>STRATEGY: The flipside of policy inertia – rising FCF yields

■  Sensex PER valuations belie the bottom-up pain. Though Sensex PER (12.5-13.0x) seemingly has more downside given (1) FY12-14E earnings CAGR of only 12%, (2) the still negative spread of earnings yield vs. risk free rate and (3) avg. Sensex PER of 11.5x during the GFC, we expect the rising FCF yields (focus of this report) to begin supporting valuations. The top-down market PER, however, has been supported by the increased weights in FMCG, IT and Pharma and the sustained premiums thereof, thus understating the severe de-rating in other sectors. It is also interesting to note that the India weight in benchmarked funds relative to MSCI EM has remained stable at an Overweight of ~1% during the past two years. Even the absolute India weight has declined only 190bps from the peak of 9.5% two years ago, suggesting significant sector rotation even as relative Over/Underweight has been stable.


■  FCF yield at 2SD to provide downside support, identify stocks. Meanwhile, the flip-side of the collapse in the capex cycle is the rising FCF yields; the Sensex fwd FCF yield is now at 4.5%, higher than 2008-09 levels and almost at 2SD. We believe this could provide material downside support to market valuations notwithstanding the regulatory/policy overhangs. Continuing with our thesis, we map stocks based on the (1) FCF yield (FY13/14E avg.) and (2) the delta in FY13/14E yield vis-à-vis FY12. Stocks that stand out on both parameters are Apollo, Cairn, HZL, Crompton, M&M and TAMO. Stocks with high FCF yields but low deltas are HCLT, Ambuja, ACC, Infy, Bajaj Auto and BHEL. In the model portfolio, we reduce Staples to UW from EW and increase weight on Industrials (OW vs. EW), Financials (EW vs. UW, mainly through PSU banks) and Energy (Reliance). We also reduce weights in Pharma/Healthcare and Materials.


■  FY12-14E earnings CAGR of 12% below nominal GDP growth now: Meanwhile, earnings have continued to slide – Sensex FY13/14E EPS stands at Rs1,216/1,338 (Rs1,247/1,372 in end-Feb). We don’t see too much further downside as margin expectations are low and gains from a weak rupee will start flowing through FY13 earnings. The Earnings Revision Index (ERI) for India has also declined from -0.5 in Sep-11 to -0.1 and has been stable in the past 3 months.


■  Top picks: ACC, HCL Tech, DLF, ICICI Bank, Dr. Reddy’s. We replace Cipla with Dr. Reddy’s and drop HUVR, Tata Motors and Bharti from the top picks. Top Midcap Picks: Apollo, PLNG, Adani Ports, Sobha, YES Bank.


To read report in detail: INDIA STRATEGY
RISH TRADER

>Companies doing Buy-Back – Offers value to investors

Corporate that generates profit usually deploy it in two forms one in the form of dividends to reward the shareholders, the remainder portion is redeployed in the business for future growth. Theory suggests that if the management is able to generate higher returns by deploying the profits so generated in business, then they should conserve cash for investing. However if the business is not able to generate better returns, the profit generated should be paid out to the investors as dividend.

Another form of rewarding the shareholder is through share BuyBack as an alternative to the dividend payout which is more efficient and better alternaive to dividends.The advantage is that buy-backs give a boost to share price and give shareholders capital gains rather than income. The management of the company may also resort to share Buyback when they feel that the stock is under valued and the surplus cash can be utilised to enhance the shareholder value for the existing shareholders, as sharebuy back is also one way of improving earnings per share. It is an indirect way of increasing the promoter holding in the company and reducing the floating stock.

To read report in detail: BUY BACK OFFERS

RISH TRADER

>LARSEN & TOUBRO: Larsen & Toubro Electrical & Automation acquires UK-Based Thalest Group".

Investment Highlights
Q4 FY12 Results Update L&T Ltd. has reported net profit of Rs 19204.00 million for the quarter ended on March 31, 2012 as against Rs 15862.10 million in the same quarter last year, an increase of 13.89%. It has reported net sales of Rs 184609.00 million for the quarter ended on March 31, 2012 as against Rs 153842.10 million in the same quarter last year, a rise of 20.00%. Total income grew by 19.18% to Rs 187751.00 million from Rs. 157540.30 million in the same quarter last year. During the quarter, it reported earnings of Rs 31.36 a share.



Recommends Dividend: Larsen & Toubro Ltd has recommended a Dividend of Rs. 16.50/- per share (previous year Rs. 14.50/- per share)


Allotment of Shares: Larsen & Toubro Ltd has allotted 3,80,562 (Three Lakh Eighty Thousand Five Hundred Sixty Two) shares on May 14, 2012 to those grantees who had exercised their options under the Company’s Employee Stock Ownership / Option Schemes.


L&T bags Rs 1937 crore order from GVK for Construction of Road Infrastructure IC of L&T Construction has bagged a major order worth Rs 1937 crore from the GVK group for Design, Engineering, Procurement and Construction for 4 Laning of a major portion of Shivpuri - Dewas section of NH -3 in Madhya Pradesh totaling 235 Km. The project has to be completed in 27 months.

