>SOBHA DEVELOPERS: High visibility, improved cashflow to drive valuations; CL Buy

What's changed
In 4Q, Sobha has launched two projects in Chennai and is on track to launch another residential project in Bangalore. With these, Sobha will have launched 11 mn sqft of residential projects in the last 6 quarters and is in the process of launching 8 mn sqft in FY13. These projects provide sales visibility of Rs78 bn or 16 quarters worth based on the recent quarterly run rate. We expect Sobha to pre-sell residential real estate of Rs16.5-17 bn in FY12 compared to Rs11.2 bn in FY11. This growth of more than 45% yoy is in contrast to the declines seen at most developers in FY12 ytd. We expect this large operational outperformance to be reflected in stock performance as well.


Implications
We see a significant jump in operating cashflow in FY13 on increased customer payments and stable/declining interest payments. Based on recent quarterly results, Sobha offers attractive cashflow yield of 12%. We expect operating cashflow to further increase to Rs3.7 bn in FY13 (operating cashflow yield of 14%), as (1) pre-sales momentum remains robust; (2) interest payments will decrease on lower debt level and interest cost, and (3) a large number of launches are planned. Key stock price catalysts include continued improvement in growth visibility as well as cash flow. In addition, our view of affordability and current property pricing levels in Bangalore is constructive.


Valuation
We reiterate our Buy rating (on CL).Our 12-m NAV based TP of Rs353 is unchanged. Sobha is trading at a 37% discount to our Mar-13 RNAV of Rs392. Ongoing and forthcoming projects provide post-tax cashflow visibility of Rs32 bn against current EV of Rs37 bn.


Key risks
Key risks are lower-than-expected volumes sold and slower execution.
RISH TRADER

>GODAWARI POWER & ISPAT LIMITED: Pellet paving the way for a prosperous future

A backward integrated business comprising captive iron ore mines and a flexible sales product mix of steel, pellets and power make Godawari Power & Ispat Ltd, GPIL, an interesting investment bet in the midcap steel space. Ramp up in captive iron ore mining and pellet production together with increased steel product sales is likely to result in impressive net sales and EBITDA CAGR of ~23% and ~15% respectively over FY11-14E. We initiate coverage on the stock with a Buy rating and target price of Rs157.


■ Flexible business model with rich product portfolio: GPIL has created a strong niche for itself in the midcap steel space through its rich product portfolio forward integrated into HB Wire and backed by backward integration from iron ore and pellets. The product mix of GPIL remains flexible to derive
maximum profitability.


■ Pellet making to double in two years, drive earnings: GPIL is doubling its pellet making capacity to 2.4 mtpa by FY14E through the set up of a new pellet plant of 1.2 mtpa at Chhattisgarh at a capex of Rs3.8bn. Pellets result in cost saving on iron ore feed for sponge iron unit and enjoy EBITDA margin of ~40% on spot merchant sales when captive fines are used. We see merchant pellet sales growing at a CAGR of 21% during FY12-14E and account for ~65% of overall pellet production by FY14E thus driving the earnings
of GPIL.


■ Captive iron ore back on track: GPIL’s Ari Dongri iron ore mine of 0.6 mtpa results in crucial cost savings for pellet and sponge iron making and is back on track after facing problems on mining and logistics in H1FY12E. We see 80% capacity utilization in iron ore mining for GPIL in FY13-14E.


■ Power provides hedge to steel business volatility: GPIL’s 53 MW power portfolio provides a natural hedge for steel business volatility and we expect the company to continue selling a mix of steel and merchant power to maximize returns.


■ Solar power foray remains an unrelated diversification: We remain concerned on GPIL’s foray into solar power generation (50 MW capacity at a capex of ~Rs8bn with 70:30 debt: equity) and view it as an unrelated diversification. GPIL has thus far invested Rs1210mn as equity into the project and the project is expected to commission by May’2013. We have not factored the same in our earnings and valuation as
of now and await more clarity on the same.


■ Valuations – attractive, Buy: The stock trades at Rs100, which discounts its FY13E EPS and EV/EBITDA by 3.2x and 4.1x. We see earnings growth ahead driven by pellet volumes and value the stock at 4x FY14E EV/EBITDA to arrive at a fair value of Rs157. We don’t factor in any value for the solar power investment by the company as of now. We initiate coverage on GPIL with a Buy rating and target price of Rs 157.

■ Key Risks: Lower sales volumes, drop in steel and pellet prices, hike in royalty on iron ore and lower returns from investment into solar power.
RISH TRADER

>INDIA STRATEGY: The “Sell-Side” Consensus Ratings: The Bear Hug (MORGAN STANLEY)

• Key Debate: The Indian market has rallied 15% since the start of the year, downward revisions to aggregate earnings and GDP growth estimates have slowed, and the conviction level of the buy side (if FII inflows is an indicator) has gone up. Will all this lead to change in the views of sell-side analysts, which have fallen to their lowest level since April 2010.


• What’s New: In the latest run of our bi-annual update on the consensus ratings, the sell-side conviction level on Morgan Stanley coverage stocks has fallen to 0.3 – a 22-month low from 0.42 in Aug-2011. A score greater than 0.3 implies a “buy” or equivalent rating, while a score of less than -0.1 implies a sell or an equivalent rating. Across market cap segments, we notice that consensus views are highly dispersed – with no particular market cap segment standing out as the most bullish or bearish call for consensus.


• We assign a 1 point to a buy rating, -1 point to a sell rating, and 0 score to a hold. We find that the consensus has a “buy” or equivalent rating on 59% of our coverage universe (of 130 stocks), down from 68% in Aug-11. Similarly, Morgan Stanley analysts have a “buy” (equivalent) rating for 41% of the universe vs. 46% in Aug-11. This suggests that Morgan Stanley analysts remain more bearish than consensus.


• MS Analysts vs. Consensus: Morgan Stanley analysts agree with consensus ratings on less than half of our coverage universe with consensus (62 out of the 130 stocks covered) – the lowest level since Feb-09.


• Out of the 68 stocks where they disagree, Morgan Stanley analysts have a “buy” (equivalent) rating on only 12 stocks, while consensus has a “buy” rating on 37 stocks, suggesting a more bullish consensus.


• Within the Morgan Stanley coverage universe, there are 35 stocks, or 27% of our coverage universe, in which 70% or more of the Street has a “buy” or equivalent rating. Morgan Stanley analysts differ with the street on 13 out of these 35 stocks. On the other hand, there are only four stocks on which 60% or more of the Street has a “sell” or equivalent rating. Notably, Morgan Stanley analysts have a “buy” (equivalent) rating on two of these stocks. Please see pages 4 and 5 for the most bullish and bearish consensus calls along with the contrarian calls between Morgan Stanley and consensus.


• Consensus Sector Calls: The average consensus ratings have fallen since Aug-11 for five out of the 10 sectors, with Industrials leading the charge. On the other hand, Technology gained the most. The consensus ratings are most positive for Energy & Financials, while they remain least positive for Telecoms (see page 6).


• Conclusion: The sell-side consensus conviction seems to be approaching a low point. However, the consensus seems to be more constructive than Morgan Stanley analysts. The opportunity, in our view, lies at the stock level. See page 5 (and the table on the front page) highlights these calls.


To read full report: INDIA STRATEGY
RISH TRADER

>SHAREHOLDING MONITOR

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

To read full report: SHAREHOLDING PATTERN
RISH TRADER