>Just Dial Limited: 2QFY15 RESULTS REVIEW (ANTIQUE)

Stable quarter; Expansion plans to weigh on margins, Hold

Just Dial's 2QFY15 revenues grew 31% YoY to INR1.5bn, ~8% below our estimate. Increase in revenues was on the back of healthy growth in paid campaigns, which grew 6.5% sequentially to 296,100, and increased realisations per paid campaign. EBITDA came in at INR426m, in line with

our estimate. Margins declined 237bps YoY to 29% for the quarter, due to a one-off expense of INR32m towards employee stock options. Adjusting for this one-off, margins remained flat YoY. EBITDA margins were ~200bps higher than our estimate, led by lower-than-anticipated one-offs and higher estimated revenue base for the quarter. PAT came in at INR315m versus our estimate of INR366m, led by lower other income (INR85m). Listings increased 44% YoY to 14.5m. Search Plus currently offers 20 live services. However, most are on a trial basis and are yet to be monetised. We expect Search Plus to start contributing from FY16e and meaningfully from FY17e. Cash and investments stood at INR7.4bn as on 2QFY15 vs INR5.7bn as on 2QFY14. The board of directors recently approved a resolution to raise INR10bn to plough in inorganic expansion opportunities. The company has pushed its mass communication campaign for Search Plus Services to 4Q. The stock

trades at 55x FY16e earnings, which is rich in our view. We maintain our estimates for FY15e and FY16e and retain our Hold rating on the stock with a target price of INR1,650 per share.

Revenues grow 31%, margins better-than-estimated

2QFY15 revenues grew 31% YoY to INR1.5bn. However, the same was below our estimate as we factored in higher monetisation of the 2.3m business listings acquired last quarter. Growth in revenues was underpinned by: 1) Healthy uptick in paid campaigns, which grew 6.5% sequentially; and 2) Increased realisations per paid campaign. Margins were weighed down 237bps YoY to 29%, led by an INR32m one-off spend towards employee stock options. Adjusting for one-offs, EBITDA margins were flat YoY and better-than-expected as there was no one-off spend towards advertising on Search Plus Services as anticipated earlier. Margins are expected to remain subdued this fiscal on account of increased advertising spends and expansion-related investments.

Lower-than-expected paid campaigns

Paid campaigns for 2Q, though healthy, were lower than our estimate. It continues to comprise only ~2% of business listings vs 2.4% in 2QFY14. Listings remained soft and grew 3% sequentially to 14.5m during 2Q. Growth in business listings continues to outpace growth in paid campaigns, signalling conversions are increasingly hard to come by.

Fund raising on the anvil

The board of directors recently approved an enabling resolution to raise up to INR10bn. The management is presently looking at organic and inorganic expansions in international markets like the UK, US, Canada, and other emerging markets. These markets are highly competitive and regulated, thereby increasing uncertainty. Any meaningful inroads would entail significant investments and drag margins lower.

Valuations and outlook

The stock trades at 55x FY16e for 31% earnings CAGR over FY14-16e. We find valuations rich and maintain our earnings estimate for FY15e and FY16e. We retain our Hold rating on the stock, as the upside from current levels is limited, growth in paid campaigns tapering off, and increased capital/operating expenditure that would be required to enter new geographies.

RISH TRADER

>Exide Industries Limited: 2QFY15 RESULTS REVIEW (ANTIQUE)

Margins set to recover from 3Q itself

Exide Industries' (EXID IN) 2QFY15 adjusted earnings rose 6% YoY but was down 32% QoQ to INR1.3bn, way below consensus estimates of INR1.5bn. Margins fell 340bps QoQ and 230bps YoY to 11.8%, due to weaker scale, larger fuel and freight costs, and higher technology upgradation-related expenses. On account of weak seasonality in industrials, revenue contraction was broadly in line with estimates, down 8% QoQ to INR17.6bn. An 80bps QoQ decline in gross margins and higher other expense, as a percentage to sales, of 170bps QoQ led to a negative surprise in terms of EBITDA margin at 11.8% as against expected levels of ~14%.

We leave unchanged our revenue and margin estimates for FY15e/FY16e, factoring a revenue CAGR of 19% over FY14-16e, on the back of low base in industrials in FY14 and a cyclical recovery in the original auto equipment manufacturer segment. We also retain our margin estimates at 14.4%/15.2%

for FY15e/FY16e, respectively. On the back of a cyclical recovery in the automotive segment, leading to better scale; price hikes in the inverter segment by ~5%; and incremental 10% correction in lead prices over 1Q levels to ~USD2,000 per tonne, we are confident of EXID achieving over 15%

margin levels by 4QFY15 itself. The management is guiding at a capex of INR5.5bn over FY15-16e to enhance automation, technology, and capacity in some segments. After incurring losses in FY14, due to currency volatility, the smelter subsidiaries are expected to improve profitability in FY15e, thus contributing to consolidated earnings. The company's insurance business had already turned profitable in FY14, with a PAT of INR0.5bn. It is expected to improve its performance further this fiscal.

We upgrade the stock to Buy but maintain our price target at INR179 per share, based on 17x FY16e battery business EPS of INR9.8 and value the insurance business at INR13 per share. With capital efficiency recovering to over 20%; strong earnings visibility of ~31% CAGR over FY14-16e, led by

demand recovery across segments and stable margins ~15%, we do not foresee any reason for EXIDE to trade at a significant discount to its long-term mean traded core earnings multiple of 18x.

