>Styrolution ABS (India)

For 2QCY2012, Styrolution ABS (India) Ltd. (formerly known as INEOS ABS India Ltd.) reported sequentially flat top line at `236cr, 8.2% higher than our estimate of `218cr. EBITDA came in at `14cr, far lower than our estimate of `18cr. Operating margins fell by 357bp sequentially to 6.1% owing to 385bp higher raw material cost. The company reported net profit of `10cr, 40% lower sequentially on the back of poor operating performance.


Persisting short supply coupled with capacity expansion to boost growth
Styrolution has recently expanded its capacity of ABS and SAN. This provides company an opportunity to reap benefits owing to domestic ABS demand supply gap (met by imports) which has persisted for long and continues to exist. In addition to capacity expansion company has come up with many tailor made products taking advantage of ABS’ flexibility of composition and structure, which allows its use in diverse applications.


Outlook and valuation
We expect Styrolution’s revenue to post a CAGR of 14.5% to `1,081cr over CY2011-13E on the back of consistent developments by the company. EBITDA is expected to grow at 18.7% CAGR to `115cr leading to margin expansion of 74bp to 10.6% in CY2013E. Net profit is expected to post CAGR of 23.1% to `82cr in CY2013E. At CMP of `670, stock is trading at PE of 14.4x and EV/Sales of 1.1x for CY2013E. We remain positive on the stock and recommend Accumulate with a target price of `744, based on target PE of 16x and implied EV/Sales of 1.2x for CY2013E earnings.

To read report in detail: STYROLUTION ABS


RISH TRADER

>STRATEGY: Global worries remain, domestic environment to improve going ahead

4QFY2012 and FY2012 earnings snapshot: Sensex companies reported adjusted earnings growth of 19.2% yoy for 4QFY2012, against our expectation of 13.8%, aided by unexpected earnings surprise by ONGC. Excluding the ONGC’s suprise, earnings grew by 13.7% yoy, compared to our expectation of 15.1%, as lower-than-expected earnings of metal and telecom companies (sectoral earnings declined for both) largely offset better-than-expected performance of auto companies (primarily Tata Motors), Sun Pharma, SBI and ICICI Bank. Overall for FY2012, the earnings performance story was directionally similar to that witnessed in 4QFY2012, with lower-than-expected sectoral earnings of cyclical and structurally stressed sectors largely offseting better-than-expected yearly performance of few sectors like Private banks, auto, pharma, FMCG and IT. In fact, excluding Tata Motors (which was aided more by its foreign subsidiary) and SBI (which had a low base of earnings in FY2011), overall earnings growth for Sensex companies came in at just 9.6%.


Global worries remain, but domestic environment to improve going ahead:
Concerns about a crisis in Eurozone, which had earlier abated somewhat, have risen again on the back of recent developments in Europe (particularly regarding elections in Greece and the intensifying banking crisis in Spain), which coupled with series of lower-than-estimated economic data have led Indian markets to fall in April-May 2012. However, going ahead we expect the domestic macro environment to improve on the back of easing commodity prices, moderating inflation, further monetary easing in the form of repo rate cuts and narrowing current account deficit. Weak demand outlook have led to a significant decline in commodity prices including crude oil. The decline in global commodity prices, which generally gets reflected in inflation levels domestically with a lag, is expected to lead to a further decline in manufacturing inflation, while current forecasts suggest good monsoon levels which is expected to keep food inflation under control.


CAD to narrow going ahead: Indian exporters are expected to benefit significantly from INR depreciation, as it has improved their competitive edge vis-a-vis global competitors such as China. Also, imports are expected to decline on 1) lower domestic demand on account of slowing capex activities; 2) moderating global commodity prices including crude oil prices; and 3) reduction in gold imports (~10% of total imports) as gold is unlikely to generate similar supernormal returns as it did in last few years. Hence, we expect the trade deficit (in USD terms) also to narrow from here on, leading to a reduction of 50-100bp in current account deficit.


Outlook and valuation: Overall, for FY2013, we expect corporate earnings to be aided at the revenue level by better growth prospects than in FY2012, at the earnings level due to directionally better inflation scenario and lower interest costs. We expect Sensex companies to deliver EPS growth of 11.4% in FY2013E (12.2% CAGR over FY2012-14E). We continue to prefer rate sensitives like financials, infra and auto sectors, which are likely to benefit the most from the expected correction in interest rates and also select export-oriented IT and Pharma companies. We arrive at our 12-18 months Sensex target of 19,800, maintaining our conservative multiple of 14x FY2014E earnings. Our target implies an upside of ~19% from current levels.



Sensex earnings performance aided by ONGC surprise; Ex. ONGC performance remain mixed
For 4QFY2012, on a yoy basis, Sensex companies' adjusted earnings grew by 19.2% yoy as against our expectation of 13.8%, aided by the unexpected earnings surprise by ONGC. Excluding the positive surprise from ONGC, earnings grew by 13.7% yoy, compared to our expectation of 15.1%, as lower-than-expected earnings of metal and telecom companies (sectoral earnings declined for both) nearly offset better-than-expected performance of auto companies (primarily Tata Motors), Sun Pharma, SBI and ICICI Bank. Sector wise, on a yoy basis, Sensex earnings growth was primarily contributed by BFSI stocks, followed by auto, oil and gas and IT stocks. Excluding SBI (which had a low base in 4QFY2011 due to exceptional pension-related expenses) and ONGC (on unexpected earnings surprise), overall earnings growth for Sensex companies came in at just 4.1% yoy, as against our anticipation of 6.7% yoy.


