>EDUCOMP SOLUTIONS: Pricing revives in Smart Class

Educomp Solutions’ (Educomp) Q4FY12 EBIT at Rs1.2bn and PAT at Rs0.6bn were in line with our expectations, though lower than the management’s guidance which was sharply cut a quarter ago. The management has guided for 25-30% revenue growth in FY13 and EBITDA margin improvement of 150-250bps YoY. However, it refrained from providing PAT guidance. We expect FY13 recurring PAT to be flat YoY mainly due to expected surge in interest cost by 53% YoY owing to likely refinancing of US$110mn FCCB maturing in July 2012 including premium which was not getting charged off earlier. While the volume growth momentum in the core business of Smart Class remains strong, pricing and hence margins are likely to remain under pressure because of intense competition. Other businesses like K- 12 schools and supplemental education are in nascent stage and in investment mode. Educomp is unlikely to turn FCF positive over the next two years. The stock has corrected 40% since our downgrade last quarter and is down 70% YoY, and with valuations at FY13E P/E of 8.6x and EV/E of 6x, we believe that the downside
is limited. Hence, we upgrade the stock to REDUCE from SELL with a revised target price of Rs148 (6x average FY13-14E EV/E), however, it is still not the time to accumulate the stock. Higher-than-expected Smart Class additions and any stake sale of assets are the key risks to our negative stance.


■  FY13 – a year of consolidation – unlikely to regain investor’s confidence. We cut our FY13E EBITDA by ~8% due to lower than expected margins in Smart Class and PAT by 25% owing to likely higher interest costs. We now factor in revenue and EBITDA CAGR of 20% and recurring PAT CAGR of 10% over FY12-14E.


■  Educomp unlikely to turn FCF positive over next two years: In spite of full securitisation of Smart Class receivables in FY12, DSO days remained high at 252 days and the same is unlikely to reduce significantly in the medium term. While absolute capex in K-12 schools is likely to come down, 43 new schools (21 greenfield schools and 22 schools under asset-light JVs) are likely to be constructed and the existing 69 schools would require upgradation and maintenance.


■  Pricing revives in Smart Class, but margins declined: Smart Class pricing went up 10% QoQ in Q4FY12 to Rs0.37mn per classroom after a 17% QoQ fall in the prior quarter. Average classrooms per school also went up to 6.8 vs 5.3 in Q3FY12. In spite of this, the EBIT margin declined 60bps QoQ to 39% owing to higher marketing expenses. The company added a massive 17,815 classrooms in Q4FY12 and ~40,000 classrooms (guidance of 40,000-45,000) in FY12 vs ~27,000 classrooms in FY11. The company securitised all its FY12 Smart Class receivables amounting to Rs6.9bn under the reduced guarantee model and received Rs6.33bn till March 2012.


To read report in detail: EDUCOMP SOLUTIONS
RISH TRADER

>INDIA UTILITIES: Coal India (CIL) is close to signing fuel supply agreements (FSAs)

Synopsis of draft modified FSAs
• Statutory charges pass through: The wording of the draft modified FSAs stipulates that royalties, cesses, duties, taxes, levies etc if any payable under relevant statue but not included in the base price shall be paid by purchaser. Hence, it appears that the liabilities arising out of the MMDR bill will interpreted as statutory charges and will be pass through in nature. Major positive for CIL


• Introduction of force majeure: CIL’s responsibility stands waived in case of laundry list of events such as flood, adverse geo mining condition, explosions, civil disturbance, strike, legal issues, global issues with respect to coal availability, breakdown et al (it includes almost everything that can possibly impact CIL’s production). Change in statutory laws is included in the clause. Positive for CIL


• Purchaser’s condition precedent to put onus of timely execution on power company: Power companies will have to complete activities within 24 months from the date of signing FSAs as a condition precedent for the formulation of FSAs. This will lead to exclusion of delayed power projects from the list of projects eligible for coal. Moderately positive for CIL


• Import in the event of low domestic availability: CIL shall inform buyer three months in advance in case coal import is required, and the transportation charges from port shall be borne by the purchaser. There is no clarity on pooling of coal costs, however, this will be a pass through for CIL. CIL will announce price of
imported coal from time to time. Positive for CIL


• Negligible incentive for over delivery: Matching the penalty level, incentives are set at 0.01% for delivery in excess of 90% of ACQ. Negative for CIL • Negligible penalty for not meeting FSA: Penalty has been set at 0.01% of FSA value for delivery in case of undersupply. However, we believe that CIL is unlikely to pay any penalty, as it has the option to import coal to meet the domestic shortfall and in case the quantity offered for imported coal is not accepted by the purchaser, there will be no penalty for the shortfall.


• Quality assessment at loading end daily: There will be joint sampling, either manually or mechanically, for moisture, ash, and GCV of coal on a daily basis. The quality assessment will also help in implementing GCV based pricing system. Assessment at loading level is positive for CIL, as transportation related issues are beyond its control. Weighment of coal will be done at loading end. Positive for CIL


• Older FSAs to have priority: Commitments made under prior FSAs and commitments existing under "Coal Distribution System" shall take precedence over commitments made under the current FSAs. Positive for NTPC


• Lack of wagon availability to reduce availability; not to be included for calculation of penalty.


• FSAs fully reviewable by CIL: As per the terms, the FSA can be reviewed by either party after five years. And, nine months after the review, if either of them find the terms unsuitable, they have the right to end the agreement.


• Capacities – Total FSA for 25GW with 104mnte of LoAs (Letter of Assurance). 13.5GW of capacities have linkages with LOAs of 56mnte, which were commissioned in FY12. For FY11, 5.8GW of capacities have LoAs of 23.2 mnte. For FY10, 5.3GW of capacities have LoAs of 24mnte.


