Saturday, December 31, 2011



The year 2011 can best be described as a lackluster year for Indian real estate sector. There were several headwinds that prevented the sector from delivering to its full potential. High property prices and rising home loan interest rates kept the home buyers away from the property market. Property transactions in major Indian cities were down by 20-40% for the year.

As we move into 2012 there are several un-answered questions. Where does the property market go from here? What is the current psyche of home buyers? Is it still a seller’s market or buyers will dominate the market movement? Is affordable housing still the top priority, when the common man goes home shopping? Which is the hottest destination for investing in real estate in 2012? To get an insight into these and many more issues,, the fastest growing online property website, conducted a survey among its users.

The survey christened “Property Trends 2012” ran on the website between 27th November to 15th Dec 2011, witnessed a voluminous participation of 4430 home buyers from across the country including cities of Mumbai, Delhi NCR, Bangalore, Chennai, Hyderabad, Pune, Kolkata, Ahmedabad, Chandigarh & more. Most of the survey takers were male, in the age group of 26 – 45 years. The major findings of the survey are highlighted here

Higher tax rebate &; Carpet area are most desired reform of 2012
Property Trends 2012 asked home buyers to give an advice that would bring a positive impact on Indian realty sector in 2012, nationally, 29% people wish for an increase in income tax exemption limit, on repayment of interest on home loan, from current 1.5 lac p.a to 3 lac p.a. Next advice from the home buyers is to resolve the constant conflict of Super area Vs Carpet area. 27% of home buyers want the developers to charge on the Carpet area rather than Super area. They believe this will bring more transparency, as Carpet area is measurable as against the latter which in most cases is ambiguous.

Home buyers expect the home loan interest rates to fall in 2012
As far as purchasing a home is concerned; arranging funds becomes the most critical aspect. Usually home buyers rely on home loan for making a property investment. In the recent past RBI has increased the benchmark REPO rate 13 times in the past 18 months. Home buyers seem to believe that RBI is at the end of the interest rate increase cycle, majority 41% expect the home loan rates to fall in 2012.

End user demand to drive property market in 2012
2012 is going to be a year that will be dominated by end users. Home buyers seem confident for making a property purchase in 2012 with some help, in the form of a price correction & softening of home loan. We asked home buyers on the main reason for buying a house in 2012.

To read the full report: PROPERTY TRENDS 2012


>2012: GLOOM vs. OPTIMISM: WHAT’S IN THE PRICE? - Alexander Treves

2011 has been an intense year for equities globally, with one consistent theme - volatility. Through the tsunami in Japan to unrest in the Middle East, concerns of slowing US and emerging market growth to the survival of the euro region, most equity markets have fallen notably. Would 2012 be any different or does the uncertainty spill over into the next year as well? Alexander Treves, Head of Investments, Fidelity Worldwide Investments, India feels that while the year could be challenging, it also presents an opportunity to build positions in top quality companies that have a long term competitive advantage.

Globally, three key factors that played out this year were the ongoing eurozone sovereign debt crisis, fears of a slowing US economy, and a sharper than expected rise in inflation in emerging markets prompting higher interest rates. Apart from these, we witnessed events such as the surge in commodity prices in the first half of the year due partly to the political stability in Middle East and North Africa, and the Japanese earthquake and tsunami which disrupted the global manufacturing supply chain.

Of these, fears over slowing growth in the US have eased with better than expected performance of the US economy recently. However, refocus on the fiscal / debt position in the US will begin to gain headlines as the presidential elections draw closer through the latter half of the year. Inflation in emerging markets could decline over the coming months and interest rates in many economies are currently on hold. The year could further test the resilience of the emerging market growth story to the economic slowdown in the developed world.

However, it will be the eurozone that is likely to dominate headlines and the situation could worsen further before being contained. Some of the key themes for 2012 could be as below:

2011 has witnessed developments on the economic as well as financial front in the euro region and these have prompted reactive and temporary fixes by eurozone governments. The locus of the crisis has now moved from the periphery to the core economies and even France and Germany have not been spared. Our colleagues in Europe believe we are in the last leg of the sovereign debt crisis, and the closer the crisis moves to the core economies, the faster would be the move towards more decisive action. In that sense, whether the eurozone breaks up or moves towards a credible fiscal union, 2012 is likely to be a challenging year – albeit the challenges will act as catalyst for resolution. Recent political changes in Spain and Italy are significant and new governments are fully focussed on fiscal prudence. Having said that, we may see a general re-pricing of core, AAA rated sovereign debt. We have started to see the beginnings of this process and the markets are ahead of the rating agencies once again. The euro region could enter into recession in view of the constrained bank lending and austerity measures. The length and depth of the recession would be dictated by the policy response from the European Central Bank.

