>Manmohan’s Tryst With Reforms

PM redeems his pledge to revive animal spirits, not wholly or in full measure, but very substantially


Slowing revenue growth but rebound in EBITDA and net profit growth: Revenue growth of Nifty companies is expected to fall to a ten-quarter low of just 13.4% YoY (the previous time it had fallen lower than this was in Q3FY10 at 9.9%). Revenues excluding Oil & Gas are expected to fall at 10.5%, again a ten-quarter low. EBITDA growth, on the other hand, is expected to bounce back strongly by 12.4% YoY (excluding Oil & Gas by 14.5% YoY). Similarly, PAT growth will bounce back by 16.4% YoY (excluding Oil & Gas by 16.4% YoY). Moderation in input price inflation on a YoY basis and strengthening of rupee leading to near-absence of foreign exchange losses has been responsible for this uptick in net profit growth. Revenue and PAT growth for all the companies under PL’s coverage universe are expected to grow YoY by 12.4% and 2.9%, respectively and de-grow QoQ by 0.1% and 7.5%, respectively. EBITDA margin (excluding BFSI) is expected to decline YoY by 1.01% and 0.08% QoQ. Corporate India continues to encounter headwinds in the form of slowing demand due to uncertainty in macro-environment and high interest rates.

Strong performance from Cement, Pharmaceutical and Banking & Financial Services sectors: Strong growth in realizations offsetting a tepid volume growth, observance of strict discipline by various players in the sector helping to maintain prices, healthy balance sheets and lower leverage levels due to strong cash flow generation will lead to a stellar performance by cement companies. Strong growth in the US, better operational performance and boost provided to net profits due to expected forex gains on hedges & foreign loans due to favorable currency movements will underpin pharmaceutical sector’s earnings. It is a story of contrasting halves in the Banking & Financial sector. Private Banks and NBFCs would report strong operating performance helped by easing of wholesale rates and retail asset quality holding up well. PSU Banks, on the contrary, will be impacted by muted loan growth and continuing pressure on slippages in bad & restructured asset book. Banks with overseas exposure could see contraction in their international book due to 5% rupee appreciation during the quarter.

Metals, Power, Construction and Real Estate continue to be laggards: Deteriorating global demand environment raising downside risks to spreads, weak domestic demand and excess supply in the domestic market will put pressure on earnings in metals sector. Power sector will continue to reel under increased fuel and interest costs causing delays in execution. Rising debt levels would continue to strain balance sheets and raise questions on viability of some power projects. No significant pick-up in order inflows, earnings impacted due to large interest burden as a result of high debt levels and no improvement in working capital cycle will put pressure on construction sector. Challenging macro-economic environment with no respite from high interest rates and no significant drop in prices impacting buyer affordability will continue to impact the performance of the real estate sector.

To read report in detail: INDIA STRATEGY
RISH TRADER

>INFOSYS: Inorganic Booster – Acquired Lodestone

Infosys announced acquisition of Lodestone, a Switzerland based management consulting company. The company has paid an enterprise value of CHF330m ($349m) in cash for the acquisition. We see the acquisition as a step towards Infosys 3.0. This will enhance consulting and system integration practise of Infosys. The transaction is expected to close by the end of October, 2012.

􀂄 About Lodestone – Strength in C&SI: Lodestone, headquartered in Zurich (Switzerland), current has ~850 employees, including 750 SAP consultants in the company. Lodestone Management Consultants is founded on August 1, 2005, by Ronald Hafner, Jürgen Bauer and Peter Ödman. All three founders have broad consulting and industry experience. It has more than 200 clients across industries including Manufacturing, automotive, life sciences, chemicals, and consumer goods sector. Post acq uisition Infosys would have Consulting and
Package Implementation revenue of $1bn+.

􀂄 Lodestone reported steady growth: Lodestone had reported revenue of
CHF207mn for 2011, growing from CHF181mn in 2010. Lodestone has presence in 17 countries across five continents, with the headcount growing steadily since 2005. It has in its kitty marquee clients like Allianz, BMW, Kimberly Clark, Sandoz SHAPE, Warner Chilcott, Munich Re, AGCO System and Roche. The acquisition will enhance the presence of Infosys in Europe and emerging markets like Latin America and Asia Pacific. Revenue for the Lodstone has grown at CAGR of 45% (2005‐11), whereas employee strength has grown steadily by 57% (2005‐12).

􀂄 Valuation & Recommendation – Much needed inorganic booster, Reiterate BUY: Infosys has been looking for acquisition from a long time to strengthen its presence in Consulting and Package Implementation domain. After loosing-out on Axon acquisition, Infosys organically grew its C&SI revenue to $525m (5% CQGR over last 20 quarters). We see this acquisition as much needed inorganic booster for the company. We reiterate “BUY” rating with a target price of Rs2,850.

To read report in detail: INFOSYS
RISH TRADER

>ROLTA INDIA

Rolta reported another quarter of revenue below expectation with margin ahead of expectation. The currency depreciation resulted in higher interest cost and MTM losses eroding bottom-line. As Rolta moves away from the services business to solution business, we continue to see likelihood of volatile earnings performance in H1FY13. The company has managed to honor its FCCB comittment by raising debt at 7.75% interest cost. High interest cost in a challenging demand environment makes the outlook for the company cautious. We retain our ‘Accumulate’ rating.

􀂄 Another quarter of low revenue but margins ahead: Rolta reported revenue growth of 4.4% QoQ to Rs4.45bn (PLe: Rs4.90bn, Cons: Rs4.60bn). EBITDA  margin expanded by 886bps QoQ to 54.6% (PLe: 45.9%, Cons:42.4%), driven by margin expansion in EGIS, EDOS and EICT segments by 977bps, 1557bps and 604bps QoQ, respectively. EPS de-grew by 29% QoQ to Rs2.97 (PLe: Rs4.22, Cons: Rs3.72), due to lower lower tax rate and stronger margin performance.