To read report in detail: INDIA UTILITIES
RISH TRADER

>CIPLA: A potential opportunity in Dymista which is a combination of azelastine and fluticasone; has been a development partner for Sweden-based speciality pharma company Meda AB

Sweden-based speciality pharma company Meda AB (MEDA) has indicated that its NDA for a combination inhaler branded Dymista (azelastine and fluticasone) for allergic rhinitis could be approved in H2CY12. Cipla is the development/manufacturing partner of Meda for this product. The global market size for azelastine is ~US$250mn market while that for fluticasone is ~US$350mn. We expect Cipla to benefit significantly when this product is launched in the US and EU markets in CY12. We have currently not built this prospect into our estimates and expect upgrades if and when this product is approved. Maintain BUY with target price of Rs393/share.


■ Dymista, the opportunity: Dymista is a combination of azelastine and fluticasone and is administered through an inhaler device. Having filed an NDA in the US in Jun’11 and a pre-registration in EU in Oct’11, Meda is preparing for a launch of the product in H2CY12. Individually, fluticasone (a steroid) and azelastine (antihistamine) have global sales of ~US$250mn and ~US350mn respectively and we believe that a combination has potential to offer better treatment. In one single product, patients will receive the benefit of a steroid (to treat the inflammation) and an antihistamine (for rapid effect and relief of nasal congestion).


■ Cipla as a partner: Cipla has been a development partner for Meda and will also be the manufacturer for the product – both the formulation as well as the inhaler device. In CY09, it expanded its partnership to include other major markets like Australia, Brazil, Europe, Japan and South Korea over and above the US and EU. We believe Cipla will gain from the combination product as its sales pick up.


■ Timelines: Meda has filed an NDA (for seasonal allergic rhinitis) in the US in Jun’11 and has indicated that its PDUFA (Prescription Drug User Fee Act) date for Dymista will be early May’12 indicating an imminent launch thereafter. In the EU Meda has filed a pre-registration in Oct’2011 and an NDA would be filed soon.


■ Recent underperformance provides an opportunity: Since the announcement of Q3FY12 results, the Cipla stock has corrected ~10%. Our estimates have not changed post the Q3FY12 results and we continue to believe that Cipla’s export potential remains under-appreciated. At current price, Cipla trades at 17.8x FY13E EPS – ~10% discount to peer average. We find value in the stock and thus recommend BUY with target price of Rs393/share.


To read full report: CIPLA
RISH TRADER

>SHAREHOLDING MONITOR

Promoters, public, FIIs and MFs are the major equity stakeholders in a listed corporate entity. Of the stakeholders, FIIs have been major investors in Indian corporates as is evident from the accompanying chart (Exhibit 1) with their holding in BSE 500 companies moving up from 11% in December 2009 to 12.2% in December 2011. The optimism displayed by FIIs in the Indian corporate growth story arises from the fact that the Indian economy remained relatively insulated from the global economic meltdown mostly on account of the strong domestic consumption, thrust on infrastructure development and a strong banking system. The resilience of the Indian economy reaffirmed the faith of FII investors who have increased their holding in Indian companies. After pulling out | 53,052 crore in CY08 during the global economic meltdown, FIIs have invested | 85,368 crore in CY09 and | 1,34,294 crore in CY10. In CY11, FII investments in equity have been volatile with a cumulative net outflow of | 3358 crore. Q1CY11 was characterised by a pre-Budget selloff with FIIs being net sellers to the tune of | 3100 crore while Q2CY11 had seen positive inflows to the tune of | 5171 crore and Q3CY11 has seen an outflow of | 2961 crore. Lastly, Q4CY11 has registered a net outflow of | 2450 crore. FII holding has declined by 4.1% in Q4CY11 with the BSE 500 index correcting by 9.5% to 5779 level in December 2011 from 6386 levels in September 2011.

To read full report: SHAREHOLDING PATTERN
RISH TRADER

>Crude Oil: Geopolitical tensions around Iran driving prices higher •

Oil prices have risen amidst increasing geopolitical tensions around Iran
Oil markets have increasingly focused on the escalating geopolitical tensions over the Middle East in general and Iran in particular. Iran is the second largest oil producer in OPEC, with an output of around 3.5 million barrels per day (mbpd), accounting for almost 4% of global oil production. In response to rising geopolitical concerns, the front-month Brent oil price has risen by around 12% in the month of February and hit a 9-month high of USD 125.55/bbl, while long speculative positions on oil have also increased. We had earlier highlighted the upside risks posed by geopolitical tensions to oil prices in our December report1.



The US, the European Union (EU) and Israel have been engaged in efforts to diplomatically isolate Iran over its alleged nuclear weapons program. The US recently imposed additional unilateral sanctions on Iran and froze Iranian Central Bank’s assets in the US. Earlier, US had classified the Central Bank of Iran (CBI) as a centre for money laundering, and also passed a law that would punish any foreign financial institution that did  business with the CBI. [For further details on Iran related sanctions, please refer to Appendix] Efforts have been stepped up to discourage countries from importing oil from Iran. Meanwhile, risks of a military conflict remain high-ranking US and Israeli officials repeatedly stressing that “all options remain on table”, an apparent allusion to military strike, in order to deal with Iran’s alleged nuclear weapons program. We attempt to briefly evaluate the risks to oil supply and energy security emanating from the current crisis over Iran.