Historically, US stock markets have had a high correlation with those in Europe. The US cannot be immune from its linkages with Europe, be it through exports or financial markets or consumer confidence. The US consumer is still burdened by debt and consumer sentiment is weak, mainly due to high inflation expectations and static growth in real income. Nevertheless, on a positive note, the release of upbeat economic indicators in the recent months, including better than expected growth numbers for the third quarter, have allayed fears of a recession in the US. Our colleagues tracking the US markets believe that corporate profits
in the US are robust.

This has historically been a reliable indicator of job creation, as confirmed by the latest jobs data, and a positive indicator for a rise in capital spending and industrial activity. Nascent signs of stabilisation in house prices, a decline in foreclosures and vacant house units, and a correction in housing inventory point to a
brighter outlook.

Most Emerging Asia economies could not stay immune to the deteriorating situation in the eurozone and sluggish growth in the US, given export linkages to the west. Capital flows to the EM have slowed leading to a further sell-off in the equity markets, tightening of credit conditions, and pressure on some currencies. Some of the countries in the region also face domestic challenges such as a correction in China’s property market, weaker investment sentiment in India, and high household debt weighing on consumption growth in Korea. Recent data releases on the growth front in China and India suggest that economic activity is losing

To read the full report: GLOOM Vs OPTIMISM

>EQUITY STRATEGY 2012: We are moving into cyclical gain in 2012

Where we are ……………. 
 The Democratic Government has become directionless

 Inflation infuser

 Capital Inflow window has tipped into "Currency crunch"

 India’s much valued entrepreneurial energy has become more of a corporate governance quagmire

Moving to…………….
■ The government has acknowledged its poor performance on reforms front and overall governance in closed way we may expect some quick policy dose in next six months through budget and hike in FDI in some sectors

 Inflation moderation outlook

■ New Divestment strategy,  Global rotation trade possibility and flow of capital through FDI route may result into rupee appreciation

■ Spreading positive investment sentiment

To read the full report: EQUITY STRATEGY 2012


What to expect and How to prepare?

A world with too much debt

Total debt-to-GDP levels in the 18 core countries of the Organisation for Economic Co-operation and Development (OECD) rose from 160 percent in 1980 to 321 percent in 2010. Disaggregated and adjusted for inflation, these numbers mean that the debt of nonfinancial corporations increased by 300 percent, the debt of governments increased by 425 percent, and the debt of private households increased by 600%. But the costs of the West's aging populations are hidden in the official reporting. If we included the mounting costs of providing for the elderly, the debt level of most governments would be significantly higher. (See Exhibit 1 below)

To read the full report: COLLATERAL DAMAGE

Friday, December 30, 2011

>INDIA'S ECONOMY: Doing business in Dharavi

We visited Mumbai’s Dharavi Slum on Boxing Day, gaining a peek into this city within a city. We were moved by the scenes of daily life that we encountered but were most surprised by the sophistication of Dharavi’s economy. As a single data point in India’s informal economy, the recycling, textiles and leather businesses that we saw were vibrant enterprises and had developed sophisticated links with the wider economy.

One of Mumbai’s largest slums
 Dharavi encompasses a 1.7km2 area and is home to an estimated one million residents
 Its residents face a daily challenge from their impoverished conditions

Sophisticated businesses
 Dharavi supports a strong economy, producing ~US$600 million of goods each year
 We visited local recycling, textiles and leather businesses and were surprised by their sophistication

Sophisticated consumers
 Even in the midst of poverty, we still saw evidence of growing consumerism
 We were struck by the number of smartphones in use, satellite TV dishes on the rooftops and motorcycles on the streets

Seeing is believing
 We recognise that Dharavi is just one slum of many and may not be representative
 Still, Dharavi provides a fascinating insight into India’s informal economy and refutes the idea that the informal economy must be stagnant and backward
 We recommend investors contact Reality Tours & Travel to see Dharavi with their own eyes (contact details provided inside)

To read the full report: India's Economy

>Recent developments in the road and highway space; NHAI (National Highways Authority of India)

Key takeaways from the meeting with Mr. Gajendra Haldea, Principal Adviser (Infrastructure) in the Planning Commission with a view to facilitate in-depth discussions on the roadmap in respect of US$1trn spending on infrastructure

The 11th Plan (FY07-12) infrastructure spending is estimated at US$460bn and the 12th Plan (FY12-17) infrastructure outlay would be US$1trn, on which a detailed document will be released within a month. Taking into account sector-wise problems like the power sector facing issues such as shortage of coal, losses suffered by state electricity boards (SEBs), delay in getting environmental clearance and also airport construction companies facing lack of clarity on airport guidelines, land acquisition and funding problems, Mr. Haldea said he expects a slippage of only around US$100bn in infrastructure spending, which still implies 100% higher infrastructure outlay (US$900bn) under the 12th Plan.