To read report in detail: INDIA STRATEGY

RISH TRADER

>BOSCH

Bosch (BOS) reported better-than-expected operating performance for 1QCY2012 aided by EBITDA margin expansion on account of cost rationalization and localization benefits. We revise upwards our earnings estimates for CY2012E/13E, primarily on account of upward revision in our EBITDA margin estimates. We maintain our Accumulate rating on the stock.


Strong performance boosted by operating margin expansion: BOS registered healthy top-line growth of 10% yoy (12.5% qoq) to `2,295cr, in-line with our expectation, primarily driven by ~15% and ~16% yoy growth in the after-market and power tools segments, respectively. While the diesel systems segment reported ~8% yoy growth, the gasoline systems segment registered flat growth on account of slowdown in the passenger car industry (petrol variants). Exports also grew at a sluggish pace of ~3% and stood at `250cr mainly on account of slowdown in Europe. The company posted better-than-expected EBITDA margin of 20.8%, registering an increase of 192bp yoy (331bp qoq), mainly on account of a decline in raw-material expenses. Raw-material expenses as a percentage of sales declined by 170bp yoy (54.6% of sales), led by cost savings due to localization benefits, strategic buying decisions carried out by the company and cost-cutting measures. As a result, net profit registered strong 22.4% yoy (19.5% qoq) growth to `336cr.


Outlook and valuation: We expect BOS to register a ~15% CAGR each in its net sales and earnings over CY2011-13E, leading to EPS of `420.2 and `471.4 for CY2012E and CY2013E, respectively. At `8,781, the stock is trading at 20.9x CY2012E and 18.6x CY2013E earnings, respectively. We retain our Accumulate rating on the stock with a target price of `9,429, valuing the stock at 20x its CY2013E earnings.


RISH TRADER

>SINTEX INDUSTRIES

For 4QFY2012, Sintex reported a 30.1% yoy decline in its net sales to `1,024cr. The company’s EBITDA declined by 45% yoy to `160cr and its EBITDA margin contracted by 415bp yoy to 15.6%. PAT came in at `91cr, down 46% yoy. We maintain our Buy recommendation on the stock.


Lower monolithic segment’s revenue impacts earnings: Sintex’s consolidated net sales declined by 30.1% yoy to `1,024cr during 4QFY2012, lower than our expectation. The decline in revenue was mainly led by the monolithic segment, which reported a dip of 54% yoy to `264cr; and flat performance by the storage tanks segment at `59cr. The domestic custom moulding segment reported 22% yoy growth to `266cr, while the overseas custom moulding reported a 71% yoy decline in revenue to `91cr. Sintex’s 4QFY2012 consolidated EBITDA stood at `160cr, down 45% yoy. OPM for the quarter stood at 15.6%, down 415bp yoy (up 158bp qoq) on the back of margin expansion in all segments. During the quarter, Sintex booked other income of `12cr (up 35% yoy). Consequently, PAT came in at `91cr, down 46% yoy, significantly below expectation.


Outlook and valuation: We have downgraded our earnings estimates for FY2013E and FY2014E on account of slowdown in the monolithic segment. Sintex will have low net debt/equity of 0.7x, by FY2014E. The stock is currently trading at 3.3x FY2014E EPS and 0.4x FY2014E P/BV only, which we feel is very attractive. Over the last five years, Sintex has traded at an average one-year P/E of 11.4x, which makes current valuations attractive. Moreover, further integration of foreign subsidiaries and acquisition in the monolithic segment will act as key catalysts for the stock. We maintain our Buy recommendation on the stock with a target price of `79.



Plastic segment pull downs EBITDA margin on a yoy basis
During the quarter, the plastic segment’s EBIT margin declined by 434bp yoy but\ improved by 102bp qoq on account of a better product mix. EBIT margin in the textile segment contracted by 525bp yoy but expanded by 203bp qoq owing to pick-up in demand for high-end fabrics and better pricing. In our view, quarterly margins are not a fair indicator of the company’s performance due to lumpiness of its business.


To read report in detail: SINTEX INDUSTRIES

>CAIRN INDIA LIMITED: 4QFY2012 results

■ CIL reports modest 4QFY2012 results: CIL’s top line declined marginally by 0.1% yoy to `3,651cr (above our expectation of `3,437cr). Gross crude oil realization increased by 16.0% yoy to US$109.3/bbl. Operating margin contracted by 207bp yoy to 81.6%, resulting in a 2.6% yoy decline in operating profit to `2,981cr for the quarter. CIL recorded an exceptional loss of `217cr due to forex fluctuation during 4QFY2012. Excluding this exceptional gain, adjusted net profit declined by 4.4% yoy to `2,403cr (above our estimate of `2,263cr).


■ CIL reports rise in potential resources: During 4QFY2012, CIL reported that its estimated potential resources increased to 7.3bboe compared to earlier estimate of 6.5bboe. The recoverable reserves estimate also increased from 1.4bboe to 1.7bboe during the quarter.


■ Outlook and valuation: CIL has the infrastructure in place to ramp up production to meet its targets. Hence, we expect production to gradually increase in the coming quarters to reach a capacity of 175kbopd by FY2013 and 205kbopd by FY2014. Further, there are various untapped exploratory upsides in Barmer Hills and other fields waiting to be developed. Hence, we recommend Accumulate on the stock with a target price of `372.