Diplomatic efforts have increased to embargo Iranian oil out of world market
The EU on January 23rd agreed to halt oil imports from Iran from July onwards. Such an oil embargo will force EU to seek other sources of oil supply, and is likely to push up oil prices. The EU decision comes amidst increasing diplomatic pressure on Iran’s major trading partners – China, India, Japan and South Korea – to halt oil imports from the country and aid in its diplomatic isolation.


To read the full report: CRUDE OIL

>PROBABLE DELISTING COMPANIES

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


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


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


To read the list: DELISTING COMPANIES
RISH TRADER

>PRINT MEDIA: Hindustan Times, Jagran Prakashan, Mint & Dainik Bhaskar

We upgrade DB Corp to BUY from ADD owing to the recent correction in the company’s stock price, while maintaining our target price at Rs244/share. HT Media remains our top pick in the sector and we expect it to outperform other print media players on the back of its increasing readership (both Hindi and English) and turnaround in its new media ventures. High newsprint prices remain a concern for the sector.

• HT Media – Steady performance. HT Media witnessed a steady performance as per the IRS-2011-Q3 with its Hindi segment readership growing at 0.4% QoQ and English remaining flat. Hindustan Times maintained its leadership in Delhi ahead of Times of India in the English segment. In the Hindi segment, Hindustan maintained its leadership in Bihar and Jharkhand while posting a steady increase in its readership in Uttar Pradesh.

• DBCL – Strong growth. Dainik Bhaskar continued with its steady performance, growing 0.6% ex-Jharkhand as per the IRS-2011-Q3. The newspaper posted a strong 2% and 8% growth in readership in Madhya Pradesh and Chhattisgarh respectively, thereby maintaining its leadership. Dainik Bhaskar’s performance in Jharkhand was strong given that the IRS-2011-Q3 included the readership of its Ranchi edition for only nine months.

• Jagran Prakashan – Numero uno. Dainik Jagran maintained its overall leadership in 2011 Q3 in terms of Average Issue Readership (AIR), growing 0.4% over the previous quarter. Jagran’s AIR grew a robust 4.9% QoQ and 6.1% QoQ in Bihar and Uttaranchal respectively. In Uttar Pradesh, Jagran’s readership declined by 0.3% QoQ but it continues to report strong numbers in key urban towns of Kanpur, Lucknow and Varanasi.

• Mint – Maintains its no. 2 position. Mint maintains its position as the country’s no 2 business daily in terms of AIR, witnessing a 5.4% growth QoQ. Mint (ex-Hyderabad and Ahmedabad) enjoys an AIR of 253,000 against 812,000 for The Economic Times and 161,000 for Business Standard as of Q3 2011.

• Mid-Day posted a strong 6.4% QoQ growth, reversing its trend of declining readership since 2009R2. Mumbai Mirror’s AIR was flat in the latest IRS at 760,000 against 380,000 for Mid-Day.

RISH TRADER

>TATA STEEL: Jamshedpur expansion remains the key

Domestic demand visibility for upcoming expansion, concerns on Tata Steel Europe’s (TSE) margins, outlook on pension liabilities and incremental cashflow stress dominated investor concerns in our roadshow with Tata Steel’s (TSL) management. Though the stock at current level is drawing investor attention, the management’s cautious guidance on TSE’s H2FY12 margins, volumes and cashflow will lead to a wait and watch strategy. For us, it is the uncertainty over despatches of upcoming HRC capacity which is leading to maximum quantum of value loss. We have cut FY13 contribution from 2.9mtpa Jamshedpur expansion to 0.7mtpa from 1.3mtpa (the management still guides for 1- 1.2mtpa). Further, there are unnecessary concerns on domestic cashflow on the possibility of increased lending requirement, where one overlooks Rs30bn of working capital inflow in TSL in H1FY12. We are revising down our FY12/13 earnings estimates by 37%/19% respectively, we still maintain BUY with a revised target price of Rs482 (Rs590 earlier).

• Expansion volumes guided at 1-1.2mnte in FY13: The management maintained the commissioning of Jamshedpur expansion in March 12, pegging the first year volume estimate at 1-1.2mnte. We have revised down our FY13 incremental volume contribution from the expansion to 0.7mtpa from 1.3mtpa, in line with our in-house assessment of HRC demand scenario in India (using a bottom-up approach).

• Management’s cautious commentary on TSE’s margins reflects ongoing pricing weakness in Europe. Surprisingly though, the volume guidance is not tracking the margin commentary in Europe. Also, analysis of Ijmuiden’s margins suggests that sub US$20/te scenario in TSE for FY12 looks difficult.

• Pension liability continues to reign supreme in investor mind: TSL has clarified that P&L impact for restatement of surplus/deficit is not related to % deficit that can come out of actuarial valuation. Further, the management maintained that cashflow requirements would not be immediate.

• Still counting on release of working capital: Management clarified that impact of reducing raw materials as well as working capital release for TSE will be deferred to Q1FY13. We have taken almost flat working capital outflow in TSE in H2FY12 (HoH)

• Reducing estimates for domestic operations: We have cut target price from Rs590 to Rs482, ~90% of which is led by revision in the numbers of domestic business. Further, domestic numbers have higher probability of surprising negatively from current levels than TSE’s numbers. Nevertheless, we still see value in the stock. Maintain BUY.

RISH TRADER

>AXIS BANK: Low cost of funds propels bottomline (ICICI DIRECT)

Axis Bank declared its Q4FY10 earnings, which were above our expectations. The PAT grew 32% YoY to Rs 765 crore (we estimated Rs 716 crore). A drop in the cost of funds, primarily driven by repricing of bulk deposits, growth in demand deposits and QIP proceeds, helped the
bank to inch up its NIM to 4.1% (3.4% in Q4FY09).