Key takeaways from the management interaction:

􀂄 Price hike of 5%, effective November, in the inverter segment, presently contributing close to 30% of overall revenues, to drive partial margin recovery next quarter. A QoQ decline of ~10% in lead would get reflected in gross margin from 4Q onwards. Drop in crude prices is set to partially impact raw material prices, as other than lead, crude derivatives too form a chunk of raw material expenses for manufacturing battery casings.

􀂄 Drop in diesel prices will reduce freight expenses in addition to other fuel-related expenses at the plant level. The management is focusing on reducing charging-related expenses too going forward. Technology upgradation-related expenses will increase the element of automation. Productivity improvement has risen this quarter in the form of consultancy charges and is set to persist for a few additional quarters. The company is also trying to reduce its lead content per battery to improve margins down the line. It is targeting a

250bps structural improvement in gross margins over the next two-to-three years.

􀂄 The management is content with its present market share in the replacement market and looking forward towards margin improvement strategies like controlling dealer incentives. It does not foresee any major price war with its largest competitor, which is adding new capacity in the coming quarter. EXIDE broadly operates at 83% and 79% utilisation in the two- and four-wheeler segments, respectively.

􀂄 The company is confident of achieving 15-17% margin in FY16e, and would move towards that trajectory from next quarter itself. Despite 3Q being another weak quarter for industrials, the management is certain of a substantial improvement in margins. In the longer run, we do not see any hurdles towards a low double-digit sustainable growth in the auto battery replacement market.

Valuation

We upgrade EXID to Buy from Hold, leaving our price target unchanged at INR179 per share, based on 17x FY16e core business earnings and value the insurance business at INR13 per share. With visibility of enough drivers for margins to recover from the seasonally weak level of 11.8% back towards 15%, we leave our margin estimate unchanged at 15.2% for FY16e, amid a cyclical recovery in overall volumes.

RISH TRADER

>HERO MOTO CORP LIMITED: Launching a new model in 3Q post recent launch of Splendor Racer, a variant of Xtreme & Production at Nemrana plant started

Core business earnings in line with estimates; exports all set to pick up

Hero MotoCorp (HMCL IN) adjusted operational earnings came broadly in line with our estimate of INR7bn, though reported earnings at INR7.6bn was higher led by a one-off other income to the tune of INR0.68bn. Blended realisation was flat QoQ and up 2% YoY with mix broadly remaining the same leading to a revenue growth of 21% YoY at INR69bn, broadly in line with estimates. EBITDA
margin at 13.5% too was in line with estimates and flat QoQ despite higher staff costs on account of commencement of production at Nemrana plant from July led by slight improvement in gross margin QoQ. We believe with the excise duty disparity in Hardwar plant impacting margin by ~130bps getting away from equation possibly from 4QFY15 onwards along with rising scale and rising impact
of internal cost cutting strategy, we expect margin to inch up a notch towards 14-14.5% in FY16e. With scooter capacity set to ramp up to 100k units by January 2015 and to 150k by mid-FY16 from 75k now, we believe attaining the short term target of 250k exports would get easier. First time motorcycle buyers have come back in the scheme of things after a long break in recent months boosting overall industry demand along with HMCL maintaining share around 54%. With couple of new launches in the scooter portfolio along with continuous launch of variants across the motor cycle portfolio on and above higher exports, we are confident of a 12% volume CAGR in FY14-16e resulting in a volume of 7.85mn in FY16e. We are maintaining our volume and margin estimates for FY16e resulting in a robust earnings CAGR of 32% in FY14-16e.

Conference call highlights
􀂄 Festive season demand going on pretty strong and HMCL is confident to close festive season with 10-11% growth this year. With inventory being pretty much in control amid high competitive intensity we believe HMCL has done a commendable job of maintaining market share despite a high base.

􀂄 Launched 2 new variants in Maestro, both have seen good response from the market. Have 75k unit scooter capacity currently and will take capacity to 100k by January 2015 and plan to increase to 150k by mid-FY16. Planning a couple of new scooter launches in the next one year with focus towards the 125cc segment.

􀂄 Target of exports at 250k unit in FY15 with higher scooter capacity helping to boost exports soon. Have vision to export to 50 countries by 2018 from 20 markets presently. Got a large order of 45k unit of scooters in export markets and will be executed by November only.

􀂄 Launching a new model in 3Q post recent launch of Splendor Racer, a variant of Xtreme.

􀂄 Production at Nemrana plant started July onwards and is expected to ramp up production this quarter itself with peak capacity of 1.2mn.

Valuation
We maintain our Buy on HMCL with a price target of INR3,151 based on 18x FY16e core EPS of INR161 and INR255/share of cash and equivalents. We believe interim dividend of INR30/ share this quarter along with visibility of annualized payout of 55-60% signifying a FY16e DPS of ~INR100, implies HMCL is trading at an attractive dividend yield of ~3-4%.

RISH TRADER

>Cairn India Limited (ANTIQUE)

Discovering value; Upgrade to Buy

Cairn India has corrected ~20% post its 1Q results, due to oil prices softening to USD85/bbl; USD1.3bn related party loans and advances; and concerns on production growth. The company has remained confident of achieving 7-10% production CAGR over FY14-17e from execution of Mangala, Bhagyam and Aishwariya enhanced oil recovery (EOR) and infrastructure projects (180-
200Mbbl/d); additional production from BH+satellite fields (10-30Mbbl/d); and development of gas potential (10-20Mboe/d). We estimate an 8% CAGR growth in Rajasthan output over FY14-17e to 230Mbbl/d (mid-range of the management's guidance) and Brent at USD95/bbl to arrive at our target price of INR315 per share, which values exploration upsides conservatively at 10% of 3bnboe exploration potential and USD3/boe. We upgrade the stock to Buy with a revised target price of INR315 per share.