􀂄 Order book grew steadily in the quarter: Order book grew by 3.5% QoQ to Rs21.42bn, strongest growth in the last five quarters. EICT order book grew by 8.3% QoQ, the sharpest growth among all the segments, whereas EGIS and EDOS grew by 1.8% and 2.7% QoQ, respectively. Book-to-Bill (LTM) overall moved to high teens for the first time in the last five quarters. Q4FY12 book-tobill remains at 1.17, highest level since Q3FY11. The company’s decision to move away from low-end services business to solution offering could put additional pressure on order book. We expect order book to remain volatile.

􀂄 Other highlights: 1) FY13 Revenue growth guidance of 10-15% YoY 2) Total Capex in FY13: Rs500-2000m ) Tax Rate FY13: 18-20% 4) Total Debt: Rs23.5bn 5) Avg. interest rate on debt: 7.75% (Quarterly int. cost Rs420-450m @ Rs55/$)

􀂄 Valuation and Recommendation – ‘Accumulate’, target price of Rs85: We believe that the decline in the revenue is a matter of concern. We believe that a high interest cost in depreciating currency and a weak business environment could result in decline at the bottom-line. We retain our ‘Accumulate’ rating, with a target price of Rs85, 6x FY13e earnings estimates.

To read report in detail: ROLTA INDIA

>ABAN OFFSHORE: Interest charges mar profits

􀂄 Operational performance in line: Aban’s operational performance was in line with expectations, with top-line at Rs8.5bn (16.2% YoY growth and 5.8% QoQ growth). The depreciation in rupee was the major contributor to the top-line growth. Margins stood at 59.5% as against 62% in Q1FY12 and 52.5% in Q4FY12.

􀂄 Interest charges rise sharply with rupee depreciation: On account of ~70% of the loans being foreign currency loans, interest charges have moved up sharply with rupee depreciation, coupled with an increase in interest costs. Interest charges for the quarter stood at Rs3.1bn, 44% up YoY and 9.4% up QoQ. On account of this, increase in the company’s PAT stood at Rs521m, a decline of 41% YoY and 35% QoQ.

􀂄 Vessel status: Of the 18 vessel fleet, 16 are contracted. DD7 started its contract in June 2012 at a day rate of US$147000/day. Contracts for five vessels will expire in September 2012 and hence, their deployment is the key to watch out for. Other than one asset, all the assets coming up for re-deployment are new and hence, we do not foresee too much trouble in deployment of the same. However, since the company has not yet announced any new contracts, we expect a time lag in deployment.

􀂄 Valuations: We are valuing Aban at 6x FY14 which gives us a value of Rs413. We upgrade the stock to ‘Accumulate’.

>TITAN INDUSTRIES

􀂄 Policy actions impacting; though not significantly: Government policy actions (customs duty, PAN card restriction) have started impacting TTAN, though not significantly. However, it is moderating the pace of shift from unorganised to organized segment, of which, Titan has been a key beneficiary so far. According to the management, absence of consumer demand in grammage terms, particularly in the last six months, has been slightly surprising despite the
prevailing weak consumer sentiment.

􀂄 Various plans to induce demand: On its part, in order to induce consumer jewellery demand, TTAN is experimenting with an exchange scheme in some states and intends to roll it out on a bigger scale soon. Currently, exchange forms just 15% of the business and in the new scheme, it will accept even Jewellery from other retailers with some carratage correction. As per management, it will help achieve twin objectives: a) restrict cash outflow for consumer and b) reduce overall Gold imports for the country. It may also contemplate a cut in labour charge to drive jewellery demand.

􀂄 Watches – expanding selectively: TTAN will concentrate its efforts around Fastrack and Helios and will go easy on World of Titan expansion as it already has a geographically strong 350 store presence.

􀂄 Confident of achieving medium‐term target (US$3bn turnover by FY15e): Focus for FY13e has shifted to bottom-line growth by cost containment (wherever possible) and margin enhancement (direct Gold import will save 70bps). We maintain ‘BUY’ with TP of Rs255.

RISH TRADER

>Gujarat Pipavav Port

􀂄 Container volumes down sharply: Container volumes witnessed a sharp decline of 26% sequentially to 122716 TEUs on account of Maersk shifting one of its lines to Mundra Port. Although this has been replaced by another line, it is much smaller in terms of volumes and is likely to take 2-3 quarters to scale up. Further, the uncertainty in the overall container trade situation proves to be of no help to volumes as well. Bulk volumes, though better than expectations at 0.87m TEUs, remain lacklustre due to lower coal imports.

􀂄 Weak EBITDA margins; other operating income props results: GPPV’s operating revenues declined 6% YoY and 7% QoQ on account of weak volumes. The company reported ‘Other Operating Income’ of Rs87m as duty benefits under the SFIS scheme which we have clubbed with other income. Excluding this, margins for the quarter stood at 41% as against 44.9% in Q1FY12. PAT (inclusive of other operating income) grew 44% YoY and 12% QoQ.

􀂄 Repaid debt post QIP: Post the QIP+ preferential issue of Rs3.5bn, the company has prepaid debt of an equal amount. It plans to raise Rs6.5bn through the ECB route to fund its expansion plan. Its expansion plan entails an investment of Rs11bn which shall be financed through equity of Rs3.5bn, debt of Rs4.5bn and the remaining through internal accruals.

