Monday, October 31, 2011

>UNITED STATES: Rising from its ashes

�� Now, it’s unquestionable: the US economy did not double-dipped, since GDP actually accelerated in the third quarter, posting the highest rate of growth for 2011. After sluggish growth over the first half of the year (+0.4% in Q1 and +1.3% in Q2, on a quarterly annualised basis), GDP grew by 2.5% in Q3.

�� The public sector kept on weighing down on overall demand, with government spending flat over the quarter. Government demand has been cutting overall GDP growth for a full year, now. Since it peaked, in 2010 Q3, public spending lost 2.4%, subtracting 0.6 point to overall GDP growth. This is to continue: while the budget consolidation process is still ongoing at the state and local levels of government, it will start as next year for the federal government. Additionally, the impact is way larger than the direct one on GDP figures.. Since the summer of 2008, government (federal, state and local) payrolls have been cut by 1 114 000 employees: this represents 22% of the total decline in the US employment over the period. The government directly contributed to the decline in households’ labour income, even it was partly offset with a rise in benefits.

�� With real disposable income constrained by a depressed labour market and rising commodity prices, in a context of deleveraging, households’ demand cannot be buoyant. It however held up quite well in Q3, with a 2.4% increase in consumption and even a small increase in residential investment (+2.4%).

�� The main source of strength was thus in business spending and exports. Non-residential investment grew by an annualised 16.3%, spending on equipment and software being a particularly bright sport, at +17.4%. As for exports, they gained an annualised 4.0% in Q3, highlighting the continuous improvement of the US external competitiveness, achieved through a massive drop in unit labour costs, and helped by a declining dollar.

�� The strengths within today’s report are unquestionable. Even if, together, the business and the external sectors represent only a small part of overall demand, they can feed a self-sustained recovery. For this to happen, the US economy “just” needs the households sector to hold up a little longer. Federal money would help…

To read the full report: US ECONOMY

>AXIS BANK: Low probability of negative surprise from hereon

⇒ AXSB’s Q2FY12 NII at Rs20bn ahead of consensus. Net profit of Rs9.2bn marginally lower due to higher Opex and provisions

⇒ NIMs bounce back sharply (50bps qoq) with help of better yields and CASA (up 170bps qoq). We expect lower NIMs in coming quarters due to higher balance sheet growth

⇒ Slippages move up sharply at Rs5bn, highest in last 6 qrtrs. Rs2.3bn of MFI exposure restructured in Q2FY12. Slippage guidance of 1.3%, marginally higher than our estimate

⇒ Valuations at 2.2x/1.9x FY12E/FY13E ABV. Estimates already factor in higher slippages and NIMs compression. Expect no –ve surprise. Upgrade to ACCUMULATE

NII in line; Opex and provisions drag profits
AXSB’s Q2FY12 NII at Rs20bn (24% yoy and 16% qoq) was ahead of consensus estimates (Rs18.5-19.5bn) and sharply ahead of our estimates. The better than expected NII was largely driven by sharply improved margins at 3.8%, an improvement of 50bps qoq. The net profit at Rs9.2bn was tad lower than expected as 22% yoy growth in operating income was offset by more than doubling of provisions for the quarter to Rs4.3bn.

The growth in advances was at 6.2% qoq with overall balance sheet growth of 7.5% qoq as AXSB seems to have added some more of non-SLR investments too.The advances growth was driven by retail and corporate advances. Commendably, despite adverse interest rate environment, the CASA expanded by 70bps yoy (170bps qoq) in overall deposit growth of 6% qoq.

To read the full report: AXIS BANK

>GAIL LIMITED: Results inline, maintain Accumulate

⇒ Results were inline with our estimate, with EBIDTA at Rs.16.7bn and PAT at Rs10.9bn. Subsidy payout for Q2FY12 grew by 64% YoY to Rs5.67bn

⇒ Revenue from natural gas transmission declined marginally by 1.1% to Rs.9.1bn, While trading business grew by 20.3% to Rs.67.3bn YoY respectively

 Transmission and trading volume grew by 2.4% to 118.6mmscmd and 2.8% to 84mmscmd on QoQ respectively, mainly driven by higher volume offtake of spot and APM gas

 Accumulate with TP of Rs.510, given its dominant market share in transmission business and expected volume growth. Subsidy sharing remains a key overhang on the stock

Highlights of the results
GAIL reported results which were inline with our estimates. Revenue for the quarter was
at Rs97.2bn (against our expectation of Rs.95bn), growth of 19.7% YoY, mainly due to
better performance from petrochemical and LPG & other LHC segment. EBITDA during
the quarter was at Rs.16.7bn, growth of 15%, YoY. During the quarter the company
reported net profit of Rs.10.9bn, (as against our estimate of Rs.10.7bn), growth of
18.5% YoY. Subsidy payout stood at Rs.5.7bn growth of 64% YoY, mainly due to higher
crude oil prices during the quarter.

Better performance from Petrochemical and other LHC segment drives the revenue and profitability in Q2 FY12
Revenue has increased by 19.7% to Rs.97.2bn in Q2 FY12, mainly due to higher volume growth and higher realisation in both Petrochemical and other LHC segment backed by strong pickups in domestic demand. Petrochemical revenue grew by 28.9% YoY and 47.8% QoQ to Rs.9.2bn. Petrochemical volume and realisation grew by 20.6% to 0.13mnt and 7% to $1540/mt YoY respectively. While other liquid hydrocarbon revenue jumped by 34% YoY and 21.4% QoQ to Rs.9.8bn. other liquid hydrocarbon volume and realisation grew by 9% to 0.38mnt and 23% to $560/mt YoY respectively.

Transmission volume and tariff grew marginally by 1.3% and 1.9% respectively on QoQ, mainly driven by higher offtake of spot and APM volumes.
Natural gas transmission volume and tariff gained marginally by 1.3% to 118.6mmscmd and 1.9% to 0.84/scm respectively on QoQ, mainly driven by higher volume offtake of spot and APM gas. However transmission EBIT margin has declined sequentially by 56bps to 3.8% mainly due to higher other expenditure (forex loss on ECB and bad debts provision). We believe transmission volume for Q3 FY12 would be around 119- 121mmscmd.

Subsidy payout for Q2FY12 grew by 64% YoY to Rs5.67bn
During the quarter, subsidy payout stood at Rs.5.7bn, growth of 64% YoY. Also share of subsidy burden has increased sequentially from 5% to 8%. However, subsidy payout declined by 17% sequentially mainly led by duty reduction in petroleum product and recent price hike in LPG, Kerosene and Diesel.