Even in a worst case scenario, assuming long-term oil price at USD85/bbl and no production (190Mbbl/d) growth over the next three-years, we arrive at a DCF-based target of INR270 per share, at which it trades at an inexpensive valuation of 2.5x EV/EBITDA on FY16e EBITDA of INR101bn, with FY15-end cash balance of ~INR260bn, implying almost negligible downside from current levels.

► PAT at INR22.8bn slightly below estimate due to higher taxation
The company reported a 2QFY15 consolidated net profit of INR22.8bn, down 33% YoY, due to a 7% YoY decline in working interest production to 123Mbbl/d, on account of maintenance at the MBA terminal; 7% lower oil realisations; and 17% higher profit petroleum at INR15.4bn. Rajasthan output declined 7% QoQ to 163Mbbl/d in 2Q, led by planned maintenance shutdown at the Mangala Processing Terminal. Well interventions measures at Cambay have led to 23% YoY increase in production at CB-OS-2 field but remained flat QoQ. Average realisation was down 6% QoQ to USD91.3/bbl, while Rajasthan operating expenditure rose to USD6.3/bbl on account of maintenance.

► Significant progress in achieving 7-10% production CAGR
In Phase I, CIL has upgraded MBT fluid handling capacities, ahead of schedule, to ~800,000 barrels of fluid per day. It is also on-track for first injection of polymer in 4QFY15. Since all major equipment has been erected at the central polymer facility in MBA fields, the company is targeting 50% recovery, with a production potential of 180-200Mbbl/d. In BH+satellite fields, the company is leveraging technology and existing infrastructure to target 200-300MMboe, which is above our recoverable estimate of 165MMboe, with a production potential of 10-30Mbbl/d. It received operating committee approval to increase production at Aishwariya field up to 30Mbbl/d, while Bhagyam polymer flood EOR plan is being reviewed by its joint venture partner.

► Continued successful exploration, conservatively valued at INR28 per share
With resumption in exploration, CIL has struck 11 discoveries to establish 1.4bnboe of in place resources, out of 3bnboe exploration. While 0.6bnboe is under testing, the remaining 1bnboe is to be established during FY15/16. It has also identified 3bnboe of additional resources in Rajasthan, which raises the block's potential to ~10bnboe. While it is too preliminary at this juncture, we assume a 10% recovery, due to its tight nature (300Mmboe reserves), and USD3/boe valuation multiple estimate to arrive at a potential value of INR28 per share. The company has maintained its production and capex guidance, while final approval for nearterm triggers like Barmer Hill and Raageshwari gas development are awaited.

► Upgrade to Buy with a revised target price of INR315 per share
At long-term Brent of USD95/bbl and net recoverable resources of ~870MMbbl (MBA, BH+satellite fields), we arrive at our DCF-based target price of INR315 per share, which values exploration upsides conservatively at 10% of 3bnboe exploration potential and USD3/ boe. We upgrade the stock to Buy with a revised target price of INR315 per share.


RISH TRADER

>BHEL: Recent coal sector reforms are extremely positive (ANTIQUE)

Coal reforms a key positive

The recent coal sector reforms are extremely positive for Bharat Heavy Electricals as it stands to significantly benefit from the government's decision to allocate coal mines to central and state power generators, on a nomination basis. We maintain our view that the Indian power generation equipment market is set for a rebound, on growing concerns of a power shortage in the country over the next
three-to-five years. We see BHEL as the biggest beneficiary of a power equipment demand revival, given weakened competition, cost advantage, and high degree of localised manufacturing. We reiterate our Buy rating.

■ BHEL is among the biggest beneficiaries of the ongoing reforms in the coal sector
In a key decision, the Union government recently decided to promulgate an ordinance to facilitate e-auction of coal blocks for private companies’ captive use and allot mines directly to state and central public sector undertakings. This comes in the backdrop of last month's Supreme Court order cancelling 214 coal blocks allocated to various companies since 1993. The process of auction is expected to be completed in the next three-to-four months. BHEL is the key beneficiary of these initiatives as 14 coal blocks, with 8.2bn tonne allocated to state and central PSUs, would be re-allocated and lead to higher capacity addition, with fresh equipment ordering for these capacities.

■ BHEL bagged two significant orders in the past two months
During the past few months, BHEL has bagged several orders. In the past two-months itself, the company bagged two significant orders, with an aggregate order value of INR113bn, to set-up power plants on an engineering, procurement, and construction (EPC) basis. It includes a major contract for setting up a 2X660MW supercritical thermal power plant worth INR78bn (8% of order book) at the Ennore special economic zone in Tamil Nadu from Tamil Nadu Generation and Distribution Corporation, at a healthy price of INR59m per MW, on an international competitive bid basis. BHEL also bagged an EPC order worth INR35bn from Gujarat State Electricity Corporation to set-up an 800MW power plant.

■ State electricity boards getting active to set-up capacities
Among other key developments, BHEL entered into a memorandum of understanding (MoU) with the Telangana State Power Generation Corporation to set-up 6,000MW power plants in the state. Many states are looking at aggressively building up power generation capacities, including Maharashtra, Andhra Pradesh, Telangana, and Rajasthan, which will significantly boost demand for power generation equipments over the next two-to-three years.

