>UNITED SPIRITS: Downgrade to Neutral on nearterm overhangs; core business valuation remains attractive

■ Action: Cutting estimates and downgrading to Neutral

We cut our FY12F and FY13F earnings estimates by ~30% and downgrade the stock to Neutral to reflect our lowered expectations for domestic business profitability. While we expect FY12F to be a year of consolidation marked by stable EBITDA per case in the domestic business, we expect marginal improvement into FY13F. We believe nearterm overhangs, particularly the group company Kingfisher Airlines, will hold back stock price performance; however, valuation at 15.3x FY13F P/E remains attractive, in our view.

Hangover to last for a while

■ Catalysts: Softening raw material prices a positive catalyst for FY13F

As the company continues to build more in-house capacity post the acquisitions of Pioneer and Sovereign distilleries, we believe it will be able to capture more of the distillation margins over the next couple of years. This should, in our view, help improve profitability of the domestic

business. However, we are not building in any material improvement in profitability in our numbers as visibility on that remains low.

■ Valuation: Near-term concerns outweigh valuations

On our revised numbers, UNSP trades at 15.3x FY13F P/E, a steep 38% discount to the FMCG sector average. While we expect UNSP to deliver 20% earnings growth in FY13F, we expect FY12F to be a year of consolidation. While valuation at 15.3x FY13F looks attractive, near-term

concerns over the balance sheet and funding requirement at group company Kingfisher Airlines will likely remain overhangs, in our view. We prefer to remain on the sidelines in the near term.

To read the full report: UNITED SPIRITS

>Hindustan Zinc: Silver boost in the price – little to look forward to

■ Action: Lack of catalysts either way

HZ has been one of the better performing metal stocks during the past two months (down 19.6% compared to the BSE metal index’s fall of 26.8%).

We believe the stock will have downside support on account of: 1) cash of INR192bn and 2) earnings visibility. However, upside will likely be capped as we expect: 1) earnings growth to taper since most of the expansion is already completed and given higher royalties on account of new mines and mineral acts and 2) we don’t expect yield on its cash and equivalents to improve for lack of investment opportunities. Maintain NEUTRAL with a target price of INR120.

Downside support, but upside capped

■ Catalysts: Not in the immediate future

The sale of the remaining stake in HZ by the government would be a key positive catalyst, in our view.

■ Valuations: Fairly valued, maintain NEUTRAL

We have valued HZ at 10x FY13E EPS of INR13. On our valuations the stock would trade at 7.6x FY13E EV/EBITDA and 1.8x FY12E P/B. Since cash contributes more than 35% of the total value, we believe there is a strong support for the stock on the downside.

■ Although zinc prices have corrected by 16% during the past two months, the impact was mitigated by a corresponding 10% depreciation of INR.

■ We have reduced our target price to INR 120 from INR 130 earlier, as our earnings estimates have come down due to higher royalties on account of new mines and minerals bill.

To read the full report: HINDUSTAN ZINC

>INDIA STRATEGY: 2QFY12 Preview: Weak earnings; Downgrades continue

■ Different quarter same story; Results expected to be weak

The Sensex companies are expected to mirror the previous quarter with weak headline profit growth of 10.8% on a consolidated basis and 14.6% on a standalone basis. This is the weakest forecast in the last 8 quarters. Second, even the sales growth at 16.9% is expected to be the slowest in the last 8 quarters. Third, margins on an aggregate basis are expected to continue

declining. Lastly, we continue to expect downgrades to our Sensex EPS from 1140 currently to 1100-20 levels. We see bigger risk to FY13 estimates of Rs1340 (our expectation is Rs1250).

■ Margin pressure continues; Energy, IT & Autos worst hit

Aggregate Sensex EBITDA margins are expected to show a drop of 90bp. This is largely led by Energy (-210bp YoY), Software (-200bp YoY) & Auto (-130bp YoY). While input cost pressures are likely to ease off, we think slowing topline growth will continue to drag earnings growth.

■ Energy, Pvt banks lead growth; Autos, Telecom & Tisco drag

Among Sensex cos, Energy (RIL), Pvt. Banks (ICICI & HDFC Bk), Sterlite & ITC are expected to be key contributors of growth. On the other hand Autos (Maruti, Tata Motors), Telecom (Bharti) & TISCO are expected to drag down growth.

■ Rupee depreciation could cause earnings volatility

The depreciation of the rupee will likely cause volatility in earnings. On the positive side, rupee EPS for IT companies (Infosys) should be upgraded. On the negative side companies like Ranbaxy, Power Finance, Sintex are likely to report losses on forex borrowings (most companies don’t route this through the P&L).R

To read the full report: INDIA STRATEGY

>STERLITE INDUSTRIES: News flow should improve – valuations at deep discount, reaffirm Buy

Power ramp-up a key catalyst

■ Action: Overly pessimistic valuation; attractive opportunity

Sterlite Industries has corrected by 40% over the past 12 months (Sensex:-26%), reflecting continuous negative news flow and concerns over a deteriorating macro environment. We believe the current stock price is building in a USD1,600/t zinc price (current: USD1,860/t), assigning no

value to the power and aluminium business, and ignoring loans to group companies. Although its 64.9% stake in Hindustan Zinc (HZ) contributes 50-55% of earnings, Sterlite has underperformed HZ by 28% over the past 12 months.

■ Catalysts: Improving power business and news flow

Improving utilization of power plants should be a key catalyst along with resilient earnings, we believe. Any news flow on a stake sale by the government in HZ and Balco should also be positive.

■ Valuation: Target price cut to INR169; reiterate Buy

We value Sterlite Industries on a sum-of-the-parts basis at INR169/share. We have cut our target price to incorporate expected lower zinc prices and higher coal costs. The stock is trading at 5.6x FY13F EPS of INR18.7 and 3.4x FY13F EV/EBITDA. The stock is trading at a FY12F P/B of 0.8x,

despite an ROE close to 14% even on our conservative estimates. We believe these are attractive valuations and reaffirm our Buy rating.

Sterlite Energy (SEL) has shown PLF improving to 60% over the past two months from near 30% in March 2011. Although coal costs have risen, we believe SEL has performed much better than expected. With a third unit of 600MW under commissioning, we expect SEL to see better performance.

To read full report: STERLITE INDUSTRIES