Tuesday, August 31, 2010

>FX Alert – QE2 as USD end-game

A second round of QE will likely put sharp downward pressure on the USD, to some degree versus the euro and other G10 currencies, with potential for a broader USD sell-off. Foreign investors are likely to view the renewed direct intervention as indicating that the Fed’s balance sheet expansion and implicit monetization of fiscal expenditures are first line approaches to dealing with disappointing recovery prospects, rather than the exceptional measures they were meant to be initially. This could have severe implications for foreign perceptions of the quality of the US assets that they are accumulating in private and official portfolios, and
may lead them to draw the conclusion that USD weakness is less a by-product than a desired outcome of these measures.

It is hard to argue that the EUR and JPY do not share some of the same weaknesses. However, the euro zone is essentially self-financing, with private savings offsetting almost all public deficits, and fiscal deficits remaining considerable smaller than in the US. Moreover, the euro zone’s fiscal austerity provides a credible, if painful, signal of an underlying desire to reduce fiscal imbalances that so far is lacking in the US.

Even if the ECB maintains its ‘pragmatism’ on the collateral front, the reluctance to buy significant quantities of government debt signals a desire to return to orthodoxy. From a currency perspective the euro zone combination of external balance, fiscal austerity, ECB
pragmatism and reluctant sovereign buying is likely to be more attractive than the US mix of QE2, limited deficit reduction and the need to finance a growing external imbalance while offering increasingly low rates.

Buying a little government debt while austerity is put in place is ultimately more credible than buying a lot when austerity is not put in place.

We are more sympathetic to the view that the USD/JPY is close to its trough. The stronger yen is increasingly negative for growth and wealth (through the reaction of equity markets to yen strength). Japanese real interest rates are much higher than elsewhere in G3 because of deflation. This is not really a currency plus because it is impossible for investors to arb the Japanese and USD CPI against nominal interest rate differentials. It creates a headwind to growth that becomes more severe as deflation intensifies and the yen appreciates.

To be sure the major euro risk remains that the austerity and slowing global growth will slow euro zone growth to such a degree that a sovereign default occurs and has severe knock-on effects on other fiscally weak countries. That clearly remains the major euro zone risk. However, investors have tolerated prior ECB intervention well, and the ECB’s reluctant intervention to avoid the worst in sovereign debt markets has been euro positive.

Concern that monetary policy is ineffective
Recent downward surprises in housing and investment data suggest a deepening risk that the US is entering into a significant slump. Given the run of very weak data investors are now focused on the policy response, with comments by Fed and international officials at Jackson Hole the ‘payrolls’ event of this week. Central bankers are loath to admit that they may be pushing on a string, although the combination of balance sheet constraints at commercial banks, idle balances throughout the financial system and low loan demand by borrowers make this a possibility. Moreover unlike the first run at QE, neither the level of rates nor spreads point to an obvious problem that a new round of QE can solve (unless they decide to buy Greek and Irish debt). Our US Economists have stressed that “… monetary policy will need to err on the side of ease…. The [Fed] reinvestment plan likely will be enhanced by more active balance sheet expansion or perhaps new efforts to unblock credit.”

To read the full report: FOREX ALERT

>SOVEREIGN SUBJECTS: Ask Not Whether Governments Will Default, but How

This is the first issue of Sovereign Subjects, a new Morgan Stanley publication focusing on sovereign risk in advanced economies. In this first installment, we take a broad perspective on government balance sheets and raise several themes to which we will return in more depth in subsequent issues. We encourage clients to provide us with feedback on this new publication.
Debt/GDP ratios are too backward-looking and considerably underestimate the fiscal challenge faced by advanced economies’ governments. On the basis of current policies, most governments are deep in negative equity.

This means governments will impose a loss on some of their stakeholders, in our view. The question is not whether they will renege on their promises, but rather upon which of their promises they will renege, and what form this default will take. So far during the Great Recession, sovereign (and bank) senior unsecured bond holders have been the only constituency fully protected from partaking in this loss.

It is overly optimistic to assume that this can continue forever. The conflict that opposes bond holders to other government stakeholders is more intense than ever, and their interests are no longer sufficiently well aligned with those of influential political constituencies.

There exists an alternative to outright default. ‘Financial oppression’ (imposing on creditors real rates of return that are either negative or artificially low) has been used repeatedly in history in similar circumstances.

Investors should be prepared to face financial oppression, a credible threat against which current yields provide little protection.

To read the full report: SOVEREIGN SUBJECTS


Focused mid-income housing player with an asset-light model: Godrej Properties (GPL) is a focused mid-income housing player, with a pan India presence and a differentiated business model. Almost ~77% of GPL's land bank of ~50msf comprises of joint development (JDA) projects. The JDA approach allows GPL to enjoy a low risk, low capital intensive business model. The advantages of GPL's model are reflected in its superior RoEs.

Ability to emerge as a leading pan India player: Several RE players have been trying to position themselves as pan-India players. Nonetheless, most RE companies have not been successful in their pan India expansion attempt because of the lack of brand recognition. Godrej group enjoys tremendous brand recall and trust across the country. Hence, we believe GPL has the potential to emerge as a leading pan India RE player, going forward.

Option value provides significant upside potential: GPL's parent, Godrej Industries Limited (GIL) and its group/ promoter companies have strategic land holdings across India. GPL has been identified by the Godrej group as the RE development vehicle for developing these key land holdings through the JDA model. It already has MoUs with Godrej group companies to develop ~185acres. We have attempted to capture this option value by valuing all the disclosed MoUs and assuming an incremental development on 100acres at Vikhroli (Mumbai). Based on our probability-weighted methodology, we arrive at an option value of Rs177/share. Our option value still does not capture possible upsides from (i) new MoUs with group companies for their existing land bank and (ii) the full developmental potential of the 500-acre Vikhroli land.

Expect valuation to remain at premium to NAV due to high growth visibility: We expect GPL to trade at premium to NAV due to its strong growth visibility, asset-light model and brand equity. We estimate GPL's FY12E core NAV at Rs538/share and probability-weighted option value NAV at Rs715/share, which is our price target (33% premium to core NAV). GPL currently trades at 46% premium to FY12E core NAV and 10% premium to option-adjusted NAV. It is richly valued at 4.6x FY12E BV of Rs167 and 24x FY12E EPS of Rs32. Going forward, the key catalysts which could further re-rate GPL are (i) traction on disclosed MoUs, (ii) visibility on development of other group land bank (particularly at Vikhroli) and (iii) continued momentum on new third party JDAs. We initiate coverage on GPL with a Neutral rating.

To read the full report: GODREJ INDUSTRIES

>CUMMINS INDIA: Exports to grow 3x by FY12, driving 37% EPS CAGR over FY10-12

Encouraging long-term outlook, as parent looks at sourcing more from India; domestic sales to grow at a steady pace

Strong demand to boost growth: Cummins India (CIL), the largest engine
manufacturer in India, is likely to post accelerated growth over the next two years,
led by improving demand in the domestic market and strong rebound in exports
on the back of increased outsourcing by its parent. Better product mix, healthy
pricing environment, stable commodity prices, and continuous cost-cutting
initiatives will keep margins strong.

Domestic business to grow at 26% CAGR over FY10-12: After sluggish demand
in FY09 and 1HFY10, the domestic engine market has shown impressive recovery.
With growing power shortage, diesel engine demand for power-generation
applications will continue to be strong. We expect robust demand pull from the
industry segment as well, particularly from construction and mining.

Exports to grow 3x by FY12; parent raises guidance: CIL is among Cummins
Inc's leading manufacturing bases, and meets its global requirement for several
key products and components. After reaching a high of Rs13b in FY09, exports
sharply declined to Rs4.8b in FY10, as US and European economies shrank.
However, buoyed by strong recovery in American and Asian markets, its exports
have grown sharply since 4QFY10. We expect exports to reach Rs15b by FY12.
Cummins Inc has also raised its sales guidance for CY10 to US$13b, which
augurs well for CIL.