To read the full report: GAIL

>SESA GOA: Regulatory checks weigh down performance

⇒ Topline in line with estimates at Rs 7897 mn, down 14% YoY and 63% QoQ on low realizations and on sales volume of only 1.55 mt

 EBITDA was down 92% YoY and 97% QoQ at Rs 259 mn including forex loss of Rs 2600 mn, well below estimates. EBITDA/ tonne for iron ore business stood at US$33

 PAT on the back of other income of Rs 504 mn was reported at Rs 12.8 mn. Adjusted for forex loss and tax rate, the PAT stood at Rs 1.6 bn, lower than our estimates of Rs 2.04 bn

 Cutting core EPS estimates for FY12E and FY13E to Rs 24 and Rs 29. We reduce our SOTP target price to Rs 239; Assign Hold rating on the stock

Lower volume and realizations impacted the topline
As reported earlier, iron ore production for the quarter was 1.12 mt (vs 2.88 mt in
Q2FY11) and sales were at 1.55 mt (vs 1.82 mt in Q2FY11). The lower production and
sales are attributed to mining ban in Karnataka, discontinuing of operations in Orissa
and most importantly, planned reduction of inventories. In the quarter, the company sold
0.71 mt and 0.83 mt of iron ore at Karnataka and Goa respectively. Realization during
the quarter remained subdued at US$84/ tonne for iron ore (taking average USDINR at
45.8). We believe, iron ore realizations to remain stable to weak in the immediate future,
whereas, volume growth remains uncertain due to continuing mining ban in Karnataka
and problems arising in Goa.

Raw material costs and INR depreciation depleted the EBITDA
During the quarter, EBITDA was largely impacted by increase in raw material costs and
loss on foreign currency loans and FCCBs. While the raw material costs as a
percentage to sales increased from 4% in Q1FY12 to 13% in the Q2FY12 (6% in
Q2FY11), the forex losses amounted to Rs 2.34 bn, depleting EBITDA to a large extent.
The EBITDA margin came in at 3% as against 54% in the same quarter previous year.
EBITDA/ tonne stood at US$33 during the quarter. We believe weak INR would
continue to be a deterrent for foreign currency outstandings.

Karnataka mining impasse continues; Goa could be a spoil sport
Karnataka continues to be under the mining ban. The company did not sell any amount
through e-auction form Karnataka during the quarter. During October, Sesa sold ~0.3 mt
out of total 0.8 mt inventory. The company is hopeful that Karnataka issue will be solved
by Q4FY12. We believe, Goa could be a spoil sport, as issues related to illegal mining
and export of iron ore are under comprehensive investigation by the Shah Committee.

To read the full report: SESA GOA

>RELIANCE INDUSTRIES: Concerns overdone, attractive BUY

⇒ ¾ Negatives like declining KG D6 gas production, lack of clarity on cash utilization and CAG report findings already priced in. See limited downsides from current levels

⇒ ¾ Any positive outcome emerging from the RIL-BP tie up (in the form of increased production) or a suitable acquisition can boost sentiment and trigger a re-rating

⇒ ¾ Refining business outlook also turning positive owing to the current scenario being favorable for complex refineries like RIL

⇒ ¾ Valuation attractive at 10.4x FY13E and 5.9xEV/EBITDA. Favorable risk reward ratio coupled with stable/improving financials warrant a Buy on RIL. Initiate coverage with TP of Rs.1,119

To read the full report: RIL

Tuesday, October 25, 2011

Ballooning Natural Gas Supply-Demand Deficit to Fuel LNG Imports

India‟s natural gas supply has been adversely impacted in 2011-12 due to fall in KG D6 production to 46.6 MMSCMD in H1 2011-12 from 55.9 MMSCMD in 2010-11. KG D6 production is likely to remain at subdued levels over the next couple of years, especially in comparison to the earlier anticipated production of 60-80 MMSCMD. Overall, ICRA expects domestic natural gas supplies to increase to around 153 MMSCMD by 2014-15 from 143 MMSCMD in 2010-11. The current estimate is about 22% lower than our previous estimates of 195 MMSCMD primarily due to lower KG-D6 production and delays anticipated in commissioning of KG satellite fields. 

On the demand front, despite the significantly high potential across several sectors, the realisable demand for natural gas will be a function of gas supplies in the market at reasonable price, the price competitiveness of gas as compared to alternative fuels, timely commissioning of the proposed transmission pipeline infrastructure, and regulatory initiatives in the power sector. 

ICRA believes that demand will increase from new customers once the bottlenecks in the trunk pipeline are cleared in the near to medium term. Overall, ICRA expects gas demand to rise to around 410 MMSCMD by 2019-20 from the actual consumption of around 177 MMSCMD in 2010-11. ICRA believes that India, despite the long-term contracted LNG volumes with Australia and mid-term contracts signed by GAIL, needs to secure additional supply on a long-term basis, especially in view of less-than-anticipated domestic supply and possible shortage of LNG after a couple of years. India‟s high reliance on LNG is expected to increase further, which will pose significant risks in a scenario of tight LNG supply demand scenario, leading to low availability and high prices of spot LNG. 

As regards gas allocation and pooling, an inter-ministerial committee has recently recommended i) preferential allotment of available domestic natural gas to core sectors, that is, fertiliser and power sectors, along with a certain amount reserved for the CGD/CNG sector, ii) cap on domestic gas allocation to certain other sectors and iii) inferred gas price to be used as benchmark for domestic gas pricing. The committee has not suggested any form of pooling at the all-India level across industries but the objective has been assumed to be served by indirect pooling at the end of consumers, with price-sensitive sectors (fertiliser/power/CGD) getting a higher share of cheaper domestic gas. ICRA believes that the policy recommendations, if accepted, will provide more clarity to gas usage mix and pricing, which in turn would help companies across industries to formulate their capital expenditure plans (capex) and future requirements of natural gas.

To read the full report: NATURAL GAS

>EQUITY STRATEGY: Portfolio Musings: Time to look at banks

Portfolio Musings: Continue to remain cautious
We continue to believe equity markets will stay cautious with no credible solution
yet on the European situation. Domestically too, the window of likely policy action
(relaxed FDI, fuel price and fertilizer subsidy reform) is now threatening to close for
the medium term with Uttar Pradesh state elections drawing closer (unless
prescheduled, expected in May 2012). However, while inflation remains elevated,
we believe that policy rates may be approaching a peak with expectations of
slowing global growth and increasing regulatory focus on exchange-traded
commodities. Athough valuations are beginning to look attractive for the Indian
market, investors are now increasingly beginning to look at the outlook for FY13,
where the jury, on economic growth and earnings growth,is still not in. However,
the Indian hinterland - driven by rising prosperity in tier 2 and tier 3 towns, remains
robust doing the heavy lifting for the Indian economy along with services.

