial crisis, China accounted for
only 6.3% of the world GDP. In the following three years the world economy expanded by $7.2 trillion, while China’s economy grew by $2.4 trillion, which means China accounted for 33% of world growth.

To read the full report: SLOWDOWN IN CHINA
RISH TRADER

>RURAL BUSINESSES: Growth Drivers & Key Challenges

2012-01-16T22:44:00.002+05:30

Rural India accounts for nearly 70% (approximately 720 mn) of the total population and plays a critical role in the country's economic development. Apart from being a large consumer market, the availability of cheap labour and low-cost land are key drivers for businesses to penetrate rural areas. In addition, the government's focus on inclusive growth (National Common Minimum Programme), and massive infrastructure development programmes is expected to bridge the rural-urban divide. What was once a fully agrarian market is now evolving into a major consumption market—the Monthly Per Capita Expenditure (MPCE) in rural areas is 1 estimated at INR695, nearly half of urban India's MPCE .

Growth Drivers

• Rising per capita income in rural India:
Almost of half of the rural GDP comprises agriculture relative to less than 20% of national output for overall India. Factors such as higher food prices, increase in agriculture income and a shift from farm to non-farm based employment are expanding the average income levels for rural India (growing at 12% per 2 annum) . Thus, companies, across sectors such as financial services, FMCG, telecom and others, aim to tap the rural market in India.

• Empowerment of rural India through various employment generation schemes:
The NREG Act 2005, which guarantees every rural household up to 100 days of wage employment in a year, has been highly successful in ensuring improved quality of life and enhanced income for rural households. As per estimates, on an average, daily wages have increased INR20–30 per person due to this scheme. This translates into INR 342bn (approximately USD 7.5bn) per annum of additional wages. Other schemes for employment include Sampoorna Grameen Rozgar Yojna, National Food for Work Programme and Swarna Jayanti Gram Swarozgar Yojna.

• Infrastructure development programmes:
The government has initiated a series of rural infrastructure development programmes under the Bharat Nirman project. Under this project, the government would undertake infrastructure building in the areas of irrigation, rural housing, rural water supply, rural electrification and rural telecommunication connectivity. Other prgrammes such as the Rajiv Gandhi Grameen Vidhyutikaran Yojana (RGGVY) and Pradan Mantri Gram Sadak Yogana (PMGSY) have provided a significant boost to rural India.

• Increasing farm credit a boost to rural India:
Through the government's focussed initiative of improving farm credit, rural India is benefiting from access to finance for various agriculture needs. The credit off take from the farm sector increased to USD 59bn in 2008–09 from USD 56bn the previous year. On an average, about 48.6% of total households in India have access to finance through a mix of informal and institutional arrangements. Although households with large land availability tend to receive institutional sources of funds, those with small land (less than one hectare) are mostly dependent on informal sources of funds.

Key challenges

• Weak socio-economic status:
Though India has been successful in reducing poverty levels; the country's population below the poverty line is more than 300 mn (or around 25% of the total population). Rural India accounts for 73% of the poor population in the country. Furthermore, rural areas lack proper healthcare facilities and socioeconomic parameters are weak with relatively high infant mortality rate, poor nutrition levels and low literacy rates.

• Rural development is mostly undertaken through government funds; as a result the execution of several projects under development is delayed. Consequently, significant resources allocated for rural development are under utilised and also lead to cost overruns.

To read the full report: RURAL BUSINESSES
RISH TRADER