>KPIT Cummins: 1QFY13 Results Update

Good quarter, rich valuations; Maintain HOLD

KPIT reported good 1QFY13 with an ahead-of-industry 5% Q/Q US$ revenue growth, limited margin decline despite taking wage hikes ahead of peers and healthy metrics all-across. Further, management expects growth momentum to continue driven by healthy deal pipeline. We believe that KPIT would continue to grow ahead of industry and build revenue/EPS CAGR of 27%/21% over FY12-14E. While we fundamentally like the company, valuations at P/E of 12x FY13E, are at the upper end of mid-cap trading range. Maintain HOLD with a revised Mar’13 target price of Rs130/share.

 Healthy top-line growth: KPIT’s 1Q reported USD revenue came in at USD 98.05mn up 2.8% and broadly in-line with expectations. Adjusted for the SSG divestiture, continuing business grew by a healthy 5% QoQ. SYSTIME’s revenue grew by 11.6% QoQ to USD 14.7 million. We continue to expect a healthy 3-4% CQGR throughout the year which should help deliver a 22% organic growth over full year FY13.

 Manufacturing steady; US, Europe healthy: From a vertical perspective, Energy & Utilities grew by ~22% QoQ on a low base while manufacturing was steady with 3.4% QoQ growth. Among geographies, US and Europe saw healthy growth of 6.9% and 4.2% respectively. Enterprise solutions (Oracle) mix increased to 44.4% (42.6% in Q4), while SAP mix declined to 31.9% (32.4% in Q4).

 EBITDA Margins in-line, PAT beat driven by FX gain: EBITDA margins came in at 15% down 75bps QoQ, slightly ahead of expectations. The company has given a full quarter of wage hikes of 10% offshore and 4% onsite. Margin movement breakup: growth +30bps, forex +230bps, Wage hikes -300bps and Visa costs -35bps.

 Metrics: KPIT added 3 new clients in the quarter and 1mn+ customers increased by 6 to 65. Overall head count increased by 154 in the quarter while development headcount increased by 141. Offshore utilization stayed flat at 74.1%. Debtor days were at 75. Hedges outstanding at the end of 1Q were $120mn.

RISH TRADER

>JSW ENERGY LIMITED: Barmer tariff petition key near-term trigger

We initiate on JSW with a HOLD and a PT of Rs 50. We like the company for its conservativeness with regard to expansion, i.e., even under current operating conditions, JSW would be free cash positive (pre-debt this year and after debt and capex in 2 years). The company has also gained from lower imported coal prices YTD (a 1% change in INR-denominated coal prices would impact FY14 EPS by 1.5%). Nevertheless, most of these positives are priced in after the near 50% move YTD. At 12xFY14E PE, we think valuations are fair for utility with low visibility on tariffs and fuel costs.


 Limited capacity addition=FCF positive: JSW has guided for nil expansion until more clarity emerges on coal availability. While this could weigh on near-term MW growth, we think this will prepare them for profitable growth at an opportune time.


 Falling imported coal prices to help FY13 margins and earnings: YTD, global coal prices have corrected 20% in INR terms. JSW sources ~65% of fuel for its 3140MW capacity from overseas (SA+ID), and is likely to benefit from falling coal prices globally – every 1% change in INR-denominated coal prices would impact FY14 EPS by 1.5%. We expect benefits to earnings in 2QFY13.


 Barmer tariff petition key near-term trigger: JSW has filed a tariff revision petition before the Rajasthan Electricity Regulatory Commission (RERC) for revision of the lignite transfer price from Kapurdi and Jalipa mines (to ~Rs 1781/tn), and power tariffs from Barmer plant (from Rs3.35/kwh to Rs 4.86/Kwh). Against this, we have built in a tariff of Rs3.61/kwh - 10% RoE on the revised project cost.


 Valuation and rating: We think most of the positives are priced in at CMP. Given this, and its structurally dependence on imported coal, exposure to merchant power markets, and absence of capacity addition post FY13, we initiate with a HOLD with a TP of Rs 50/sh. Key upside risks are above expected ROE on Barmer, and lower than estimated international coal prices.


To read report in detail: JSW ENERGY


RISH TRADER

>THERMAX: Subsidiaries impacted by cost over-runs, competition

> Increase in working capital: Working capital in FY12 continued to remain higher than the historical trend on weakness in order inflows and increase in receivable days. Receivable days were at 84, in line with the highest levels in the past 10 years. Customer advances days declined to 47 (from 69) as order inflows in FY12 were at Rs 40.3bn, down 24% YoY. However, absolute cash and cash equivalents were comfortable at Rs 7bn (33% of the consolidated BS).


> Projects business expected to remain weak: The management expects the power business to continue to be weak in FY13E and FY14E as order inflows are likely to be weak in H1FY13E; however, the commentary on the Boiler and Heater business is relatively positive on account of expected revival of captive power plants. To counter the decline in power projects business, the company has increased focus on the power services business, but the scale is fairly small.


> Subsidiaries impacted by cost over-runs, competition: The main subsidiaries which reported a loss in FY12 were: 1) Thermax Instrumentation – construction arm of the power division – loss of Rs 104 mn on cost over-runs, 2) Thermax Zhejiangabsorption chillers in China – loss of Rs 70mn on high competition, 3) Thermax B&W – a JV for supercritical boilers – pre-operative expenses. However, Danstroker grew ahead of expectations in a challenging environment in Europe.