To read report in detail: CAIRN INDIA
RISH TRADER

>RELIANCE INDUSTRIES LIMITED: RIL to set up a petcoke gasification plant (4QFY2012 Results)

For 4QFY2012, Reliance Industries (RIL) reported 17.2% yoy growth in its top line. However, EBITDA and PAT declined by 33.3% yoy and 21.2% yoy, respectively, due to a decline in KG-D6 gas production and lower gross refining margins (GRMs).


Lower gas production leads to a decline in bottom line: RIL’s net sales increased by 17.2% yoy to `85,182cr, in-line with our estimate of `84,669cr. However, EBITDA decreased by 33.3% yoy to `6,563cr on account of lower profits from all its three main segments. GRM stood at US$7.6/bbl in 4QFY2012 compared to US$9.2/bbl in 4QFY2011 and US$6.8/bbl in 3QFY2012. Production from KG-D6 stood at 35mmscmd in 4QFY2012 compared to 41mmscmd in 3QFY2012 and 51mmscmd in 4QFY2011. Other income increased by 150.3%
yoy to `2,295cr and depreciation expenses decreased by 21.5% yoy to `2,659cr. Hence, despite the 33.3% decline in EBITDA, PAT decreased by only 21.2% yoy to `4,236cr (slightly above our estimate of `4,177cr).


RIL to set up a petcoke gasification plant: During 4QFY2012, RIL finalized its plan to set up a petcoke gasification plant for a capex of US$4bn. The company also downgraded its KG-D6 reserves by 12-15% due to reservoir complexity.


Outlook and valuation: RIL’s refining and petrochemical segments’ profits declined during 4QFY2012. Going forward, although there are some concerns on the KG basin gas output, we believe RIL along with BP will optimize its producing blocks in KG-D6. Moreover, the stock is currently trading at a PE of 11.1x FY2013E and 10.4x FY2014E, compared to its past five-year trading average of 17.0x forward PE. Thus, we maintain our Buy recommendation on RIL with an SOTP target price of `872.


To read report in detail: RIL
RISH TRADER

>JYOTHY LABORATORIES LIMITED: Exploring new opportunities with Henkel’s acquisition

Jyothy Laboratories Ltd. (JLL), a company having three brands, is set to transform into a multi-brand company with the acquisition of an 83.7% stake in Henkel India (Henkel), which owns seven brands. As a result of this synergy, we expect JLL’s consolidated revenue to post a CAGR of 35% to `1,627cr and profit to post a CAGR of 36% to `166cr over FY2011-14E. We initiate coverage on JLL with a Buy recommendation and a target price of `248, based on SOTP valuation.


Investment rationale


Turnaround of Henkel – A bright future for JLL
JLL acquired an 83.7% stake in Henkel in August 2011. Management is now planning various turnaround strategies for Henkel, such as a new management, revamping of all its brands and shifting its manufacturing to JLL’s units. We expect Henkel’s turnaround to result in profit of `19cr in FY2014E.


Jyothy Fabricare Services Ltd. (JFSL) – A long-term growth driver
We expect JFSL, JLL’s subsidiary engaged in the laundry business, to post a 102.4% CAGR in its revenue to `193cr over FY2012E-14E with an operating margin of 26.1% in FY2014E. Further, JFSL is expected to reach its breakeven and start yielding profit from FY2013E, registering a profit of `30cr in FY2014E.


Outlook and valuation
We expect JLL’s consolidated revenue to post a CAGR of 35% to `1,627cr and profit to post a CAGR of 36% to `166cr over FY2011-14E. We initiate coverage on JLL with a Buy rating view and an SOTP target price of `248.


To read full report: JLL
RISH TRADER

>ASHOKA BUILDICON

For 3QFY2012, on a consolidated basis, Ashoka Buildcon (ABL) reported a healthy set of numbers on all fronts, in-line with our estimates. Order book as of 3QFY2012 stood at `4,312cr (4.2x FY2011 E&C revenue) with the company bagging a BOT project (`1,100cr) and power T&D order (`400cr) during the quarter. We maintain our Buy rating on the stock.


Robust performance as expected: ABL’s top line witnessed robust growth of 49.3% to `352.9cr, in-line with our estimate of `360.6cr. The E&C segment witnessed strong yoy growth of 52.8% to `300.4cr, higher than our expectation of `268.4cr, while the BOT segment reported 30.1% yoy growth to `66.3cr, lower than our estimate of `92.2cr. On the EBITDAM front, ABL’s margins came at 19.6%, lower than our estimate of 21.3%, owing to lower margins in the BOT segment, led by major and regular maintenance work in two projects. Interest cost came in at `27.3cr, a jump of 70.6% yoy/10.9% qoq. Despite lower EBITDAM, ABL posted decent performance at the earnings level, owing to robust top-line growth and reported PAT growth of 17.3% to `19.5cr, in-line with our estimate of `21.0cr.


Outlook and valuation: NHAI has done a commendable job by handing out ~4,500km so far in the current fiscal and is looking on track to achieve 80% of its target of awarding, ~7,300km in FY2012. Further, in the long run, the road segment continues to offer a number of opportunities for road-focused players such as ABL. We have valued ABL on an SOTP basis – by assigning 5.0x EV/EBITDA to its standalone business (`104/share) and valued its BOT projects on NPV basis (`141/share) to arrive at a target price of `245, which implies an upside of 26.4% from current levels.