Strong business growth leads to NIM improvement YoY, QoQ
The bank witnessed 23% YoY and 24% YoY growth in advances and deposits to Rs 1,04,343 crore and Rs 1,41,300 crore, respectively. This resulted in 23% YoY growth in total business of the bank. The key highlight for Q4FY10 was sequential 39 bps improvement in cost of funds, which helped the NIM to be at 4.1% levels. On the other hand, CASA was stable at 46%. We expect NIM to stabilise around 3.5% by FY12E.

Non-interest income
The non-interest income of the bank grew moderately by 10% YoY in Q4FY10 to Rs 934 crore. This was lower than our estimate of Rs 1,010 crore. Going forward, we expect 37% CAGR in non-interest income over FY09-12E to Rs 5,403 crore.

Asset quality showing early signs of stress
GNPA inched up QoQ by Rs 144 crore whereas NNPA improved by Rs 11 crore to Rs 419 crore. The GNPA slipped from 0.9% in FY09 to 1.1% in FY10, while NNPA stayed stable at 0.36%. The silver lining for asset quality remains the fact that provision coverage has improved sequentially from 69% in Q3FY10 to over 72% in Q4FY10. We have built in higher provisioning for the bank till FY12E to absorb any shock on asset quality.

Valuation
We expect the bank to generate a business CAGR of 22% over FY09- FY12E with NIM hovering around 3.5% levels. We expect the bank to deliver healthy return ratios with improvement in credit offtake. We expect RoA of 1.7% and RoE of 19% for FY12E. We are rolling over our target price on FY12E estimated ABV of Rs 544 and valuing the bank at Rs 1302 (2.4x ABV).

To read the full report: AXIS BANK

>FMCG: Steady growth (ICICI SECURITIES)

I-Sec FMCG universe is expected to post steady sales growth of 14.3% YoY on the back of strong underlying volume growth. Despite a high base, ITC is expected to register volume growth of 8.5% in Cigarettes. On a low base, HUL will deliver volume growth of 9%; but, because of price cuts, sales growth will be restricted to 6.3% YoY. Operating margins for our universe will expand 100bps YoY, albeit decline 160bps QoQ. Increase in input costs and rollback of excise duty will arrest any further margin expansion. We expect paint companies to post >60% PAT growth, while profits of Britannia and HUL are expected to decline. Valuations are high as most stocks are trading at 10-15% premium to historical valuations. We maintain ITC and Asian Paints as our top picks. We drop Marico from our list of top picks as the recent spurt in its stock price leaves limited room for upside.

■ Steady double-digit sales growth to continue. We expect I-Sec FMCG universe to post steady sales growth of 14.3% YoY in Q4FY10E, in line with the 15% YoY growth achieved in Q3FY10. Volume growth is expected to be strong across companies. According to Nielsen retail audit data, 40% of the categories have grown >10% over January-February ’10. ITC will continue to register strong volume growth in Cigarettes – we expect ITC cigarettes volumes to grow 8.5% YoY. On a low base and on the back of aggressive advertising spends, HUL will deliver volume growth of 9% YoY; however, price cuts will keep sales growth at 6.3% YoY.

■ Margin expansion reduces as material cost benefits wither away. Operating margins for the I-Sec FMCG universe are expected at 22.1% in Q4FY10E, implying only 100-bps YoY expansion versus YoY expansion of 260bps, 330bps and 181bps in the first three quarters of FY10. The quantum of margin expansion has come down owing to unfavourable base and increase in prices of raw materials. On a YoY basis, Asian Paints will witness the highest margin expansion (up 528bps), followed by Procter & Gamble Hygiene & Health Care (up 465bps), Kansai Nerolac (up 279bps) and ITC (up 214bps). Britannia’s margins will suffer the most (down 264bps YoY), followed by HUL (down 106bps YoY). As prices of raw materials rise and benefits of old contracts fade away, we expect input costs-to-sales to increase going forward.

■ Robust PAT growth of 19% YoY. We expect I-Sec FMCG universe to register robust PAT growth of 19% YoY. Asian Paints and Kansai Nerolac are expected to post highest growth, of 73% and 62% respectively; Marico, ITC, GSKCH, GCPL and Colgate are expected to witness PAT growth within the 20-25% range. Britannia and HUL will disappoint this quarter, with PAT decline of 11% and 2% respectively.

■ Valuations expensive but not stretched. The BSE FMCG index has outperformed the broader indices by ~35% since the market peaked in January ’08. This performance is despite HUL’s sluggish performance, who is a key constituent in the FMCG index. Most companies are trading at 10-15% premium to historical valuations. We maintain ITC and Asian Paints as our top picks. Marico was our top mid-cap pick in FY10 (over which it outperformed the BSE Sensex by 10% and BSE FMCG Index by 50%); however, post the recent spurt in Marico’s stock price, we drop Marico from our list of top picks owing to limited upside.

To read the full report: FMCG

>NTPC: From trot to gallop (ICICI SECURITIES)

We maintain BUY on NTPC with Rs243/share target price owing to: i) strong 14.2% regulated book CAGR with >2.9x rise in the pace of capacity addition to 15.8GW through FY11E-15E versus 5.4GW over FY06-10, ii) foray in merchant power (500MW Korba & 500MW Farakka) to gain from the current power deficit, thus boosting earnings – this will also mark the beginning of a new era for NTPC as it prepares for a non-regulated regime, iii) FPO overhang behind and iv) attractive valuations. Key risks are: i) inability to manage imported coal and captive production and ii) slow down in project accrual pace with mandatory competitive bidding beyond FY11.