To read report in detail: THERMAX
RISH TRADER

>JAGRAN PRAKASHAN: Acquires Nai Dunia in an all-cash deal

JAGP, which owns India’s largest read daily Dainik Jagran, has acquired Nai Dunia (ND) – the country’s ninth largest Hindi newspaper. This acquisition gives JAGP a much-awaited entry into the underpenetrated and fast-growing markets of Madhya Pradesh (MP) and Chhattisgarh (CG), and brings consolidation in the print media industry. Financial highlights of the deal: (a) JAGP has valued ND at an enterprise value of Rs 2.25bn (incl. ~Rs 250mn debt), or ~2x EV/sales; (b) JAGP is entitled to tax benefits of ~Rs 800mn owing to ND’s accumulated losses of Rs 2bn-2.5bn. While the valuation is on the higher side given ND’s negative EBITDA, we feel this acquisition is a good strategic fit for JAGP on account of: (a) its geographical expansion in Hindi-speaking states, (b) reduction in gestation period for expansion in new territories and (c) cost and revenue synergies. Maintain BUY with TP of Rs 135.


■  Underpenetrated MP and CG markets offer good growth: Literacy rates of MP and CG are lower than the national average, and so is newspaper penetration, with sole readership at a mere 15%. With rise in disposable incomes owing to increased GDP growth rates (~6.5% for MP, 9.5% for CG), these markets offer good growth potential.


■ JAGP’s ongoing litigation in MP necessitates inorganic route: We note that JAGP has wanted to enter MP and CG since 2005. However, it couldn’t use its flagship brand Dainik Jagran due to family litigation and hence, had to either introduce a new brand or acquire an established player like ND.


■ ND – a good fit: Nai Dunia is published in the Hindi heartland states of MP and CG with a circulation of 0.5mn copies and a readership base of ~2mn, which has more than tripled over the last five years. While ND’s current readership share is 23%, its advertisement market share is ~15%. Its FY11 revenues were at Rs 1bn (FY12E: Rs 1.1bn) with 70‒75% generated from advertising (mostly local). The company incurred an EBITDA loss of Rs 250mn in FY12.


■ Turnaround to be quick, aided by synergies: On the revenue side, JAGP expects to increase the contribution from national advertising to ND’s revenues from <25% now to closer to its own 40% levels. On the cost side, JAGP will benefit from reduced newsprint and manpower costs.


■ Deal financial summary: The deal was closed for an all-cash consideration of ~Rs 2.25bn (including debt). However, JAGP stands to gain tax benefits to the tune of Rs 0.8bn owing to ND’s accumulated losses. Post the deal, JAGP has Rs 1bn of net cash on its books.


■ Maintain BUY with a TP of Rs 135: We believe that this acquisition is another step in the direction of consolidation in the print media space, wherein smaller regional players will be acquired by larger national players like JAGP, owing to both revenue and cost synergies. We continue to like the print media space because of: (a) healthy ROEs (25% +), (b) good dividend payouts (45‒50%) and (c) attractive valuations (currently 12.7x FY14E). Maintain BUY with a TP of Rs 135 (17x FY14E).


To read full report: JAGRAN PRAKASHAN
RISH TRADER

>RBI's draft PSL guidelines - negative for asset financiers. 22 February 2012

RBI today released the draft guidelines on re-classification and updates for priority sector lending (PSL) and related issues under the chairmanship of Mr. M. V. Nair. While most of the original PSL guidelines remain unchanged, a sub-target of 9% of Adjusted Net Banking Credit (ANBC) for small and marginal farmers (SFMF) within agriculture and allied activities has been recommended (negative for private banks). At the same time, the distinction between direct and indirect agriculture has been done away with (positive for banks in general and private banks in particular). RBI has also revised the guidelines for on-lending to/securitisation by NBFCs, which we believe could be negative for MMFS and SHTF.


■ No major impact on listed banks: PSL has been increased for foreign banks to 40% of ANBC (from 32%), in line with public and private banks. The sub-target of 10% for exports and 15% each for agriculture and MSE has been recommended as PSL for foreign banks. A sub-category of weaker and marginal farmers has been introduced, which should be 9% of the total ANBC and can be negative for private banks given their lower rural reach. However, the RBI has also done away with the distinction between direct and indirect agriculture for the 18% PSL target requirement (4% + 14% earlier), which we believe is positive for private banks.


■ Guidelines for asset financiers like SHTF and MMFS: The draft recommends that NBFCs should maintain a minimum threshold requirement of 65% of their total Assets Under Management (AUM) on their balance sheets (of the last financial year), as also on an average throughout the financial year. However, pre-existing assets on book may be excluded for the purpose of priority sector classification. Moreover, spreads for asset financing companies under on-lending, securitisation and buyouts under direct assignments have been capped at 6% and for HFCs at 3.5%.


■ Impact on asset financiers like SHTF and MMFS, and HFCs: Shriram Transport Finance (SHTF): As on 31 Dec’11, securitised assets comprised 39.6% of the company’s AUM. On an incremental basis, given that 65% of AUM will have to be held on the balance sheet, securitisation levels should likely come down at the margin. However, as per the draft guidelines on-lending to SHTF would also be eligible for PSL classification, though, we also believe that overall loan portfolio eligible for PSL classification could be lower than 35% due to interest spread cap of 6% put up by RBI (spread on securitisation is significantly higher than 6%). Moreover, we note that a cap on spreads at 6% of securitised assets could be a negative, as we estimate the securitised portfolio spreads at 10%+ since spreads on old CV portfolio are higher (as of 31 Dec’11, old CV constituted 76% of AUM). Mahindra and Mahindra Financial Services (MMFS): As on 31 Dec’11, MMFS’ securitised portfolio would have comprised ~10% of its total AUM. As per our interaction with the management, the securitisation portfolio primarily comprises tractors, for which spreads would have been significantly higher than 6%; these could come under pressure if the draft guidelines were to be implemented. Housing Financiers: We do not foresee much impact on housing financiers as we estimate their spreads on the mortgage book to be lower than that the stipulated 3.5% as per the draft guidelines.