Robust top-line performance, in-line with estimate
ABL’s top line witnessed robust growth of 49.3% to `352.9cr (`236.4cr), in-line with our estimate of `360.6cr. The E&C segment witnessed strong yoy growth of 52.8% to `300.4cr, higher than our expectation of `268.4cr, while the BOT segment reported 30.1% yoy growth to `66.3cr, lower than our estimate of `92.2cr.


During the quarter, the company almost completed two projects (Durg and Jaora Nayagaon). While toll collection on Durg project is likely to start from 4QFY2012 end, Jaora Nayagaon project has two sections already operational and tolling on the third section is expected to commence from 4QFY2012-end. Therefore, ABL is expecting the remaining under-construction projects (Sambalpur Baragarh, PNG, Belgaum Dharwad projects) to drive its E&C revenue growth going ahead.



BOT toll revenue
On the toll collection front, for 3QFY2012, ABL witnessed 70.5% yoy/4.2% qoq growth. This growth was on the back of addition of Belgaum Dharwad project and pickup in toll collections of Jaora Nayagaon project, which started toll collections on the second section from May 2011.


Under-construction BOT projects – Update 

Decent growth at the earnings level despite lower EBITDAM
During the quarter, ABL’s margins came at 19.6%, lower than our estimate of 21.3%, owing to lower margins in the BOT segment, led by major and regular maintenance work in two projects. Going ahead, we are factoring EBITDAM of 21.7% and 23.1% for FY2012E and FY2013E, respectively, as maintenance charges booked in this quarter pertained to ~9 months. Interest cost came in at `27.3cr, a jump of 70.6% yoy/10.9% qoq. Despite lower EBITDAM, ABL posted decent performance at the earnings level, owing to robust top-line growth and reported PAT growth of 17.3% to `19.5cr, in-line with our estimate of `21.0cr.



Outlook
History has shown that a world-class road network is a basic requirement for any economy hopeful to maintain high economic growth rates. However, India’s road network is barely adequate to maintain its current growth trajectory – indicating an urgent attention towards the same and putting it on the priority list. Positively, political will to acknowledge and address these issues in now visible. Records till date are mixed for road development in India – with PMGSY doing reasonably well and NHDP lagging behind on meeting its targets. However, matters have improved gradually on NHDP’s end with positive developments happening and with experience gained on both sides – government agencies and private sector. Some issues have been addressed on the ground and at the policy level. But still the sector faces a number of issues – for instance, land acquisition, environment clearance and dispute on certain aspects on the Model Concession Agreement. Having said that, the pace of awarding has definitely picked up considerably as compared to the past, though lower than targets. Therefore, there are a number of opportunities for the private sector, especially for road-focused players like IRB, ABL and ITNL.


However, we believe ABL is little differently placed than its peers on account of its leverage position. In recent times, ABL has won large orders, which has resulted in huge premium commitments to NHAI (~`220cr) and equity contributions from ABL’s side, which we believe would further stretch its leverage (net D/E is expected to rise from 1.4x in FY2011 to 3.0x by FY2013E). Also, the current cash flow generation from BOT projects and the EPC segment would not fully suffice the equity requirements for under-development projects. Hence, we believe the only options for ABL would be to raise equity, which seems extremely tough in current times, and/or raise debt for equity funding of its subsidiaries, which we have factored in after considering ~50% of requirement been met from internal accruals/refinancing of operational projects. Management is confident of raising US$100mn-150mn through private equity by March 2012. We believe tying up of funds is the biggest catalyst markets would watch out for in case of ABL and any delay in that would negatively impact its stock performance on the bourses.


Valuation
We have valued ABL on an SOTP basis – by assigning 5.0x EV/EBITDA to its standalone business (`104/share) (lower multiple as compared to IRB/ITNL given the scale of operation) and valued its BOT projects on NPV basis (`141/share) (it should be noted we have been conservative than management on revenue estimates (toll receipts) for under-construction projects, keeping an eye on revenue yield given the current competitive environment) – to arrive at a target price of `245, which implies an upside of 26.4% from current levels. We maintain our Buy rating on the on the stock with an SOTP target price of `245.



RISH TRADER

>STRATEGY: Self-correcting mechanisms are already at play, which should make 2012 a better year for Indian equities

Looking back at 2011, Indian equity markets were struck by a multitude of issues, ranging from persistently high inflation, monetary tightening, stalling mining activity to sinking capital formation. The Eurozone crisis made matters worse, causing global financial markets to become all the more risk-averse. But self-correcting mechanisms are already at play, which should make 2012 a better year for Indian equities.

Most importantly, cooling of inflation and consequently interest rates should end the spell of margin compression, which has afflicted corporate earnings in the past several quarters. Also, India's widening current account deficit has been another macro overhang. But, here again, even at 49-50 levels, the 10-12% INR depreciation, in our view, should provide the requisite boost to India's exports to gradually self-correct the deficit.

Expect 19,300 Sensex by December 2012

Sensex FY2012 earnings growth is likely to be modest as high inflation and interest rates have battered margins. But with this scenario on its way to changing in FY2013, we expect the earnings growth rate to improve from 9.5% in FY2012 to 16.2% in FY2013. Also, in our view, risks that the government inertia continues and GDP growth remains at ~7% have already been largely factored in valuations by the market. We believe this offers a favorable risk-return trade-off, considering that several domestic negatives can be reversed by quick, simple and rational policy actions. For instance, quick approval of FDI reforms in aviation and insurance, among others, as well as pick-up in infrastructure ordering activity are low-hanging fruits. Already, ordering activity by NHAI and Power Grid is reasonably robust, and it is a matter of time before others would follow suit. The financial troubles of SEBs is another unnecessary crisis that is finally changing with recent tariff hikes. Amongst more difficult to push-through are measures to end the mining logjam, but in our view the government will soon have to balance environmental concerns and expedite mining and land acquisition to step up GDP growth.