􀂄 Reducing estimates for CY12: On account of the pressure on container volumes which has a direct impact on margins, we have reduced top-line estimates by 7.2%, EBITDA margins by 500bps and hence, PAT by 21.5%.

􀂄 Valuations: Although we see near-term challenges for the company on the container and bulk volume side, we retain our positive stance on the stock, given the favorable long-term volume growth prospects and resultant margin expansion expectations. Based on our DCF-based approach, our SOTP-based target price stands at Rs63/share. We (Prabhudas Lilladher) maintain ‘Accumulate’.
RISH TRADER

>Deepak Fertilisers & Petrochemicals Corporation

Beats estimate, cost pressure continues…


􀂄 Better‐than‐expected quarter: Deepak Fertilizer and Petrochemicals’ (DFPC’s) net sales grew by 33.8% YoY to Rs6,341m (PLe: Rs4,839m). Higher fertiliser trading sales resulted in better-than-anticipated Q1FY13 sales. Chemicals and Fertiliser volumes grew by 9.6% and 2.2% YoY, respectively. Complex fertiliser volumes de-grew by 6.5% YoY on account of liquidation of inventory as industry had pushed the same during Q4FY12. DFPC’s EBITDA de-grew by 9.5% to Rs1,022m (PLe: Rs966m). EBITDA margins have fallen by 770bps YoY (up 320bps QoQ) to 16.1% mainly due to higher input cost (ammonia and propylene) in the chemical segment. Further, higher contribution of fertiliser trading business (low
margin business) has resulted in lower EBIT margin in the fertiliser business. We believe that the rupee depreciation has also impacted the same. Chemical segment’s EBIT margin has came down by 800bps YoY to 20.4% (up 410bps QoQ). Finance cost is up by 109.6% YoY to Rs266m (up 9.0% QoQ) due to an increase in working capital with the delayed receipt of government subsidy and full capitalization of new TAN plant. Adjusted PAT de-grew by 28.8% YoY to Rs455m (PLe: Rs389m).


􀂄 Key Highlights: Management believes that global ammonia prices would ease from H2FY13 which would consequently ease the stress on company margins, going forward. Company is steadily ramping up the capacity utilization at the new TAN plant and is expected to produce 2L MT (~70% utilization level).


􀂄 Maintain ‘Accumulate’: During FY04-12, stock traded in the P/E band between 4x-7x. We maintain our “Accumulate” rating on the stock, with the target price of Rs148 (i.e.6xFY13E). Stock has dividend yield of 4.2% at CMP. We believe that cost pressures will continue in the next couple of quarters and further, issue of KG basin gas allocation to P&K producers would be a near-term risk to the stock.

RISH TRADER

>Tata Consultancy Services

Tata Consultancy Services (TCS) reported Q1FY13 results touch-ahead of PLe/ consensus expectations. The management indicated no worrying signs in clients’ spending behaviour. Moreover, they indicated that some of the delays that they had witnessed at the beginning of the last quarter are allaying away. We see uncertain demand environment and weak pricing environment to restrict consensus estimate upgrade. We retain our ‘Accumulate’ rating, with a revise target price of Rs1,290.



􀂄 Beaten expectation in a challenging environment: TCS reported Q1FY13 results touch ahead of PLe/consensus expectation. Revenue grew by 12.1% QoQ to Rs148.69bn (PLe: Rs145.85bn; Cons: Rs146.41bn) and 3% QoQ in USD terms, led by better-than-expected volume growth of 5.3% QoQ (PLe: 3.7%). EBIT margins eroded by 20bps (PLe: +30bps, Cons: -20bps) to 27.5%. EPS grew by 11.7% QoQ to Rs16.76 (PLe: Rs16.53, Cons: Rs16.01).


􀂄 Is pricing at risk? The pricing in Q1FY13 declined by 1.06% QoQ in constant currency. However, the management sees no pressure on pricing. Nevertheless, as the demand environment gets challenging, the competitive landscape will give opportunities to client to take advantage and seek pricing cut. Moreover, peers would use pricing as a strategy to regain market share. We see pricing to remain under pressure in the near term.


􀂄 Growth ‐ broad‐based or select few? According to the management, the deal pipeline is more broad-based and the growth has come across the vertical. The strong growth in BFSI and telecom is led by one client ramp-up in each vertical. We see the growth getting scarce as the demand environment gets challenging. However, already pocketed deals for TCS gives better visibility of revenue compared to peers. The management is confident of achieving higher end of NASSCOM guidance in the constant currency terms.


􀂄 Valuation & Recommendation: The current price factors in strong performance by TCS. We tweak our model; hence revise our target price to Rs1,290 (from Rs1,270), 17x FY14E earnings estimate. We value TCS on FY14 due to better revenue visibility compared to Infosys, which we value on FY13 estimates.


To read report in detail: TCS


RISH TRADER

>BHEL

Ambitious targets set


We (Prabhudas Lilladher) recently met with the management of BHEL to get an update on the latest developments in the company and its strategy, going forward. The key takeaways of the same are as follows:


􀂄 Betting on government projects: BHEL is targeting order inflow of ~14,000MW in the current year based on different projects under various stages of discussions, tender pipelines and upcoming bids. Most of the projects are from the States and the Centre. The company has not considered the recently cancelled tender by Rajasthan SEB (Suratgarh/Chabra) in the pipeline. It is looking to bid for the revised tender. We believe that the target is quite ambitious, given the impending coal shortage issue and no resolution in sight.