Superior product mix, cost-cutting boost margins; more surprises likely:
CIL has surprised markets by sharp improvement in margins during the last two
years. In FY10, EBITDA margin expanded 410bp to 18.5%. The company has
maintained strong margin momentum, posting 21.3% (up 290bp YoY) in 1QFY11.
We believe that better product mix, healthy pricing environment, stable commodity
prices and continuous cost-cutting initiatives will keep margins strong, going

Powerful tailwind; aggressive capacity expansion: Given quality standards
and cost benchmarks that CIL has established, Cummins Inc will enhance the
product portfolio that it outsources from India. To meet domestic demand and
export requirements, CIL will spend around US$300m at its new mega-site near
Pune over the next five years, which will add capacity at 20% CAGR. This is a
significant positive for the company's growth.

Earnings CAGR at 37%; stock trades at 17x FY12E earnings; Buy: CIL has
exhibited strong 26% earnings CAGR over the last four years, despite uncertain
business environment globally. We expect the company to post a robust 37%
earnings CAGR over FY10-12. We believe that the stock will command higher
valuations due to long-term growth potential and possible upside to earnings
expectations in the medium-term. We upgrade the stock to Buy, with a target
price of Rs840 (20x FY12E earnings).

To read the full report: CUMMINS INDIA

>BHARTI AIRTEL LIMITED: Some positives, more unknowns

We assume coverage of Bharti Airtel with a Neutral rating and a Mar-11 price target of Rs357 (13% upside). We prefer Bharti over RCOM and Idea as we believe it is better placed to benefit from Phase 1 (minute growth, moderated price competition). However Phase 2 in the Indian telco sector (competition resurgence) could throw up some challenges and we also expect Bharti to face operational issues in Africa in the near term. We see regulation as a continued overhang and don’t expect consolidation in the market anytime soon. Improving performance in Africa, benign regulations, and evidence of high-end churn not increasing at Bharti would make us more positive.

Phase 1 opportunity: Bharti, helped by its leadership position and strong operational performance, will fully benefit from the moderating price competition coupled with minute growth at the GSM majors, in our view.

Phase 2 challenges: We expect to see increased competition in the postpaid wireless segment as a result of 3G rollouts and implementation of MNP. With 3G we expect to see higher capacity in the market, a need to defend 2G revenue base (70% coverage), and also an opportunity for
revenue consolidation. We estimate that a 0.5% increase in Bharti’s postpaid churn negatively impacts its margins by 1.5%.

Africa a near-term concern: Africa offers Bharti longer-term growth potential, in our view, especially if management is able to deliver on cost management. However, we expect Bharti to face operational and execution challenges. On our estimates, Africa is 8%/4% dilutive on EPS in
FY11/FY12 but 4% accretive in FY13.

Our Rs357 price target is based on our SOTP valuation. At current levels we don’t believe Bharti is inexpensive – it is trading at over 14x one-year forward P/E (up from 10-11x in May) back to the levels last seen in early 2008. Key risks to our rating and price target are rational competition post MNP and a better performance in Africa on the upside, while downside risks include higher-post paid churn at Bharti on account of competition, a less benign regulatory environment than is being priced-in currently.

To read the full report: BHARTI AIRTEL

>CAIRN INDIA: Disappointing deal

Vedanta to acquire 51-60% stake in Cairn India: Cairn Energy is expected to sell 40-51% of its stake in Cairn India (it currently has 62.4%) to Vedanta Resources for a consideration of US$6.65bn-US$8.48bn, implying per share value of Rs405. This includes Rs50/share of non-compete fee paid to Cairn Energy for not engaging in E&P operations in Bhutan, India, Sri Lanka and Pakistan for a period of three years. At the acquisition price of Rs405/share, Vedanta has valued Cairn India at ~US$24/boe (2P+2C). Post the open offer (additional 20% at Rs355/share) Vedanta would hold 51%-60% of Cairn India. Cairn Energy’s stake in Cairn India, on the other hand, would reduce to 21.6%-10.6% (fully diluted basis) depending upon the open offer

Open offer lower at Rs355/share; lower than our expectations: Given a non-compete fee of Rs50/share, the open offer price has been fixed at Rs355/share. We see limited rationale in paying a non-compete fee for a commoditised business and hence believe that the deal is unfavourable from minority shareholder’s point of view. This differential treatment, we reckon, has been the primary reason for the stock’s correction by over 6% in trade yesterday. While concerned, we expect company fundamentals to provide support at the current levels.

Fundamentals intact; management’s lack of sectoral experience a concern: We continue to remain excited about the exploration prospects in the Rajasthan basin, especially the Balmer Hill formation where we expect upgrade in recovery factor going forward. Additionally, prospective exploration resource base of 2.5bn boe (10% recovery) in the Rajasthan block would provide the necessary leg up to resources going forward. However, given the lack of experience of the new management (Vedanta) in running oil & gas operations, we believe that the stock could reflect the above concerns going forward.

Downgrade to HOLD: While maintaining our 12-month target price of Rs380, we downgrade the stock from BUY to HOLD, mainly on two counts a) the stock is likely to be range bound given deal closure by 1QCY11 b) concerns on the lack of experience of the new management in handling E&P operations is likely to impact valuation in the medium term. We would however highlight that Vedanta management has delivered superior operational performance in assets acquired historically (Sesa Goa, Hindustan Zinc).

To read the full report: CAIRN INDIA

>BANK NIFTY: Banking – End of road soon (IIFL)

Bank Nifty has rallied staggering 226% from its bottom of 3,330 touched in March 2009. The
outperformance to Nifty has been substantial at 113%. Improvement in market sentiment followed by robust earnings has driven a sharp upswing in banking stocks both PSU and private.

In the past one month, (from July 16th), CNX Bank Nifty index has delivered returns of ~9% with majority of PSU banks scaling to all-time peak. Nifty appears to be stalling around resistance levels of 5,450-5,550 and the Bank Nifty, which has ~22% weightage, could see some profit booking. We have conducted a study of 15 banking stocks (large and medium size banks) and Bank Nifty to arrive at our medium-term outlook.

Ideally, as per Technical analysis, whenever, a stock trades at its all time high, it is considered to a bullish signal. However, taking into consideration advanced technical parameters like fibonacci
extension, fibonacci retracement and RSI, our study found that 8 out of 15 stocks covered in this
report have entered into an overbought zone. Any unwinding pressure at these levels could lead to sharp corrections in them. All chart studies have been carried on a weekly and monthly
basis to get a better perspective of the medium-term outlook.

To read the full report: BANK NIFTY

Friday, August 27, 2010

>ASIA FINANCIAL STRATEGY: Is the grass greener on the other side? (KEEFE, BRUYETTE & WOODS)

Colleagues returning from visits to continental Europe report quiet holiday retreats, vacant homes and empty shops. Yet much of Asia is very different, with vibrant activity and signs of growth.

For investors with a cautious view of the global economy Asia financials can offer defensive qualities, in our view. We screen banks using criteria that are generally considered indicators of defensiveness.

We screen consensus bank data for names that have a 2011 consensus PE below 12x, consensus eps growth above 10%, a dividend yield above 3%, a beta below 1.2 and a tangible common equity ratio above 5.5%.

The scan highlights defensive characteristics in names in Hong Kong, China and SE Asia.

China names qualify because despite capital raisings, dividend yields have remained high.

India and Indonesia banks are clearly more growth oriented. They fail the defensive screen with low dividend yields and in the case of India with high valuations.