 L&T construction has bagged new orders valued over Rs 1880 crore
L&T Construction has bagged new orders valued over Rs 1880 crore across various business segments during the fourth quarter of FY2012.


The Infrastructure IC has secured new orders aggregating to Rs 1048 crore from The Government of West Bengal.


In the Water and Effluent Treatment business unit, L&T Construction has secured orders worth Rs 348 crore from Gujarat Water Infrastructure Limited for providing, supplying, lowering, jointing & commissioning of bulk water transmission by M.S.Pipeline at Surendranagar and Junagadh Districts in Gujarat.


In the Power Transmission & Distribution IC, new orders valued at Rs 263 crore have been bagged from esteemed clients. The orders include construction of e-BOP system for 2x600 MW Coal fired thermal power plant at Singhitarai in Chhattisgarh from a private developer and another order from DMRC for supply.


L&T Construction has also received additional orders worth Rs 221 crore from various ongoing projects.


To read report in detail: LARSEN & TOUBRO

>RELIANCE CAPITAL LIMITED: CCI clearance for sale of 26% stake in MF arm to Nippon Life and reversal of interest rate cycle positive

Impressive Q4FY2012 results & sale of stake in MF and Life Insurance arms are major triggers for RCap


■ CCI clearance for sale of 26% stake in MF arm to Nippon Life and reversal of interest rate cycle positive for RCap: Recently, Competition Commission of India (CCI) approved the proposal of Japanese major Nippon Life to acquire 26% stake in Reliance Capital's (RCap) mutual fund arm Reliance Capital Asset Management (RCAML). CCI is of the opinion that the proposed combination is not likely to have any appreciable adverse effect on competition in India. The deal, (which took place on January 19, 2012) valued at an aggregate amount of Rs.1,450 crore, is the largest FDI deal in any Indian asset management company till date. The transaction pegs the valuation of RCAML at around Rs.5,600 crore ($1.1 billion) or about 7% of its overall assets under management (AUM) at the time of the transaction. This deal has been done at valuations which are better than some of the deals done in the recent past, at valuations of 1.5 - 3.5% of assets. Also, on April 17, 2012, RBI cut the Repo rate, after a period of 3 years, by 50 bps, signaling a reversal in the interest rate cycle, which will be positive for RCap.


■ Sale of 26% stake in Reliance Life Insurance another booster: Nippon Life has already invested $680 million in October 2011 for a 26% stake in Reliance Life Insurance Company (RLIC) pegging the total valuation of Reliance Life Insurance at more than to Rs.11,500 crore (at the then prevailing INR/USD rate). The deal value for a 26% stake in RCAML and RLIC amounts to Rs.4512 crore (according to the USD/INR exchange rate prevailing at the time of the deals), valuing these two businesses alone at Rs.17,100 crore. The market cap of the listed entity Reliance Capital is Rs.7,809 crore only. The proceeds from the stake sales have helped the company reduce its consolidated debt burden which has come down from Rs.20,000 crore in September 2011 to Rs.11,000 crore as on March 31, 2012. Another way to look at it is that based on the valuations of these two deals, the valuation of RCAML and RLIC alone comes to Rs.696/share whereas the stock of RCap, which has a range of other businesses in the financial services sector like broking, wealth management, private equity, etc, is trading at Rs.318/share only, which is a 54% discount to this valuation.


■ Impressive Q4FY2012 results indicate the worst is over for RCap: We believe that the worst is over for RCap. On the back of adverse corporate newsflows, the company’s stock price has been punished very severely, more than it deserves. Also, the company has posted impressive Q4FY2012 results. While total income has increased by 26% YoY to Rs.1995 crore, the company has posted a net profit of Rs.329.3 crore against a net loss of Rs.6.5 crore in the corresponding period of the previous year, mainly due to significant improvement in operating margins contributed by less net claims incurred during Q4FY2012. For FY2012, net profit increased 57% YoY to Rs. 457.8 crore while total income increased 22% YoY to Rs.6,577 crore. For FY2012, the life insurance business posted PBT of Rs.372.6 crore against loss before tax of Rs.129.3 crore in FY2011.


■ Other businesses provide further comfort: The other businesses of the company provide further value to the company. Reliance Securities had 6.85 lakh broking accounts as on March 31, 2012. The distribution business, Reliance Money, has a pan-India distribution network of 6,000 outlets. Reliance General Insurance (RGI) is amongst the leading private sector general insurance companies in India with a private sector market share of 8%. Reliance Commercial Finance had a loan book size of Rs.13,260 crore (USD 2.6 billion), as on March 31, 2012.


■ Risk to View: Any further steep slowdown in the industrial economy could impact its profitability adversely.


■ Valuations: We believe that the stock price of the company has seen significant correction, more than it deserves, of 48% from its 52-week high of Rs.612/, on the back of adverse corporate news flows. We believe that the worst is over for the company and its Q4FY2012 results have been impressive. At the current market price of Rs.318/, the stock is trading at 11.9x its FY2014E EPS of Rs.26.8 / and 0.62x its FY2014E BV of Rs. 512/. We continue to recommend BUY on this stock with a fair value of Rs.440 which is 16.5x FY2014E EPS and 0.86x FY2014E BV.


To read report in detail: RELIANCE CAPITAL
RISH TRADER