Raising O/W on banks, reiterating conviction Buys on tractors & 2-wheelers
Our banking analysts Manish Karwa and Manish Shukla believe that the banking
sector is trading at trough valuations, despite conservative estimates on asset
quality (a legitimate concern, which may already be priced in). Following the high
conviction call from our banking team, we raise our overweight on banks to
179bps with SBI and HDFC Bank the top picks in our model portfolio. We continue
with our high conviction O/W call on 2-wheelers and tractors (M&M and Bajaj
Auto) as we believe that continuing strength in India’s hinterland (aided by strong
monsoon) should drive robust demand for tractors and 2-wheelers. Our key U/Ws
are: (a) Utilities - with power sector continuing to languish from coal-shortage, (b)
Metals - we see further risk to global commodity prices from slowing global
growth plus increased regulatory focus on exchange traded commodities.

Key additions: SBI, cement, NHPC & Exide; Deletions: SunTV, Bharat Forge
New additions to our portfolio: SBI - a top pick with our banking analysts as SBI’s
NIM trajectory has been improving, while its strong liability franchise continues to
help immobilize low-cost deposits. We also add 3 cement stocks (Ultratech, ACC
& Shree Cement); our cement analyst foresees rising capacity utilization and
narrowing price differentials between wholesale and retail prices benefitting key
cement players. We introduce NHPC (regulatory focus for hydro power expected
to turn favorable) and Exide (EBITDA margins to improve). Top Picks: Asian
Paints, Bharti, Bajaj Auto, Coal India, HDFC Bank, ITC, JSPL, L&T, M&M, SBI.

DB India Model Portfolio continues to outperform benchmark MSCI India
Our model portfolio has outperformed MSCI India by 102bps since 5th August
2011 (date of last change to the portfolio) driven chiefly by our O/W stance on 2
wheelers and tractors. Our Model portfolio has outperformed MSCI India byEU
384bps YTD and by 455bps YoY respectively.

To read the full report: EQUITY STRATEGY

Friday, October 21, 2011

>GOLD: Macro and financial factors driving gold returns over the past three years should remain in place for 2012.

Goose with the Golden Eggs

 Gold holds a unique historical status as a non-consumable commodity universally
recognized as a medium-of-exchange. Given the large amount of non-perishable
inventory overhang, traditional demand-and-supply dynamics do not apply in the short
term. In times of macroeconomic stress, financial factors may drive gold prices well
above physical costs of replacement for extended periods of time, thus exhibiting
“bubble-like” characteristics.

 There is a high probability that macroeconomic and financial factors which have
propelled gold prices over the last three years will continue for the next 12 to 18
months. We look at three major macro-financial drivers of nominal and real gold price
returns: denomination effects from inflation and currency adjustments, followed by real
interest rates, and finally financial demand for gold as a safe haven.

Denomination — Nominal gold prices quoted against the US dollar must reflect
changes in the value of the denominator. Common measures of changes in the
purchasing power of the US dollar include consumer price inflation and currency
exchange rates against a weighted basket. This has accounted for some but not all of
the appreciation in nominal gold prices.

Real Interest Rates — Once adjusting for denomination effects, real interest rates
serve as a useful proxy of the value of holding purely financial as opposed to physical
assets, thus capturing the opportunity cost of investing in gold. Given the weak
economic outlook, we expect central banks to keep nominal and real interest rates low,
providing the impetus to drive gold prices higher.

Financial Demand — Lastly, gold has seen an unprecedented amount of financial
demand from both retail investors and central banks seeking a safe-haven against
other asset classes. Given the high level of market uncertainty and continued turmoil
from the euro-zone crisis, this financial demand should continue into 2012.

Gold Price Outlook — We forecast nominal gold prices, which averaged $1220/t oz in
2010, to average $1575 in 2011 and $1950 in 2012.

To read the full report: GOLD

>RELIANCE INDUSTRIES: 2QFY12 results; revise EPS, target, reco

Reliance’s 2QFY12 net profit rose 0.7%QoQ to Rs57bn – 1% below expectation.
Ebitda came 7% ahead as weak refining was offset by better petchem. E&P Ebit
was also higher due to lower DD&A and higher liquids output. Forex losses and
lower other income pulled reported EPS estimates. We have cut FY12/13 EPS by
4/2% primarily to model a $0.2-0.3/bbl cut to GRMs. We also reset our 12m
forward target to Rs950/sh. After recent stock price rally, this implies only a 10%
upside; we revise our reco to O-PF noting also that the stock is again trading at a
premium to global peers with implied E&P value similar to the base BP-deal value.

2QFY12 net up 0.7% QoQ. Reliance’s 2QFY12 net rose 16%YoY/1%QoQ to Rs57bn
(Rs17.4/sh) – 1.3% below estimates. Lower refining was offset by better petchem
while E&P Ebit was also higher than expected on lower depreciation and higher liquids
output. Overall, core Ebit (Rs71.5bn, +9%QoQ) was 9% ahead. However, a large forex
loss (Rs4.4bn) and lower than expected other income pulled reported profit below our
estimates. Reliance also adjusted Rs45bn in translation losses on its forex debt on its
balance sheet driving up reported debt and fixed assets by this amount.

GRMs fall QoQ. Refining Ebit declined 4% QoQ – 10% below expectation led by a
US$0.2/bbl QoQ decline in GRMs (US$10.1/bbl) – US$0.4/bbl below estimates. As in
the last few quarters, Reliance’s realised margins continue to lag the strength in Singcomplex
margins (+US$0.5/bbl QoQ); for the quarter management attributed this to
primarily to softer light-heavy spreads, lower gasoil spread and use of higher cost LNG.

Strong petchem. Petchem Ebit rose 9%QoQ (16% above estimate), though, on
higher margins in polymers and chemicals offset by lower chain margins in polyesters.
A rebound in domestic demand (+21%QoQ in both polymers and polyesters) would
have helped while implied opex was also sharply lower (down 16%QoQ).