■ Covered names highlighted include:
■ Daegu (005270.KS, KRW 13850, Outperform)
■ BOC(HK) (2388.HK, HKD 20.55, Market Perform)
■ Hang Seng Bank (11.HK, HKD 107.60, Market Perform)
■ ICBC (1398.HK, HKD 5.74, Market Perform)
■ CCB (939.HK, HKD 6.60, Outperform)
■ BOC (3988.HK, HKD 4.04, Outperform)
■ The screen is arguably too defensive. Growth markets can continue to perform strongly, in our view, if global growth does not deteriorate further, inflation pressures in those countries remains in check and policy globally avoids a protectionist lurch.

To read the full report: ASIA STRATEGY

>ADANI POWER: Plug in; More upside left

Still more upside despite run-up Adani Power (APL) shares have outperformed the MSCI India by 10.6% in the past three months and have surpassed our previous target price of INR135. We retain our BUY rating, as our new TP suggests another 16% upside from current levels despite factoring in the risk of higher tax incidence and a slight delay in capacity addition. We now
estimate the company will achieve 4.6x net profit growth over FY11-13, on the back of a 10-fold growth in power generation capacity to 6.6 GW by FY13. APL currently has 990 MW of capacity under operation and it will be India’s first power generator to complete a super-critical power plant, when it starts its Mundra III power plant early next year.

Modelling in risk of possible rise in tax incidence
Despite a delay in capacity addition, our FY11E EBITDA goes up by about 9% on higher merchant tariffs and more power available for spot sales. However, our FY11E EPS goes up only by 1.5% as we assume a 20% income tax rate versus 0% earlier to factor in the risk from the
government’s proposals to levy an export duty or to withdraw tax exemptions to units situated in Special Economic Zones (SEZs). Our FY12E EBITDA goes down by 2.7% as we assume lower capacity utilization as new plants ramp-up. We cut our FY12E EPS by 15.9% as we assume a 20% income tax rate versus nil earlier. Ceteris Paribus, our valuation is not impacted by a higher tax incidence as we were valuing APL on a fully taxed basis.

Raising TP to INR160 – BUY
We raise our DCF-based TP by 18.5% from INR135.00 to INR160.00 , primarily on a roll-over to FY12. We continue to like APL as we believe it will be the fastest growing IPP on the back of solid execution. We value APL’s 6.6GW of projects by estimating project free cash flows for the
next 15 years and then discounting it using project-specific WACCs. We consolidate the project discounted cash flows and assume a 3% terminal growth rate. For our WACC calculation, we continue to assume a cost of equity of 15% and a cost of debt of 11.5%. APL trades at our FY13E
EV/EBITDA of 6.0x vs the global peers at 7.4x. At our TP, the stock would trade at an FY13E EV/EBITDA of 6.5x. Key risks stem from execution delays, higher-than-expected coal costs, lower utilization and lower-than-expected merchant tariffs.

To read the full report: ADANI POWER

>>INDIA STRATEGY: A Tale of Two Stocks

Stock Weight in MSCI India: RIL and INFY Converge

• Key Debate: Reliance Industries’ MSCI India index weight converged with Infosys’ weight earlier this week. In our view, this is significant because it was only at the end of 2007 when the stocks were separated by 11% points in terms of index weight with Reliance at about 17% and Infosys below 7%. They are both now at just below 11%. What is also significant is that Morgan Stanley’s analysts rate both these stocks Equal-weight, that is almost 22% of the index accounted for by two stocks expected to move in line with the index. We see these noteworthy developments especially given that both companies are in some way linked to global growth and in other ways are solid proxies on India’s long-term growth story. The key debate is what lies in store ahead, where are these stocks in terms of what the market is pricing in and what is the market view on these stocks?

• Infosys is pricing in slightly more growth than Reliance but Reliance finds greater favor with investors:

• Infosys has handsomely outperformed Reliance since the beginning of 2008 (by 110% points).

• Infosys (Rs2,778.60) has gone through a big earnings and stock rating upgrade cycle since May 2009. For the first time (since we have data going back ten years) the sell side is rating Reliance (Rs972.25) below the market average. The earnings estimates have been recently cut by the sell-side consensus for RIL along with its stock rating.

• That said, institutional investors have been buying Reliance over Infosys over the past five quarters. This is especially true for domestic institutions who have purchased Reliance and sold Infosys since March 2009.

• Both companies have gone through a weak patch, fundamentally speaking, with ROEs dipping below trend line. The prospective estimates suggest a recovery with RIL expected to beat INFY on earnings growth (3-year CAGR of 23% vs. 18%).

• Our single stage implied growth model suggests that the market is implying INFY’s long-term EPS growth to be 15.2% vs. 12.2% for RIL. Thus, RIL is a tad more attractively valued although this has to be seen in the context of its cyclical business mix.

• Conclusion: Both these stocks appear to be set for a period of consolidation relative to the market and maybe even some downside. On a five-year basis, both stocks represent high quality investments though from a top-down perspective we think the scales are tilted slightly in favor of RIL given valuations and earnings growth prospects. Investors with a 12-month horizon could be better off in more attractive large cap stocks such as SBI (Rs2784), DLF (Rs315.75), L&T (Rs1804.80), Adani Power (Rs141.30), Ranbaxy (Rs445.20) and Bharti (Rs317.55) – all rated OW.

To read the full report: INDIA STRATEGY

>CAMPHOR ALLIED & PRODUCTS LIMITED: Chemical market back on huge expansion

Since 1961, Camphor & Allied Products Ltd. (CAPL) has been a pioneer in the field of Terpene Chemistry in India. It established the first Synthetic Camphor plant with technology from Dupont, USA. CAPL is India’s largest manufacturers of variety of terpene chemicals and other speciality aroma chemicals. CAPL’s vast product range includes Synthetic Camphor, Terpineols, Pine Oils, Resins, Astrolide, and several other chemicals finding applications in vast array of industries ranging from Flavours & Fragrances, Pharmaceuticals, Soaps & Cosmetics, Rubber & Tyre, Paints & Varnishes and many more.

A state of the-art manufacturing facility was set up at Nandesari, Baroda (45 minutes by air from Mumbai) in 1999, to manufacture high value fragrance chemicals and fragrance chemical intermediates based on inhouse technology. Products manufactured at this plant are of international standard and are well accepted in markets abroad and at home.

CAPL has two plants – first at Bareilly, UP & second at Baroda, Gujarat. CAPL also has a dedicated in-house Research Center CAPL has been witnessing major change in the performance and profitability since the change in the management in 2008. The company was taken over in 2008, via stake purchase and open offer @ Rs 167/share.

The new promoters are leaders in fragrance industry – Oriental Aromatics Ltd. Since then the turnover has increased from 105 Cr to 165 Cr and NP from 0.49 Cr to 10.18 Cr.

Camphor has manufacturing facilities in Bareilly (Uttar Pradesh) and Nandesari (Gujarat). Its product range includes fragrance chemicals such as amberone, pharmaceutical products such as camphor and terpineols, aromatic chemicals.

To read the full report: CAPL

>GMR INFRASTRUCTURE: Focus back on domestic assets

GMR's focus is fully back on its high-growth domestic assets following the commissioning of its largest asset, the Delhi airport (DIAL), the start of its gasbased power plant in Kakinanda and the progress on exiting Intergen. However, DIAL's ramp-up has been delayed. We lower our EPS forecasts but reiterate Buy.

1QFY11 results impress on EBITDA, but disappoint on PAT
GMR Infra recorded consolidated normalised PAT post minority of Rs24m (-89% yoy, -95%
qoq) on net sales of Rs12.3bn (+5% yoy, +9% qoq). Even though EBITDA was 11% ahead of our estimate, growing 17% yoy and 20% qoq to Rs3.78bn, PAT disappointed due to FX translation impact, a sharp decline in other income and higher taxes. In terms of divisional performance, all except roads and others recorded qoq dips in EBIT, while, on a yoy basis, airports and roads recorded a sharp increase.