To read full report: FINANCIALS

>INDIA RETAIL: Expectations on on strong performances by JUBI, TTAN and BATA

Q3FY12 preview: A mixed bag 


We expect our retail universe to report a strong 21.8% YoY revenue growth for Q3FY12 on strong performances by JUBI, TTAN and BATA. At the same time, a key metric to monitor would be volume growth deceleration across categories due to high inflation, a spike in apparel prices and increase in gold prices. We maintain that discretionary spends would likely remain under pressure going forward, given the slowing GDP growth that would in turn pressurise margins. Our top pick in the space is BATA, and we remain UNDERWEIGHT on JUBI, TTAN and SHOP. v BATA to maintain strong growth trajectory: We expect BATA to report a strong 25% revenue growth led by robust double-digit volume growth, which would in turn be driven by space addition. We expect margin improvement for the company to continue with Q4CY11 margins likely improving 180bps YoY due to leverage on employee costs and overheads. PAT growth for BATA will be the strongest ever at 42% YoY to Rs 490mn.


■ TTAN to witness marginal slowdown in jewellery volumes, largely compensated by higher gold prices: We expect TTAN’s jewellery volumes to see a low single-digit drop led by high gold prices (up 39% YoY for the quarter); the business would see value growth of 37%. The Watches business would likely see 15% revenue growth (led by a 5−7% price hike). While EBITDA margins would likely contract ~70bps YoY due to lower margins in the watches business, PAT would see a strong 27% YoY growth to Rs 1.75bn.


■ JUBI to see marginal growth moderation: JUBI is likely to report a strong 40% growth in revenues with same-store-sales (SSS) growth at ~25% levels. We expect a gradual tapering off in SSS growth going forward, as the outlook on discretionary spends remains muted. EBITDA margins are likely to improve by 65bps YoY as the company has taken a ~5% price increase to counter input cost inflation. We expect
PAT growth for JUBI at 36% YoY to Rs 258 mn.


■ High interest costs to impact PF earnings: PF is likely to see a slowdown in SSS growth (2−3% levels) as Diwali sales have not been strong for the company. We expect PF to report a 13% YoY increase in sales led largely by space addition. While margins are likely to improve 60bps YoY, a 30% YoY increase in interest costs to Rs 1.4bn will impact PAT growth for the company (expect a 4.6% YoY decline in
PAT to Rs 451mn).


■ SHOP to report PAT of Rs 86mn in Q3FY12: SHOP’s Q3FY12 consolidated revenues are likely to grow 16.5% YoY to Rs 8bn driven by high single-digit SSS growth. Standalone sales are likely to see a growth 13% YoY while HyperCity sales 25% YoY. EBITDA margins, however, could dip by 60bps YoY on account of consolidation of HyperCity losses, while PAT would likely plummet by 48% YoY to
Rs 86mn.


To read the full report: INDIA RETAIL
RISH TRADER

>FMCG SECTOR:Potentially strong Q3FY12 performers include HUVR, ITC, MRCO, BRIT, GCPL, GSK Consumer and CLGT

We expect a strong quarter from our FMCG universe with topline/EBITDA/PAT growth of 18%/19.5%/20.3% YoY, led by EBITDA margin expansion of 50bps—the first margin uptick in four quarters. Potentially strong Q3 performers include HUVR, ITC, MRCO, BRIT, GCPL, GSK Consumer and CLGT, whereas NEST, APNT, UNSP and Dabur could deliver muted PAT growth. HUVR and ITC remain our top picks, though select mid-caps look attractive as well (MRCO, BRIT, UNSP, GSK Consumer, Emami) in the wake of strong large-cap outperformance.


■ Expect sales growth of 18% YoY: We expect sales to increase by 17.9% YoY for our FMCG universe, led by strong organic numbers from GCPL, BJCOR, MRCO, NEST and BRIT. Volume growth is likely to remain steady with CLGT, MRCO and BJCOR reporting healthy numbers. We expect large-caps HUVR and ITC to report strong topline growth YoY at 16% and 18.5% respectively.


■ Operating margins to improve 50bps YoY: The average operating margin for our FMCG universe is likely to expand by 50bps YoY, the first increase in four quarters. Though gross margins would still contract YoY for most companies due to the higher raw material prices, the decline would be limited by a lower base and flattening of input costs QoQ. We expect EBITDA margins to improve the most for CLGT, GCPL, BRIT, HUVR and ITC while a few companies such as Dabur, JYL and APNT will continue to witness YoY declines.


■ Key issues to watch for: (1) Any signs that a consumer spending slowdown is denting category volume growth. (2) Pricing action/strategy in highly competitive categories such as shampoos, biscuits and detergents. (3) A&P spending trend post weak H1FY12 spending. (4) Gross margin pressure on a QoQ basis. (5) Product mix shifts across categories. (6) Forex impact.


■ HUVR and ITC our top picks: HUVR and ITC remain our top picks in the sector. However, following the strong outperformance of sector large-caps over mid-caps in the last six months, the risk-reward has now turned favourable for select mid-caps. Our preferred picks in the mid-cap space include MRCO, BRIT, GSK Consumer, Emami and UNSP. We remain UNDERWEIGHT on CLGT, NEST, APNT, UBBL and JYL.


To read the full report: FMCG
RISH TRADER

>INDIA STRATEGY: Uncertainty prevails, recommend stock-specific portfolio

Our December’12 Sensex target of 18,000 implies 16% upside from current levels.Global and Indian macro risks are both unlikely to diminish quickly in 2012. This makes it difficult to have high-conviction industry and/or sector bets. Instead, we advocate building up portfolio positions via stock selection (bottom-up) until more transparency emerges on key macro overhangs.


This approach results in a highly concentrated portfolio with a slight Overweight in Diversified Financials and Automotive and an Underweight in Metals and Real Estate. Our key stock selection criteria include: (1) a turnaround in fundamentals – WIPRO, (2) excessive pessimism priced in – STATE BANK OF INDIA, (3) sound fundamentals with an execution track record in difficult times – HDFC, (4) market share gains – HERO MOTOCORP, and (5) cheap valuations – BPCL.


■ Domestic outlook still weak but bottoming out: We expect near-term growth to surprise on the downside and estimate GDP growth at 6.5% in FY12. However, inflation is now falling—largely driven by the base effect—giving the RBI the capacity to cut rates by 50bps in Q1CY12. We think growth is close to bottoming out, but don’t expect a significant improvement in the next 6–9 months.