The methodology adopted by the Planning Commission in respect of capital expenditure in every Plan period for each infrastructure segment is based on historical trend and assumes a holistic approach to determine the infrastructure spending. Based on the analysis by the Planning Commission, the expenditure may show an increase or remain stagnant, but not decline, after factoring in structural and technical problems pertaining to the respective segment.

Despite lot of problems, Mr. Haldea expects the infrastructure sector to grow at a moderate rate. However, he has not given a clear roadmap to justify his point of view. The key sectors that would drive growth under the 12th Plan period are power (generation, transmission), roads, and ports. The power sector is expected to remain as a top investment option, but with a selective approach.

Mr. Haldea said the power distribution space needs much more than what the Shunglu Committee and the B.K. Chaturvedi Committee have proposed. He does not expect any state to revise the power tariff every year, as it is a politically sensitive issue. The road ahead is a blend of the committees’ recommendations and government support which includes partial bailout by every state, partial write-off of loans by banks and power tariff hike by some states to offset the losses of SEBs.

Mr. Haldea believes that India is an infrastructure deficit country, which will keep demand intact in the long term. Funding seems to be a problem area for policymakers, as most of the banks have reached their limits in terms of lending to infrastructure companies. However, the policymakers are currently outlining ways to meet this huge capex which includes increasing borrowings via the ECB route, infrastructure debt fund, insurance funds and household savings, with the private sector accounting for 50% of the share. He does not expect a dramatic structural shift in project implementation and expects moderate growth in the long run to continue.

Key takeaways from the meeting with Mr. Mr. N.R. Dash Chief General Manager (Finance) in National Highways Authority of India (NHAI) to track the recent developments in the road and highway space, which is the only infrastructure segment currently that drives robust growth.

■ NHAI has set a target of awarding 7,300km of highway projects during FY12, of which 4,300km has been already awarded during April–November 2011, 1,000km is in advanced stage of evaluation and the rest 2,300km (14 projects) are in different stages of the bidding process. NHAI is confident of achieving its FY12 target. Till date (i.e. April-November 2011), 33 projects were awarded, of which 22 projects were offered at a premium.

■ Out of the total ~50,000 km of national highways planned by the NHAI, work on 28,000 km of highway projects has been awarded (of which 15,000 km of projects have been completed and 13,000 km are in progress) and 22,000 km of projects are yet to be awarded. NHAI expects robust growth in the award of projects to continue, with 22,000km of projects to be awarded in the next three years, thereby translating into 7,300km every year.

■ NHAI believes the aggressive bidding scenario is cooling off, but still there is good demand for highway projects. It says the aggressive bidding is justified keeping in mind the opportunity of higher traffic growth, decline in interest rates and factoring in the project cash flow over the concession period.

■ NHAI is also carrying out a study on higher difference in project cost calculated by it and the project cost announced by developers. Out of 33 projects awarded, the cost of 18 projects is higher by ~0-25%, six projects’ cost is higher by 25%-50% and five projects’ cost is higher by 50%. NHAI normally takes two years for it to award a road project from the date of preparation of feasibility report and another three years to construct the project, for which it adjusts any escalation in input costs.

■ NHAI has outlined three major risks for the road sector: shortage of skilled labour, land acquisition issue and problems in project funding.

■ Land acquisition has seen an improvement since the past two years after the implementation of the state support agreement, creation of land acquisition units and an apex body for acquisition. During CY11, NHAI acquired 12,000 hectares as against 8,000 hectares acquired in CY10. It has not faced any major problem on the land acquisition front till date, but requires more clarity on the market price as stated in the Land Acquisition Bill (which is an issue due to improper maintenance of records in rural areas). Currently, NHAI is granting orders on the basis of 50% land aggregation as against the norm of 80% stated in the concession agreement, which would keep the project award momentum on track. During the 12th Plan period, estimated requirement of funds would be ~US$70bn of which US$35bn is
likely to be invested by private players, translating into equity investment of ~US$10bn. To ease project financing, NHAI has come out with guidelines that developers can exit from a project completely after two years of project COD (earlier, developers had to hold 26% stake during the entire concession period). This would increase churning by equity funds. Apart from this, NHAI is pushing for changing the status of loans for road projects availed from banks from unsecured to secured, for which it has given an assurance to increase the concession period by 1.5% for fall in traffic by 1%.