In fact, we do not expect domestic factors alone to have the capacity to trigger new lows for the markets. It is only the Eurozone crisis that may still lead to volatility in the near term, but policymakers there as well are taking steps to avert any crisis event - accordingly, as of now we are basing our market view on a likely orderly outcome in the Eurozone. Considering that valuations are also reasonable, with domestic macro indicators improving and with earnings trajectory likely to follow suit, we have a target of 19,300 for the Sensex by December 2012. 

Select stocks to give better returns

Looking beyond the Sensex, there are a host of good investment opportunities in our view in companies across several sectors, such as banking, IT and pharma. On the other hand, there are sectors such as capital goods and cement where we still remain cautious. In this compendium, we have therefore given an overview of our entire coverage universe of 160+ stocks, having a combined market capitalization of ~`40lakh cr. Currently, we have a Buy recommendation on 82 of these, broadly preferring companies having high-quality cyclical businesses rather than high-quality defensives. Also, we have covered several mid caps, which in our view offer enormous potential - either because they are leading brands within their sectors trading cheaply or belong to high-growth sectors benefitting from rural, export or consumption themes.

To read the full report: STARTEGY

RISH TRADER

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

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

>SESA GOA: Government raises export duty

■ Government raises export duty on iron ore: The government has raised export duty on iron ore to ad valorem 30% on lumps and fines, with effect from December 30, 2011, compared to 20% earlier. Iron ore exports from India have already declined by 25.2% to 35.4mn tonnes from April-October 2011 on account of export ban in Karnataka, stringent measures in issuing export permits in Odisha, a sharp decline in international iron ore price and increased export duty. Post the export duty hike, rise in rail freight and the recent decline in iron ore price are expected to severely affect iron ore exports from India. Before the export duty hike (as per Federation of Indian Mineral Industries), total iron ore exports during FY2012 were estimated to be 60mn tonnes compared to its previous estimate of 75.0mn tonnes. We now expect iron ore exports to be lower than 60mn tonnes during FY2012. While Sesa Goa’s profits are expected to be affected adversely, we do not expect any impact on NMDC’s financials as we do not expect any export of iron ore by NMDC during FY2012 and FY2013.


■ Higher export duty to affect Sesa Goa’s profitability: Sesa Goa generates ~90% of its net sales from iron ore exports. Hence, the export duty hike would increase the company’s export duty expenses without any corresponding increase in iron ore prices. Accordingly, we have raised our export duty expenses for Sesa Goa to `1,681cr (previous estimate – `1,390cr) for FY2012 and to `1,932cr (previous estimate – `1,546cr) for FY2013. Also, we now believe some of the Karnataka iron ore would now be sold domestically, as EBITDA/tonne may not favor exports anymore. Our EBITDA estimates for FY2012 and FY2013 stand pruned by 8.1% and 9.1% to `3,314cr and `3,712cr, respectively.


Outlook and valuation
Despite the recent correction in spot iron ore prices, we expect international iron ore prices to remain firm in the medium term, as we expect additional meaningful supplies to hit the sea-borne market only from CY2014. We believe the current stock price discounts negatives such as acquisition of a minority stake in the unrelated oil business via acquisition of Cairn India’s stake, increased export duty, higher railway freight and lower volumes from Goa mines. We recommend Buy on the stock with an SOTP-based target price of `195 (`213 earlier).


To read the full report: SESA GOA
RISH TRADER

>ASHOKA BUILDCON LIMITED: Traditionally a state player, has transformed into a national player

Ashoka Buildcon (ABL), traditionally a state player, has transformed into a national player by winning four NHAI projects totaling to a TPC of ~`5,156cr. However, this transition has come at a cost, as it entails premium commitments to NHAI (~`220cr per year, albeit covered by toll collections during the construction period) and huge equity contributions from ABL’s side, which we believe would stretch its leverage (consolidated net D/E is expected to rise from 1.4x in FY2011 to 3.0x by FY2013E). We have valued ABL on an SOTP basis – by assigning 5.0x EV/EBITDA to its standalone business (`87/share) and valued its BOT projects on NPV basis (`158/share). We initiate coverage with a Buy rating on the stock and a SOTP target price of `245/share and key catalyst being raising equity from capital markets.


Integrated business model: ABL boasts of an integrated business model in place with strong in-house execution capabilities, which helps it to have control over time and cost – the two key essentials of road development business. In the past, many industry players have witnessed severe strain on the financials and profitability of their projects because of their inability to control these important factors. Even in current times, there are developers who do not have an integrated business model and are dependent on contractors for construction activities, making them vulnerable. Hence, we believe players (read ABL) having an integrated business model are better placed.


Road sector; opportunities galore: NHAI has set itself an aggressive target of awarding ~9,371km of road projects in FY2012 against ~5,000km in FY2011. NHAI has done a commendable job by handing out ~4,000km so far in FY2012. Going ahead, NHAI, state and rural projects are expected to garner investments of `6.1trillion over FY2012-16E, which augurs well for road developers. Prefer IRB over ABL in the Road BOT space: We initiate coverage on ABL with a Buy rating and a SOTP target price of `245. Our analysis indicates that ABL would need to infuse equity up to ~`990cr (FY2012-14E) in various SPVs; this would be substantially funded by the PE route, as per management. However, we have not factored the same in our estimates, given the gloomy market conditions; instead, we have penciled in the increase in debt levels. In recent times, markets have been harsh on companies with loose financial discipline and, hence, we are conservative in assigning trading multiples to ABL. Therefore, we prefer IRB over ABL, considering ABL’s comparatively smaller size, dependency on capital markets for equity and projects at nascent stage.