■ Power generation equipment market set to rebound over the next one-to-two years
We maintain our view that the Indian power generation equipment market is set for a rebound on growing concerns of a power shortage in the country over the next three-to-five years. We estimate that ~64GW (only coal) of power equipment orders will be placed during FY15-18e, predominantly by central and state sectors. In the next 12-15 months, we expect 18-20GW of orders to be placed. We see BHEL as the biggest beneficiary of a power equipment demand revival, given weakened competition, cost advantage, and high degree of localised manufacturing. We expect BHEL's order intake for FY15-17e to be an average INR521bn per year as against an average INR272bn per year during FY12-14. This will ensure a sharp pick-up in revenues from FY17 onwards. We expect BHEL's revenues to grow 6% and 17% over FY16e and FY17e, respectively.

■ Earnings to sharply rebound in FY17; Near-term earnings may be under pressure
Savings in material costs and better operating leverage will help improve EBITDA margin to 12.9% and 15.7% in FY16e and FY17e, respectively, from 11.6% in FY14. We see BHEL earnings bottoming out in FY15e (INR13.4, down 5% YoY; 48% of peak EPS of INR28.8 in FY12). We expect an earnings recovery from FY16e (17%) to spread into FY17e (41%). We maintain our Buy rating with a target price of INR315 per share (20x FY16e earnings).


RISH TRADER

>FDI in retail aviation and broadcasting are probably the biggest and toughest reform initiatives that the UPA Government

Shrugging off its image of being in a state of ‘policy paralysis’, Government of India unleashed a blitz of reforms late last week, including diesel price hike and opening up FDI in several key sectors. Though many will argue that these measures will have limited impact, we believe that 51% FDI in multi-brand retail and 49% in airlines are probably the biggest and toughest reform initiatives that the UPA Government has taken in its tenure of eight years. We believe that it will have significantly positive implications for the economy and the market.

FDI in retail (51%), aviation (49%) and broadcasting (74%)
FDI will bring much needed funding options for domestic players. We see Pantaloon, being the largest player, a key beneficiary of FDI in retail as it will strengthen its back end operations and inventory management, which in our view has been one of the most challenging areas for the company. We believe increased FDI is very positive for the broadcasting industry. With nearly 90m households and top five players having market share of 50%, the market is fragmented. FDI, coupled with digitalization, will lead to consolidation, benefiting larger players. We remain positive on both cable and DTH. Our top picks are Hathway and Dish. On the other hand, Spicejet is among the biggest beneficiaries of FDI in civil aviation due to significant market share (~18%) and relatively better balance sheet.

Rate cut hopes: Not unfounded
With falling GDP growth and dwindling capex cycle, need for sustained rate cuts is more
than ever before. We believe that the Government has initiated small yet meaningful steps,
such as diesel price hike and divestments of certain PSUs, to bring down cost of capital. We
believe that banks, particularly PSU banks, will be key beneficiaries of rate cuts, as it will
arrest formation of NPAs in the system. SBI is our top pick among banks. Lower rates,
coupled with PM’s concerted efforts to revive infrastructure investments, will also boost growth
outlook for large infra-plays. We like L&T and IRB Infrastructure in this space. We
believe that stocks like Maruti (demand outlook may improve, lower import bill) and PFC
(Wholesale funded NBFCs key gainers of rate cuts) will also see significant re- rating, following
rate cuts.

Re unlikely to fall further; Can appreciate buoyed by inflows
FII investment in India has already crossed US$10b, YTD. Historically, strong reform initiatives
by government have led to improved foreign capital inflow. We believe that appreciation of
INR vs. US$ will significantly benefit a host of companies, exposed to imports. This will also
help curtail oil import bill, thereby further helping fiscal situation. We like JSW energy,
which operates 2.6GW of power plant, and meets its coal requirement through imports. JSW
Energy will benefit from appreciating INR, apart from falling international coal prices.

To read report in detail: FDI

>INDIAN DIESEL CONSUMPTION: Taking a dragon fly

Diesel demand boosted by controlled lower prices
Diesel consumption for April-May’12 jumped 14% over full year FY12 (up 8.5% YoY). We believe that controlled prices are fuelling the strong demand for diesel led by dieselisation of cars and substitution of FO by diesel due to the continued substantial price advantage. 15% YoY decline in April-May’12 FO demand substantiates our point.


Petrol demand impacted by high prices
April-May’12 petrol demand declined 1% YoY as higher petrol prices impacted driving demand. The growth level is expected to remain low as long as petrol price remains high with huge difference in HSD selling price, a derived benefit of de-control. Petrol demand growth peaked in FY10 at 14% and post decontrol in June 2010, demand growth has slowed down to 5.6% in FY12, lowest in six years.


Diesel price hike seems to be the only solution
With gap between diesel and petrol prices further widened post petrol price hikes in May'12, diesel usage is expected to be further boosted, leading to increased u/r for the sector. We have built a diesel demand growth of 5% in FY13e, for estimating u/r at INR1,376bn, which may be increased by INR30bn if diesel demand growth remains ~10%.


SKO demand falling due to rationalisation of allocation
SKO demand fell 17% YoY in April-May’12 due to rationalisation of PDS Kerosene allocation to states, considering expansion of domestic LPG through release of new connections. LPG growth was moderate at 7.2% in April-May’12 due to availability constraint in the product adversely affecting consumption.


To read report in detail: INDIAN DIESEL CONSUMPTION
RISH TRADER

>TRIBHOVANDAS BHIMJI ZAVERI LIMITED: Go for the GOLD...

Investment Highlights

Tribhovandas Bhimji Zaveri Ltd. (TBZ) is a high growth potential story in the organised Indian jewellery sector backed by: 1) strong brand (the most important factor for trust amongst gold consumers); 2) innovative ability; and 3) aggressive expansion plans. We estimate TBZ to record strong earnings growth with a CAGR of ~52% to INR1.33bn during the next two years (FY12-14e) led by a net sales CAGR of 42% to INR28.0bn. We initiate coverage with a BUY recommendation and a target price of INR158, implying FY14e PE of 8x.