Mixed outcomes in E&P. Reliance adjusted the BP-deal from end Aug-11 leading to a
Rs32.2bn cut to E&P gross block; lower DD&A drove E&P Ebit up 4%QoQ even as KGD6
gas volumes declined 4mmscmd QoQ. Our interaction during the analyst meet
indicates that drilling and completions of additional wells may take 2-3 years implying
that a quick rebound in output is unlikely. Monetisation of other discoveries in KG-D6,
NEC-25 etc are also continent on government approvals and are unlikely before 2015.
Reliance also underscored that it has frozen exploration activity pending the outcome
of comprehensive review with BP. Progress in shale-gas is encouraging though, with
the Pioneer JV now producing at 6mmscmd of gas and ~25kbpd of condensate.

We lower EPS by 2-4%. We make several changes to our model, including an
US$0.2-0.3/bbl cut to GRMs, leading to a 4/2% cut to FY12/13 EPS. Lower earnings
and an alignment of NEC-25 resources to recent media comments (1.2tcf) leads to a
5% cut to our Mar-12 fair value to Rs915/sh; we set our 12-month target at Rs950/sh.

Revising rec to O-PF. After the recent rally, this implies just a 10% upside; we are
revising our reco to O-PF. We also highlight that the stock now implies an E&P value
similar to the base-value of the BP transaction (US$7.2bn for 30%) and is again
started trading at a 1-39% premium to peers on earnings based valuation multiples.

To read the full report: RIL

>ONGC: 2QFY12 oil realisation to improve significantly; Buy

Rising net realization and production growth on the horizon; reiterating Buy
We expect ONGC’s oil net realization to jump by 60% QoQ to US$78/bbl in
2QFY12 versus the last four years' average of US$52/bbl, driven by duty cuts and
fuel price hikes implemented by the Government of India in June 2011. Moreover,
ONGC’s newly elected Chairman has indicated production growth of 15% in oil
and 58% in natural gas over the next five years. ONGC’s stock price is currently
implying an upstream subsidy sharing of 50% going ahead, as against 31-42%
historically. Reiterating Buy.

Net realization to rise by 60% QoQ, to US$78/bbl, on lower subsidies
We estimate ONGC to report robust INR73.2bn net profit (+36% YoY, +79% QoQ)
for 2QFY12, on higher net realization of US$78/bbl (+24% YoY, +60% QoQ) and
lower royalty payments for the Rajasthan block RJ-ON-90/1. The sharp increase in
net realization is a result of lower estimated gross under-recoveries (INR204bn, -
53% QoQ), driven by fuel price hikes and duty cuts by the Government of India in
June 2011, as well as seasonally weaker diesel sales. ONGC’s average net
realization has been US$52.4/bbl the last 17 quarters. We assume an upstream
subsidy sharing of 38.7% (in line with FY11), vs. 33% in 1QFY12.

Expected production CAGR of 4.3% in oil and 3.6% in gas in the next 4 years
ONGC’s newly elected Chairman Mr Sudhir Vasudeva recently indicated
production growth of 15% in oil, to 28m tonnes, by FY14, and 58% in natural gas,
to 100mmscmd, by FY17. This is likely to come from the development of marginal
fields (G-1, GS-15, G-4-6, etc.), and the Daman Offshore and KG DWN 98/2 blocks.
We believe production start-up from KG DWN 98/2 is likely to be delayed. We
have built in a production CAGR of 4.3% in oil and 3.6% in gas in FY11-15E.

DCF-based value of INR365/sh; uncertain subsidy sharing the key risk
We value ONGC at INR365/sh, based on DCF, assuming a 12.9% WACC, based
on Deutsche Bank’s CoE assumptions for India (rfr 6.7% and risk premium 8.1%),
and a beta of 0.85. Key risks are vagaries in government policy on fuel pricing and
subsidies, a further increase in oil prices and a fall in oil & gas production.

To read the full report: ONGC


Key Investment Rationale

Plastic consumption in India to grow at 15% CAGR
With India’s GDP growing at 8% annually and plastic products increasingly
finding application in all sectors of the economy, replacing other competing
products such as steel and aluminium, we expect demand to remain robust.
The application of plastic is increasingly evident across sectors including
packaging, agriculture, healthcare, aerospace, electronics and infrastructure.
According to the All India Plastics Manufacturers’ Association (AIPMA), the
domestic consumption has been growing at 10-12% CAGR over the last decade
and is all set to reach the 12.5mn tonnes in 2012 from 9mn tonnes in 2010
which will make India the third largest plastic consumer after US and China.

Innovation & introduction of value-added products: Key to growth & margins
The key USP in any industry that is largely unorganised is to regularly innovate
and come out with niche products at regular intervals. Sintex, Supreme, Astral
Time have consistently followed this thumb rule and thus have been able to
grow at a pace which is way above the industry average.

Plastic composites: Niche high growth engine
Plastic composites are new age products and are ideal replacement for
conventional materials such as steel, aluminium and wood on account of their
durability, corrosion and maintenance free character. The Indian composites
industry has grown at healthy 16-18% CAGR over the last five years, more than
twice the GDP growth rate. The burgeoning manufacturing sector and heavy
investments in infrastructure is expected to provide an impetus to the Rs 63-
bn Indian composite industry, which is expected to grow at 16-17% CAGR.
From our coverage universe, Sintex and Time Technoplast have a presence in
the composites segment while Supreme Industries is currently putting up a
facility to make composite cylinders. These companies will not only benefit
from high growth in these segments but will also enjoy better margins as
compared to their bouquet of conventional plastic products.

To read the full report: PLASTICS INDUSTRY

>MARUTI SUZUKI INDIA: Cutting ests on continuing strike; longer term concerns on margins

What's changed
1) Due to the persistent labour strike at Maruti Suzuki’s Manesar plant and supplier Suzuki Power Train, we cut our volume estimates for Maruti Suzuki to 1.2mn units for FY12E (from 1.35mn), with further potential downside should the current impasse between labour and management continue beyond Oct’11. 2) We believe this will prevent the company from
taking advantage of new capacity at Manesar in the face of demand uptick driven by a) seasonally strong festive season, and b) launch of new Swift model in Aug’11. 3) Due to lower volume estimates, we cut our FY12-14E EPS by 13-15% (revised estimates 20% below Bloomberg consensus), and 12-m FY13E P/E-based TP by 9% to Rs1,071 (from Rs 1,173).