􀂄 Power to dominate the orderbook in current plan, Transportation to dominate industrial segment: BHEL believes that the power sector will continue to dominate the order book in the current plan. Out of the new business (Transmission, Water, Transport, Oil&Gas etc.), it is looking to scale up the industrial segment transportation which could be the largest pie (~50% of the segment) over the next five years. The company is also exploring opportunities in the metro railway, given the huge likely thrust on metro in various cities over the next few years. It is expanding its capacity for railway locomotives from 50/annum to 75/annum. It is expecting order of ~100-125 loco from railways in the near term. It has seen no movement in awarding of locomotive plant to be built in Bihar/West Bengal. BHEL has requested the government to consider awarding at least one of the plants on nomination basis.





􀂄 Other Highlights: Out of the current order book of 62,000MW (55,000MW power, 4,000MW industrial and 3,000MW international), there are no slow moving orders. BHEL plans to add 11,000 employees in the XI plan period (will periodically scale down if needed) against 20,000 employees added in the XI plan.


􀂄 Outlook and Valuation: The stock is trading at 9.4X FY14E earnings. Though the stock is trading at multi-year low valuation, depleting order book, weak pipeline of orders, risk to execution from few private orders in order book, risk to margin due to continued pricing pressure and lack of meaningful progress on new initiatives continue to make outlook uncertain. We maintain our negative stance on BHEL.

>INDIAN BANKS: How intense is the credit cycle and what is factored in ?

Our detailed corporate health check for ~3500 listed companies indicates that the credit cycle is getting deeper with breadth of mid and small cap companies facing stress increasing at a brisk pace along with an elongated down cycle, leading to higher ultimate delinquencies. But the good part is asset for large caps (excl. Infra, ~60% of debt) have held up relatively better and more importantly, stress sectors have already seen large scale recognition, either as NPA or restructured asset. We do not see a significant rebound in the credit cycle near term and hence, prefer ICICI/Axis, where corporate underwriting has been robust and our sensitivity analysis indicates 15% upside even considering ~15-20% write-offs. PSU banks’ adj. valuation is undemanding indicated in our rating upgrades in some PSU names after 4Q12 but the BUY case for PSU banks is more contingent upon a fast recovery
and more importantly front ended monetary easing.


 Corporate health check – Analysing pain points: We ran a detailed Interest coverage (IC) analysis of all listed companies to understand breadth/depth of the credit cycle. The bad news: (1) IC, for mid corporate and SMEs, has come to levels below 08-09 levels with increasing intensity - 25% of mid and SME companies with IC of <1x. (2) The bigger worry is that IC for mid and small caps have remained low for 3-4 quarters now and elongated stress time leads to ultimate delinquency. The good news: (1) Some pockets in large caps are seeing some incremental stress but overall IC levels remain comfortable and this reduces asset quality risks as they constitute ~60% of the total Rs15trn of industrial credit we analysed.


 What levels of stress is recognized/discounted? Though the credit cycle is building up, segmental data provided by SBI/PNB indicate that 10-25% of total exposure in some stress sectors has already been recognized (either NPA or restructured), though intensity continues to increase. Engineering/construction still remains vulnerable as stress recognition remains lower than stress indicated by our IC analysis.


 Factoring risks not captured through our IC analysis: Infra risks/delays are still to hit P&L and hence, our IC analysis does not capture Infra/power risks. Our bottom-up analysis indicates that ~20GW of thermal plants face fuel/off take issues (~20% of capacities commissioned in 09-15E). Though we expect large restructuring in private power space, strong promoter financials in some cases, extension of loan tenure and most importantly systemically acceptable level of cost of power produced (Rs3.1-3.2/unit) even assuming 25% imported coal blending, will significantly limit ultimate delinquencies.


 Stress testing- ICICI/Axis remain top Buys : Our stress test indicates that valuations for ICICI/Axis is ~15% lower than their LT averages after considering ~15-17% hit to book values. The hit on PSU banks book is larger at ~30% of book given NPA shortfalls and higher restructuring, but that seems to be fcatored to some extent in valuations. The credit cycle is getting elongated and challenging and easing modetary stance now will bring some relief to asset quality.


To read report in detail: INDIAN BANKS

>RAYMOND: Moving towards an asset-light model:

■  Strong branded retail play: Leveraging on its strong five decade old brand, Raymond is spurring ahead and expanding its retail presence which is currently at 853 stores, up from 584 in FY09 and targeting 100 stores/year, going forward. The might of the brand is further accentuated by the fact that 78% of its stores are franchises. Besides, its franchise model involves outright purchase of stocks by franchise owners, thus, limiting the company¡¦s working capital.


■  Focused restructuring paves the way: Raymond has been on a strong upward trajectory post its FY08-11 restructuring. Strong scale-up in revenues and cost savings have emanated from the series of restructuring activities undertaken which includes transfer of its Thane operations, closure of its loss-making denim factories, realignment of its brand strategy, as well as stabilisation of ERP. With the restructuring complete, we expect a clear runaway, going forward.


■  Moving towards an asset-light model: Keeping a strong eye on return ratios which are currently low, Raymond targets to remain asset-light by focusing on its franchise-strategy on the retail side as well as outsourcing of routine manufacturing processes.


■ All-round growth: Besides the textile & garments segment, which is expected to grow at 15% CAGR over the next two years, the company expects strong growth of 28% CAGR for its engineering division as well which includes the tools & files as well as the auto components segment.


■  Valuations: We have used a host of consumption names with retail bend for comparison since there is no strict peer group for the company. These trade at an average PER of 26x FY13 & 23x FY14, albeit with much higher return ratios than Raymond. Accounting for the same, we are valuing Raymond at a PER of 12x FY14 which gives us a value of Rs467/share. Further, the prime land in Thane owned by the company provides an option-value of Rs244-326/ share, although not included in our target price. We initiate coverage on the stock with
a ¡¥BUY¡¦.