Store expansion to drive growth

TBZ is embarking on a strong retail expansion plan to drive growth during the next three years. The company which currently operates about 14 stores across 10 cities in 5 states (retail showroom carpet area of 47,796 sq ft), plans to add 43 showrooms (25 large format high street showrooms and 18 small format high street showrooms) by the end of FY15e, which would take the total number of showrooms to 57 (total carpet area ~150,000 sq. ft.) in 43 cities across 14 states. This would drive sales at a strong CAGR of 42% to INR28.0bn during the next two years.

Profitability on a structural uptrend

PAT margins would witness consistent improvement during the next three years with the application of the gold lease model. TBZ's interest outgo during FY13e and FY14e is estimated to drop to INR215m and INR360m, respectively, as against INR315m in FY12. This in turn would improve net margins by 53bps during FY13e and FY14e to 4.7%.

Valuation and outlook

At the CMP of INR110, the stock trades at a PE of 8.5x FY13e and 5.6x FY14e. On an EV/EBITDA basis, it trades at 4.2x FY13e and 2.7x FY14e. We believe that TBZ would trade at a premium over its peers like Shree Ganesh Jewellery (which has yet to create a branding in the domestic jewellery retailing) and Thangamayil Jewellery (which is more of a regional brand as compared to TBZ which has been able to create a presence across both the key geographies of west and south India). We therefore value the stock at a PE of 8x FY14e, providing a target price of INR158 and recommend a BUY.

To read report in detail: TBZL

RISH TRADER

>NESTLE INDIA: 1QCY12 RESULTS REVIEW

Gearing up for growth


Nestlé India's performance has been below expectations with a further slowdown in volume growth during 1QCY12 due to substantial price hikes (13%). However, going ahead, over the next six months, we believe that it would post a recovery in volumes with ramp up in marketing
spends and increase in distribution. Additionally, the rising awareness for nourishment in the rural markets augurs well for the long-term growth plans of the company. We maintain a HOLD recommendation.


■ Net sales grew by 13.1% to INR20.5bn in the backdrop of a 13.7% growth in domestic sales at INR19.5bn and 3.3% growth in export sales at INR1.01bn. In our view domestic volume growth during the quarter has been almost flat.


■ EBITDA grew by 19% to INR4.57bn and EBITDA margin expanded by 104bps to 22.3%. The improvement in EBITDA margin was on account of 301bps drop in raw material cost to 45.8%. However, this improvement in EBITDA margin was below our expectations due to a 90bps increase in staff cost to 7.6% of net sales and 107bps increase in other expenses to 24.3% of net sales. The increase in staff cost has been due to increase in headcount to support the company's expansion initiatives. Additionally, the increase in other expenditure we believe has been because of ramp up in marketing expenditure.


■ Profit before tax grew by 14% to INR4.16bn while recurring PAT grew at a lower rate of 10% to INR2.9bn due to an increase in effective tax rate by 248bps to 30.6% of PBT.


■ Our channel checks suggest a substantial increase in marketing initiatives to fuel strong growth in sales during the next three years backed by the capacity expansion. Therefore, we believe that volume growth will recover over a period of six months led by the substantial ramp up in operations and subsiding of the impact of the price hikes. Additionally, the company's medium to long-term growth potential remains strong with rising awareness of nourishment even in the rural markets. 


Valuation and outlook
At the CMP of INR4,938, the stock is trading at a PE of 40.5x CY12e and 33x CY13e. We believe that Nestlé India would witness a strong recovery in sales momentum during CY13e backed by the ramp up in production and distribution. We therefore upgrade our EPS estimates by 2.4% for CY13e to INR149.8. We maintain our HOLD recommendation on the stock at the current levels with a target price of INR4,495.


RISH TRADER

>Indian Oil Corporation Limited: The entry tax jolt

IOCL lost UP entry tax case in Allahabad High court, liability of INR84bn: Allahabad High Court has dismissed IOCL's petition and upheld the UP Entry Tax Act 2007, whereby UP govt is entitled to levy an entry tax/octroi on crude oil at 5% (USD5.5/bbl at current oil prices) for its Mathura refinery. IOCL
will have net liability of INR84bn (refer table on page 2) including last ten-year demand with interest. Hon'ble Supreme Court while accepting the review petition has asked IOCL to deposit 50% of the accrued tax liability (INR42bn) and furnish bank guarantee for the balance within next few months. Hon'ble Supreme Court has also asked IOCL to pay the tax at the prevailing rates for the future period till the review petition is decided.


■ Entry tax - an irrecoverable item for refiners, to make Mathura refinery unviable: Entry tax has been an irrecoverable item for refiners and not included as part of the refinery transfer price (RTP) as it is based on import parity price and does not include local taxes. Entry tax burden of USD5.5/bbl is huge with respect to average USD6.1/bbl GRMs made by Mathura refinery (8mmtpa) during FY09-11 and an average net margin of USD3.9/bbl.


■ Full price hike in marketing looks difficult, we expect 2.5% underrealisation: IOCL will require MoP&NG approval (largely political clearance) for raising prices on regulated products in UP to cover this additional tax. On nonregulated products, IOCL will face the problem of substitution, as products imported from nearby states will attract entry tax in UP, which can be fully set-off against VAT. We believe that when Central Govt. itself is looking to raise prices of regulated products, it would be very difficult for IOCL to separately raise price in UP to pass through the entire entry tax leading to irrecoverable expense of ~2.5%.