1) Industry-wide – The Society of Indian Automobile Manufacturers believes rising instances of labour unrest in the industry (e.g. tool-down strikes at MRF Tyres and Bosch India over the last two months) are also due to restrictive employment regulations in India (source: CNBC TV18).
As per a study published by the World Bank in Economic Times in Feb’07, there are 47 central laws and 157 state regulations dealing with labour markets, which are at times contradictory and overlapping, preventing efficient framing of employment contracts. 2) Company-specific – Any
worsening in labour disputes could potentially drive structural downside risk to Maruti Suzuki’s margins from higher staff costs in the long run, in our view. Maruti Suzuki’s current staff cost as a percentage of revenue is one of the lowest among peers in India and Asia.

The stock is currently trading at 1.8x FY13E P/B vs global peers trading at 1.5x and 7-year historical average at 2.9x.

Key risks
Greater/longer-than-expected impact of labour unrest and competition; interest rate cycle; volatility in commodity and currency markets.

To read the full report: MARUTI SUZUKI

Wednesday, October 19, 2011

>Thematic: Milk Inflation (MACROCENTRIC ISSUE)

Its cost and not affluence that is causing inflation shocks

Protein consumption has declined structurally: In spite of higher economic growth, per
capita calorie and protein consumption during the past 27 years has declined. Between 1983 to
2004-05 per capita daily protein intake fell 12.1% in rural areas and 4.6% in urban (as per NSS).
Milk & milk products contribute only a part of protein intake (9.3% in rural areas and 12.3% in
urban, 2004-05) and has been growing only modestly in per capita terms: CAGR 1.25% in rural
and 0.95% in urban between 2004-05 and 2009-10. Incorporating the rise in proportion of
households consuming milk we estimated that overall growth in milk consumption (NSS based)
may have grown at 4% CAGR during FY05-FY10. While this may be to an extent an
overstatement, we believe production growth far exceeded consumption: Total consumption
multiplied 1.6x during the survey periods 1993-94 & 2009-10 while production multiplied 1.9x.

The implausible excess demand argument: Contrary to the NSS data, expenditure GDP
shows a structural decline in growth of real expenditure to 3.5% during FY02-FY10 (high GDP
per capita growth phase) vs 6.6% during 1990’s. Trend decline in consumption growth is
accompanied by a decline in production growth. Hence, the declining trend in milk inflation
from an average of 10.7% during FY89-FY94 to 2.6% during FY02-06 seems natural. Therefore, from a structural standpoint the sudden spike of 20% in milk inflation during FY10-FY11 seems abnormal. Importantly, 3.8% production growth during FY07-FY10 was higher than consumption growth at 2.7%, which should ideally imply excess supply.

Sustained net exports of milk products indicate surplus: Sustenance of net exports of milk
powder during 2000’s coincides with declining milk production and consumption growth,
thereby corroborating the presence of excess supply. Since FY00 India has been a net exporter
of milk powder. It averaged 17.3% of total production during FY01-FY10 and domestic
consumption declined to 75% of total supplies during FY05-10. Significantly, despite the large
import of milk powder by government in FY11 in the wake of rising domestic milk prices, India
still remained trade surplus in milk and milk products.

Our empirical analysis and survey refute the affluence syndrome: Our long term empirical
analysis shows that real per capita GDP growth is not relevant in determining milk consumption.
The correlation (FY84-FY10) between real per capita GDP growth and milk inflation is found to
be negative. The negative coefficient (-0.41) for milk inflation in consumption function indicates
that rise in milk inflation causes a decline in milk consumption growth, thereby refuting the
view that milk inflation is caused by a rise in consumption. Our inflation function highlights the
predominance of various cost variables. The feedback from our primary survey of cattle sheds in
Mumbai corroborates our empirical findings. In particular, steep rise in costs, rising land prices
and limited pass-through are making milk production unviable.

Cost linkage in protein inflation: As per NDDB (Jun 2011) the cost of inputs like dry fodder, oil
cakes, and cattle feed have grown at a much higher rate compared to the price which farmers
gets for milk from either cooperatives or other milk procurers. Oil seed cakes, an important
component in cattle feed and key source of crude protein that gets converted into milk protein
have seen a steep rise in prices. Similarly other fodder components have also undergone
significant price escalation: price of de-oiled rice bran nearly doubled in 2011, since 2005-06,
molasses increased 140%; rape seed extraction increased 130%.

Burst of income flows do not cause enduring rise in demand for milk: Increase in public
consumption spending through fiscal stimulus, employment guarantee programs (NREGA),
farm debt waiver as well as salary hike of government employees (Sixth Pay Commission)
resulted in sudden burst of income flows which collectively caused a surge in consumption in
the past and may have spilled over to demand for milk as well. But such sudden spurts in
demand do not cause permanent rise in consumption as price shock neutralizes the positive
income effect quickly, without adding to absolute consumption of milk. The slowing of real
expenditure on milk & milk products in FY10 corroborates this phenomenon.

To read the full report: MILK INFLATION

>Metals & Mining – Q2FY12 Preview

Q2FY12 was very eventful for the entire Metal and Mining space. The sector is facing many demons all at a time (fear of global recession, ongoing slump in Indian markets, regulatory blows on mining and industry unfriendly mining bill). Nevertheless, Q2FY11 numbers would be better than anticipated earlier as companies are able to hold on higher prices inspite of lull demand. Thus the contraction in margins will be much lesser than earlier expectations.

Stable realization lessen contraction of EBITDA/ton for ferrous players
Inspite of lull demand, steel prices remained more or less stable during the quarters due to ongoing mining crisis in Karnataka. Stable realizations will help companies to somewhat mitigate higher raw material prices. EBITDA/ton of ferrous players are expected to fall by ` 1000-1500/ton during Q2FY12.

Non-ferrous results would be better, mining to take a hit
Base Metals prices have marginally corrected during the quarter due to credit crisis in Europe and credit tightening in China. However the correction is very marginal to have a material impact on company’s financials. Sterlite and Hindustan Zinc are expected to report good numbers due to volume ramp up in Zinc and power business and improved Tc/Rc margins. NALCO and Hindalco are expected to benefit from high alumina and aluminum prices. Mining segment is hit hard by ongoing mining crisis and very heavy rains. Both volume and profitability of mining companies are expected to remain subdued.

We continue to maintain our cautious view on the sector as slump in demand is much higher than expected and thing are still not moving on ground. Moreover fear of recession in the western world and sovereign default risks of Euroland has made things very difficult for the sector. We believe that H2FY12 is going to be tough for metal and mining space and companies will see margin contraction and lower growth. Inspite of negative view, we believe that there are few structural stories unfolding in the Indian Metal and Mining space and the correction should be used to accumulate good quality stocks. Our top picks in the sector are – Tata Steel and Sterlite Industries.