>DIVIDEND YEILD STOCKS: table of companies that offer dividend yield of 4.5%+

To read the table: DIVIDEND YIELD STOCKS


>MAHINDRA SATYAM (MSat; erstwhile Satyam Computer Services): Resolution of the major litigations has paved the way for the potential merger of MSat and Tech Mahindra

■ Business momentum continues: The MSat management has indicated business momentum has improved with increased client mining and new deal wins from existing clients. Besides, the company is seeing invitation for new requests for proposal (RFPs) gaining momentum. In the last five quarters, MSat’s revenues grew at a compounded quarterly growth rate (CQGR) of 4.3%.

  • Focus on client mining: MSat is increasingly focusing on deepening its relationship with its existing clients and getting new business from its existing pool of customers. Currently 98% of its revenues come from repeat business from the existing customers. The company plans to mine its existing clients and move up the value chain in terms of service offerings. This can be witnessed in the growth in the contribution from the top 20 clients—the same has increased from 54% in Q4FY2011 to 57% in Q2FY2012. Also, the number of $20-million clients has increased from 12 to 16 in the same period. Currently, of 228 total active clients about 65-70 clients are Fortune 500/Global 500 companies.
  • Finalisation of accounts aiding sales pitching and invitation for new RFPs: Till last year the company was facing difficulty in pitching for new business as its financials had not been finalised. However, the restatement of accounts for the last three years and better understanding of the company’s capabilities have led to MSat increasingly participating in the new RFPs.
  • Tech Mahindra—MSat joint go-to-market strategy a winwin for both: Tech Mahindra and MSat have initiated a joint go-to-market strategy, which has started showing traction and MSat has already won ten clients. Going forward, the management is optimistic of winning more business through strong domain expertise of both the companies - MSat (enterprise solutions practice) and Tech Mahindra (managed services practice).
  • Margin to range in 15-17%: MSat has seen a smart improvement in its EBITDA margin from 5.6% in Q2FY2011 to 15.3% in Q2FY2012. The margin improvement has been possible due to an improving volume growth (1.5% to 4% in the same period), cost rationalisation, increase in fixed price projects, higher offshoring and flattening of employee pyramid. The percentage of employees in the 0-3 years experience category has increased from 18% in Q2FY2011 to 27% in Q2FY2012. The management expects the margin to remain in the range of 15- 17% (ex currency impact) backed by the available levers like further flattening of the employee pyramid, higher offshoring and improvement in utilisation.

On a visible path to recovery

■ Business outlook remains soft on the back of macro uncertainties: The escalation of the sovereign debt crisis in the euro zone has kept the business outlook uncertain and affected the lead time for closure of deals (the lead time has gone up in the recent months).  Nevertheless, the management foresees a decent revenue growth in the coming quarters (ex currency impact). However, it expects lower discretionary spend owing to the macroeconomic uncertainties.

  • Cut in discretionary spends to have lower impact: On account of the current uncertain environment discretionary spends would be under pressure. MSat is a focused player in the enterprise solutions (ES) space contributing about 43% of the revenues of the company. Of the ES revenues, about 60% comes from the maintenance &; support services, which are largely annuity based.

  • Billing rates comparable to mid-tier players: As per the management, the current billing rates are comparable with that of the mid-tier Indian IT companies like Patni Computers but are much lower than that of the big IT companies like Infosys. However, as per the management MSat is getting higher rates on new deals.
  •  CY2012 budgets flat to down: In mid November 2011 the company did a survey of its top 30 clients. The survey pointed to a flat to marginally down IT budget for CY2012. However, offshoring is expected to increase. Also, there are no major worries regarding the budgeting cycle. There would be pressures on clients’ discretionary spends.

■ Q3FY2012 expectation: The management expects the revenues to grow at 2.0-2.5% in US dollar terms with a volume growth of about 3-4% whereas cross-currency movement would adversely affect by 1.5%. The EBITDA margins are expected to be lower by 20-30 basis points. The margins would be affected by a wage hike (an impact of 250-300 basis points) whereas the rupee’s depreciation would lower the adverse impact. The company expects a
net gain in its foreign exchange transactions in Q3FY2012; at the end of Q2FY2012 the company had total hedges of $221 million.

■ Manufacturing and TME remain the stronger verticals: For the company manufacturing and telecommunications, media and entertainment (TME) would remain the focus verticals. The company has strong offerings in the two verticals as well as proprietary solutions to cater to these verticals. Though the two verticals would be affected by the uncertain macro environment, the management expects the two verticals to be steady on an overall basis. The banking, financial services and insurance (BFSI) vertical would see volatility on a quarter-on-quarter basis due to lumpiness of business. The management is looking at acquisitions to grow in the BFSI vertical.