■ Global growth risks still on the downside: According to our global strategist, EM equities should outperform DM in 2012 by 10–15%. While austerity and weak growth will be dominant themes in the West, EM equity market performance will have an increasingly strong tailwind from more growth-supportive fiscal and monetary policy across the region. European recession appears inevitable but global recession is unlikely. Thus, investment should be made on the premise that growth surprises from the developed world are unlikely and that politics/policy will be the biggest sentiment and risk-asset performance drivers over the coming year.


■ Earnings and valuation: Our FY12E/FY13E Sensex EPS is Rs 1,120/Rs 1,254, lower than consensus by 2.5%/5%. We think the market is already pricing in an earnings backdrop closer to our expectations. Hence, while we expect consensus estimates to adjust lower in Q1CY12, we don’t see this as a catalyst for another legdown in equities and would use any weakness as an opportunity to add to positions. Our December’12 target is based on a 13x forward P/E multiple, an 18% discount to historic multiples due to near-term growth fears, declining ROE and a perceived lack of governance.


■ What could trigger a turnaround: (1) Internalising crude oil prices to address the twin-deficit problem. (2) A revival in governance, with fast-track implementation of projects in key areas, and long-delayed reformist legislation as confidence-building measures for the corporate sector and investors. (3) Sharp growth deceleration leading to a drop-off in inflation and cut in policy rates.


To read the full report: INDIA STRATEGY
RISH TRADER

>AXIS BANK: Strong near term outlook but reducing TP due to high presence in risky segments

The management continues to guide for a credit growth of 1.3x the industry growth rate in the medium term. While the bank’s reported NIMs would come off from 3.8% in Q3FY11, compression of NIMs is likely to be restricted to ~20bps. Fee income growth would likely be in line with asset growth, as the impact of changes in the accounting policy on commissions is already in the base. Asset quality is likely to improve further in the near term, as slippages from restructured assets are expected to decline. Lower loan loss provisions are likely to boost earnings in the coming quarters. However, in the medium term, higher exposure to infrastructure and power sectors remains a concern, as higher losses in SEBs and execution risks in upcoming projects could weigh on valuations. Hence, we are maintaining our estimates and BUY rating on the stock but lowering our valuation multiple to 16x FY12E EPS and 3.1x FY12E BV. Our target price thus stands revised to Rs 1,675 (from Rs 1,800 earlier).

To read the full report: AXIS BANK

>INDIA STRATEGY: FY11/12 Earnings: What do Analysts think?

Consensus downgrades moderating before Q2 season

Analysts are turning bullish for the first time in a year. Riding into the quarterly earnings season, we gauge consensus sentiment across sectors, and find that earnings revisions are no longer headed south. We aren’t seeing substantial upgrades just yet, but the trend of downward revisions is moderating. Economic growth is on track with a solid monsoon, robust consumption demand (and
perhaps, a booming market), leading analysts to take a second look at earnings. RCML’s Q2 PAT (ex-oil) estimate is 29% for the Sensex, and 21% for our broader 135-stock coverage universe.

■ Consensus signals a moderation in earnings downgrades: Earnings revisions
across the market have turned slightly positive in the last two months. The MSCI
India Earnings Revision Index*, a key measure of sentiment, which has been on a
downward trend (i.e., more downgrades than upgrades) since September ’09, has
now shown signs of a reversal before the quarterly earnings season commences.
Sentiments have been even more positive for the 600+ stock IBES India universe,
the set of all stocks under sell-side coverage. In the backdrop of prolonged global
weakness and the possibility of a double dip, analyst optimism is borne out of a
good monsoon season, strong consumption demand, and a resilient Indian
market post-crisis.

■ FY11 earnings growth at ~20%, but not on upgrades: Meanwhile, profit growth
for Sensex companies remains largely unchanged since the ‘Tata (Motors/Steel)’
spike in June, at 20% for FY11 and 18% for FY12 (Fig 2). Gross FY11 profits have
remained flat (-0.6%) during this period. In other words, analysts haven’t factored
in any rise in full-year profits post Q1FY11. Not yet anyway.

■ Autos remain the sector of choice, Telecom the least-liked: Sector-wise, Autos
(Fig 3) have seen the highest earnings growth since last year, riding on the strong
volume growth post-recovery. Telecom earnings in contrast have been pared
down by a third in this period. While the overhang of competitive intensity, 3GBWA,
and MNP (where in contrast to the costs, data-revenue estimates are still
hazy) explains the negative quarterly estimates, the latest round of downgrades is
largely due to consolidated (including Africa) figures for Bharti. High upgrades
also imply an increased risk of disappointment, with Autos, Metals, Health, and
Capital Goods seeing the highest upgrades in the last three months and remain as
sectors to watch this earnings season.

■ Earnings upgrades and market performance… may not go together: Ratings may
not always translate into performance, as we know. While Autos, Cement and
Metals outperformed the market in line with upward earnings revisions, Banks,
Telecom and Real Estate have seen outperformance despite flat or downward
earnings revisions.

■ Sectors to watch out for this earnings season: Sectors such as Real Estate and
Telecom are the ones to watch out for this earnings season as outperformance
ahead of earnings could well turn into sharp underperformance in case of any
negative earnings surprises.

To read the full report: FY 11/12 Earnings

>Stocks with 35-50%+ potential

Midcap monitor is a new product from the Religare Strategy team where we
would analyze and provide updates on midcap stocks. In our first edition, we
provide 10 midcap picks (market cap of US$500mn-US$2bn) that we believe
have 35-50% upside by Dec-11. To build a diversified portfolio, we have
chosen stocks across the entire spectrum of Indian growth story – consumption
(Ashok Leyland, Educomp, Glenmark Pharmaceuticals), investment (Voltas,
Sobha Developers, Shree Cement, KEC Intl), Energy (Petronet LNG), diversified
(Sintex), financials (M&M financial Services). We recommend investors to take
significant position in these stocks for alpha performance.