■ Impact on earnings: IOCL has to provide for this entire liability of INR84bn in one go, wiping off FY12e earnings. Also payment of INR42bn in next few months will increase interest liability by INR3.4bn in FY13e. Assuming 2.5% less pass through, IOCL recurring EBITDA would be impacted by INR7.4bn annually (INR2.1/sh post tax) on IOCL's recurring earnings.


Valuation and outlook
■ Downgrade to HOLD: Considering Hon'ble SC doesn't reverse High Court order, we have reduced our earnings for FY12-14e. We have revised our valuation methodology and now value IOCL at an average of: i) FY12e 0.8x BV at INR174/ share; and ii) FY13e 10x EPS at INR200/share (FY13e revised EPS of INR20). We value listed investments at INR80/share. We downgrade the stock to HOLD in light of the above changes with a revised target price of INR267/share (earlier INR314/share).


To read the full report: Indian Oil Corporation Limited
RISH TRADER

>HAVELLS INDIA LIMITED: Q3FY12- No sign of fatigue here! ; Sylvania sees margin improvement

■ Domestic revenues maintain strong momentum
Havells India Limited’s (HIL) 3QFY12 standalone and consolidated revenues at INR9bn
and INR16.6bn were in line with our estimates. In India, growth was impressive across
all verticals viz. cables & wires (C&W), lighting & fixtures (L&F) and consumer durables, while the switchgears division delivered the second quarter of superlative growth (30% YoY) after two quarters of sluggish growth in 4QFY11 and 1QFY12. Sylvania’s revenues fell 4% YoY to Euro114m, but improved product mix and timely price increases across several key product lines coupled with tight cost control resulted in EBIDTA rising 30% YoY to Euro7.8m in the quarter.


■ Sylvania sees margin improvement, Indian OPM slightly better
HIL delivered margin improvement of 290bps (consolidated) on the back of a superior product mix and savings resulting from the management's efforts at rationalisation of manufacturing and selling costs in Sylvania. This reflected HIL's continued preference on operational profitability as opposed to improving revenues at the cost of margins and cash flows. In India, HIL registered an OPM of 12.7% (+10bps YoY). Its consolidated EBIDTA jumped 52% to INR1.8bn in the quarter. The company also registered a forex loss of INR194m on account of M-to-M provisioning on its forex loans in India as well as its Brazilian operations. PAT stood at INR889m (+40%).


■ Valuation and outlook
HIL’s 3QY12 operating performance and profitability, at the domestic and international levels, were in line with our estimates. Going forward, we believe that HIL’s domestic turnover and margins would play a key role in shaping the operational cash flows of the company. We expect HIL to focus on higher channel sweating in domestic and international markets, which in turn, should bolster profitability and cash flows. This would be the key to fortifying its balance sheet metrics and return ratios. We reiterate a BUY recommendation on the stock, with a marginally higher target price of INR535, which represents an upside of 12% from current levels.
RISH TRADER

>PUNJAB NATIONAL BANK: Q3FY12 RESULTS REVIEW- Operating performance inline, asset quality disappoints

Punjab National Bank (PNB) reported earnings with net profits at INR11.5bn (+6% YoY) in 3Q, below our estimates of INR12.54bn (consensus estimates at INR12.58bn), on higher than expected loan loss provisioning. However, core earnings progression positively surprised on better than expected NII traction and stronger recoveries in written-off accounts. Higher slippages and deterioration in asset quality ratios were the key negative that emerged from the result.


■ Moderation in b/s growth in line with industry; margins compress on expected lines
Loan growth moderated to 19% YoY, pretty much in line with the industry, driven by infrastructure, retail and MSME loans. Margins for the bank came compressed by 7bps sequentially to 3.88% on the back of rise in cost of funds. Given the high interest rate environment, the bank has witnessed signs of cannibalisation of low cost deposits to retail term deports leading to erosion in CASA by 100bps with CASA ratio share declining to 36.1%. While the momentum in savings and current deposits accretion slowed down, retail term deposits continued to be robust at 31% YoY. Going forward, management is guiding sedate NIMs at 3.5% levels for full year FY12e and moderate b/s growth.


■ Asset quality deteriorates
Asset quality for the bank substantially deteriorated with GNPA accretion at 25%QoQ. Slippages came in at INR16.83bn (delinquency ratio at 2.6% vs. 1.6% in 2QFY12) as the bank recognized its exposure to Kingfisher as NPL (INR7.5bn). Overall, provisioning came in higher at INR9.46bn on the back of NPV provisioning of INR1.2-1.3bn linked to GTL exposure under CDR. However, lower recoveries and upgrades were key disappointment during the quarter. Restructured book increased by INR18.9bn (one
large chunky account related to telecom of INR9.9bn) to INR168.8bn at 6.4% of advances. While the bank is likely to witness SEB restructuring (related to Rajasthan & Haryana) during 4Q, the management is confident of containing GNPA ratio at <2%.


■ Valuation and outlook
While slippages and credit costs continue to remain high for the bank, risk adjusted margins (margins - credit costs) continue to remain amongst the highest within PSU banks. PNB continues to remain one of the best deposit franchises with best in class margins and returns profiles and has adequate earnings power to absorb any negative surprises on asset quality. Hence, we reiterate a BUY with a target price of INR1,340.
RISH TRADER

>ICICI BANK LIMITED: 3QFY12 RESULTS REVIEW- Impressive core; guidance even better

ICICI Bank reported operational 3Q earnings at INR17.3bn, above our as well as consensus estimates, on the back of better than expected core earnings progression driven by margin improvement of 10bps (2.6% to 2.7%) and dividend income of INR1.5bn from ICICI PruLife. Credit costs during the quarter were at 56bps while asset quality continued to remain stable. Bank management's positive guidance on asset quality and margins for FY13e were the key positives that emerged from the result.