  Major litigations resolved paving way for merger with Tech Mahindra: MSat has seen the resolution of major litigations: both the class action suit and the Upaid litigation have been resolved. The company has not provided for the Aberdeen class action suit whereas for the IT demand the company has provided for about Rs400 crore. The resolution of the major litigations has paved the way for the potential merger of MSat and Tech Mahindra.
Tech Mahindra-MSat merger expected by December 2012: The merger process of the two companies has begun with MSat initiating the winding down of its American depository shares (ADS) which is expected to be completed by March 2012. The management had earlier indicated the merger would get complete by May 2012. However, the delay in resolving the other litigations would delay the merger process till December 2012.

MSat has come a long way from its tainted past with rechristened Mahindra Satyam, much improve financials and better business prospects. Going forward, to recapture the growth prospects MSat would be leveraging its own legacy in the enterprise part of the business and Tech Mahindra’s expertise in the area of managed services. We remain optimistic on the revival of MSat in the coming years. However, intermittent hurdles cannot be ruled out. On valuation parameters, MSat currently trades at 8.3x FY2013E consensus earnings estimate whereas relatively comparable companies like Patni Computer and Mphasis trade at 12.8x CY2012E and 7.6x FY2013E consensus earnings estimates.

Patni Computer’s superior valuation has more to do with the anticipation of a higher open offer price than with the fundamentals of the company whereas Mphasis finds it difficult to recover its lost ground owing to a series of lacklustre performance in recent quarters. Among these three mid-tier IT companies, we prefer MSat owing to its better growth visibility with earnings
compounded annual growth rate (CAGR) of 35% over FY2011-13E as compared to negative earnings CAGR of 13% in Patni Computer and flat earnings in Mphasis over the same period. Currently, we do not have any active rating on MSat but we remain positively biased.


>Commercial Engineers & Body Builders Company (CEBBCO): Largest player in outsourced body building fabrication of commercial vehicles (CVs) in India

■ Beneficiary of increasing demand for FBVs: Commercial Engineers & Body Builders Company (CEBBCO) is the largest player in outsourced body building fabrication of commercial vehicles (CVs) in India. The company stands to gain as fleet operators are increasingly in favour buying fully-built vehicles (FBVs), as against the earlier practice of buying a chassis and getting the body built by vendors in the unorganised market. The share of FBVs in total CVs has risen from 12% in FY10 to ~25% in the current fiscal. Our interaction with players in the industry leads us to believe that this would rise further, as in addition to better product quality, fleet operators can obtain complete financing for vehicles through the FBV route.

Organised body-building to spur growth

■ Railway segment to drive incremental growth: CEBBCO recently forayed into wagon manufacturing after a successful entry into the wagon refurbishing market, where it has garnered a market share of 20% over a two-year period. We expect the railways segment to contribute 20% of total revenues by FY14, up from 11% in FY12, post commencement of wagon production at its new plant in Deori, Jabalpur in Mar12. Moreover, given the higher margins in the segment, we expect blended EBITDA margins to improve by 40bps in FY13 and 30bps in FY14 to 13.7% and 14% respectively.

■ Outlook and valuation: CEBBCO’s operating performance post its IPO in late 2010 was adversely impacted as its largest client, Tata Motors’ (TTMT) realigned production to meet new, changed emission norms. However, we consider this an aberration; its fundamentals remain strong, as seen by its 1HFY12 results, wherein it posted a PAT of Rs164mn, against a PAT of Rs57mn for FY11. Going forward, we expect CEBBCO to grow revenues at CAGR of 32.2% over FY12-14, backed by the increased demand for FBVs (spurred by strong demand in the tipper segment) and higher revenues from railways segment. This robust growth in revenues, combined with better EBITDA margins should result in earnings CAGR of 31% over FY12-14. We value the company at a P/E of 10x FY13 EPS of Rs7, given the cyclical nature of the industry and lower entry barriers in the body fabrication business. We initiate coverage on CEBBCO with a Buy rating and a target price of Rs70.

To read the full report: CEBBCO

>JSW STEEL: Feedback from USA NDR (Non deal road show)

JSW Steel was on an NDR (non deal road show) with us last week to the USA. Investors seemed concerned about the outlook for commodities given concerns in Europe and, more importantly, the slowdown in China. For India, concerns are greater given policy inaction and high interest rates. Though the investors generally believe that the valuations are factoring in most of the concerns, they don’t see a trigger for the stocks to perform in the near term.

We highlight some of the key areas of discussion during the meetings.

■ Agree with valuation comfort but not sure the time is right
In general, investors have adopted a wait and watch policy given global growth concerns. While most agreed that stocks have corrected a lot and are now factoring in most of the issues, they are not convinced if it’s the right time to buy. They don’t see any near term triggers as, apart from global issues, Indian stocks have faced internal issues as well, which have little clarity even now.