Large caps are not cheap: Indian markets have risen 14% this year, 9% of it in
this month alone, and with Sensex at 19x 12m forward earnings, valuations are
not cheap for most of the large caps. While we continue to be bullish on India’s
long-term fundamentals, we do accept that near-term upside is limited in large
caps. As such, we find most investors are looking for mid-caps that still offer
significant share price upside either due to higher earnings trajectory or
possibility of multiple re-rating or a combination of both. This is our effort to
provide names of some of the midcaps with such upside potential.

Historical performance supports mid-caps: In the Indian markets’ near one-way
trajectory since 2003, small and mid-caps have outperformed large-caps by a fair
margin in 4/6 years. This year too, the BSE Midcap and Small-cap indices have
outperformed the Sensex by 15 and 22% YTD. While past performance is no
guarantee for future returns, we believe there’s sufficient growth potential in each
of our picks to become a large/mega-cap tomorrow. In this context we also
expect hitherto low foreign participation (13% in midcaps, 7% in small-caps vs.
25% in Sensex) to become more broad-based going forward.

Show me the money: Most investors believe that the higher risk of buying
midcaps needs to be justified by higher returns. Hence while screening the
midcap space for value and growth potential; we have shortlisted picks that we
believe will generate 35-50% returns by Dec’11.

To read the full report: POTENTIAL STOCKS

>MIDCAP STOCKS MONITOR REPORT

We are suggesting 10 midcap stocks in this Midcap Monitor report which we believe have 35 -
50% upside by Dec.-2011. We have selected the following stocks from the entire gamut of
Midcap growth story -

1) Ashok Leyland
2) KEC International
3) Glenmark Pharmaceuticals
4) Educomp Solutions
5) Petronet LNG
6) Sintex Industries
7) Sobha Developers
8) Mahindra & Mahindra Financial Services Ltd
9) Shree Cement
10) Voltas

India’s medium-term economic growth story continues to remain healthy on account of a revival in demand - the current year looks particularly good given the better monsoon and its impact on rural demand.

Till September 29 this year, FIIs have invested about Rs 85,340 crore in the Indian markets, which is among the largest inflows in recent years and a lot of foreign money has flowed into the largecap stocks. Therefore, midcaps have underperformed in the recent past. The BSE Midcap index has delivered only 6.14% returns in the last one month vis-a-vis the Sensex’s 10.8% returns.

To read the full report: MIDCAP STOCKS

>COAL SECTOR: Facing demand-supply mismatch

Indian coal industry is the world’s third largest in terms of production and fourth
largest in terms of reserves after the US, Russia and China and also the world's
third largest coal consuming nation after US and China. Around 70% of the total
production is used for electricity generation and the remaining by the steel,
cement and other heavy industries. Coal is also used as fuel for domestic
purposes. About 88% of the total coal production in the country is produced by
various subsidiaries of Coal India Ltd. which is the largest supplier of coal in the
country.

Power sector fuels demand: India has emerged as one of the major buyers of
global coal, with imports doubling in the past four years. A significant portion of
the supply is used by the power utility sector followed by steel (coking coal). For
the current year the coal imports are expected at around 90 million tonnes as
new thermal capacities come up. According to working group on coal and
lignite, the projected domestic availability of coal is 680 million tonnes (mt)
against the projected demand of 731 mt in the terminal year of the Eleventh Plan
period, that is, 2011-12.

Demand-Supply Mismatch: India faces a steep demand supply mismatch with
the power sector growing at a faster rate of 10% while the coal production
clocking in a growth at 5-6%. Currently there is a 10% gap in the demand and
supply of the dry fuel which alone accounts for more than half of the country’s
annual overall demand for commercial energy at 329 million tonne oil
equivalent (Mtoe). As per government estimates coal shortage in India is likely to
touch 15% or 81 million tonnes by the end of the current Plan period that is
March 2012.

Govt initiative: The government has proposed to increase investments in
developing infrastructure at the coal fields. Investments towards regional
exploration, detailed drilling, environmental measure and development of
transportation infrastructure in coal fields will be raised to Rs 400 crore in 2010-
11, from Rs 260 crore in 2009-10. However, Coal India Ltd and Singareni
Collieries Company Ltd, from their internal resources, propose to invest Rs 3,800
crore and Rs 1,335 crore in 2010-11 against provision of Rs 3,100 crore and Rs
634 crore during 2009-10 respectively for increasing production.

Going ahead: The production from Coal India Ltd (CIL) and its subsidiaries is not
able to keep pace with the demand, with economic activity gaining momentum.
Inadequate railway unloading infrastructure is another reason for difficulty in
meeting production targets. The demand-supply gap is set to further widen in the
coming years. Total coal availability in the country by end 2017 would be close
to 647 mt with a projected import requirement of over 86 mt. A major constraint
in ramping up production is the failure of companies to develop captive coal
blocks allotted to them by the coal ministry. The shortage is likely to continue
unless almost all the coal blocks are in production mode.

Our view: The demand-supply mismatch in the coal sector is likely to continue
in the next few years. Power utilities are also importing coal to meet the shortfall
in domestic supply. To reduce the input cost, the companies are also doing
backward integration. In the long term Sarda Energy & Minerals Ltd. remains our
Top Pick on better performance.

To read the full report: COAL SECTOR

>LINC PEN & PLASTICS LIMITED: Good growth prospects

Linc Pen (Linc) has over the years built an aggressive supply chain which comprises the manufacture of writing instruments at very competitive costs. The Kolkata-based manufacturer of writing instruments and stationery also supplies goods to various global retail chains.

■ Stock trigger: Linc, we believe is a play on the India’s consumption and outsourcing stories. We believe that news of any major orders from any global retail chain will act as a trigger for the stock. On the other hand retail network expansion, in the short-term, may be a lowdown for profitability.