Delay in DIAL ramp-up impacts financials
We halve our FY11 EPS forecast, as we build in the more than three-month delay in DIAL becoming fully operational, the change in our revenue-recognition method from assured returns to actual sales, and higher interest and depreciation costs for GMR’s Turkey airport. Our FY12F EPS cut is limited to 25%, as the Vemagiri power-plant expansion is ahead of schedule and operations are likely to start six months early, in October 2011. These EPS cuts have little impact on our DCF value for individual projects, as airport returns are assured by the government for the time value of money. We value the 50% stake in Intergen at the restructured equity investment of Rs15.8bn (Rs8.5bn earlier), which raises our SOTP-based target to Rs79 (from Rs78.40). Upside could come from pending financial closure of projects that we haven’t valued, like Male International Airport and 2,800MW in power projects.

Intergen overhang is behind us, focus on domestic project execution. Buy
We expect sales traction to improve sharply in the coming months, with the commissioning of
GMR Infra’s largest asset, DIAL Terminal 3, and GMR Energy’s gas-based Kakinada power
plant. For the medium term, GMR’s plan to sell its 50% stake in Intergen and deploy it in the
domestic power business should help drive ROE higher. We expect a sharp ROE uptrend in
FY13, which puts GMR at only 1.18x FY13F PB with low equity-dilution risk following the
improvement in its net debt/equity to 1.43x in June 2010. We reiterate Buy on 27% upside.

To read the full report: GMR INFRASTRUCTURE

>INDIA CONSUMER: Disconnect Between Industry Fundamentals and Stock Valuations

Maintain Cautious industry view: We believe Indian home and personal care products EBITDA margins have peaked for now. Rising input costs amidst intense competition and slowing revenue growth are likely to continue to constrain earnings. We maintain our OW rating on United Spirits Рthe top pick in our coverage universe. We reiterate our UW rating on HUL and Marico and downgrade ITC to EW from OW as valuations look less compelling. We upgrade Colgate to EW (UW earlier) given the recent sharp increase in operating margins in a relatively benign competitive environment for oral care in India. We upgrade Nestlé to OW from EW on recent stock underperformance and a potential tailwind from input costs.

What's new: Our proprietary input cost index has risen 8% YoY with prices of palm oil up 14% and copra up 4% over the past month. Higher input costs further squeeze FMCG companies in an already intensely competitive environment. We estimate that an inability to pass on input costs could erode operating margins of the HPC companies under our coverage by 90bps in F11.

Where we differ: Valuations of Indian consumer companies are the highest in four years (25x F11E earnings vs. last four-year average of 22x). Part of the outperformance can be explained by an investor penchant for consumer stocks in emerging economies in the current volatile macro environment – the MSCI AxJ consumer index has outperformed the MSCI AxJ index
by 15% over the past year. However, with an improving global economy and thus increased appetite for risk, Indian consumer stocks may underperform. We believe investors are factoring in sporadic and short-lived competition in the domestic HPC segment, while we expect competition to persist, since it is driven by companies with long-term commitments and strong
balance sheets.

To read the full report: INDIA CONSUMER

>RELIANCE INDUSTRIES: Upgrade to Buy: Cyclical Risks Priced In; Structural Gas Rewards Not

Weak cyclical outlook reflected in under-performance — After a 15% YTD underperformance vs. the market, we believe the unexciting refining/petchem outlook is largely priced in and reflected in RIL’s valns that now stand at a 3-year low relative to Sensex. However, structural changes we see in the rapidly developing Indian gas market could provide the trigger for stock performance from a 6-9 month perspective, driving our upgrade to Buy, while maintaining our TP and estimates.

Stock trading closer to bear-case value — RIL now trades close to our bear-case value of Rs930/sh (5% downside from current levels), offering attractive riskreward. Our bear-case value is based on an avg of: (1) our bear-case SOTP that assumes lower GRMs of US$8.0/8.5 over FY11/12E, steeper yoy petchem EBITDA declines of 12/7% over the same period, and E&P valued at Rs364/sh, a moderate 15% premium to NAV, and (2) our bear-case P/E-based valn methodology that assumes 8-14% lower earnings over FY11-12E and a lower 14x Sep-11E multiple.

Structural changes in gas sector — Following recent, higher prices set by the Gov’t for ONGC’s production from new fields (US$4.75-5.25), we expect gas prices from other domestic sources (e.g. KG) to also structurally move higher driven by: 1) cheap domestic gas (vs. expensive LNG) remaining scarce, with growth backended, 2) demand continuing to substantially exceed supply, 3) increasing acceptability of higher priced LNG (e.g. NTPC). Customers, however, will continue to benefit, with economics vs. naphtha/FO still remaining extremely compelling.

US$4.2 now a base price…possible price surprise? — Post the APM price hike, US$4.2 is now a base price level of domestic gas, with gas from all other sources (ex-KG) now priced higher (Figure 15). With rising E&P costs and demand for higher prices to exploit new/marginal fields, there exists a case for the benchmark to move higher. Given the Government’s recent moves, we believe any willingness on its part to implement higher prices for incremental KG production (possibly over the next 6-9 months) could lead to reserve value enhancements and potential

earnings upsides (~3-5%) for RIL, driving stock performance.

To read the full report: RIL

>STATE BANK OF INDIA: Revising EPS estimates upwards

To read the full report: SBI

Sunday, August 22, 2010

>JM FINANCIAL LIMITED: Q1FY11 result analysis

JM Financial Ltd’s revenues recorded an increase of 57.2% y-o-y to Rs 1.9 bn in Q1FY11,
backed by healthy growth in the investment banking and securities funding businesses.
However, PAT dipped by 2.4% to Rs 304 mn due to poor performance of the securities
broking business. Intense competition in the broking business and preference for lowyielding
options vis-a-vis the cash segment has put significant pressure on brokerage yields.
However, JM Financials’ diversified business model has buffered the impact and helped it
report stable earnings. We maintain our fundamental grade of ‘4/5’, indicating JM Financials’
fundamentals are ‘superior’ relative to other listed equity securities in India.

Q1FY11 result analysis
• The investment banking and securities businesses reported revenue growth of 44.1% y-oy
to Rs 1.1 bn in Q1FY11. The investment banking division completed six deals worth Rs
70.6 bn in Q1FY11. However, the performance of the broking business was impacted by a
dip in brokerage yields and an increase in costs related to scaling up of the institutional
desk. As a result, segmental profit declined by 50.6% y-o-y to Rs 94 mn in Q1FY11.
• Revenues from the securities funding business increased 156% y-o-y to Rs 651 mn in
Q1FY11. Earnings growth was lower at 10% y-o-y to Rs 198 mn due to a higher mix of
borrowed funds resulting in increased interest cost.
• The asset management (AMC) segment’s revenues increased by 17% y-o-y to Rs 91 mn
supported by higher average AUM at Rs 77.2 bn (14% y-o-y) in Q1FY11. This helped the
company cut losses from Rs 19.3 mn in Q1FY10 to Rs 11.7 mn in Q1FY11.

• The alternative investment segment registered a 73.6% y-o-y increase in revenues to Rs
176 mn while profit increased by 122.5% y-o-y to Rs 112 mn in Q1FY11. The alternative
AUM stands at Rs 17.2 bn and has recorded an increase in quality investment
opportunities, which will support good performance.

Scaling-up of institutional business to drive growth
During the quarter, JM Financial got empanelled with few more institutional clients. The
company’s research coverage has increased to 132 companies. We expect the business to
take around 12 -15 months to start contributing to the overall profitability.