■ Improved execution pace to boost regulated book. We expect 14.2% regulated book CAGR through FY11E-15E owing to increased pace of execution. NTPC is likely to commercialise ~15.8GW in FY11E-15E versus 5.4GW in FY06-10 due to increased focus on meeting XI Five Year Plan (FYP) targets, resolution of disputes with suppliers, significant rise in BHEL capacity and improved gas availability.

■ Merchant foray of 1GW – New beginning. NTPC has planned ~1GW merchant capacity addition in FY11E-12E. This will boost FY12E earning 6.4%, which will taper-off with softening merchant rates by FY15. We believe the foray marks a new beginning for NTPC, preparing it for the transition from 100% regulated business model to competitive bidding that will likely be implemented after FY11.

■ Key risks – Coal, competition and condition of state electricity boards. Operational performance was impacted for some of NTPC’s plants owing to low coal availability. Given constraints from Coal India (CIL) – supply CAGR a meagre ~5% – NTPC will have to ensure smooth coal supply via imports in the interim and captive production in the medium term. Further, the project accrual pace may slow down post FY11 as competitive bidding may become mandatory for PSUs. Finally, state electricity boards’ (SEBs) deteriorating health is a cause of concern for the Power sector and NTPC is not insulated from it.

■ FPO pressure behind; valuations attractive. The FPO overhang had created significant pressure on the stock. The stock has significantly underperformed the Sensex in the past one year (~50.4% YoY). We believe the current stock price offers ~18% upside with 2% dividend yield, taking the overall upside to 20%. BUY.

To read the full report: NTPC

>TECH MAHINDRA (ICICI SECURITIES)

We initiate coverage on Tech Mahindra (TechM) with HOLD as we believe that risks such as high client concentration and focus on single vertical will likely result in revenue & EBITDA underperformance (ex-Mahindra Satyam) versus peers. The Mahindra Satyam (erstwhile Satyam) acquisition was the right step in diversifying long-term organic risk, but achieving normalised EBITDA margin for Satyam is an uphill task and seems difficult till H2FY11/FY12. We strongly believe that for TechM, the margin for error is low versus peers considering organic business risks and the difficult task of turning around Satyam. Therefore, any major valuation re-rating is unlikely and we prefer other large peers, with BUY on HCL Technologies, Infosys and Tata Consultancy Services (TCS).

■ TechM – Real struggle still to start. TechM’s revenues have grown at a scorching ~47% over FY05-09 with 78% CAGR through non-British Telecom (BT) clients. Our analysis indicates that capex growth for most of TechM’s top-5 clients (still 75% of revenues) and telecom operators in the US/Europe is likely to be muted in the coming years. This is besides continuing trouble in BT and current high base, which indicate weakening revenue growth visibility for TechM. We believe, revenue growth, excluding BT and US/Europe, would require investment and will likely take toll on
margins. Within non-BT clients, most of the growth is likely to come through higher offshoring (not yet witnessed) and from clients outside the US and Europe (which still form 14% of current revenues; margin in these markets is likely to be lower).

■ Mahindra Satyam – Running a tight ship. The Satyam acquisition has put TechM in the league of other Indian IT large-caps, who are now moving up the value chain (e.g. Axon acquisition by HCL Tech). The current valuation of Satyam is already factoring in ~15-20% EBITDA margin in FY11E-12E versus likely single-digit EBITDA margin in FY10. Hence, we believe further valuation re-rating for Satyam (trading at FY11E & FY12E EV/E of 9.6x & 6.7x) is dependent on margin upside beyond 20%, which is an uphill task for the management and unlikely till FY12.

■ Initiate with HOLD and Rs925 target price based on sum-of-the-parts (SOTP): i) Rs533 for TechM (excluding Satyam), discounting FY12E diluted EPS by 13x (our EPS calculation excludes amortisation of restructuring fees over five years received from BT) and implied EV/E of 7.8x based on adjusted EBITDA and ii) Rs392/TechM share through Satyam – target EV/E of 7.4x Satyam’s FY12E recurring EBITDA, which is at ~40-45% discount to Infosys’s and ~10-15% discount to HCL Tech’s target multiples. (EV/E is a better multiple for Satyam given less predictability on items below EBITDA with restatement of earlier years’ accounts in future.) Our target price discounts consolidated FY12E diluted adjusted EPS (including Satyam) by 14x.

To read the full report: TECH MAHINDRA

>Ninth Annual Investor Conference 2010 (ICICI SECURITIES)

We concluded our ninth annual investor conference in Singapore last evening – over the two-day period, we hosted 36 companies and ~550 meetings. We thought the overall mood at the conference was neutral to slightly upbeat. Corporates are back in a growth phase and are aligning strategies accordingly. With the Government’s budget proposals out of the way and with no signs of any major upheavals in the global markets, most investors appear reasonably comfortable with overall market levels, though there does not appear to be any overt bullishness either. Key highlights from various meetings are detailed below.

India Unlimited

■ Financials. The banks expect the transition to a base rate regime to be positive for net margins. FDI relaxation is expected to be cleared in the monsoon session of the Parliament (from 26% to 49%). Non banking financial companies (NBFCs) seeking bank licences expect the Reserve Bank of India (RBI) to announce several regulatory requirements and there is also uncertainty on whether NBFCs affiliated to industrial houses could be granted such licences.

■ IT Services. Tata Consultancy Services (TCS) and Wipro are confident of surpassing NASSCOM’s FY11 target of 13-15% revenue growth (dollar denominated) – we expect FY11E growth to be 20%. Wipro has revised wages as well, effective February (2% onsite and 8-10% offshore).

■ Metals. The steel companies were quite upbeat. They expect at least 15% increase in domestic steel prices and given low dealer inventories, anticipate raw material price increase to be passed on. Capacity will significantly increase in India over the next few years but will still lag supply.