■ Brands: Linc owns a well-established brand in the domestic market. The company in all has three manufacturing units of which two are in Goa and one is located in Kolkata. Its brand portfolio also includes names like Uniball from Mitsubishi Pencil & Company and Lamy of Germany.

■ Vast distribution network: Other than a nationwide distribution network, the company is also a supplier to retail chains in the UK, Northern Europe and the US. Linc also supplies goods to retail chains like Wal-Mart and Tesco.

■ Retail chains for office stationary: Starting with Kolkata, the company is rolling out retail outlets for office stationary under the brand name Justlinc and Officelinc. These retail outlets are based on the idea of providing all stationary items under one roof. Having already set up a few stores in Kolkata, Linc is planning a nationwide rollout, going ahead.

■ Our View: We expect Linc to clock sales of at least Rs 300 crores in a year. Considering the same even if we were to value the company at 1x sales we have a triple bagger. We have a mid-term target price of Rs 150. Near-term target price Rs 110. Buy.

To read the full report: LINC PEN

>UNITECH: Triple Treat Ahead

Unitech (UT) has been successfully implementing its revamped business strategy, thereby showing continued momentum in new launches and bookings. The company has also been successful in lowering debt from peak levels. Looking ahead, we see three more drivers for the stock performance which may help bridge the discount to NAV – these include: 1) development of key land parcels; we estimate that over 25% of the land bank accounts for ~55% of UT’s GAV – such concentration makes valuations more tangible, 2) Once listed, Unitech Infrastructure should further help unlock value in non-real estate businesses, and 3) UT’s proposal to purchase Unitech Corporate Parks Plc (UCP) (60% stake in six IT Parks/SEZs in India) may add 4-5% to our NAV. We maintain Buy with a price target of Rs.100

■ Driver 1 – Value concentration in a few land parcels: We note that ~55% of the GAV for UT’s real estate business is contributed by a cluster of five key properties in Gurgaon, Noida and Mumbai. In our view, such concentration makes the valuation more tangible considering high visibility. Further, all of these are prime properties with high development potential and hence form part of the management’s key focus for value generation. We reckon that progress in development of these land parcels will increase cash flow visibility and hence valuations, thereby bridging the discount to NAV.

■ Driver 2 – Unitech Infra demerger: UT’s plan to demerge the infrastructure business should unlock value considering efficiencies coming from the separate management control and low-cost debt available to infrastructure projects. At the same time, value accretion from the infrastructure demerger will depend upon the on-ground performance (in terms of new contracts, etc). We note that at a value of 1.5x P/B for the infrastructure business UT’s NAV increases by 9%.

■ Driver 3 – UCP merger: Recently, UT offered to purchase 100% stake in UCP at 31pence/sh (£112mn) as against the CMP of 28pence/sh (£101mn). The offer is for the same assets which were sold by UT in FY07 at a total valuation of £317mn. Based on our current valuation of 90pence/sh, the proposal offers a significant value accretion for the company. Although we do not rule out a further increase in offer price, we see value accretion of 4-5% even if the price is escalated by 50%.

■ Valuation – maintain Buy: We revise our revenue and PAT estimates for FY11/12/13 by -1%/-2%/-5% and -2%/0%/-3% respectively as we realign our model to include improved realisations in select properties and lower volume assumptions. UT is our top pick in the large cap real estate space.

To read the full report: UNITECH

>Analysis of royalty payments in view of Maruti’s margin surprise

Meaningful overhang on margins and valuations for foreign equity companies

Maruti delivered a big negative surprise this weekend as Suzuki raised royalty payments by 150 bps from 3.6% to 5.1%. While the impact on Maruti is already discounted (stock down 10% today), we have looked at the other companies in BSE-500 to ascertain the impact on broader Indian market. We find that that 75 (32 of them to foreign entities) companies in BSE500 pay
royalties largely dominated by automotive, capital goods, pharmaceuticals and FMCG sectors.

With the recent government regulation allowing for higher royalties, we could see the Maruti case being played out in several of these players. While the exact impact is difficult to quantify (as it will be case specific), we note that increasein royalties could hurt margins substantially by 370 bps if implemented across the board. We would closely watch out for more such announcements/changes over the next few months.

■ Govt. allows companies to pay royalty under automatic route: The Govt. recently allowed companies to remit royalty payments (upto 8% on exports, and 5% on domestic sales) on foreign technology collaboration under the automatic route (With retrospective effect from Dec 2009, notes attached). Companies have since raised royalty payments to foreign collaborators: Maruti raised royalty payments to parent Suzuki Motor Corp by 150bps to 5.1% of sales this quarter.

■ 15% of the BSE500 pays royalties, 32/500 to foreign equity holders: Royalty payments are made by 75 companies in the BSE500 universe, and comprised~19% of the overall SG&A costs in FY09, accounting for ~130bps on EBITDA margins. The new notification affects companies (32/500) that have technical collaborations with foreign (non-portfolio) equity-holders, and thus excludes domestic companies that have no restrictions on royalty payments. Whollyowned
foreign subsidiaries have no restrictions either.

■ Sector/stock focus: Royalty payments are generally made by companies in the auto and capital goods (technical know-how and collaboration), pharma (marketing rights) and FMCG companies (brand equity). Margin Impact: Royalties for these 32 cos. constituted 11% of their SG&A, accounting for 100bps at the EBITDA margin level (FY09 margin at 16%; FY10 figures available for 8 companies thus far). A quick sensitivity analysis shows that a rise in payments to a blended 5% of sales would hurt margins by a further 390bps, i.e. margins would fall to 11.8%.

■ Royalty payments vs. dividends: Royalties paid amounted to more than 40% of the total dividends declared in FY09. With little information on the actual value of the technical expertise, or by way of equity of certain brands, a potential rise in payments could raise questions on fair distribution of earnings to common stockholders.