To read the full report: ABL
RISH TRADER

>TATA GLOBAL BEVERAGES: Poised to perform

Tata Global Beverages Limited (TGBL) is an emerging player in the global beverage market. The company has made a strategic shift from being a local tea company to a global beverage company through various acquisitions and strategic partnerships with global beverage giants like PepsiCo and Starbucks. As a result, the company has made an entry into the top 10 global companies list in the hot drinks category, posing a challenge to global players like Nestlé, Unilever and Kraft Foods. The company’s product portfolio comprises leading global brands like Tetley, Eight O’ Clock and local brands like Tata Tea.


Bottomed-out margins; expect a positive surprise: We model in TGBL’s OPM to improve by ~150bp over FY2011-13E from 8.6% in FY2011 to ~10.1% in FY2013E, driven by a shift in the company’s focus from the plantation business to branded products and rationalization in the operating cost structure. While TGBL’s focus on volume growth remains intact, selective price increases and stable ad spends will further aid in margin improvement. Also, with the Tea Board of India estimating higher tea production in 2011 as compared to 2010 (~5% higher production), we expect auction prices of tea to soften, thereby providing a relief to the company from heightened input cost pressure.


Estimate ~40% plus adjusted EPS CAGR over FY2011-13E: We model a ~40% EPS CAGR over FY2011-13, led by (1) 9% revenue growth and (2) a ~150bp margin improvement. We believe the company is set to outperform the industry’s growth, with the help of selective price increases and strong brands like Tata Tea Premium, Tata Tea Gold, Agni Dust and Kanan Devan.


Key valuation trigger: Despite its leadership position in the Indian packaged tea market, No. 2 position in the global tea market and generating ~90% of its total revenue from branded products, TGBL is trading at 12.2x FY2013E EPS (which is at a discount to its FMCG peers, trading at 20x–35x FY2013E EPS). Also, on EV/Sales basis, the stock is trading at 0.6x FY2013E EV/Sales (historical average of 1x EV/ Sales). Hence, we initiate coverage on the stock with a Buy recommendation and a target price of `97, based on 14x FY2013E EPS of
`6.9(0.8x FY2013 EV/Sales).


To read the full report: TGBL
RISH TRADER

>ORIENT GREEN POWER: IPO NOTE; Unexciting ‘Orient’ation

Orient Green Power (OGPL) is India’s leading renewable energy-based power generation company focused on developing, owning and operating a diversified portfolio of renewable energy power plants. OGPL, which currently has an installed capacity of 213.0MW, has another 836.5MW of prospective capacity expected to get operational by FY2013.

Huge potential for the development of renewable power: India’s renewable energy-based power capacities have increased their share of total power capacity from 2.0% in FY2003 to around 10.0% in 2010. Despite this, the renewable power sector still has huge potential, which remains untapped. The country’s wind power capacity stands at 10,890MW although the potential has been estimated at approximately 48,500MW. The government has announced a number of fiscal incentives and measures such as renewable power obligation and the renewable energy certificate mechanisms, which are expected to spur growth of this sector.

Leading player in the renewable energy segment and poised for rapid growth: OGPL plans to increase capacity by more than four-folds to 1,049MW by FY2013 and is well poised to capitalise on the untapped potential in the renewable energy space. OGPL currently has 405MW of wind power committed projects, and the infrastructure is in place for majority of the projects. Financial closure has also been achieved for most of the projects. It may be noted here that the execution risks and project commissioning time are lower for renewable energy projects due to the lower land requirement and lesser regulatory hassles. Hence, we believe that OGPL has good revenue visibility going ahead.

Lower PLFs to suppress IRRs: OGPL’s wind energy plants currently have a PLF of 20-21% (varies according to wind density), which is lower than the normative PLF of 25% set by the CERC. This would result in the company reporting lower IRRs than the achievable IRRs if CERC’s prescribed norms are achieved. Moreover, the company also does not have fuel supply contracts in place along with lower availability of fuel for the biomass plants, which would result in lower PLF than the normative standard set by CERC.

Outlook and Valuation
The renewable energy sector is set for healthy growth due to its vast unexplored potential and supportive government policies. Leader OGPL has also charted out aggressive expansion plans to capitalise on the emerging opportunities in this nascent but growing industry.

At the lower and upper price bands OGPL is available at implied P/BV of 1.7x – 1.9x on FY2012E financials, which we believe is fair considering higher RoE’s of its business and the risks associated with lower PLFs. The IPO is available at a premium to its private sector peer Indowind Energy (1.3x FY2012E P/BV), which has lesser operational assets at 44MW. For OGPL, the EV/MW works out to Rs6.3cr and Rs6cr on FY2012E capacity at both ends of the price band, which is at 10% and 7% premium to its replacement cost, which limits further upside
considering the return ratios. Hence, we recommend a Neutral view on the IPO.