Downward revision in FY11 and FY12 estimates
We have revised our top line forecast downward by ~3% each for FY11 and FY12 to reflect
the pressure on brokerage yields. The hardening in the yield curve will result in increased
funding cost to support the securities funding book. However, we expect the funding
business to do well and support JM Financials’ overall performance. Accordingly, we have
revised PAT estimates downwards by 18% and 14%, respectively, for FY11 and FY12 to
account for the pressure on brokerage yields and increased interest cost.

Valuations – strong upside from current levels
In line with the earnings revision, we have lowered our fair value estimate for JM Financials
from Rs 50 to Rs 45 per share. We maintain our valuation grade of ‘5/5’, indicating that the
stock has ‘strong upside’ from the current level of Rs 35.8 (as on August 11, 2010).

To read the full report: JM FINANCIAL

>INDIA EQUITY STRATEGY: Owning India Inc.: FIIs - Investing More, Owning Less

A lot of foreign flow, but less and less to show — A fair amount of foreign money flowed into India in the March–June quarter ($2.5b) while domestic MF flows were negative; but foreigners owned less of India Inc. at the end of the quarter (-40bps, 16.4%). This appears an extreme outcome - probably a combination of flow timing, underperformance (buying high selling low?), paper supply and insurance company buying. But a longer-term trend of foreign flows/market performance suggests that more and more foreign money is still moving the market, but by less
and less.

Staying bullish – foreigners more so than domestics — The market is up <5%>
and 21% yoy, but portfolio appearance suggests more bullishness than market performance so far. FII portfolios appear most bullish (financials, discretionary and industrials key over-weights), the domestic MFs a little less so but hugely overweight capital goods, and the insurers probably the only ones playing a little safe – but building up on their OW financials call. Energy, IT and Utilities are the consensus UWs. No big positioning/sectoral shifts within the quarter – with some marginal shifts toward the benchmark, across investors.

Ownership mix; settling down, or are domestic flows destined to dip? — CY10 has witnessed little change in key owner classes: Promoters at about 50%, FIIs 16- 18%, Domestics (MFs and insurers) sub 10%, and individuals about 8%. Is this here to stay or is it the lull before a massive (domestic) regulatory storm? With MFs already hurting due to new distribution regulations (-$2b YTD), insurers anxiously preparing for a sea change in distribution/product changes (effective Sep 1, 2010 – key risk to incremental growth/flows) and retail investors preparing for possible long-term capital gains tax from April 2011 (zero currently), will it be only foreign money hereon? Time will tell, but if that does happen, FIIs would probably need to invest less to own more – unlike the last quarter.

To read the full report: INDIA STRATEGY

>McNally Bharat Engineering

MBE declared its 1st qtr results which were below expectations, with a growth in net sales on standalone basis at 12%, operating profits degrew by 9% whereas PAT has grown by 15.8%.

1st Quarter Highlights

Order Book growth
Order book for the Projects business stands at 42000 mlns. Infrastructure forms 23% of the total order book, power comprises 37%, material & non ferrous segment forms 29% whereas steel mines & port forms the remaining 11% of the total. Order book for McNally Sayaji stands at 2480 mlns whereas for CMT & German Manufacturing business it stands at 3550 mlns. In May’10, MBE has bagged its first overseas order in Zambia of Rs. 1140 mlns. MBE also bagged its single largest BOP order of Rs. 8140 mlns in Apr’10.

Revenue Growth
MBE’s net sales stand at 2834.8 mlns out of which material & non ferrous segment contributed 54%, steel, mines & port contributed 26% power contributed 19% whereas the rest comes from the infrastructure sector. Operating margins have been lower at 5.5% due to completion of low end jobs in the 1st qtr. Outsourcing expenditure as a % of net sales have increased from 19% to 24% which has led to incremental expenditure from 93% to 95%. Employee cost has increased drastically by 70% from 5.7% to 8.7% yoy as a % on net sales. Interest cost has reduced by 24% yoy which could be due to partial repayment of high interest loan. Consequently PAT has
remained flat at 2.2% reflecting its dull performance for the qtr.

Bad performance from Subsidiaries
McNally Sayaji has delivered very poor results with an incremental growth of 17% in its net sales while its operating profits have degrown by 23% and and PAT has degrown by 66% mainly on account of lower volume growth, low margins jobs, higher interest outgo and higher depreciation on additional capacity created. Similarly for CMT business, revenue stands at 760 mlns, with operating profit margins at 4% and PAT margins at 3%.

MBE has indicated plans to participate in a big way in the Steel sector modernization packages of SAIL , Balance of Plant(BOP) packages in Power sector, Port expansion programme of NMDP and capacity increase in nonferrous metal sector, as and when it picks up again.

At its CMP of Rs 286, the stock quotes at PE of 14x and 11x its FY11E and FY12E cons. earnings of Rs 20.7 and 26.9 respectively. We have reduced our earnings estimates based on weak Q1 performance but we remain bullish over its long term performance and give an Accumulate Rating on the stock, with a target price of Rs. 323 based on a PE of 12x consolidated FY12E EPS of Rs. 26.9 per share.

To read the full report: MCNALLY BHARAT

>SANGHVI MOVERS: Performance in line

Sanghvi Movers (SML) reported its performance for Q1FY11 that was in line with our expectations. The company reported a PAT of Rs 24.02 crore, in line with our expectation of Rs 23.2 crore. SML registered 4% YoY revenue growth of Rs 86.14 crore in Q1FY11. The EBITDA margin declined 140 bps YoY to 74.6% in Q1FY11 on the back of an increase in operating expenses and other expenditure. The subsequent EBIDTA stood at Rs 64.26 crore indicating a marginal increase of 2%. The company reported a 4% increase in net profit to Rs 24.02 crore in
Q1FY11 against Rs 23.1 crore in Q1FY10.

Highlights of the quarter
■ In terms of sector wise break up of revenues for Q1FY11, power contributed 29%, wind mill contributed 25%, refinery and gas contributed 13%, cement contributed 17%, steel and metal
contributed 9%, metros, roads, bridges, ports, etc. contributed 2% while other industries contributed 5%

■ During Q1FY11, the effective yield stood at 3.1% per month as compared to 3.6% during the previous year. The average utilisation for cranes in Q1FY11 stood at 81%

We expect SML’s performance to improve in the next few quarters due to higher utilisation (~80% vis-√†-vis ~74% last year) of its cranes. The company expects an improvement in capacity utilisation on account of increased capex from the power sector. At the current price of Rs 169, the stock is trading at 7.3x its FY11E EPS of Rs 23. We recommend BUY rating on the stock with a target price of Rs 195, 8x FY12E EPS of 24.4.

To read the full report: SANGHVI MOVERS

>Easun Reyrolle- Initiating Coverage

Easun Reyrolle is an acknowledged leader in the field of electrical power management. The company offers a "ONE TOUCH ACCESS" to power system solutions. It has 25% market share in the relay panel (a power system protection device) market in the country. It has diversified its offering to protection products, protection systems, energy meters, automation, communication & control products, turnkey projects business, and switchgears. ERL expects to sustain the growth of 50% CAGR for next 4 years. Easun is one of the leading players in power management – power
system protection, control and automation, would benefit from the investments in the power sector,
especially transmission and distribution space.

Recent Developments : Easun, recently, has been awarded for the Overall Best Product Displayed at ELECTRAMA 2010 (largest exhibition for the Electrical Power Transmission and Distribution products and solutions in the entire Asia and is among the largest in the world in this category) for its Solid Insulated Switchgear- ISIS. ISIS, which has smallest size in the world, is free from toxic green house gas SF6. ISIS has attracted keen interest from domestic as well as global player over GIS.