To read the full report: INDIA STRATEGY

>MONETARY POLICY: Hawkish stance; more hikes in the offing

The RBI hiked policy rates today – repo by 25bps and reverse repo by 50bps, in
line with our expectations. The central bank also increased its FY11 GDP growth
projection to 8.5% from 8% and fiscal-end headline inflation (March ’11)
forecast to 6% from 5.5% in the last review. The overall stance was hawkish and
the RBI appears to be gearing for a full-blown war against inflation. In our view,
today’s rate hike is effectively 50bps as liquidity is expected to return into the
system in 3–4 weeks, making reverse-repo the effective policy rate. However, we
believe that the RBI is still behind the curve, and that inflation will remain
elevated this fiscal and a risk to growth.

RBI’s hawkish monetary stance; liquidity to ease shortly: The RBI hiked repo by
25bps and reverse repo by 50bps today. We had anticipated either a 50bps hike in
both policy rates or a 25/50bps hike in repo/reverse repo respectively, as against
the consensus expectation of a 25bps hike in both rates. The RBI in its statement
said “With growth taking firm hold, the balance of policy stance has to shift
decisively to containing inflation and anchoring inflationary expectations”. The rate
hikes tell us that the RBI is confident liquidity will return to the comfort zone in 3–4
weeks, when the effective policy rate will be reverse repo, and not repo as is the
case now.

FY11 GDP and inflation projections hiked: The central bank appeared rather
convinced about the strength of India’s economic recovery. However, the concerns
over inflation have become more intense now. The central bank has acknowledged
that inflation has decisively become generalised, citing evidence from sectoral
price inflation as well as other measures (CPI-IW). The RBI raised its FY11 GDP
growth projection to 8.5% from 8% earlier and fiscal-end headline inflation
(March ’11) projection to 6% from 5.5% earlier.

Rate corridor narrowing a positive step: The rate corridor – the difference between
repo (rate at which banks borrow from the RBI) and reverse repo (rate at which
banks lend to the RBI) – has diminished to 1.25 percentage points now from 1.50
earlier. This will result in reduced interest-rate volatility in the money market.
Our GDP and headline inflation numbers remain unchanged: Our FY11 GDP
estimate stands at 7.9%, with some downward bias, while inflation is likely to
average at 8.5%, peaking at ~14% in August before declining and closing the fiscal
(March) at ~6.5%. We continue to believe that the persistently high inflation is
likely to hurt private consumption and investment demand, and poses a significant
risk to economic growth.

More rate hikes this fiscal (at least 75bps): With Delhi’s diminishing reservations
against an aggressive monetary policy stance (due to political-economic realities:
eight states go into elections in the coming 10 months and an opposition devoid of
any credible election agenda), we believe the RBI will try to get back on the curve.
We expect a further 75bps rate hike at least in the current fiscal, while the rate
corridor may narrow further by 25bps. Further, we do not rule out another rate hike
before the next scheduled policy meet on 16 September. The benchmark 10-year
bond yield fell below previous day’s closing (7.67%) just before the policy
announcement. It then rose to peak at 7.72%.

To read the full report: MONETARY POLICY

>INDIAN INFRASTRUCTURE: Accelerating investments... ....…unprecedented opportunities

12th plan spend of Rs 27tn driven by power, roads, railways

We expect India to see an investment of Rs 27tn in infrastructure development
over the 12th plan period (FY13-FY17); 65% of this investment is estimated to
be in sectors like power, roads, and railways. This development will offer
~Rs 12tn of EPC opportunity to construction companies. The Private sector is
likely to account for 39% of the total spend. Overall debt funding of Rs 14tn
may not be a constraint if the proportion of infrastructure credit to total bank
credit continues to rise moderately each year. Key risks include delays in coal
availability (power capex) and road project award activity by NHAI, and slow
execution of railway projects. Within our coverage universe, we prefer L&T,
IVRCL, NCC, Patel Engineering and Ahluwalia Contracts and recommend
buying these stocks for long-term value creation.

Expect infrastructure investments of Rs 27tn over 12th plan period: We estimate
an infrastructure investment of Rs 27tn, up 32% over government’s revised
estimate of Rs 20tn spend for the 11th plan. We expect the government (centre
and state) to account for Rs 16.5tn of the spend (61% of total). We are factoring
in Rs 7.1tn of budgetary support, which is ~1.6% of GDP in that period. In terms
of debt funding, we estimate requirement of Rs 14tn across the private sector,
centre, and state (54:34:12).

Debt funding may not be a constraint: Bank credit to infrastructure, as a
percentage of total bank credit (non-food), has increased from 8% in FY07 to
12.7% in FY10. Even if the share of credit to infrastructure increases by 50bps
every year over FY10-FY17, bank credit itself can meet 47% of the total debt
funding requirement. The remaining requirement will be met through other debt
sources like NBFCs, pension funds, and ECBs.

Private sector share to rise to 39% in 12th plan from 36% in 11th plan: Private
sector share will rise in roads (to 44% in 12th plan from 17% in 11th plan), power
(to 51% from 44%) and railways (to 14% from 4%). However, lower spend in
telecom (large private sector share but capex peaked out) and lower private
sector share in airports will limit the rise in overall share to 39% in the 12th plan.
65% of total spend in power, roads, railways: Power sector will continue to
account for highest share in the 12th plan spend at 32%. The road segment is
likely to see an investment of Rs 4.5tn, 17% of total. Rise in project award
activity by NHAI will lead to higher investment in national highways. Railways
will see an investment of Rs 4.5tn over the 12th plan period.

EPC opportunity of ~Rs 12tn: We estimate an EPC opportunity of ~Rs 12tn from
12th plan, primarily in sectors such as roads, railways, power, irrigation, and
water supply. This will necessitate ramping up of business by existing players.
Key risks: a) Delay in coal availability for power plants; b) delay in road project
awards by NHAI (due to land acquisition, environmental clearances); c) slow
execution by the railway ministry.