European crisis a concern but Chinese slowdown a bigger threat for commodities
While the European debt crisis is a concern, investors think the slowdown in China would be a bigger threat for the steel industry. China has large surplus capacity and in general the fear is that it could start dumping excess production (despite at a loss) leading to a collapse in global steel prices. There is little clarity on the extent of Chinese demand slowdown and how it will pan out.

  •  Our house view on China recognises the above concerns and agrees that there is a threat to current production numbers. Our China Steel analyst expects flat production/demand in China going forward. However, we think the threat of cheaper exports would be limited, given raw material prices remain high and our belief that companies would rather go for production cuts than flood overseas markets with cheaper steel; overseas demand is weak anyway and lowering prices won’t lead to higher utilizations.

■ Indian steel sector is in worse shape – policy inaction/lower investments the key reasons
Apart from the global crisis, India as a country is in bad shape with almost all the fields seeing a slowdown in activities/growth. As a result of policy inactiveness and high interest rates, investments have been impacted. This has resulted in slower steel demand growth. The key
question is how companies see the demand outlook? If the same scenario continues India could turn into a steel surplus country, and along with a global surplus scenario, this could lead to a fall in capacity utilizations. Therefore Indian companies might see both margin pressure and lower volumes.

  •  Our view: While we agree that Indian steel demand has remained weak, we believe even the supply side has been weak with delay in SAIL (SAIL IN, BUY) expansion and even ESSAR Steel (Not listed) has been slow in the ramp up of production. Therefore we see limited steel capacity addition for the next 12-18 months. Even if Indian steel demand grows 5-6% YoY, India would remain a marginal importer of steel. We don’t believe overcapacity is a concern in India and hence don’t see volume pressure for Indian companies.

 Depreciating INR – has saved P&L of Indian steel companies, but what about balance sheet
Depreciating INR has helped Indian companies as domestic steel prices haven’t corrected much despite fall in global steel prices. However all the major companies have foreign currency debt and would see cash flow pressure. How would this affect the balance sheet stretch and cash outflows if any in next 6-12 months time?

  • Our view: We agree that the depreciating INR would have a negative impact on the balance sheet of the companies. However most of the companies have hedged the foreign currency loans and the problem is with the convertible loans which are not hedged and given current stock prices, these are unlikely to be converted. However, companies don’t have very significant FCCB and hence it shouldn’t be a major concern – though is certainly a negative.

 Government regulation over land acquisition/iron ore bans – when is clarity likely
Land acquisition and illegal iron ore mining have been two key issues affecting expansion plans in India. With new mining act even royalty would be doubled. Investor concern is that what other government intervention is likely and how would it affect the industry. Will doubling the royalty in the mining bill help the industry in any way (through better land acquisition policy)?

  •  Our view: While we agree that government policy has created an uncertain environment and there are no near term solutions to these issues, the stocks have been sufficiently penalized and we believe stock prices are discounting expansions (despite spending a significant sum on capex) altogether.

■ JSW Steel: is there an alternate to Karnataka iron ore?
Investors agree that while there is strong likelihood of Karnataka iron ore situation improving, they asked the company if it has any alternate strategy in place in case there is no solution in the next six months.

  • Company view: JSW Steel mentioned that if Karnataka ore is not available they can’t run the plant in the long run. Imported iron ore would not make sense as costs would be too high, while getting iron ore from Orissa is not likely due to high freight and logistics issues.

Some key points highlighted by the company during the road show:
■ Enough iron ore to run the plant at 80-85% utilization
JSW Steel has maintained its guidance of 7.5mtpa production in FY12 and has enough iron ore visibility to run the plant at 80% utilization for next six months. They expect some mines to start production in next 2-3 months time (they expect some decision by January 2012 and post that mines will gradually start production) and major production to start in six months’ time.

■ Expansion to slow: Bengal project delayed
The company has said that while 2mtpa expansion at Vijaynagar will continue (though at a slower pace), the Bengal project has been postponed by a year. They expect some clarity on the start of the project by next year (FY13).

■ Debt to remain high on working capital increase and FCCB payment
The company has indicated that working capital would increase due to iron ore price increase. At the same time there is FCCB payment of US$ 380mn in July 2012 which would be financed through new debt.Therefore debt should remain at higher levels.



Issue of tax-free secured redeemable non-convertible bonds in the nature of debentures

  • Issue period: Friday, December 30, 2011 to Monday, January 16, 2012
  • Basis of allotment: On a first-come-first-serve basis within each category
  • Issue size: Rs1,000 crore with an option to retain an oversubscription up to the shelf limit of Rs4,033.13 crore)

Interest rates are at peak level; best time to invest in fixed income tax free instruments.