Financials : Net profit of Easun Reyrolle rose 229.17% to Rs 0.79 crore in Q1FY11 as against Rs 0.24 crore YoY. Sales rose 11.57% to Rs 40.60 crore in the quarter ended June 2010 as against Rs 36.39 crore during the previous quarter ended June 2009. In year 2009 company bought back FCCB at 50% discount. As on March 2010 the Company is Debt free having more than INR 110 crore cash and bank balance in balance sheet with a net worth around Rs 250 crore.

Valuations: Easun Reyrolle CMP provides an attractive entry point to long term investors. The
stock has been valued on P/E multiple basis to arrive at a price target of 290. At CMP, stock trades at 6 X FY11E and 4 X FY12E earnings with an EPS of Rs. 19.38 and Rs. 29.08 respectively. The stock looks attractive from a medium – to- long-term perspective and hence
we recommend Accumulate the stock.

To read the full report: EASUN REYROLLE

Wednesday, August 18, 2010

>INDIAN TOLL ROAD SECTOR: The Roads to Revenue

■ The Indian Toll Roads sector is an excellent proxy to play on India’s vibrant growth story

■ NHDP is entering an important inflection point and NHAI alone would be coming up with orders worth Rs 1.9 trillion over the next four years

■ ITNL and IRB are our top picks in the Toll Road sector: We believe ITNL will leverage its parent’s strong background, superior execution skills, and established track record of executing BOT projects. It is bidding for GoI projects worth Rs.425bn and we conservatively expect it to secure projects worth Rs.85bn. New project wins would be the key catalyst for IRB. It is on the final shortlist for five projects aggregating 576km that will be awarded this quarter. Further, it is pre-qualified for projects worth 1,925km. We believe ITNL and IRB would be an excellent play on India’s vibrant growth.

To read the full report: ROAD SECTOR

>STATE BANK OF INDIA: Result Update 1QFY2011

For 1QFY2011, State Bank of India’s (SBI) standalone net profit grew 25.1% yoy and 56.1% qoq, which exceeded our estimates on account of better-thanestimated NII and lower operating expenses. Robust operating performance with reasonable asset quality was the key highlight of the result. We maintain an Accumulate rating on the stock.

Robust operating performance: The bank’s net advances increased 20.4% yoy
and 3.4% qoq to Rs6,53,220cr, while total deposits grew 6.8% yoy and 1.4% qoq
to Rs8,15,297cr during 1QFY2011. Reported net interest margin (NIM) improved
by 22bp qoq and 88bp yoy to 3.18% during the quarter despite a hit of 12bp due
to change in the method of calculation of SA interest. The margin expansion was
underpinned by improvement in the CASA ratio to 47.5% as of 1QFY2011 from
38.5% as of 1QFY2010 and from 46.7% as of 4QFY2010 coupled with shedding
of high-cost bulk deposits. Gross NPAs were up by 6.6% qoq and net NPAs
increased 1.9% qoq to Rs20,825cr and Rs11,074cr, respectively. NPA provision
coverage ratio including technical write-offs improved to 60.7% compared to
59.2% as of 4QFY2010.

Outlook and Valuation: Due to strong CASA and fee income, SBI’s core RoEs
have improved over the past few years and unlike virtually all other PSBs, actual
FY2010 RoEs are below core levels due to low asset yields, providing scope for
upside as the CD ratio improves and yields normalise to sectoral averages. SBI is
trading at 2.1x FY2012E ABV while excluding value of insurance and capital
market subsidiaries, it is trading at 1.7x FY2012E ABV v/s its 5-year range of
1.3-2.0x and median of 1.7x. We believe this provides reasonable upside,
especially in light of its dominant position and reach, strong growth and superior
earnings quality. We maintain an Accumulate on the stock, with a Target Price of

To read the full report: SBI

>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


Dolphin Offshore Ltd (Dolphin) reported a net loss of Rs 123.1 mn in Q1FY11 as against a net profit of Rs 120.1 mn in Q1FY10, which was well below CRISIL’s estimates. During the quarter, the company undertook significant additional work resulting in extra time and cost for two EPC contracts. However, the company has not booked the revenue against this as it is yet to receive change orders for such work. The company’s order book has increased by just around 4 per cent in Q1FY11 over the previous quarter due to the slow tendering process of its major client
– ONGC. This slow pace of order book addition has led us to lower our yearly projections for FY11. Assuming that the management will quantify and receive claims for the change orders for additional work done in the remaining quarters of FY11, we continue to assign Dolphin a fundamental grade of ‘3/5’, indicating that its fundamentals are ‘good’ relative to other listed securities in India. However, given its client concentration risk any delays in receipt of change orders or order book could result in a revision of its fundamental grade. We assign a valuation grade of ‘4/5’, indicating the market price has upside potential from its current level of Rs 273 (August 12, 2010).

Q1FY11 result analysis
- Dolphin’s Q1FY11 revenues declined by 51% y-o-y and 30% q-o-q to Rs 802 mn as
the company has not booked revenue against additional work done during the quarter
on 2 EPC contracts on which it is yet to receive change orders.

- The company’s EBITDA margins for Q1FY11 were in negative at around 12% as
against a positive 6% and 13.9% in Q4FY10 and Q1FY10 respectively.

- Dolphin registered a net loss of Rs 123 mn in Q1FY11 as it incurred heavy marine
spends on the additional work against which it couldn’t book revenues.

Order book growth remains subdued, increased competition to impact margins
- As on June 30, 2010, the outstanding order book of the company is Rs 2.4 bn - a net
addition of Rs 100 mn during Q1FY11. This was largely due to a delay in the
tendering process from ONGC, its major client.

- ONGC is expected to invite tenders for contracts worth Rs 30 bn in FY11. We expect
Dolphin to bag around 16% of these orders.

- Although we assume that the management will quantify and receive claims for the
change orders for additional work done in the remaining quarters of FY11, the lower
visibility on the company’s order book compels us to revise our revenue forecasts

- Further, on account of the steep decline in oil prices and the BP oil spill, there has
been a slowdown in the global oil field equipment and services market. As a result, lot
of overseas assets are lying idle and owners of these assets have been putting
pressure on prices in India to try and pick up work and get deployment. These factors
are expected to put pressure on the company’s margins in FY11 and FY12. These
factors have led us to reduce our EPS estimates for FY11E and FY12E by 10% and
6% to Rs 24 and Rs 35, respectively.

To read the full report: DOLPHIN OFFSHORE


Financial Technologies' (FT) standalone revenue (Rs0.74b v/s our estimate of Rs0.82b) and EBITDA margin (39.1% v/s our estimate of 48.7%) for 1QFY11 were below expectations, though PAT (at Rs0.45b) was in-line on lower than anticipated taxation on higher export revenues. Standalone business corresponds to FT's technology business.

FT's standalone revenue for the quarter was Rs0.74b (up 25.8% YoY, down 11.9% QoQ), EBITDA margin was 39.1% (down 620bp QoQ) and PAT was Rs0.45b (up 120% YoY and 3% QoQ) on lower effective tax rate of 4.5%.

MCX and MCX-SX continue their market leadership status, with 87% and 56% shares in the commodity and currency exchange segments, respectively.

The high court has directed SEBI to decide on allowance of equity and interest rate derivatives trading at MCX-SX by September 2010, reducing the scope of further delays in decision making by SEBI.

FMC (Forward Market Commission) has waived the requirement of selling 10% of MCX stake to government companies as a precondition for IPO, paving the way for MCX IPO filing post clarity on the SEBI MCX-SX tussle.

FT expects three of its exchanges to go live as scheduled - SMX (Singapore Mercantile Exchange) in August 2010, GBOT (Mauritius) in September 2010 and BFX (Bahrain) by October 2010.