Prefer L&T, IVRCL, NCC, Patel Engineering and Ahluwalia Contracts: We expect
companies within our coverage universe to deliver revenue/earnings CAGR of
20%/25% over FY10-FY12E. These companies are set to tap the upcoming EPC
and asset development opportunities. We prefer companies with strong cash
generation, a good execution track record, and reasonable valuations.

To read the full report: INDIAN INFRASTRUCTURE

>CEMENT: Prices in South decline, too soon too fast

Cement prices continued on their downward trajectory for yet another month, but this time at an accelerated pace, particularly in Andhra Pradesh (AP). Cement prices in this market are currently hovering around Rs 150-155/bag, down by Rs 50-60/bag from its peak two months back. Cement prices in Chennai too have declined by Rs 15-20/bag to ~Rs 230-240/bag. Dealers believe that prices in south India could fall further in the coming weeks as demand shows no signs of revival. While prices in central and northern regions, particularly in Delhi, have remained flat, that in the western region of Pune have declined by 15-20/bag. Interestingly, these price corrections have happened during the pre-monsoon period; with the monsoon setting in, a further drop cannot be ruled out. We continue to maintain Sell on ACC, Ultra Tech, and India Cements. Grasim (post steep correction) and Shree Cement remain out best bets in the sector.

■ South prices nosedive: Our dealer checks indicate that cement prices in the south have declined by Rs 15-20/bag across states. This revision has brought down prices in Chennai to Rs 230-240/bag and Bangalore to Rs 230/bag. The decline has been sharper in AP – cement prices in this market have tumbled by Rs 55-60/bag from its peak two months back and currently stand in the range of 150-155/bag. With monsoon setting in and the demand already lackluster, further price cuts in the south are inevitable.

■ Western region a mixed bag: The Pune market in the western region is essentially correlated with the AP market as dispatches enter Maharashtra from AP, once the gap between the prices widens. Prices in the Pune market have corrected by Rs 15- 20/bag in the last 15 days. Dealers opine that prices could well go below Rs 200/bag as monsoon sets in and AP market looks weak. For the Mumbai market, although prices have been steady at Rs 245-250/bag, a decline is expected in the next 15-20 days.

■ Northern region stays flat: Cement prices in New Delhi have remained steady at Rs 245-250/bag. Gurgaon, however, has seen a drop of Rs 5-10/bag to Rs 225- 230/bag and, is likely to see a further decline of Rs 5-10/ bag in the coming weeks. While prices in Jaipur have increased by Rs 5/bag in last 15 days, and are in the Rs 230-238/bag range currently, our dealer checks suggest that since demand is low, the price rise may not be absorbed by the market. Central region flat; eastern markets see a decline: Cement prices in Uttar Pradesh have remained flat at Rs 250/bag; however, demand continues to be weak in this market. In the eastern region, especially in Kolkata, prices have declined by Rs 5/bag and are currently at Rs 280-290/bag; in the bulk segment, prices are hovering at Rs 260-265/bag. Dealer suggests prices in this market
could decline by Rs 10-15/bag.

■ Caution advocated: Given the low single-digit demand growth, lurking monsoons, and increased supply pressure, we believe this is not an opportune time to enter pure cement players. We reinstate a Sell on ACC, Ultra Tech, and India Cements. Grasim (post significant correction in last one month) and Shree Cement remain our best bets in the cement sector.

To read the full report: CEMENT

>UNITECH: Non-core spin-off to unlock value (RELIGARE SECURITIES)

Unitech plans to spin off its non-core businesses (construction, telecom, power, SEZs and amusement parks) and focus entirely on real estate. We believe the objective behind the de-merger is to create two separate listed entities that will allow for a sharper business focus. The move will also enable the management to raise funds more easily in the non-core entity as compared to the real estate business. We see value-accretion for investors from the spin-off and hence maintain a Buy on Unitech with a target price of Rs 101.

Non-core line up: We believe the proposed non-core entity would comprise the company’s 40% stake in Unitech Corporate Park (UCP), 50% stake in Unitech Amusement Park, 32.5% holding in Uninor Wireless (telecom), and the in-house construction and power transmission divisions.

Unitech Corporate Park – the SEZ vehicle: UCP – an AIM-listed entity – operates in India’s commercial real estate segment with a focus on IT and IT-enabled services. The company has six properties (five SEZs and one IT park) in the national capital region (NCR) and Kolkata with a total development potential of 21.4mn sq ft (1.05 msf leased out). UCP is a debt-free company with cash of £ 48.3mn as on December ’09. Knight Frank has valued the company’s six assets
at £ 517.7mn; we have built in this figure for our best-case valuation of UCP. Accordingly, the value of Unitech’s 40% stake stands at Rs 14bn (Rs 68/£). Amusement parks: Unitech holds a 50% stake in Unitech Amusement Park which owns two parks, one in Noida and another in Rohini (Delhi). The Noida amusement park is spread over 148 acres in Sector 38. Phase I has been concluded and comprises 20 rides along with 1msf of operational retail space.

The park in Rohini called ‘Adventure Island’ covers 61.7 acres and has 22 rides and 0.2msf of retail space operational under the first phase. We have valued this business based on the leased portfolio, at Rs 5bn in the best case scenario.

Telecom, construction and power: Unitech holds a 32.5% stake in its telecom business – Uninor Wireless, which we have valued at Rs 29.6bn (based on Telenor’s 67.5% stake acquisition in Uninor for Rs 61.3bn). We value the construction business at 4x Market cap/EBITDA (~Rs 1bn) and power at Rs 1bn.

De-merger to be value-accretive for investors: Including subsidiaries and JVs, we arrive at a value of Rs 19.5/share for the de-merged entity in the best case and Rs 12.9/share in the bear case at full dilution (see Fig-1). We expect the spin-off to unlock value for investors and hence maintain our Buy rating on the stock with a target of Rs 101. We reintroduce a discounted value for the realty business on concerns of rising interest rates and escalating realty prices, which affect volumes.

To read the full report: UNITECH