>INDIA STRATEGY: Preserving Capital- Best Risk - Reward Bets

To read the report: INDIA STRATEGY


RISH TRADER

>PUNJ LLOYD LIMITED: Has ~Rs39bn worth of orders from Libya and set to start execution in 1-2 months

■ Takeaways from Mumbai – Punj Lloyd presented at our India Infrastructure and Industrials Conference in Mumbai on 10-11 Jan. Below we highlight key takeaways.


■ Steady improvement in operations – Company has gone through a rough patch over the past one year, but says things are under control and improving. No new issues (auditor qualifications / customer disputes) have emerged in recent times, and losses in Simon Carves are over.


■ Libyan orders set to start execution in 1-2 months – Based on the situation on the ground, company believes that it will be able to start execution of Libyan orders in 1-2 months. PLL has ~Rs39bn worth of orders from Libya.


■ Orders and margins – PLL has won Rs120bn of orders in YTD FY12. Current order backlog at similar to those reported in 1HFY12 numbers. Company targets >10% margin at project level. 30% of projects have price variation clause for raw materials.


■ Outlook on different sectors – (1) Power BOP – Company has won orders from GVK, CESC and KSK, but order inflow is now slow given problems in the power sector. (2) Pipeline – Average annual market size is Rs25bn, of which PLL has 25% share. This market is likely to increase to Rs40bn/yr. (3) Oil and gas onshore EPC – Slow as of now, but some projects which had been deferred are now being revived. The
addressable market size is Rs40-50bn/yr. (4) Tanks and Terminals – There is substantial activity in tanks and terminal space. Over next two years, 8-10 strategic oil reserves projects (each of Rs8-10bn) are likely to be given out. There are a number of LNG terminals and tanks orders from these which could be in the Rs2-4bn range each.


■ Balance sheet and working capital – Current debt is ~Rs51.5bn with average interest cost of ~11%. ~29% of debt is denominated in foreign currency compared to ~70% of revenues in foreign currency. As a result, company is looking to substitute high-cost INR debt with foreign currency debt to reduce interest cost. Currently company has ~Rs15bn receivables pending due to various reasons (~Rs4.9bn from ONGC + Rs3bn in India from OMCs and others). Oil marketing companies (OMCs) have delayed payment due to stress on their financials, which has resulted in some pressure on working capital.


To read the full report: PUNJ LLOYD
RISH TRADER

>LARSEN & TOUBRO: High investments in non-core and long gestation businesses

Best positioned to tide over the slowdown


■ Growth slowdown inevitable, but concerns exaggerated: L&T is one of the most diversified and the largest E&C player in India. It has far out-paced competition particularly on profitability thanks to 1) its highly integrated operations, 2) strong preference from private sector clients, 3) economies of scale, and 4) stringent risk management and controls. We believe that the concerns on slowdown, though not unfounded, but are exaggerated given 1) high order replacement ratio (>1.3x) despite sluggish environment, 2) superior cash flow generation and 3) strong long term potential.


■ Re-focus on globalisation – a step in the right direction: While L&T is considered one of the largest E&C players globally; it derives only c.10% revenues from international markets. However, with domestic outlook weakening substantially, the company has stepped up efforts in overseas markets, primarily Middle East. While this presents several near-term challenges, primarily stiff competition from Korean and European counterparts (much larger presence and are well entrenched in these markets), it will provide important geographical diversification, which is a step in the right direction in our view. The efforts have also started to pay off with some important break-through in the last year or so.


■ Near-term earning expectations need to be reset lower, but core returns healthy: Current earnings expectations need to be reset lower, in our view; we highlight that our standalone EPS estimates are c.11% below consensus as we have built in conservative set of assumptions on order inflows, margins, asset utilisation etc. While core business returns are set to decline from current levels (RoIC at 32.3% in FY11), they should remain enviable and healthy (we estimate c.22% in FY13-14E period).


■ Stock cheap by historical standards, opportunity to enter: After the recent correction, stock is trading at 11.7x FY13E EPS (adjusted for conservatively assigned values to non-standalone businesses), which is c.15% discount to Sensex (vs historic premiums of over 25-30%; the discount is similar to the ones during 2009 bottoms). We believe valuations have more than factored the impact of slowdown, while long-term fundamentals remain strong. We initiate coverage with BUY and Dec’12 TP of `1,275.


■ Key concerns: 1) High investments in non-core and long gestation businesses, 2) impending changes in business structure, 3) continuing deterioration in macro environment.


To read the full report: L&T
RISH TRADER

>MUTUAL FUNDS REVIEW: Institutional fund flow, Equity funds, Equity diversified funds, Equity Midcap Funds, Equity Infrastructure Fund, Equity Banking Funds, Arbitrage Funds, Exchange Traded Funds (ETF), Balanced Funds, Monthly Income Plans (MIP), Debt funds, Liquid funds etc..

• The year 2011 has been a volatile one where factors such as the ongoing Euro zone sovereign debt crisis, slowdown fears in the US and higher than anticipated jump in inflation in BRIC countries impinged on the global growth ecosystem

• The one theme that is consistent across various asset classes is safety first. Risk aversion remained at elevated levels forcing investors to dump riskier assets(global equity markets, riskier bonds and commodities) and resort to perceived safe havens (US treasuries, gold)

• Going into 2012, sentiments remain weak due to persisting European sovereign concerns and impact of any negative development

• We expect more of a time based correction and expect the markets to oscillate in a broad trading range till the time reasonable clarity emerges from various local and global macro headwinds

• In case of a negative outlier event, the markets may fall further in the wake of panic selling. However, we do not expect the markets to sustain at such levels. In such an environment, timing the markets would become extremely difficult. We believe that any sharp cuts should be bought into from a three to five years perspective. Currently, higher allocation should be made in large cap funds with some allocation to midcap funds depending upon risk appetite

• We believe at least H1CY12 will be volatile as the markets would witness huge swings to the news emanating from the emerging and western world. Also, the markets will react sharply to any surprise coming from within the country on the political/economical front. Such bouts of volatility will provide a platform to accumulate equities in a staggered manner as we expect H2CY12 to be a more trending one as a lot of macro issues may subside

• In the short term, the fortunes of equities are also tied to the relative attractiveness of fixed income, gold and real estate. Any deterioration in the risk-return trade-off in these asset classes would be a blessing in disguise for equities else equity markets may continue to be sidelined

• We expect the year end target for BSE Sensex to be boxed in the range of 15442: 14x FY12 Sensex EPS of 1103 ((bear case)– 17822: 4x FY13 Sensex EPS of 1273 (base case) in line with earnings growth of 15% in FY13 and historical average multiples of 14x

• Since we are currently trading at close to our bear case year end target, equity investors with an investment horizon of more than one year should start allocating fresh money as the long term case for investments in Indian equity markets still remains intact.

To read the full report: MUTUAL FUNDS
RISH TRADER