We remain positive on the stock from a longer-term perspective and maintain Buy with an SOTP-based target price of
Rs1,606. We value the technology business at 13x FY12E earnings (Rs523/share), MCX at 18x FY12E earnings (Rs313/ share), MCX-SX at 30% discount to the last strategic sale transaction (Rs333/share), NBHC at 13x FY12E earnings (Rs60/share), and group investments at 1.5x invested capital (Rs377/share). However, we believe near-term triggers are contingent on [1] decision on transaction fee introduction in currency exchange segment at MCX-SX, [2] SEBI allowance of new instruments (equity, interest rate derivatives) in MCX-SX, and [3] success of impending new exchange launches.

To read the full report: FINANCIAL TECHNOLOGIES


Long awaited consolidation in Texmaco has finally come to an end after prices continued their upward march to finally surpass the resistance of ‘ascending triangle’ with improved volumes. As the stock has hit a ‘double top’ formation in Feb 2010, prices have retraced back almost 38.2% of its earlier up move beginning from March 2009 and has shown quiet a bit of resilience to hold above the levels of Rs132.

Prices on the Medium chart resemble ‘inverted head and shoulder’ formation and breakout may accentuate buying momentum as volumes have started to react positively to price increase. The
neckline of ‘inverted head and shoulder’ corresponds at Rs141 which should now act as strong support zone. This move also corroborates the minimum downside risk and very high upside potential.

To be more precise, the correction after Dec 2009 unfolded in a classical ‘zig zag formation’ followed by prices crossing above the long term Fibonacci moving average of 161 days and have sustained above same for three consecutive trading sessions. Analyzing earlier price history indicates that such an early attempt has turned out to be a mere whipsaw for couple of times.

Studying MACD oscillator, a crossover above the reference line accompanied with breakout from falling resistance line supports the argument for decent upside. One can also see horizontal breakout in RSC chart with Nifty which indicates that the stock is likely to outperform the benchmark index in the near term.

Based on ‘inverted head and shoulder’, we project conservative target of Rs175 which is marginally higher than Dec 2009 peak of Rs170.5. However, in case prices are able to sustain above Rs175, next leg of rally can take prices all the way to its all time peak of Rs196.

We thus advise accumulating the stock in the range of Rs141- 147 with stop loss of Rs132 for target of Rs176.

To read the full report: TEXMACO

Friday, August 13, 2010

>Hinduja Global Solutions Ltd: Positive outlook about IT-BPO

Nasscom expects export revenues from IT-BPO industry to grow at a CAGR of 13-15% and the domestic business to grow at CAGR of 15-17%. It is expected that Indian IT-BPO to generate the revenue of $ 73.1bn in FY2010, with the IT software and service industry for $ 63.7bn of
revenues. Also US president Obama’s $871 bn healthcare reform bill could also indirectly benefit the Indian IT-BPO providers which are focused in Insurance and claims processing domains. HGSL being the larger player in this Industry is likely to be beneficial with this robust growth in the sector.

Healthy Cashflow
The company has a cash balance of r 6.42bn, of which r 5.8bn is from the stake sale of its telecom company in FY07 and the balance from company’s internal generation. Company is also planning to increase its capacity and also planning to grow inorganically with the help of this surplus cash. Any acquisition by the company will lead to rerate the stock upwards.

HGSL pure-play BPO
HGSL derives about 75% of its revenue from voice services. Of this, 90- 95% is earned from inbound calls, making it more flexible business model at the time of weakness in the global economy.

Strong revenue visibility
The company currently has 15,936 seats across its global operations as on March 31, 2010. HGSL plans to add 1800 to 2100 seats by FY2011. This increase of capacity by the company is due to large demand in ITBPO. This includes plans to open a centre in Durgapur and moving into
an SEZ facility based out of Bangalore. This continuous growth in headcounts and increase in capacity gives strong revenue visibility going ahead.

HGSL as on 31st march 2010 has cash worth r 312 per share on books. The stock at r 425 is currently trading at an attractive valuations of 7.3x and 6.8x FY11E and FY12E EPS of r 59.8 and r 63.08 respectively. Considering diversified business model, healthy cash flow and strong
revenue visibility we advise investors to buy the stock at cmp of r 428 with the target price of r 485 which is upside of 13% from current level. We expect company to grow at a CAGR of 12-14% for the next three years on the back of robust IT spending going ahead. We have projected the revenue of r 11,666mn in FY12 which is without taking consideration of any sort of acquisition; any news on acquisition will rerate the stock upwards. We expect the margins to be under pressure for the next 2 quarters due to salary hike and pricing pressure in domestic market.

To read the full report: HGSL

>ICICI BANK: Return to growth; Buy

Management meeting re-affirms our positive stance; Buy We hosted Ms. Chanda Kochhar, MD & CEO of ICICI Bk, in Hong Kong over the last two days. The bank has successfully delivered on the 4Cs strategy and is now seeking to leverage capital for growth. We believe the “return to growth” from 2HFY10 and a sustained focus on costs and profitability could see ROA expanding from <1.1%>

Key highlights from mgmt. meetings
A) While domestic loan growth for ICICI Bk should be at par with sector growth (20%), overseas growth is at +8-9%, vs. flat for FY11. Domestic loan growth may exceed sector loan growth in FY12, as pricing power emerges.

B) CASA to sustain at +40% vs. +34-35%, driven by recently added distribution.

C) Margins will definitely be stable, with an upward bias driven by rising share of deposits, higher share of CASA and rising overseas spreads.

D) NPL accretion to be low; minimal re-lapse on restructuring expected.

Better positioned for growth; est. +30% in FY11-12
We have tweaked our earnings by <1-3%>

To read the full report: ICICI BANK

>GSPL: 1QFY2011 Result Update

GSPL reported marginally lower-than-expected set of numbers for 1QFY2011 due to lower-than-expected transmission tariffs and volumes during the quarter. Bottom-line increased 30.6% yoy to Rs105.1cr (Rs80.5cr), which was below our expectation of Rs110cr. However, given the company’s strong growth potential and attractive valuations, we recommend an Accumulate rating on the stock.

Transmission volume surges, realisation dips: In 1QFY2011, GSPL recorded a 19.4% yoy jump in revenues to Rs252cr (Rs211cr), lower than our estimate of Rs266cr. Transmission volume, which surged 43.4% yoy to 36.3mmscmd (25.3mmscmd), came in below our expectation of 38mmscmd. Average transmission realisation decreased 16.7% yoy to Rs762/’000scm (Rs915/’000scm) and was below our expectation of Rs770/’000scm.

Outlook and Valuation: GSPL is a leveraged play on the increasing gas demand in the country’s hydrocarbon capital, Gujarat. Given the advantage of its location, GSPL is likely to be the key beneficiary of improving gas supplies in the country due to the rise in domestic production and LNG imports. We estimate GSPL’s volume growth to continue on favourable spot gas dynamics and ramp up of gas production from the KG-basin. We estimate GSPL's transmission volume to post
22.9% CAGR over FY2010-12E, from 32mmscmd to 48.3mmscmd. Our DCF-based target price stands at Rs120 in a base case scenario, where we have not assumed 30% PBT sharing with the Gujarat Government. In case GSPL starts contributing to GSEDS, our target price will be reduced to Rs84.

To read the full report: GSPL

Thursday, August 12, 2010

>EDUCOMP SOLUTIONS LIMITED: 1QFY11 results weaker than expected; SmartClass, K-12 schools traction continues to be strong - ALERT

1QFY11 results came in lower than expected: Revenues of Rs.2,279m came in 6% below our estimates, driven by lower ICT and preschools business revenues missing our estimates. EBIT margins of 20.4% were below our estimate of 24% mainly driven by lower margins in the SLS (SmartClass and ICT) businesses. However, sharp reduction in tax rates led to net profit (Rs. 366m) coming in just 5% below our estimates.