RISH TRADER

>VOLTAS: Update on Sidra Project

■  Margin improvement drive earnings surprise: Voltas reported numbers which was ahead of our and street estimate by reporting better-than-expected margin for the quarter. It reported EBIT margin of 8.3% in the MEP segment (100bps improvement QoQ). The improved margins were primarily driven by improved follow-up, leading to recovery of variation claims in few old projects. Sales reported de-growth of 5.8% YoY at Rs15.7bn lower than our expectation of Rs17.1bn. PAT was up 7% YoY to Rs1.04bn.


■  Update on Sidra Project: Sidra Medical and Research Centre Hospital project in Qatar is ~67% complete. Voltas has taken a hit of Rs3.2bn in FY12 on this project. The company believes that the execution of the Sidra project will get extended beyond FY13 as client continues to make changes in the project design. Voltas will conduct a techno commercial study in July-August (similar to one done in Q3FY12) to assess if any further provisions are required in the project.


■  Outlook on ordering: Voltas ended the year with an order book of Rs42.3bn, down 12% YoY. It bagged orders worth ~Rs23bn in FY12 and Rs4.5bn in Q4FY12. In the international markets, the company has started seeing some signs of revival, especially in the Dubai markets and expects to see more traction over the next six months. In Abu Dhabi, the airport order has been awarded to the main contractor. We expect the sub contractor to get finalised by October (Voltas along with JV partner bid for the same). The Joint Venture established in the new geography of KSA has begun to make progress and expects traction in Qatar and the KSA markets (already bagged orders worth Rs3.6bn in Qatar though a private JV). In domestic markets, the commercial real estate and IT/ITES continues to be slow. However, hospital and hotels have seen some
traction. Entry into in new segment in industrial space like Power, water and MEP project for automotive industry will help widen the scope of business and support growth in orders.


To read the full report in detail: VOLTAS
RISH TRADER

>AXIS BANK: Robust in FY13 with slippages/restructuring remaining inline with FY12

Axis bank’s top management ressured that they expect asset quality to remain robust in FY13 with slippages/restructuring remaining inline with FY12 levels and limited risk from growing Infra book in the near term. Retail focus will help mitigate some growth pressures but fee income will moderate. We continue to believe that market is dis‐regarding recent corporate asset quality performance and stable asset quality trends will surprise in the near term. Valuations at 1.6x FY13 book is undemanding; Axis/ICICI continue to remain top picks.


􀂄 Key Takeaways from the Management roundtable:
(1) Retail credit – Key focus: Axis re-emphasised their thrust on increasing share of retail to 30% from 22% currently. Liability customers constitute ~45-50% of incremental sourcing which we believe is a credit positive.
Management is seeing significant pricing competition in mortgages but believes competitive landscape is relatively better in auto lending.


(2) Corporate asset quality/Infra portfolio relatively comfortable:
Delinquency/restructuring in expected to remain in line with FY12 levels v/s consensus expectations of a pick up in slippages/credit costs. Axis does not expect any material near term pressure on Infra portfolio with very limited exposure to imported coal and gas projects. Power portfolio remains unseasoned (at currently 25% project commissioned) but management expects ~45% of their portfolio to be commissioned by FY14.


􀂄 Key Annual report takeaways: (1) Growth in stress sectors exposures (ex Infra) moderated to 14% y/y with contraction in non fund exposure. Infra exposure expanded by +33% y/y with power portfolio expanding by ~60% y/y largely driven by increase in non-fund exposure (2) Accretion to RIDF book of Rs10bn continue to remain low with total RIDF book equivalent of ~3% of loan book


(3) In line with industry trends, retail NPAs showed significant improvement from 1.4% to 0.8% in FY12 . Large and SME NPAs have also contracted except for services which has seen an increase in NPA levels.


To read report in detail: AXIS BANK
RISH TRADER

>CHAMBAL FERTILIZERS AND CHEMICALS: Strong Q4FY12 operational performance

Chambal Fertilisers and Chemicals’ (Chambal’s) Q4FY12 net sales, EBITDA and PAT have shown strong growth of 132.6%, 83.4% and 43.5%, respectively on YoY basis. EBITDA and PAT were broadly in-line with our expectation, while sales was higherthan- expected on account of strong trading sales. We expect Chambal’s EPS to grow by FY12-14 CAGR of ~11% on account of lower depreciation and interest. Stock had corrected ~13% and ~22% in the past one and six months, respectively. We believe that stock valuation has been reasonable post correction and is providing good medium-term investment opportunity (six months). We are upgrading the stock to ‘BUY’ with a TP of Rs83 (10xFY13E EPS). Any positive policy outcome could be an upside to our TP.


■ Strong Q4FY12 operational performance: Chambal’s Q4FY12 standalone net sales grew by 132.6% YoY to Rs18.8bn (PLe: Rs13.0bn), primarily on account of 8.2x YoY growth in trading sales. Better-than-expected sales were mainly on account of higher trading sales (Rs7.9bn v/s PLe: Rs6.0bn). Trading sales was higher as industry as well as company has pushed non-urea fertiliser product into the market to claim higher subsidy because government has cut down the subsidy for FY13. Urea sales volume was up by 2.0% YoY to 4.5Lac MT. Urea realization and EBIT/MT was higher by 34.4% YoY and 244.6% YoY, respectively, primarily due to accounting of import parity price (IPP) linked subsidy. Company has taken urea price of US$415/MT for IPP accounting on conservative basis v/s average of global urea price for FY12 – US$460/M). Sales of shipping and textiles businesses were as per our expectation. Chambal’s EBITDA grew by 83.4% YoY to Rs2.3bn (PLe: Rs2.3bn). EBIT/MT in urea business grew by 244.6% YoY to Rs3,733/MT (up by 84.4% QoQ, PLe: Rs3,000/MT).