■ Interest rate cycle has peaked out
Given the sharp slowdown in the industrial activity and softening of the food inflation, the interest rate cycle has peaked out. Reserve Bank of India has restrained from increasing the interest rates in the last policy review meet and is expected to begin reducing rates in March or April 2012. The bond yields which have increased close to 9% levels have corrected significantly and show easing of pressure on rates.

■ High post tax yield for triple A rated product
Tax free bond with yield of 8.2-8.3% is comparable with yields offered on government bonds and offer extremely attractive pre-tax yield close to 12% for a long period of time. The bond issue has got AAA (stable) rating from the rating agencies -- Crisil and CARE. The bonds would also be listed and tradable on NSE/BSE.

About Power Finance Corporation:
  • Power Finance Corporation-A Navratna Government of India undertaking (GoI; 73.72% equity stake held by GoI)
  • Set up in July 1986 as a specialised financial institution dedicated to power sector financing and committed to the integrated development of the power and associated sectors
  • Classified as infrastructure finance company in July 2010 by the Reserve Bank of India and as a public financial institution u/s 4A of the Companies Act ,1956

To see term sheet: PFC

Thursday, December 29, 2011

>INDIA CEMENTS LIMITED (ICL): International coal prices soften (Coal spot Richard Bays index)

Prices, volumes, costs better than expected
  • Cement volumes could impress due to a lower base
  • Prices unexpectedly stable down south despite rains
  • Revised FY12 EPS up by 12%, FY13 by 7%
  • Raised target price by 13% on rollover to FY13: Maintain Buy

Valuation: At its CMP,the stock offers strong value. On FY13 estimates, ICL trades at an attractive EV/tonne of US$63, a 45% discount to replacement cost. After rolling over valuations to FY13, at a conservative 30% discount to replacement cost, we up our target price by 13% to Rs 106 - a 51% upside from current levels. Reiterate BUY

To read the full report: ICL

>VOLTAS: cost overrun on Qatar project could surprise on negative side

We met the management of Voltas. The outlook for new orders continues to be weak. The cost overrun on Qatar project could surprise on negative side. UCP margin to be under pressure due to competitive pressure and low volumes. Maintain REDUCE.

 MEP segment pain to continue: The outlook on domestic orders continues to be grim as enquires levels have dropped since Q2 and the drop is across sector. The management does not expect the outlook to improve for the next 2 quarters as far as domestic MEP is concerned. On international front the order pipe line continues to be limited as few only few countries s like Abu Dhabi , Saudi and Qatar are the awarding leading to very high competitive intensity in those markets driving down the margin profile of orders to 3-4%.

The cost overrun in the Qatar project continues to be ahead of estimate due to change in scope of project and shirked timeline of the project. We believe cost over run on this project will continues to spring negative surprise and impact the earnings for the next 3 quarters as well. Apart from lack of advance due to weak
order flows ,the shirked timelines for the Qatar project have put sever stress on the balance sheet (NWC days increased to 45days in H1FY12 from 26days in H1Fy11)and the working capital cycle is likely to deteriorate further Qatar project gets closed over the next 3 quarters.

 UCP volumes continue to be weak: The company highlighted that volume continue to be weak even during Diwali season. The AC market has dropped -25- 28%YTD in FY12 resulting in inventory pile up in the industry. We believe inventory pile up will lead to discount by players, heightened competition (specially from Japanese players) and deprecating rupee will lead to pressure on margin over the next few quarter till volumes pick up.

To read the full report: VOLTAS

>CABLE & SATELLITE INDUSTRY: Dish TV, Hathway Cable & Datacom & Den Networks

India's C&;S market on the cusp of high growth phase
The Indian Cable & Satellite(C&S) industry, the third largest in the world, with 136mn C&S homes is all set for a revolution as the long-expected 'digitisation' becomes a reality. Currently there are 41mn DTH homes and 6mn Digital cable homes (35% penetration in C&S homes). Going forward digital subscriber base is expected to rise from 47mn to 83mn by 2015, increasing at 21%CAGR (2012E-2015E). An industry of Rs270bn will no longer operate under obsolete analog distribution business post digitisation. The long standing local cable operator (LCO) 'underreporting' issue will get resolved with the gradual roll out of digitisation as per the sunset clause. Aggressive marketing and promotional offers by DTH players adds to the growth factor of the industry.

Imminent Digitisation set to double digital subscriber base
C&S industry is set to expand to 166mn with 64mn DTH and 20mn digital cable gross subscribers by 2015E. Aggressive subscriber acquisitions by the well funded six DTH players have kept the digitisation momentum alive. Now with compulsory digitisation MSOs and LCOs are left with 'no choice' in the face of increasing threat from DTH. We believe with Government-mandated digitisation, the well funded national MSOs and DTH players are all set to capture the opportunity.