■ Corporate, overseas advances drive loan growth; CASA on average balances improves
Loan growth for the bank was above systemic credit growth at 19% YoY (5% QoQ) driven by higher disbursements to large corporate (23% YoY) and overseas advances (38% YoY) while retail unsecured continued to show decline. Retail segment grew 1% QoQ due to higher disbursements in the Auto and CV segment. Margins improved 10bps QoQ to 2.7% as international NIMs improved by 31bps QoQ to 1.4% while domestic NIMs improved 6bps to 2.98%. Currently, the bank is not facing any funding issues overseas given that asset prepayments are likely to offset liabilities maturing in FY12. CASA based on average balances improved by 70bps to 39% as absolute CASA improved 10% QoQ. Management is guiding margins to improve to 2.8% in FY13e driven by domestic book and loan growth at 18% driven by retail and working capital loans.


■ Asset quality stable; management guiding credit costs at 75bps in FY13e
Asset quality continued to improve with both absolute GNPA and NPA decreasing by 3% and 2% QoQ respectively. Coverage ratio marginally improved to 78.9% while credit costs remained flat QoQ at 58bps. Net additions to the restructured book were at INR5.7bn in 3Q taking total restructured book to INR30.7bn (1.3% of advances). Incremental restructuring in 4Q is likely to be at INR13bn (GTL and 3I InfoTech). The bank has not classified Kingfisher as an NPL given that it is performing for the bank. Bank management is not seeing a significantly large restructured pipeline as of now and is guiding at credit costs at 70bps for FY12e and 75bps for FY13e.


■ Valuation and outlook
We maintain our earnings estimates for FY12e and FY13e as well as target price of INR1,320 with a BUY rating based on 2.3 FY13e P/BV on core book.
RISH TRADER

>LARSEN & TOUBRO: The leader takes it all

LT- MHI, Joint ventures start production
■ L&T and MHI has started the production at its facility in it newly set facility at Hazira. The JV’s (50% each) will have installed capacity to produce 4,000 MW of Boilers and Turbines annually.

■ Apart from these two factories, the company is also setting up dedicated factories for axial fans, air-preheaters, electrostatic precipitators, high pressure piping and a forge plant. We believe these units will increase the indigenization of the manufacturing of the overall BTG
units for L&T and would result in higher margins.

LT emerges as lower bidder for Hyderabad Metro Project
■ L&T has emerged as the lowest bidder for the Hyderabad Metro Project. The company has put in INR14.6bn as the Viability Gap Funding (VGF) which is the lowest. The project has a 5 year construction and 30 years concession period which can be extended by another 25 years.

■ Transtroy BEML constortium (VGF- INR22bn) and Reliance Infrastructure (VGF – INR29.9bn) were second and third in terms of lowest VGF.

■ The project will provide ~INR90bn of EPC opportunity for the company which will be executed over the next 5 years.

Order inflows to meet guidance – 25% growth for 1QFY11
■ Based on the announced orders we believe the company is well positioned to have a 25% order inflow growth – as per guidance.

■ We estimate that the total order inflow for the quarter would range from INR106bn to INR129bn implying a 11.2-35% growth in order
inflow.
■ Our base case for order inflow stands at INR118bn translating into 24% order inflow growth.

Target upgraded to INR2,097
■ The strong order inflow for the last 4 quarters and strong execution in 4QFY10 would take the company to a high growth trajectory.

■ We have revised our target price from INR1,781 to INR2,097 on 1 year rolling basis and INR2,186 on FY12 basis.

To read the full report: L&T

>GREAT OFFSHORE LIMITED: Weathering cyclical waves

Great Offshore (GOL) is one of the largest offshore logistics companies incIndia with operational track record of over 25 years. It is operating in allcsegments of offshore oil field services with a diversified fleet of 47 vessels.

The company has demonstrated its competance in new ventures such ascmarine engineering and construction projects.

■ Capacity addition to drive earnings growth
The company has acquired 6 vessels (5 OSV and 1 jack-up rig) in FY10 at an outlay of INR5bn. GOL has 2 vessels (1 Jack-up and 1 MSV) on order and has plans to modernise fleet to tap the requirements of growing deep water exploration market.

■ Under exploited domestic E&P industry
Growing energy demand and high energy import dependency (~80%) along with unexplored domestic market, makes strong case for growth in offshore industry. Significant growth potential in domestic E&P is expected as only 44% of sedimentary basins initiated exploration with low drilling density. The overall drilling density in offshore is 1.09 compared to exploration activities
in shallow water with density of 54.2.

■ Favourable macro scenario
The strong supply side fundamentals with concerns on additional supply and growing energy requirement, particularly in emerging countries, are raising concerns on energy security. ‘Peak oil’ and ‘decline in spare capacity of OPEC’ are expected to remain the key drivers for exploration activities.

Valuation
At CMP of INR433, the stock is trading at 9.1xFY11 and 6.5xFY12 earnings of INR47 and INR66, respectively. We have valued the company on an earnings multiple of 8.5xFY12, which is 35% discount to four year average P/E. We initiate coverage with BUY recommendation and a target price of INR565, representing an upside of 30% from current levels.