■ Q4FY12 PAT grew by 43.5% YoY: Chambal’s depreciation de-grew by 20.3% YoY to Rs0.5bn (lower by 29.3% QoQ) because company’s urea Gadepan-I plant got fully depreciated (operational in 1993) during the year. Interest cost has gone up by 34.9% YoY to Rs0.3bn (up 15.2% QoQ). Company PAT has shown growth of 43.5% YoY to Rs1bn (PLe: Rs1.1bn). Company has received one-time dividend from one-third joint venture IMACID of Rs0.9bn (net of tax Rs0.8bn) during the quarter. Further, company has taken exceptional deferred tax and tax reversal of Rs0.9bn and 0.1bn, respectively, during Q4FY12. We have considered dividend income and tax adjustment as exceptional item. Hence, reported PAT stood at Rs0.9bn.
􀂄 Snapshot of FY12 consolidated results: Chambal’s consolidated net sales, EBITDA and PAT grew by 32.6%, 16.4% and 41.0% YoY to Rs75.4bn, Rs9.2bn and Rs3.3bn, respectively (PLe: Rs72.3bn/Rs8.9bn/Rs3.3bn). IMACID has shown net sales growth of 51.8% to Rs6.4bn (PLe: Rs6.3bn) led by higher phosphoric acid prices globally. IMACID EBIT grew by 1.6x YoY to Rs0.9bn (PLe: Rs0.9bn). Company’s IT business has shown improvement during FY12. IT business has reported loss of Rs0.7bn during FY12 v/s Rs1.1bn in FY11 (PLe: Rs0.7bn). Chambal’s gross and net debt stood at Rs34.7bn and Rs29.9bn, respectively (v/s Rs25.8bn and Rs19.6bn in FY11) because of higher debtors led by inventory push during Q4FY12. Company’s working capital days have gone up from 42 days in FY11 to 100days in FY12.


■ Expansion Projects: Chambal has approved setting up of Single Super Phosphate (SSP) plant in Dahej, Gujarat, with an annual capacity of 5Lac MT at a project cost of Rs122cr. Company is yet to receive environmental clearance for the project which is expected to take 24 months to complete. Land has already been allotted during Q3FY12 to the company. We have considered capex as CWIP in our FY13 and FY14 estimates. Further, company is also setting up a SSP plant in its existing facility at Gadepan, Kota (Rajasthan), with a capacity of 2Lac MT at the capex of Rs32.5m. Project is likely to get operational by Q1FY13 (June 2012). We have considered production of 1Lac MT and 1.5lac MT in our FY13E and FY14E estimates, respectively.


■ We expect EPS of Rs8.3 during FY13: We believe that company’s net sales would de-grow by 13.3% YoY to Rs65.2bn mainly on account of lower trading fertiliser sales led by lower subsidy as well as volumes. We expect Chambal’s EBIT to grow by 1.9% YoY to Rs6.2bn. Company’s Gadepan–I urea plant is fully depreciated now and we expect ~Rs0.5bn savings in depreciation during FY13. Hence, it is expected to boost profitability of urea business. But, it would be set‐off by lower contribution by trading business. We believe that IMACID is likely to report lower profit during FY13 on account of lower phosphoric acid. We are assuming EBIT Rs0.5bn (v/s Rs0.9bn in FY12) in IMACID. Further, Chambal’s IT business is operating at ~US$1.5m‐2m loss/quarter at present. Hence, we are assuming EBIT loss of Rs0.3bn (v/s Rs0.7bn in FY12), considering the present run‐rate. We expect 4.2% YoY growth to Rs3.4bn during FY13.


■ Valuation and Outlook: We expect Chambal’s consolidated PAT to grow at FY12-14E CAGR of 10.9% (v/s 10.8% in FY05-12). At present, stock is trading at one-year forward P/E of 8.5x (v/s trading range of 6x-13x for the past ten years). Stock has corrected ~13% and ~22% in the past one and six months, respectively. We believe that stock valuation is reasonable post correction and it is providing good medium term investment opportunity (i.e. six months). We are upgrading the stock to ‘BUY’ with the TP of Rs83 (10xFY13E EPS). Any positive policy outcome could be an upside to our TP. Our industry interactions suggest that government is likely to modify the present urea policy by increasing fixed cost reimbursement by Rs350/MT to urea players. If it gets approved in the near term, then we expect Chambal’s FY13E earnings to upgrade by 12.2% to Rs9.3.


RISH TRADER

>SJVN: The defensive bet

■ Strong dividend yield, negligible downside: We are turning positive on SJVN, primarily on the pretext of the deteriorating thermal power scenario, volatile market conditions and the company being the highest dividend yield (5-6%) play. The company has a sound operating history and some near-term trigger which will give an impetus to the earnings growth. We expect an EPS and book value CAGR of 7% and 9%, respectively, over FY12E-15E.


■ Capacity addition of 27% to the present capacity by FY15E: SJVN’s current operational landmark, the 1500MW Nathpa Jhakri Hydroelectric Project (NJHEP) on the river Sutlej, is running at an average plant availability factor of 99-100% during FY11—12E (which is above the normative benchmark of 82%) and thus, has surpassed MOU targets. The company is now expected to commission the 412MWs’ Rampur project (located downstream to NJHEP) by FY15E and is likely to commence another 50MW wind project during the same period. Post that, an additional capacity of nearly 1.3GWs is expected to come in by FY21E.