�� Oil&Gas – Fuel pricing. Bharat Petroleum Corporation (BPCL) expects deregulation in auto fuel pricing in the next 6-9 months and only a minor increase in kerosene prices. ONGC expects APM gas prices to be revised in phases from US$1.8 to US$4.2/mmbtu over the next three years.

■ Power. JSW Energy expects merchant rates of Rs5 per unit in FY11 and Rs4.5 in FY12. NHPC is in discussions with regulators to consider ~12% return on CWIP.

■ Real Estate & Infrastructure. Volumes in the residential segment have picked up across geographies with strong demand for mid-income housing and prices, in some locations, have crossed January ’08 highs. The commercial/retail segment remains lethargic. Lanco is looking to restructure and consolidate businesses to improve focus and funding options.

■ Telecom. The Telecom Regulatory Authority of India (TRAI) chairman presented a keynote address – the health of the industry is also an important consideration for the regulators, in addition to the requirements of the consumer. Rural penetration is another focus area. Mobile number portability (MNP) is likely in three months time.

To read the full report: ANNUAL CONFERENCE

>BHARTI AIRTEL: African safari gamble worth it (ICICI SECURITIES)

We upgrade Bharti Airtel (BAL) to BUY from Hold as its entry into Africa via Zain’s African assets (ZAF) is positive from a long-term horizon and reduces the risk of intense competition in India. BAL has bid for ZAF (excluding Sudan & Morocco) at US$10.7bn. The acquisition will give BAL control over ZAF and we believe while valuations are at a premium based on FY10E EV/E of 9.6x, the strategy will pay rich dividends in the long term. ZAF’s assets have been impacted in terms of growth and profitability by the currency devaluation and poor economic conditions. ZAF’s revenues declined 12% through 9MFY09 (annualised), but grew 5% based on constant currency. The ZAF acquisition is likely to lead to only 6% EPS dilution in FY12E (the second year of acquisition) and be EPS-accretive from FY13. We see the current fall in BAL’s stock price (11% post announcement) as a chance to accumulate since the performance will likely improve post more clarity on the deal structure and business fundamentals. Upgrade to BUY.

■ ZAF acquisition EPS-accretive by FY13. The ZAF acquisition is EPS-dilutive in FY11 and FY12, but we expect it to be EPS-accretive from FY13. We expect dilution in FY12 to be 6% assuming 100% debt funding. The acquisition through leveraging BAL’s balance sheet will improve the capital structure with low interest cost. In our view, this is a one time opportunity for BAL to enter the African markets and the premium valuations are justified for control.

“Cash combined with courage in a crisis, is priceless.” – Warren Buffett

■ African assets – Hidden jewel. We see the current profitability and market situation in Africa as misleading – post the credit crisis in ’08, African currencies significantly devalued 3-39%, with African nations highly dependent on natural resources (crude) and remittances. With current mobile penetration at 36% in ZAF’s markets of presence, Africa presents an opportunity similar to that in India in ’08 and will likely witness the maximum interest by global telcos in this decade.

■ We upgrade BAL to BUY at Rs345 target price as the current price correction is a knee jerk reaction in our view and entry into Africa via ZAF is a long-term strategy, thereby reducing the risk of hyper competition in the Indian markets. BAL’s increased debt owing to the ZAF acquisition leads to better capital structure, given that BAL’s balance sheet is being currently underleveraged in spite of its ability to raise low-cost debt. We attribute Rs273 value to BAL’s mobility business and Rs72 to towers with a total value of Rs345, implying an upside of 24%.

To read the full report: BHARTI AIRTEL

>YES BANK (ICICI SECURITIES)

Yes Bank’s Q3FY10 results were above expectations – net profits grew 18.5% YoY (I-Sec: 4.3% YoY) led by 69.5% YoY growth in NII. Credit growth, though high at 71.1% YoY, was broad-based. CASA improved to 10.1% in Q3FY10, while NIMs rose ~30bps YoY to 3.1%. Asset quality improved marginally – GNPAs fell 2bps QoQ to 0.29% – with specific provision coverage ratio at 70.4%. Capital adequacy was healthy at 16.2% (tier 1 at 9.2%). We tweak earnings to factor in higher loan growth, stronger margin and capital dilution in FY10 (from FY11 earlier). With the stock trading at 16.2x FY11E EPS & 2.5x FY11E BV, our Rs335/share target price (at 20x FY11E EPS) implies 23% upside. Maintain BUY. Sharp spike in NPL is the key risk.

SURPASSING EXPECTATIONS

■ Sharp credit growth; margins rise YoY. A 71.1% YoY credit growth, funded by a 63% YoY rise in deposits (with CASA rising 55bps QoQ & 91bps YoY to 10.1%) was the key highlight in Q3FY10. Credit offtake was broad-based and characterised by higher working capital financing this quarter. Management indicated its intent to grow credit at ~2x the industry growth. Overall duration of assets at 15-16 months was lower than 19-20 months for liabilities, indicating a favourable ALM profile in a rising rate scenario. Despite 340bps YoY contraction in yield on advances, deposit repricing and CASA accretion led to a 300bps fall in the cost of deposits, resulting in 30bps YoY NIM improvement. NII grew 69.5% YoY. We expect higher 42% NII CAGR through FY12E due to likelihood of higher-than-estimated credit growth.

■ Other income (ex-treasury) robust; costs contract. While financial advisory and transaction banking witnessed robust growth, income from financial markets was weak given negligible trading gains and a lull in foreign exchange activity in Q3FY10. Costs, however, decreased 5.4% YoY as Yes Bank added only five branches this quarter and employee costs declined ~15% YoY. We expect branch expansion to gather pace. Cost-to-income should stabilise at ~40% by FY12E.