To read the full report: ORIENT GREEN POWER

>Mid-Quarter Monetary Policy Review: Inflation continues to be RBI’s priority

RBI hikes repo (25bp) and reverse repo rates (50bp)
■ Hikes repo rate by 25bp to 6.0%
■ Hikes reverse repo rate by 50bp to 5.0%
■ Keeps cash reserve ratio unchanged at 6.0%

Inflation RBI’s priority in FY2011
The Reserve Bank of India in its maiden mid quarter monetary policy review
raised interest rates for the fifth time since mid March 2010 with an objective to
control inflationary expectations. It raised the repo rate (the rate at which it lends
to banks) and reverse repo (the rate at which it accepts surplus liquidity from
banks) by 25bp and 50bp to 6.0% and 5.0%, respectively. Effectively, this reduced
the Liquidity Adjustment Facility (LAF) corridor to 100bp after a reduction of 25bp
in July 2010 policy as well. The Central Bank has maintained status quo on Cash
Reserve Ratio (CRR) at 6.0%.

Monetary Policy - Key takeaways
■ Inflation remains the dominant concern for hiking the rates.

■ Expectation of rate hike not disrupting growth.

■ GDP and IIP growth rates indicate that the recovery is consolidating and the economy is rapidly converging to its trend rate of growth.

■ Monetary tightening that has been carried out since October 2009 has taken the monetary situation close to normal.

■ Central fiscal deficit to be contained at targeted 5.5% on account of higher than expected realizations from 3G and BWA auctions coupled with buoyant tax revenues.

The growth momentum in the Indian economy continued to be strong and was largely broad based, with IIP registering robust growth of 13.8% yoy in July 2010 coupled with healthy credit growth of 19.4% yoy in August 2010. On the other hand, continuing food inflation (14.6% yoy) has kept the overall WPI (8.5% yoy as per 2004-05 series) above RBI’s tolerable levels. Thus, with the headline inflation clearly above the RBI’s target of 6.5% as well as sustained healthy uptick in credit growth in the last few months, we expect gradual monetary tightening to continue.

To read the full report: MONETARY POLICY

>PVR

Screen additions/movie pipeline to drive exhibition business: Management has
guided for a robust 2Q/3QFY2011 for the exhibition business, aided by strong
movie pipeline (both domestic and Hollywood), and substantial screen additions
(PVR has added 28 screens and ~7,500 seats over the last six months).
Management expects a pipeline of almost 14-15 3D English movies (most of
them being sequels) to be released over the next 18-24 months, and contributing
~27-28% to top-line.

Phoenix Mill offers considerable value unlocking, not factored in our numbers:
PVR is looking at sale and lease back of its property at Phoenix Mills. It is positive
of closing the deal by end of FY2011. The company expects the deal to rake in
~Rs80-100cr cash, which will help fund its future capex needs. It will also boost
the company’s RoCE though we have not factored in the same.

Multi-fold growth for PVR Pictures in FY2011E: PVR Pictures released Aisha, which
is estimated to have contributed net revenue of ~Rs20cr. Two more productions
are lined up in FY2011. The company has also bagged the pan-India distribution
rights for Action Replayy, which will be a Diwali release.

Blu-O a profit making venture from first year: Blu-O is expected to add a 26-lane
bowling alley by 4QFY2011, in Vasant Kunj, Delhi. The company is targeting a
total of 150 lanes by FY2012 and expects it to be ~Rs80-90cr business.

Outlook and Valuation: For FY2010-12E, we expect PVR to register 44% CAGR in
consolidated top-line, aided by 34% CAGR in exhibition revenues, 120% CAGR in
PVR Pictures and 80% CAGR in Blu-O. We estimate earnings to register strong
CAGR of 436% over the period on a low base and margin expansion (on a low
base, we expect OPM of 16-17% in FY2011-12E). At the CMP of Rs174, the stock
is trading at attractive valuations of 11.5x FY2012E EPS. We maintain a Buy on
the stock with a revised Target Price of Rs226 (Rs199) based on 15x FY2012E EPS
of Rs15.1. Upside risk to our estimates include significant value unlocking in case
the sale and lease agreement for the Phoenix Mill property goes through.


To read the full report: PVR

>ISPAT INDUSTRIES: Ispat’s share being 76mn tonnes.

We met management of Ispat Industries. Key takeaways of our meeting are as
follows:

Joint venture with Stemcor to set up a coke oven plant: Ispat has entered into a JV (Amba River Coke) with Stemcor for setting up a 1mn tonne coke oven plant at a cost of Rs1,124cr. Ispat holds 26% equity stake & the balance is held by Stemcor.

The project will be funded through debt-equity ratio of 2:1 and is yet to achieve the financial closure. Ispat’s equity contribution will be Rs100cr (Rs50cr will be through land and infrastructure support and balance Rs50cr through cash infusion). Once commissioned, the plant will cater to 100% coke requirement of the company.

110MW power plant to lead to cost savings: Ispat under its subsidiary, Ispat Energy, is setting up 110MW captive power plant (CPP) comprising of two units of 55MW each. The plant will primarily use gases from coke oven and blast furnace. Land for the project has been acquired and the civil work has also started. Total cost of the project is expected to be Rs491cr and the company expects savings of Rs1,300cr post commissioning of the power plant.

Captive raw material holds the key for future performance: Ispat has already
secured the prospecting license for developing iron ore mines in Maharashtra.
The management expects to start mining in FY2012 and targets iron ore
production of 2mn tonnes. The company in a JV with Essar Steel, Mukand,
Kalyani Steel and Ind Synergy has also been allotted Behrabad (North) coking
coal block in Madhya Pradesh. The mine has reserves of 170mn tonnes, with


Outlook and Valuation: At the CMP, the stock is trading at P/BV of 1.4x and
EV/EBITDA of 7.8x FY2010. We believe that future stock performance would be
dependent upon improvement in raw material integration and successful
commissioning of the power and coke oven plants.