SmartClass segment: Educomp implemented SmartClass solutions in 6,750 classrooms in 1QFY11 - on track to achieve the high end of its FY11 guidance of 25,000-30,000 implementations. However, margins were hit by 1) induction of 160 additional sales & marketing personnel taking the sales team size to 380 people; 2) Increase in COGS due to hardware costs for partial SmartClass deployments where revenue has not been recognized – we believe this should reverse in 2QFY11.

■ ICT segment: Surprisingly, Educomp did not implement any new schools in ICT segment – leading to 27% Q/Q decline in ICT revenues. EBIT margins also declined to 17.7% vs. our expectation of 30% and 4QFY10 levels of 37.7%.

K-12 segment: Schools revenues came in at Rs. 205m (up 37% Q/Q, 71% Y/Y). Revenue decline in pre-schools segment (Eurokids and R2W) led to flat revenues Q/Q for the overall K-12 segment at Rs. 305m. EBIT margins were strong at 38% driven by better margins in the schools

Other segments: Investments in Raffles JV, Pearson JV (IndiaCan) and online ventures (Savvica, Authorgen, LearningHour etc.) amounting to Rs. 104.3m in the quarter.

Tax rate change: 1QFY11 tax rate was lower than expected (MAT rate) - the company attributed this to tax benefits arising from higher tax paid in FY10 on the school contracts transferred from BOOT to EduSmart model. As a result, management expects effective tax rate to come down to 18% in FY11 and return to corporate tax rate (30%) in FY12. We would seek further clarity on this from the management.

To read the full report: EDUCOMP SOLUTIONS

>LAKSHMI ENERGY & FOODS LIMITED: Q3FY10* margin disappoints

To read the full report: LAKSHMI ENERGY

>NTPC LIMITED: Muted operational performance

To read the full report: NTPC

>MERCATOR LINES: Valuation compelling…

MLL reported considerable improvement in operating performance in Q1FY11 with dry bulk division performing reasonably well. The company has also ramped up its coal business (mining as well as trading) which would increasingly contribute to the topline for the company. Freight rates are expected to be volatile over the next one year which could lead to fluctuations in the operating performance of the company going ahead. But MLL is well placed to ride the volatility of shipping business on account of inherent advantages such as diversified revenue stream, presence across segments, long term charter contracts, comfortable debt equity ratio and strong
management capability.

MLL posts very strong performance in Q1FY11
MLL reported 24.3% q-o-q rise in revenue at Rs 599.3 crores. The rise in topline was led by a surge in revenue from coal trading and coal mining which constituted 38.2% i.e. Rs 599.3 crores of the total revenue for the quarter. Singapore subsidiary which handles dry bulk business of the
company reported revenue of Rs 179.4 crores with improvement in operating days to 1251 days and TCE to $ 30001 per day. EBITDA margin improved to 33.1% from 29.0% in the immediately preceding quarter. The company posted net profit of Rs 61.7 crores in Q1FY11 which was higher than the profit made by the company in entire FY10.

MLL is trading at a significant discount to its global peers and almost at 0.5 x times its FY10 book value which provides an appropriate entry point for long-term investors. We have valued MLL on P/BV and P/E multiple basis to arrive at a price target of Rs 56 and recommend BUY rating on the stock.

To read the full report: MERCATOR LINES

>OPTO CIRCUITS LIMITED : Sensing strong growth ahead

Medical Equipment Industry to grow in double digits : According to Global consulting firm Capgemini, The global medical equipment industry, valued at USD 280 billion in 2009, is forecast to grow by more than 8% annually for the next seven years to exceed USD 490 billion in 2016. Some of the subsegments like orthopedic and cardiology are growing at a CAGR of 15-20%. Medical devices and supplies market in India is expected touch USD 1.7 billion in 2010, growing at the rate of 23% annually in the coming years from the current Rs. 5750 crores.

New product launch with aggressive marketing will lead to turnover growth: Eurocore GmbH, (acquired in 2006) has added invasive products ( Stents and Catheters) to Opto’s product portfolio. Eurocore’s products are CE certified and have market potential of USD 4bn. Once USFDA approval is obtained by December 2010, additional USD 6 bn market potential will be added. It sells its products in 26 countries. Criticare Systems Inc(acquired April 2008) has established product and technology leadership in anaesthetic gas monitoring, vital signs monitoring, gas and agent analysis and central station monitoring systems.

Cost cutting measures will lead to margin enhancement : Opto Circuits has shifted around 70% of the assembly and sub assembly works of Criticare Systems International Inc to Bangalore from USA. This will lead to improvement in operating margin of Criticare Inc. Recently, they have acquired N S Remedies Ltd, a Kolkata based manufacturer of medical and interventional products. This company has got CE certification for its stainless steel and cobalt chromium stent. Shifting of some of the production from Eurocore’s German facility will further enhance bottomline of the company by 65-80 basis points.

Product patent ,additional money spinner : Opto has got more than 40 product patents which provide them flexibility in product design and development. Additionally they can monetize this patent by leasing it to other interested parties .The company and its subsidiaries have recently entered contractual terms to private –label its gas analysis, vital signs and pulse oximetry modules for a few Fortune 500 medical devices companies.

To read the full report: OPTO CIRCUITS

Wednesday, August 11, 2010


Event: 1Q FY11 Novelis results ahead of Street: Hindalco’s subsidiary, Novelis,
reported excellent results for 1Q FY11, beating Street expectations. Novelis
now appears set to reap the benefits of cost cuts, increasing demand and
growth. Hindalco remains well on track to achieve our 18% above-consensus
earnings estimates for FY11; reaffirm our Outperform and TP of Rs205.

Earnings showing increasing trend: Net sales of US$2.5bn were up 29%
YoY and 5% QoQ as both shipments and realisation were up. Operating
EBITDA of US$282m is up from US$42m reported last year and 38% above
US$205m last quarter. PAT of US$50m compared to a loss of US$1m in the
last quarter. The company was operating at capacity during the quarter,
reporting peak shipments. In addition, results reflected the sustainability of
cost cuts, which did not increase in line with volumes.

On track to achieve FY11E: Our estimate for Novelis’s FY11 EBITDA is
US$967m, which implies EBITDA-per-ton of US$336 and volume of 2.8mt. In
1Q, Novelis achieved EBITDA of US$282m and shipment volume of 0.75mt,
about 30% and 26% of our respective full year assumptions.

Growth plans: Novelis plans to expand its capacity by 10% in the next two
years through brownfield expansion and de-bottlenecking its existing
capacities. The company has a cash balance of US$419m and should be able
to fund its proposed capex from internal accruals.

Extremely bullish outlook: Management expects to exceed US$1bn of
adjusted EBITDA in FY11, and expects FCF of more than US$335m in FY11.
The company expects margin gains from operational efficiencies, product
portfolio optimisation and strong spot pricing. We are building in EBITDA of
US$967m compared with guidance of US$1bn in EBITDA.

Earnings and target price revision
No changes.

Price catalyst
12-month price target: Rs205.00 based on a PER methodology.
Catalyst: Increased confidence in earnings sustainability of Novelis.

Action and recommendation
Maintain Outperform: We believe Hindalco offers good value and has strong
growth drivers. Around 60% of Hindalco’s earnings come from its subsidiary
Novelis, making it minimally dependent on aluminium prices. We think a
recovery in Novelis will be the key driver of earnings in FY11. From FY12
onward, it will start commissioning its three-fold increase in aluminium
capacity, which will be backed, in our view, by 200m of bauxite resources,
making Hindalco the lowest-cost producer.

It remains one of the least expensive stocks regionally at 9.7x FY11E, a
discount of at least 50% to peers such as Chalco (2600 HK, HK$6.69, U, TP:
HK$5.20, Christina Lee) and Alcoa (AA US, US$11.66, O, TP: US$18, Curt
Woodworth) on FY11E.

To read the full report: HINDALCO INDUSTRIES