■ Asset quality maintained; restructured accounts fall. GNPAs declined 2bps QoQ to 0.29%, though NNPAs rose 1bp QoQ to 0.09%. Specific provisioning coverage at 70.4% was healthy, while overall provisioning coverage was at 270%. Restructured accounts declined Rs219mn in Q3FY10. Outstanding restructured accounts now stand at Rs1.35bn or 0.71% of gross advances.

■ Strong growth trajectory. We foresee robust credit CAGR of 46% through FY11E, driving NII CAGR of 42%. We tweak earnings marginally to incorporate higher credit growth assumptions and capital dilution in FY10 (from FY11 earlier). Continued strength in other income and well-maintained asset quality will continue to drive ~18% RoE through FY12E. We maintain our 20x FY11E EPS multiple, with target price of Rs335/share implying 23% upside. Reiterate BUY. Sharp inflection in interest rates, chunky slippages and execution are the key concerns.

To read the full report: YES BANK

>AXIS BANK (ICICI SECURITIES)

Axis Bank’s Q3FY10 results surprised positively – net profits rose an impressive 31% YoY propped by 45% YoY NII rise and 35% YoY surge in other income, despite tepid advances growth at 12.5% YoY. Expansion-related costs pushed up overall operating expenses 28% YoY. Cost-to-income at 41.2% was stable QoQ and declined 408bps YoY. Asset quality was healthy with GNPAs and NNPAs at 1.23% and 0.46% respectively. Restructured accounts were at Rs23.1bn or 2.42% of gross advances (2.53% in Q2FY10). We raise FY11E earnings 7.4% to factor in higher-than-expected margin and lower FY11 loan-loss provision. We raise our target price to Rs1,228/share based on 2.7x FY11E BV (implying 16.6x FY11E EPS). Maintain BUY. Sluggish credit growth and NPL rise are the key risks.

Firm on its axis

■ Margins rise even as credit growth remains tepid. Subdued 12.5% YoY credit growth in Q3FY10 was a result of just 4% YoY corporate credit growth. Deposits grew 7.7% YoY with large-scale deposit repricing and strong accretion to CASA, which in turn led to 46% CASA ratio in Q3FY10. These coupled with the effect of capital raising led to margin expanding a sharp 48bps to 4% QoQ. We expect margin to come off from ~4%, but it will likely expand 18-20bps YoY in FY10E to 3.18%, leading to 21% NII CAGR through FY11E.

■ Strong core fee performance; costs up. Other income grew a strong 35% YoY, led by 29% YoY rise in fee & commission income. Trading income rose 49% YoY to Rs1.7bn. Despite a sharp 28% YoY rise in operating expenses, cost-to-income was stable QoQ at 41.2% in Q3FY10. We expect FY11E cost-to-income ratio at 42-44%.

■ Asset quality surprises positively. GNPAs & NNPAs rose 2bps & 1bp to 1.23% & 0.46% respectively. Accretion of Rs870mn from restructured accounts in Q3FY10 led to total restructured accounts at 2.42% of gross advances (2.53% in Q2FY10). We reduce FY11E loan-loss provisions to 105bps to factor in likely lower slippages.

■ Earnings upgrade, maintain BUY. Axis Bank is a strong play on pick-up in corporate credit growth, which will materialise as system credit growth picks up hereon. We anticipate this to lead to stronger YoY margin expansion and healthy other income growth through FY11. We FY11E earnings 7.4% to reflect better-than anticipated margin accretion, higher other income growth and lower loan-loss provisions. We raise our target price to Rs1,228/share based on 2.7x FY11E BV (implying 16.6x FY11E EPS). Reiterate BUY. Continued sluggishness in credit growth and re-emergence of slippages are the key risks.

To read the full report: AXIS BANK

>FERTILISER SECTOR (ICICI SECURITIES)

We expect PAT for I-Sec Fertiliser universe to decline 29% owing to high base – P&K business base was high on account of companies having benefited from rising P&K prices. Nagarjuna Fertilizers & Chemicals (Nagarjuna) is likely to witness a strong quarter on the back of increased capacity and higher trading volume; Chambal Fertilisers & Chemicals (Chambal) would see muted profitability. Improving international urea prices and expectation of a new policy has created a buzz around fertiliser stocks. We believe international urea prices, which have improved with demand pick up, would remain rangebound owing to significant capacity addition over the next three years. Ukrainian companies’ proposals for medium-term contract with government of India (GoI), at US$270/te for 3-5mnte further supports our belief about urea prices remaining rangebound. We believe there would not be any significant positive surprise on the policy front, post NPS- 3 expiry in April ’10. Tata Chemicals is seeing steady progress in brownfield urea project – However, gas availability and long-term gas contract would remain critical.

High base effect continues…

■ High base effect continues to impact GSFC and RCF. Owing to impact of inventory gains in the P&K business in base year’s profit, Gujarat State Fertilizers & Chemicals (GSFC) and Rashtriya Chemicals & Fertilizers (RCF) are likely to post significant profitability decline YoY.

■ Nagarjuna to post strong results on low base. Nagarjuna is expected to report 24% jump in EBITDA owing to increased production capacity and higher trading volumes. PAT is expected to rise 2.9x YoY to Rs179mn versus Rs46mn in Q3FY09.

■ International urea prices have crossed the US$300/te mark. Companies such as Tata Chemicals, Chambal and Nagarjuna are the key gainers as they have completed the debottlenecking exercise.