To read the full report: ISPAT INDUSTRIES

>PRINT MEDIA SECTOR: IRS 2Q2010 Analysis

■ Four of the top 10 dailies witness declines: According to the IRS 2Q2010 survey, the top 10 order in print media remains largely unchanged. However, Dainik Jagran, Dainik Bhaskar, Amar Ujala and Mathrubhumi have registered a 0–2% ror decline in their readership. Dainik Jagran
and Dainik Bhaskar, although securing the top positions amongst Hindi dailies, witnessed ror declines of 2.4% and 0.2%, respectively.

■ TOI remains the undisputed leader, DNA is the surprise package: Out of the 20 English dailies, 14 dailies showed growth in AIR figures, with Times of India (TOI) retaining its leadership position reporting an AIR of 7.1mn in 2Q2010. Hindustan Times (HT) reported an AIR of 3.5mn, posting a marginal dip from the 1Q2010 survey, but retained its second position, followed by The Hindu with an AIR of 2.2mn. DNA put up an impressive show, registering 16.6% growth in its AIR.

■ Hindi dailies show mixed trend, Dainik Jagran remains the leader: Among Hindi publications, Dainik Jagran retained its No. 1 position with AIR of 15.9mn, while competitors Dainik Bhaskar and Hindustan reported AIR of 13.3mn and 10.1mn, respectively. Incidentally, Hindustan is the only newspaper to have witnessed growth amongst the top three Hindi dailies, with readership growth of 2.3% ror.

To read the full report: PRINT MEDIA

>LAKSHMI MACHINE WORKS: Machining growth

Lakshmi Machine Works (LMW) has dominated the Indian textile machinery sector for decades, providing its clients with world class products at the lowest prices available. The company has a healthy order book of Rs3,300cr (2.9x FY2010 sales), providing good revenue visibility. During FY2010-12E, we expect the company to register top-line CAGR of 48.3% and bottom-line CAGR of 51.8%. At the current price of Rs2,476, the stock is quoting at 19.4x and 13.3x FY2011E and FY2012E EPS respectively, which we believe is attractive. The company has announced plans to buy-back its shares at a maximum price of Rs2,045/share.

We recommend an Accumulate on the stock, with a Target Price of Rs2,819. Ability to defend market share: LMW is one of the largest players in the world and one of only three players globally that manufacture the entire range of spinning machinery. In India, it has high market share of around 70% in yarn spinning and preparatory machines. It has been able to sustain this market share on the back of strong after-sales service coupled with providing world’s best technology to customers at the cheapest rates. LMW has service centres at all the textile hubs
across the country, which gives it a strong advantage over its European peers, who at the most have service centres in only 3-4 cities. LMW also enjoys an edge over competition as it caters to a huge 1,300 domestic textile players out of the total universe of around 1,600. The company has been innovating on technology for the past 15 years. In terms of prices, LMW’s products are at least 10% cheaper than its European peers who have manufacturing base in India.

Strong order book to translate into robust sales growth: LMW has a strong order book of Rs3,300cr. The upturn in the spinning industry has lent a boost to the company’s order inflow. The yarn prices have increased at 15.0% CAGR over the last two years and most listed yarn manufacturers surveyed by us are operating at utilisation rates of around 95%. This indicates that there is low probability of order deferments and the company’s robust order book is expected to result in strong growth.

To read the full report: LAKSHMI MACHINE WORKS

>STATE BANK OF INDIA: Result Update 1QFY2011

For 1QFY2011, State Bank of India’s (SBI) standalone net profit grew 25.1% yoy and 56.1% qoq, which exceeded our estimates on account of better-thanestimated NII and lower operating expenses. Robust operating performance with reasonable asset quality was the key highlight of the result. We maintain an Accumulate rating on the stock.

Robust operating performance: The bank’s net advances increased 20.4% yoy
and 3.4% qoq to Rs6,53,220cr, while total deposits grew 6.8% yoy and 1.4% qoq
to Rs8,15,297cr during 1QFY2011. Reported net interest margin (NIM) improved
by 22bp qoq and 88bp yoy to 3.18% during the quarter despite a hit of 12bp due
to change in the method of calculation of SA interest. The margin expansion was
underpinned by improvement in the CASA ratio to 47.5% as of 1QFY2011 from
38.5% as of 1QFY2010 and from 46.7% as of 4QFY2010 coupled with shedding
of high-cost bulk deposits. Gross NPAs were up by 6.6% qoq and net NPAs
increased 1.9% qoq to Rs20,825cr and Rs11,074cr, respectively. NPA provision
coverage ratio including technical write-offs improved to 60.7% compared to
59.2% as of 4QFY2010.

Outlook and Valuation: Due to strong CASA and fee income, SBI’s core RoEs
have improved over the past few years and unlike virtually all other PSBs, actual
FY2010 RoEs are below core levels due to low asset yields, providing scope for
upside as the CD ratio improves and yields normalise to sectoral averages. SBI is
trading at 2.1x FY2012E ABV while excluding value of insurance and capital
market subsidiaries, it is trading at 1.7x FY2012E ABV v/s its 5-year range of
1.3-2.0x and median of 1.7x. We believe this provides reasonable upside,
especially in light of its dominant position and reach, strong growth and superior
earnings quality. We maintain an Accumulate on the stock, with a Target Price of
Rs3,185.

To read the full report: SBI