■ Annuity‐based sales guarantee ROE: NJHEP plant operates under the CERC norms and is entitled to earn ROE of 15.5% on the regulated equity of Rs41bn plus incentives based on the upside from good monsoons which aid ROEs by atleast 4-5%. We expect the total returns to grow to Rs10.5bn in FY15E from Rs8.8bn in FY12E.


■ Valuation and Recommendation: SJVN is a relatively steady and safe bet on account of a proven track record in terms of operations, a small but reliable capacity addition and a superior dividend yield of 5-6%. The company trades at 0.8xFY14E which is at par with NHPC’s (Accumulate, TP Rs24) current valuations but below NTPC and Private IPPs. In the absence of any convincing sustainable story in the thermal sector, we turn positive on the hydro sector and thus initiate on SJVN with a ‘BUY’.


 To read report in detail: SJVN
RISH TRADER

>GEOMETRIC: One‐off marred, otherwise a decent quarter

Geometric posted a steady revenue growth in line with expectations, however EBITDA margin deteriorated by 544bps QoQ to 12.5% due to extra ordinary items of expenditure & currency fluctuation. In our upgrade note in the previous quarter, we indicated presence in growth market, with focus on margins yielding stronger performance. But this quarter performance marred our expectation due to volatility. We retain ‘Accumulate’, with a TP of Rs80.


■ Steady performance accompanied by lower than expected margins : Geometric reported in-line revenue growth of 2.7% QoQ to Rs2.25bn (PLe: Rs2.21bn, Cons:Rs2.20bn) and 5.4% QoQ in USD terms to $44.92m (PLe: $43.91m). EBITDA margin dipped by 544bps to 12.5% (PLe: 17.4%, Cons: 16.5%), due to rupee depreciation, higher utilization & extra ordinary items of expenditure. EPS degrew by 39.9% QoQ to Rs2.04 (PLe: Rs3.23, Cons: Rs3.15).


■ Two‐fold performance – Revenue growth and margin expansion: We believe that the company’s strength in PLM and PES space is playing out well. The company’s ability to cross-sell strength of different geographies has started paying-off. We expect steady margin performance as these extra-ordinary is not going to be part in FY13. The management didn’t give detail for extra-ordinary.


■ Conference call highlight 1) Volume growth at ~5.1%, no change in pricing 2) New contracts amounting to $11.71mn awarded during the quarter (Q3FY12 : $3.55mn) 3) Total headcount is 4567 (Q3FY12: 4447) 4) Growth from emerging verticals like ship building, Oil & Gas & Energy 5) Effective tax rate to be ~28% for FY13 6) Fresher Hiring for FY13 to be ~200+ 7) DSO stood at 65.28 for Q4FY12 (Q3FY12: 71.36)


■ Valuation & Recommendation: We believe that Geometric’s operational performance is expected to strengthen from here. We expect a steady revenue performance for the company in FY13 with improved margins. We reiterate our ‘Accumulate’ rating, with a TP of Rs80, 6x FY13E earnings estimate.


RISH TRADER

>INDUSIND BANK: Firing on all cylinders

IndusInd reported better‐than‐expected PAT of Rs2.23bn (up 30% YoY) led by a beat in loan growth and stronger‐than‐expected fee income momentum. Apart from improving profitability and strong growth, IIB continues to deliver on all its cycle II growth strategies, and like HDFCB, is well placed to deliver strong PAT growth in FY13. Current valuations at 3.1x FY13 book are not cheap but consistent and all round performance inspires confidence. Hence, we maintain our ‘BUY’ rating, with a revised PT of Rs400/share.


■ Surprise in top‐line performance: NII was ~4% higher-than-expected due to strong sequential loan growth (8% QoQ) and surprise in margins, with ~5bps accretion QoQ v/s a marginal contraction expected. Fee income growth has been exceptionally strong at ~60% YoY growth in Q4FY12, with growth across all segments. With margins expected to improve in FY13, we believe IIB will be able to sustain its top-line growth momentum in FY13.


■ Delivering on all its cycle II growth drivers: After the 08-11 growth phase, management had laid out it’s cycle II growth drivers and we continue to see management delivering on most counts including (1) improving liability franchise with ~2.5% SA accretion post SA re-regulation (2) filling up the product gap (LAP/credit cards) on the retail side and most importantly (3) gaining significant fee income traction in personal distribution and IB business.


■ Strong PAT growth to sustain in FY13: With a large fixed rate asset base, we expect margins to improve by ~15-20bps in FY13 and drive profitability improvement. We increase FY13/14 estimates by ~7-8% on higher growth and margins and with credit costs at ~75bps for FY13, there could be further upsides.


■ Maintain ‘BUY’, with a PT of Rs400/share: Current valuations at 3.1x FY13 book are not cheap but high loan growth, strong fee income momentum and very limited asset quality risk inspire confidence. We maintain our positive view on IIB.


RISH TRADER

>OBEROI REALTY

■ High visibility, low-cost land bank: With 82% of its gross NAV emanating from premium land parcels of Goregaon and Worli in Mumbai, Oberoi Realty is set apart, firstly, on account of high visibility of its land bank and secondly on account of its low cost, with a large majority of acquisitions having taken place pre-2005. Nearly 50% of the company’s ~20 msf land bank is currently in the execution stage. For majority of the remaining land bank too, development visibility is fairly high on account of strong project locations.


■ Picture-perfect balance sheet, strong cash generation: Generating positive cash flows consistently since FY08, coupled with a prudent land acquisition strategy, has resulted in a picture-perfect, zero-debt balance sheet with a cash balance of ~Rs14.4bn (PLe) as on March 2012. Further, we expect strong cash flow generation for Oberoi in the next few years, given the company’s lucrative residential land bank, large part of which is expected to be monetized in the next five years.