To read the full report: METALS & MINING

>AUTOMOBILE SECTOR: Monthly Numbers update September 2011

September sales brought some cheer for the domestic automobile industry as the 4W players recorded positive growth (incl unlisted players) sequentially with start of festive season and the 2W players continued the robust growth. New launches in the PC segment, increasing discounts and attractive financing scheme supported sales with beginning of the festive season. Tata Motors recorded strong growth as PC sales grew for the first time in the year while M&M continued its strong traction (higher exposure to strong rural market). So while M&M, Tata Motors, Hero Motocorp, Bajaj Auto and TVS Motors clocked growth on y-o-y basis Maruti Suzuki reported a decline of 21% as labor related issues disrupted production.

Bajaj Auto: September sales came in at record 417,686 units representing a growth of 18% on a y-o-y basis and up 9% m-o-m. The company has recorded highest quarterly volumes and we expect company to report strong Q2 results (strong quarter for three wheelers).

TVS Motor: TVS reported total vehicle sales of 219,369 units up 17% y-o-y and up 13% m-o-m as motorcycle growth surprised us positively.

Hero MotoCorp: Hero MotoCorp recorded another month of sales more than 5lacs units with beginning of the festive season, we however expect competition to intensify in H2 FY12.

Mahindra and Mahindra: Mahindra & Mahindra continues to grow across segments, with total vehicle sales up 20% y-o-y to 82,656 units driven by higher tractor and automotive segment (especially LCV segment).

Tata Motors: Total vehicle sales grew 22% to 78,786 units as the strong PC sales supported growth in CV segment. Exports grew 23% y-o-y and 48% m-o-m to 6,220 units.

Maruti Suzuki: Subdued PC sales coupled with disruptions at Manesar plant resulted in total vehicle sales declining 13% y-o-y to 91,442 units. Exports surprised with sales up 18% y-o-y to 14,356 units. YTD FY12, total sales are down 8% to 448,268 units.

We list vehicle sales of other unlisted players to just give an idea of how competition is shaping up in the Indian automobile industry.

We remain positive on 2W industry on the back of rising rural demand, shift in consumer taste towards higher end bikes and expect Bajaj Auto and TVS Motors to be the primary beneficiary (see valuation snapshot in appendix). Tata Motors (not rated) trades at favorable valuations with JLR recording strong volumes and domestic sales pick up ahead of festive seasons. We remain cautious on passenger segment post festive season as macro uncertainties still persist. We do not expect interest rates to come down until end FY12 (though another hike remains a tail event) and expect it to negatively impact PC and M&HCV growth in current fiscal.

Tuesday, October 18, 2011

>Capital Goods Q2FY12 Preview

During Q2FY12; CG index underperformed sensex by 11.8%. IIP numbers also did not help as capital goods de grew by 15.2% for July. Obstacles in the form of land acquisitions, environment clearances and rising interest rate still linger on and will continue for near term. We expect flat top line performance for our coverage universe and de growth in EBITDA and PAT due to rising input and interest cost respectively.

Flat growth in top line for Q2FY12
We expect revenue of our coverage universe to witness flat growth as a result of declining or stagnant order book for companies like BGR, Voltas and Crompton Greaves. Crompton Greaves’ overseas business will benefit from Euro appreciation against Rupee by 8% y-o-y. Elecon Engineering and Jyoti Structures shall post decent growth due to growing order book.
EBITDA and PAT to be once again hit by higher material cost and interest charges

EBITDA for coverage universe is likely to decline by 10.3% as a result of mix of increased cost and competition. Therefore, we expect margin for our coverage universe to decline by 120bps. Companies with lower base or escalation clause shall be able to at least maintain their margins. PAT is expected to de grew by 20.6% y-o-y. The de growth is likely to be a result of increased interest cost particularly for BGR Energy and Jyoti Structures.

Another dry spell for order inflow
Announced order inflows for the sector indicate that Q2FY12 could well be another dry spell for orders. Amongst large caps, L&T has just managed an order win of ` 91bln while BHEL did not announce any significant order win except a single BTG package order of 2x660MW from Singareni Collieries for ` 32bln each. Although opening of NTPC super critical bulk tenders (9x800MW) did provide a ray of hope in otherwise a lackluster quarter. Moreover, PGCIL announced orders worth ` 34.5bln (83.3% y-o-y) which may boost order book of T&D companies.

We understand poor performance of capital goods sector is built in stock prices to a certain extent; thereby arresting major downside for stocks with good revenue visibility and margin stability. Hence, we like Elecon Engineering and AIA Engineering; Elecon for its strong order book and diversified business and AIA Engineering for its successful headway into international markets in mining and cement that shall reap rich dividends in the long term.

To read the full report: CAPITAL GOODS

>Container Corporation of India

Container Corporation of India (Concor), in which the government of India controls 63% stake, is India’s largest logistics company. It has three distinct characteristics of a carrier, terminal operator, and warehouse operator.

Though the first- and last-mile transportation is by road, rail is the mainstay of the company’s transportation strategy. A majority of the company’s terminals are rail-linked. Concor benefits from a close relationship with the Indian Railways. Several of its terminals are situated on leased
Railway-land. As rail mileage is cost-effective over long distances, the price advantage can be passed on to clients, allowing for flexible and competitive pricing.

Starting operations in November 1989 with seven inland container depots, Concor has since extended the network to a total of 61 terminals. Of these, 18 are export-import depots and 13 exclusive domestic depots. As many as 30 terminals perform the combined role of domestic as well as international terminals.

>BANKING SECTOR: Preview of Q2FY12 Results

Sector Outlook
The sector has been witnessing a healthy business growth rate till now. Even though interest rates have increased, credit growth has been at a healthy 19.5%, while bank deposits rose 17.38% as on 23rd Sept, 2011.

􀂾 The credit growth has been on account of drawdown from earlier sanctions. With investment in infrastructure slowing down and firms looking abroad for raising money due to lower cost, healthy credit growth in India will see some pressure in the near term.

􀂾 According to data released by the Reserve Bank of India (RBI), bank credit rose 3.9% in the April‐September period, lower than the 5.6% growth in the same period of the previous financial year.

􀂾 RBI has raised key policy rates by 150 basis points since April to rein in inflation and anchor inflationary expectations. In June, majority of the banks increased their lending rates & a few days back, some banks have increased their deposit rates. However, we expect margin to remain stable or slightly down from Q1FY12 levels, given the fact the wholesale deposit rates have come down significantly from June levels.