■ Urea prices unlikely to see sharp rally. We expect urea capacity addition of ~18% globally over the next three years and demand to rise 3.5-4.5% YoY. This implies that demand-supply mismatch is unlikely (in ’08, the mismatch had sharply driven up urea prices). That countries such as Ukraine are willing to sell urea to the GoI at US$270/te for a 3-5 year period, further proves that suppliers too are not expecting a rally, thereby attempting to lock in for the medium term.

To read the full report: FERTILISER SECTOR

>JAIPRAKASH ASSOCIATES (ICICI SECURITIES)

■ Key takeaways from our management meet with Jaiprakash Associates (JPA) are: i) strong volume growth in cement besides low-cost production and better market mix, ii) robust ~Rs400bn EPC orderbook, predominantly in house, iii) execution of 13.5GW power portfolio proceeding as per plans – merger of unlisted power holding company into listed subsidiary and iv) robust 11.5mn sqft sale of real estate YTDFY10 & soft launch of Jaypee Greens Sport City spread over 2,500 acres. We believe market concerns on funding can be alleviated via: i) annual operating cashflow of Rs10-12bn, ii) sale of treasury shares, currently valued at Rs27bn, iii) securitisation of its power portfolio worth Rs27.5bn and iv) fund raising initiatives of ~Rs40bn in both power and real estate. We expect consolidated revenue, EBITDA and PAT CAGR to be 37%, 40% and 38% in FY09- 12E. We maintain BUY with sum-of-the-parts (SOTP) target price of Rs171/share.

■ Cement volumes strong. YTDFY10 cement despatches rose 32% YoY to 6.3mnte and crossed 1mnte/month in November ’09. JPA recently commissioned 1.2mnte plant in Gujarat and expects to add 3.5mnte capacity at Baga/Bagheri in North India by February-March ’10. We factor in 36% volume growth to 10.4mnte in FY10E.

■ Robust EPC order pipeline. The Yamuna Expressway and Karcham Wangtoo are progressing well, likely to be completed by March ’11 & May ’11 respectively. JPA recently bagged Rs11bn contract for developing the inner ring road at Agra. Besides current EPC contracts of Rs400bn, predominantly in house, we estimate additional Rs200bn EPC contracts from in-house power portfolio and real estate construction.

■ Significant option value exists in power and real estate. With 700MW operational assets and 2,820MW projects under implementation (1,000MW transmission rights), JPA is likely to have ~8.8GW power portfolio by December ’15. The merger of its unlisted power holding company into its listed subsidiary would unlock value, in our view. Besides, JPA sold ~12mnsqft YTDFY10, aggregating upfront collections of ~Rs7.5bn. Also, JPA recently soft launched Jaypee Green Sports City, spread over 2,500 acres. JPA intends to raise Rs25bn via IPO for its real estate and Rs15bn via FPO/QIP during February-March ’10, which would further unlock value.

To read the full report: JAIPRAKASH ASSOCIATES

>CEMENT SECTOR (ICICI SECURITIES)

Overall cement sector despatches for November ’09 (including ACC and Ambuja Cement-ACEM) registered a healthy 8.6% YoY growth at 15.68mnte (10.9% growth YTDFY10). We believe this is ahead of Street expectations as: i) despatches growth dropped to 6.3-7.5% over September-October ’09, ii) despatches growth of 8.6% in November ’09 is on a high base of 12% growth registered in November ’08 and iii) this is despite continued sluggishness in demand growth in the South. Post the price hike of Rs10-15 per 50-kg bag in Andhra Pradesh effective December 1, ’09, our channel checks indicate further hike of Rs5 effective December 10, ’09. We believe the sector is entering a seasonally strong demand period post the monsoons and festival season and, hence, should witness minimal pricing pressure. We reiterate our positive stance on the sector and Grasim and ACEM remain our top picks.

■ Aditya Birla Group – Leading the pack; but ACC still lags. The Aditya Birla Group (Grasim and UTCL) reported despatches growth of 15.3% for November ’09. ACEM despatches were up 4.8%, while ACC posted 3% decline. Amongst others, Jaiprakash Associates, India Cements, Madras Cements and Shree Cements registered despatches growth of 46.3%, 25.6%, 18.1% and 15.2% respectively.

■ Despatches pick-up in West; South remains sluggish; rest of India sustains strength. Despatches from the West were up 10.6% YoY; Central, North & East registered YoY growth of 13%, 9.8% & 8.9% respectively. However, South remains sluggish, with muted growth of 4.6% YoY. All India utilisations (excluding ACC and ACEM), as per the CMA, improved to 80% vis-à-vis 78% reported in September ’09. Utilisations for November ’09 in the Central, North & East remained strong at 106%, 87% & 85%, while those of the West & South stood at 77% & 68% respectively.

UPBEAT DEMAND

■ Attractive valuations. We believe cement is a structurally strong domestic growth story over the medium-to-long term and any short-term cyclicality weakness should be used as a buying opportunity. We expect supply to be managed/staggered, while demand would regain strength, reducing supply-demand mismatch. We reiterate our positive stance on the sector. Concerns about oversupply are already reflected in current prices and any uptick in cement prices should positively surprise the market. Cement stocks have outperformed the Sensex 3-15% over the past month.

■ Top picks – Grasim and ACEM. We prefer North-based companies as well as players with capacity additions in the North as these would see better incremental realisations (Grasim and ACEM), early capacity additions (Grasim and UTCL) and higher cost savings (Grasim, UTCL and ACEM). Also, we recommend BUY on UTCL (on reduction in valuation discount post the proposed restructuring) and ACC (on attractive valuations and diversified presence).

To read the full report: CEMENT SECTOR