To read the full report: GREAT OFFSHORE

>Hathway Cable & Datacom Ltd. (ANTIQUE)

Key highlights
■ Digitising opportunity: The company is acknowledged as the pioneer in the yet consolidating the Indian cable industry with 20% digital subscriber base of the expected 10m pass through homes in FY12e. With a demonstrated track record it is best-positioned to drive the digitisation move, reaping the benefits of scale and entertainment consumption spend.

■ Cross selling monetisation: Huge broadband opportunity - Hathway’s leadership in digital cable has the potential to tap the huge unserved broadband market. The cross-selling opportunity of the existing digital infrastructure augurs well for profitability with the added competitive advantage of last mile connectivity through local operators.

■ Valuation and outlook
The digitisation of the cable subscriber base is very capital intensive and the landscape is still evolving with scale being the differentiator. With ~8.2m pass through homes, we expect revenue CAGR of 19.3% over FY10-12e with 23.8% CAGR in revenue generating units. The scale would help in expanding EBITDA margins to 31% in FY12e aiding EBITDA CAGR of 48.8%. The global media companies trade at EV/EBITDA to growth ratio of ~0.7-0.9x, but we are valuing the company at a ratio of 0.4x, considering the nascent stage of the industry and future funding requirement at 19.5x FY11e EV/EBITDA on post money basis. We have a price objective of INR309, indicating an upside of 28.8% and 16.6% from lower and upper band of issue price, respectively.

To read the full report: HATHWAY CABLE

>MID CAP IDEAS FOR THE YEAR 2010 (ANTIQUE)

• BGR Energy Systems Ltd.
• Gayatri Projects Ltd.
• Great Eastern Shipping Co. Ltd.
• HEG Ltd.
• Mahindra Holidays & Resorts India Ltd.
• Opto Circuits India Ltd.
• Prakash Industries Ltd.
• Sterlite Technologies Ltd.
• Shiv-Vani Oil & Gas Exploration Services Ltd.
• Triveni Engineering & Industries Ltd.

To read the full report: MID CAPS

>Indian Telecom Sector: Waves of destruction Strictly (ANTIQUE)

■ The competitive telecom space has seen intense tariff war, however, an unseen underlying trend is reshaping the business structure ranging from customer segmentation, distribution, product design. The sector would witness bouts of wars on different flanks and this would have a chain effect impacting Bharti’s leadership and increasing vulnerability of Idea and RCOM.

■ The government’s twin objective of revenue maximisation with lowest possible tariff levels increases the discomfort for investment thesis.

■ Sectoral strategy: We recommend SELL on this sector moving our focus from long term to near term.

• Bharti (TPINR278): Bharti, being the sector leader and having high PAT margin base, would be best suited for the long drawn war. But, the competitive intensity and no earnings growth visibility would warrant EV/EBITDA multiple in line with global peers 5x FY11 EV/EBITDA.

• Idea (TPINR48): Idea’s vulnerability is highest to ARPM and Spice yet to turnaround has very volatile earnings trajectory. Owing to revenue growth in new circles, higher support from tower business valuation and significant leverage to recovery, we value it at 6.5xEV/EBITDA.

• RCOM (TPINR145): RCOM faces significant pressure on existing GSM business, whereas GSM expansion is facing competition from new entrants and incumbents. The global business and tower valuations provide the key support, and thereby, we value the stock at INR145.

To read the full report: TELECOM SECTOR

>FMCG SECTOR (ANTIQUE)

The Alcohol Goliath

Investment Highlights
■ The Indian liquor industry, traditionally dominated by low-end country liquor, has shifted to IMFL (Indian Made Foreign Liquor).

■ The IMFL industry has grown at a higher rate, particularly during the last three years, led primarily by opening up of distribution in key markets in North India and banning of country liquor in the southern states.

■ Strong entry barriers, such as ban on advertising and restrictions on interstate movement of the products, have restricted the entry of global spirit players.

■ USL has continued to be the leading player in the IMFL industry with consistent volume share on a standalone basis of nearly 55% during the last four years.

■ The Indian beer industry has been witnessing steady growth of 8% CAGR per year over the last five years led by strong beer segment, which contributes approximately 63% of the total beer volumes in India. This has aided UB's leading position in the industry.

■ Indian alcoholic beverages poised for long term growth led by low per capita consumption, higher young and working population clubbed with increase in disposable incomes.

■ We initiate, coverage on United Spirits with a BUY recommendation and a target price of INR1,092, while coverage on United Breweries Ltd. with a HOLD recommendation with a target price of INR142.

To see the full report: FMCG SECTOR

>REAL ESTATE (ANTIQUE)

To Hell and Back

■ The worst is over – Liquidity and demand concerns have abated and property stocks are back in the spotlight.

■ Home buyers are back – After several months of subdued demand, home buyers are back.

■ Affordability has improved – Lower property prices, small apartment sizes and lower mortgage rates have made homes more affordable.

■ Better buyer confidence – Improved job security and income visibility is encouraging customers to buy homes.

■ Liquidity crunch has eased – Developers are in better shape after debt restructuring, infusion of funds through QIPs and non-strategic assets sales.

■ Change in strategy – Focus is on affordable homes and pre-sale of projects. Commercial and retail segments are yet to see meaningful recovery.

■ Catalysts and challenges – Continued improvement in home demand, increase in property prices and revival of the office segment are catalysts going forward while scale up in construction activity and project execution will be a key challenge.

■ Initiate with BUY – We initiate coverage on the sector with a BUY rating on four stocks DLF (Target Price INR520), Unitech (Target Price INR136), HDIL (Target Price INR411) and Indiabulls Real Estate (Target Price INR355).

To see full report: REAL ESTATE