􀂾 We may see some earning pressure on PSU banks due to system recognition of NPA’s.

􀂾 NPA’s for the sector as a whole may rise from Q1FY12 levels in Q2FY12 results. However, we expect better recovery & upgradations in the sector during the second half of the fiscal and therefore NPA’s to improve in the second half of the fiscal for the sector.

􀂾 Currently, most of thebanks are available at attractive P/BV. We have listed some of them below with our rationale for the same.

To read the full report: BANKING SECTOR

Monday, October 17, 2011


We expect the Indian FMCG sector to report strong revenue growth earnings growth for Q2FY12. Although revenue growth for Q2FY12 will be slower than Q1FY12, earnings growth is likely to improve. We believe that HUL's results will be a critical indicator of the demand scenario in India. The following will be the key themes for Q2FY12:

  • Revenue growth will see a higher pricing component than volume, but volume growth will continue to remain critical.
  • Gross profit growth to pick up and outpace volume growth.

To read full report: INDIAN FMCG SECTOR

>EMERGING ASIA: Falling inflation will provide a welcome boost

  • We forecast that inflation should fall next year due to a combination of slowing growth and falling global commodity prices. However, inflation is likely to remain elevated in a number of countries, and will continue to be major policy concern in Vietnam and India. (See pages 2-3.)

  • Falling inflation will provide a major boost to the region’s economies at a time when exports are expected to weaken. Not only will falling inflation give central banks room to cut interest rates but it will also boost consumers’ purchasing power.

  • Central banks in Sri Lanka, Indonesia and Korea will announce their policy rate decisions this week. We expect them all to keep rates on hold as policymakers in the region are becoming increasingly concerned about the outlook for the world economy.

  • Sri Lanka Policy Rate (Mon. 10th Oct.) – Rates to remain on hold
  • Indonesia Policy Rate (Tue. 11th Oct.) – Still in wait-and-see mode
  • Korea Policy Rate (Thu. 13th Oct.) – Fears for global growth to keep rates on hold
  • Singapore GDP (Q3) (Fri. 14th Oct.) – A return to growth

Thursday, October 13, 2011


To see presentation: DCB BANK

>IT Services:: 2 Quarter Preview

Action: Prefer HCL Tech followed by Infosys
HCLT is our top pick within tier 1 IT on expectations of strong revenue
growth (5.4% q-q), lower EBITDA margin declines despite wage hikes, on
rupee depreciation and reasonable valuation comfort. At Infosys, we
expect a cut in revenue growth guidance and think any fall in the stock
should be used as an opportunity to add positions as we believe prices
already factor in a moderation in growth. We remain cautious on TCS and
CTSH on high BFSI/Europe/Client concentration exposure and lower
valuation comfort. Wipro remains our least-preferred stock in tier 1 IT.
Catalyst: Stability in macroeconomic conditions and continuation of
rupee depreciation trends would be potential positive triggers for IT

Strong quarter: no material revenue growth pain; earnings surprises driven by rupee

No material revenue growth moderation in 2Q
We expect USD revenue growth of 3.4-6.5% q-q across tier 1 IT
companies, with CTSH and TCS leading on revenue growth. Infosys and
Wipro should be in line with guidance. The impact of the recent economic
slowdown is unlikely to be visible in results this quarter, in our view.
Likely FY12F revenue guidance cut at Infosys, EPS guidance raise
The first impact of the slowdown, in our view, would be with Infosys cutting
its FY12F revenue growth guidance to 16-18% (from 18-20%) as
discretionary demand tapers and cross-currency impacts hurt USD
revenue growth. However, we see EPS guidance being raised to around
INR135 (from INR128-130) largely driven by rupee depreciation and
optimized hiring towards year-end.

Valuation: EPS up on rupee depreciation; upgrade Patni to Neutral
We revised our EPS estimates higher as we factor a new FY13F USD-INR
rate of 45 vs 44 earlier. We upgrade Patni to Neutral from Reduce.

To read the full report: IT Services

>Power Sector Q2FY12 Preview: Operational weakness; sector reforms

Adani Power
We expect sales of 3494 MU at an overall average PLF of 74% .EBIDTA margins are expected to improve by 300bps sequentially on account of better operational efficiency. However, the next and the following quarter is expected to be tough as the rupee has depreciated over 8% We expect APL to clock a PATJSW Energy
PLFs and short-term realizations could drive Q2 FY12 results, as global spot coal prices (RB Index) are sequentially flat. Operational softness is expected to continue – SBU I-II (76% PLF), Raj West I (shutdown), Ratnagiri I (70% PLF). We forecast a 153bp Q-o-Q margin contraction as declining merchant realizations outweigh nonrecurrence of one-time expenses from Q1 FY12.

KSK Energy
We expect (1) Wardha Warora offtake and fuel dynamics and (2) taxes to be the key earnings drivers. Following the recent WCL linkage activation, we factor in lower Wardha Warora fuel costs at ` 2.75/unit but also model low project PLFs (60%) and high auxiliary consumption (12%). Q1 FY12 had benefited from a negative tax rate that we do not expect to recur.

Orient Green Power
Q2 is expected to be the best quarter seasonally for OGPL, and thus expect average Wind PLFs of 21%. We expect OGPL to sell 168MU (vs 127MU in Q1FY12) at an average realization of ` 4.6/unit. EBIDTA margins are expected to remain flat yoy and improve by 795 bps sequentially to 51%.We expect Q2FY12 PAT to come in at ` 79mln which translates to an EPS of ` 0.17
PTC India
Q2 is the best quarter for PTC in terms of volumes as cross border volumes peaks during this period. We forecast PTC to trade 9.9 BU inclusive of 3 BU of Cross border Trades at average margins of 4.5bps. We expect overall EBIDTA to come in at ` 589mln implying EBIDTA margins of 1.6% and overall PAT and EPS to come in at 552mln and ` 1.87.

PLFs have continued to decline this quarter: -842 bp among private players, -777 bp all-India. Key drivers, in our view, include SEB backing down, ongoing capacity addition, seasonally-weak demand (monsoons), and preferential use of hydropower in the merit order dispatch. This quarter also saw plenty of action in coal regulatory developments and distribution sector reforms: (1) no-go/CEPI, (2) draft MMDR Cabinet approval, (3) MRRT/Australian carbon tax, (4) proposed distribution reforms and discom tariff increases, and (5) progress toward revised Case 1/2 standard bidding documents with increased fuel passthrough.