■ Project acquisitions & new launches – A trigger: On account of the company’s strong cash position, coupled with a limited development pipeline of 5-6 years, project acquisitions at attractive valuations will be an important trigger for the stock. Besides, the awaited launches of Oberoi’s Worli & Mulund project will also prove to be positive on sentiments.


■ Valuations: Two premium locations i.e. Goregaon and Worli, account for ~82% of the company’s NAV. High visiblity at both these locations, coupled with a strong balance sheet, gives us greater confidence in our NAV estimates. While Residential contributes ~44% of the gross NAV, the annuity portfolio (albeit small currently), is expected to scale up significantly in the next few years and contribute to the rest of ~54% of our Gross NAV estimates. We recommend ‘Accumulate’, with a target price of Rs309, at no dicsount to our NAV of Rs309.


RISH TRADER

>INDUSIND BANK: IIB continues to deliver on all its cycle II growth strategies

IndusInd reported better‐than‐expected PAT of Rs2.23bn (up 30% YoY) led by a beat in loan growth and stronger‐than‐expected fee income momentum. Apart from improving profitability and strong growth, IIB continues to deliver on all its cycle II growth strategies, and like HDFCB, is well placed to deliver strong PAT growth in FY13. Current valuations at 3.1x FY13 book are not cheap but consistent and all round performance inspires confidence. Hence, we maintain our ‘BUY’ rating, with a revised PT of Rs400/share.


■ Surprise in top‐line performance: NII was ~4% higher-than-expected due to strong sequential loan growth (8% QoQ) and surprise in margins, with ~5bps accretion QoQ v/s a marginal contraction expected. Fee income growth has been exceptionally strong at ~60% YoY growth in Q4FY12, with growth across all segments. With margins expected to improve in FY13, we believe IIB will be able to sustain its top-line growth momentum in FY13.


■ Delivering on all its cycle II growth drivers: After the 08-11 growth phase, management had laid out it’s cycle II growth drivers and we continue to see management delivering on most counts including (1) improving liability franchise with ~2.5% SA accretion post SA re-regulation (2) filling up the product gap (LAP/credit cards) on the retail side and most importantly (3) gaining significant fee income traction in personal distribution and IB business.


■ Strong PAT growth to sustain in FY13: With a large fixed rate asset base, we expect margins to improve by ~15-20bps in FY13 and drive profitability improvement. We increase FY13/14 estimates by ~7-8% on higher growth and margins and with credit costs at ~75bps for FY13, there could be further upsides.


■ Maintain ‘BUY’, with a PT of Rs400/share: Current valuations at 3.1x FY13 book are not cheap but high loan growth, strong fee income momentum and very limited asset quality risk inspire confidence. We maintain our positive view on IIB.

RISH TRADER

>THERMAX: JV for super critical boilers with Babcock & Wilcox is on track

■ Base business orders to grow, large orders taking time: Thermax reiterated its ability to win base business orders of at least Rs5-6bn per quarter and hence, does not expect the order flow to be below the Q3FY12 levels (Rs5.9bn). The peak base business order flow was Rs10.5bn in FY08. The current capacities can take base business orders up to Rs14bn per quarter. However, with very few enquiries for large and captive power plants, the order flow is likely to be muted for the next two quarters due to the given current issues like coal availability and higher cost of funds. The company expects the recovery to happen by H2FY13. Sectors like Cement, Steel and Oil & Gas (refineries) are likely to lead the recovery apart from sectors like Food processing, Hotels and Hospitals which are already investing. Power sector is likely to take time to recover.


 ■ Margins can be maintained if recovery happens in the next two quarters: Given the reduced order carry, sales are likely to de-grow by 8-10% next year. However, efforts are being made to curtail the fall. Though business like Chemical, Water, Absorption chiller, Services O&M, Standard boilers etc. are likely to show growth, large business segments like EPC and Boiler & Heating are likely to de-grow, leading to over all de-growth. Thermax will try and maintain margins at ~11% range despite lower turnover by various levers it has in the employee cost (Rs500m in variable pay and Rs350m in variable man power). However, if the recovery does not happen by H2FY13, then it will have to start taking orders even with lower margin to cover fixed cost.


■ Super critical JV update: The JV for super critical boilers with Babcock & Wilcox is on track and is likely to be commissioned by September 2012. However, with no enquiries in the pipeline, it is unlikely that the JV will have an order at the time of commissioning. The burn out for JV assuming no revenues in FY13 or FY14 (due to lack of orders) could be ~Rs1bn (Thermax share 51%). Some of the losses could possibly be offset if the JV were to get some international orders from its partner Babcock and Wilcox. The management did not sound too
worried as the company’s share of losses in the JV is not large compared to the net worth. Management believed that apart from issues like coal and land, the biggest hurdle for Power market will be for promoters garner equity. It also believes that though current preference is for Super critical plants, but given the constraint of coal and equity, smaller size plants of 150MW and 300MW might be back in favour. On issues of lack of coal linkage to captive plants, company commented that the economics will work for captive plants even if they have to import coal and run the plant as price of electricity is likely to go up further with capacity addition lagging target.


 ■ Valuation and Outlook: The stock is trading at 17.8x FY13E earnings. We believe that though the next few quarters will be weak in terms of earnings and order flow, Thermax’s ability to bag base orders of ~Rs5-6bn per quarter gives us a confidence that it will be able to tide the slowdown and participate in the upturn of the cycle meaningfully and surprise positively in terms of order flow. Expectation of rate cut aiding recovery of capex cycle will also help support
multiples. We maintain our ‘Accumulate’ rating on the stock
RISH TRADER