To read the full report: POWER SECTOR

Wednesday, October 12, 2011

>SWARAJ ENGINES: Capacity expansion to drive growth

We are impressed with Swaraj Engines' conservative management style, negative working capital high margin (17%) and RoE (32%) and high asset turnover (10x). While Swaraj Engines was unable to fulfill demand of Swaraj Tractors in FY11 due to capacity constratints, given 33,000 units expansion of capacity (up 79%) over FY12-13, we expect 22%, revenue and 14% profit CAGR over FY11-13E

  • Major capacity expansion to meet rising demand
  • Strong possibility of Swaraj Engines being used for Mahindra tractors
  • Construction equipment business
  • Good FY12 monsoons positive for tractor industry

>Equity Strategy: On longer, higher, cleaner growth (JEFFERIES)

Key Takeaway
To us, the Indian economy is off the celebrated 8%+ growth path. And now this should be the number one economic concern. The causes are not all in the global environment. We present a basket of signs to point that something is amiss. More importantly, we discuss what we deem as the true drivers of longterm growth and what policy action is needed as a solution. Until efforts are
being made to address growth, or we see signs of global stability, we maintain our defensive bias on equities.

Needed first and foremost – an admission that growth is off: We study the past relationships of 12 high frequency domestic economic indicators with GDP. All of them suggest that current domestic growth is likely lower than the headline published GDP growth with more slowdown ahead.

All other economic indicators imply that it doesn't feel like 7.7% GDP growth

>India Property Initiating Coverage: Cheap. Really? (Jefferies)

Key Takeaway
Property sector investment at inflection point is all about getting the timing right and fraught with risks. We are not trying to make a call on the cycle turning from here but presenting a case for remaining selective while investing in the sector given the far-reaching structural changes. We initiate coverage on eight companies with Oberoi Realty as our top Buy and DLF as our top

A free meal, no more
2011 has provided enough empirical evidence of a structural shift over the past five years. The shift to construction linked payment and buyers becoming selective has made development more capital intensive. Cheap land acquisition, a major value creator earlier, is no longer as lucrative with land owners demanding share in conversion gains. Increasing construction costs and manpower shortages are hindering growth prospects. Regulatory interference is rising and both equity and debt has become scarce and expensive. As a consequence the business is no longer as profitable as it used to be.

There will be new industry leaders that will emerge in this new era and the critical success factors will now shift to a) clean and converted land banks, b) strong balance sheets, c)
execution strengths, d) transparency, and e) lower litigation risks.

Challenging times ahead
After two years of strong volume growth across most cities, we are at the cusp of a cyclical volume slowdown. Recent trends indicate that residential volumes are beginning to slow down with a 14% YoY drop in All-India June-11 volumes on rising mortgage rates and alltime high property prices. With developers’ reluctance to cut prices, we believe that volume recovery will get pushed into 2H FY13. We expect a significant slowdown in Mumbai and Gurgaon volumes while Bangalore, Chennai and Pune expected to perform relatively better in FY12.

No gain in being bold
Realty sector has underperformed without any de-rating with consensus continuing to remain bullish on growth prospects and FII ownership at all-time highs. MSCI real estate index is up only 6% since Mar'09 and has underperformed both the autos and staples which are up 234% and 62% respectively. Despite that real estate sector has not seen any valuation de-rating vis-à-vis these sectors. Additionally, timing was critical for stock returns in the real estate sector. If one was a few months too early or late in catching the bottom for real estate stocks, most of the 2009 out-performance would have been lost.

Initiate coverage on the sector
Being selective remains the key to investing in the sector and we like management with positive cashflows, stronger balance sheets and low risks. We initiate on Oberoi, Sobha and Prestige with Buy ratings, Godrej properties and Unitech with Hold ratings and DLF, IBREL and HDIL with Underperform ratings.

To read the full report: India Property

Tuesday, October 11, 2011

>Global Financial Events (October 10 - October 16, 2011)

China: In China, we expect CPI inflation to remain elevated in September, while exports growth is likely to show moderation. On the central bank policy front, we expect the Bank of Korea and Bank Indonesia to stay on hold and the Monetary Authority of Singapore to shift to a neutral SGD stance. In the US, retail sales would be key to watch for the latest trends in consumer spending.

India: We expect industrial production (IP) growth to remain weak at 4.5% yoy in August on the back of the poor performance of various activity indicators like the Infrastructure Index, the PMI etc.

Korea: We do not expect the Bank of Korea to raise the policy rate in the October Monetary Policy Committee meeting, given the elevated financial stress in Europe.

Singapore: We now think that an even greater reduction of the slope to a 0% appreciation
stance is the most likely scenario, in light of the increased downside risks to growth and given where the SGD NEER is currently trading.

To read full report: GLOBAL FINANCIAL EVENTS

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

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

Hangover to last for a while

Catalysts: Softening raw material prices a positive catalyst for FY13F
As the company continues to build more in-house capacity post the acquisitions of Pioneer and Sovereign distilleries, we believe it will be able to capture more of the distillation margins over the next couple of years. This should, in our view, help improve profitability of the domestic
business. However, we are not building in any material improvement in profitability in our numbers as visibility on that remains low.

Valuation: Near-term concerns outweigh valuations
On our revised numbers, UNSP trades at 15.3x FY13F P/E, a steep 38% discount to the FMCG sector average. While we expect UNSP to deliver 20% earnings growth in FY13F, we expect FY12F to be a year of consolidation. While valuation at 15.3x FY13F looks attractive, near-term
concerns over the balance sheet and funding requirement at group company Kingfisher Airlines will likely remain overhangs, in our view. We prefer to remain on the sidelines in the near term.

To read the full report: UNITED SPIRITS

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

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

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

Downside support, but upside capped

Catalysts: Not in the immediate future
The sale of the remaining stake in HZ by the government would be a key positive catalyst, in our view.

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

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

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

To read the full report: HINDUSTAN ZINC

Monday, October 10, 2011

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

Different quarter same story; Results expected to be weak
The Sensex companies are expected to mirror the previous quarter with weak headline profit growth of 10.8% on a consolidated basis and 14.6% on a standalone basis. This is the weakest forecast in the last 8 quarters. Second, even the sales growth at 16.9% is expected to be the slowest in the last 8 quarters. Third, margins on an aggregate basis are expected to continue
declining. Lastly, we continue to expect downgrades to our Sensex EPS from 1140 currently to 1100-20 levels. We see bigger risk to FY13 estimates of Rs1340 (our expectation is Rs1250).

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

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

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

To read the full report: INDIA STRATEGY