Industry on the threshold of profitability
Currently the C&S industry is largely run under the outdated analog mode of distribution which has resulted in a highly fragmented value chain and allowed last mile operator to corner ~80% of the subscription revenue. With compulsory digitisation, economic retention will be the crucial driver in value creation. Curbing of revenue leakages will be the main growth factor for C&S industry to register 10% CAGR over 2012E-15E. Out of which we expect 47% CAGR in digital cable revenue over 2012E-15E.Digital cable players will benefit with increased portion of retained gains of compulsory declaration, which would drive a 3x rise in revenues. DTH subscription revenue is estimated to show 22% CAGR during 2012E-15E. Digitisation is bound to reduce the incidence of under-reporting - the bane of the Indian C&S industry. High operating leverage business model will be the key driver for organised cable players and DTH operators in magnifying their operating margins. We see major players in DTH segment and organized MSOs to breakeven by 2013.

Hathway Cable & Datacom- all set to ride the digitisation wave
Hathway, the MSO with largest paying subscriber base of 1.8mn, is all set to be the major beneficiary from compulsory digitisation. We expect a turnaround in the business with strong traction in its profitability post Phase I and Phase II of the sunset clause of mandatory digitisation. We believe changing business strategy, strong execution capabilities and market leadership in the metros would enable the company to monetise the digitisation opportunity.

We believe Hathway is the best placed MSOs to benefit from the digitisation opportunity. At CMP, the stock is trading at 7.5x EV/EBIDTA FY13E and 5.8x FY14E. With digitisation a reality, sustained leadership in its key markets, improved business dynamics of cable and broadband businesses and clarity in profitability makes Hathway a very attractive play in digitisation space. We initiate coverage on the Company with a ‘BUY’ recommendation on the stock with a target price of Rs151(7.5x EV/EBITDA FY14E). We have valued the stock on average of DCF, EV/Subscribers and EV/EBITDA(taking Comcast and Time Warner as peers).

Dish TV’s dominance to continue...
Dish TV, the pioneer in the DTH industry, continues to maintain its leadership with ~30% market share reaching more than 12mn subscribers led by competitive pricing, strong marketing push and wide distribution network making it the most commendable player in the DTH Industry.

We believe Dish TV is best placed amongst all DTH players to tap the low penetrated DTH opportunity. At CMP, the stock is trading at 9x FY13E EV/EBIDTA FY13E and 6.8x FY14E EV/EBIDTA. With digitisation a reality, sustained leadership in its key markets and clarity in profitability makes Dish TV a very attractive play in the digitisation space. We initiate coverage on the stock with a ‘BUY’ recommendation and a target price of Rs77 (8.4x FY14 EV/EBITDA).We have value the stock on average of DCF, EV/Subscribers and EV/EBITDA (taking Direct TV and Dish Network as peers).

Den Networks- leading cable operator
Den Networks, the only profitable MSO in India, has the largest reach with 11mn subscribers including ~1.4mn paying subscribers, acquired mainly through aggressive secondary point acquisitions. Its strategic acquisitions helped it in garnering better carriage revenue through improved subscriber base. Star-Den, a syndication venture with Star, added to the scale and stability of the business. Den's strong execution capabilities, market leadership in key markets and profitable business model makes it a strong contender to benefit from the digitisation wave.

At CMP, the stock is trading at 5.3x EV/EBIDTA FY13E and 3.7x EV/EBITDA FY14E. We\ initiate coverage on the stock with a ‘BUY’ recommendation and a target price of Rs64 (4.6x EV/EBITDA FY13E).We have valued the stock on average of DCF, EV/Subscribers and EV/EBITDA (taking Comcast and Time Warner as peers).

Cable Distribution Industry

Changing Dimensions

The Rs270bn Indian cable sector is the third largest in the world after China and US. The number of TV homes in India grew from 120mn in 2007 to ~148mn TV homes currently. C&S homes have witnessed a strong 12% growth in 2011 adding more than 12mn subscribers to reach 136mn (92% penetration of TV homes). Cable reaches 94mn homes with 88mn analog and 6mn digital cable households. DTH has 41mn subscribers reaching 30% of C&S homes. The TV viewing experience has changed a great deal over the last few years with the upcoming broadcasters producing differentiated and niche content like reality shows, food channels and more. The number of channels available has more than doubled to 600 plus channels, offering viewers more choice than they could ask for. Digital technology is fast catching up and gaining wider acceptance amongst viewers who are quality conscious and wish to have a better TV viewing experience.

Profound growth opportunity..
Currently 65% of C&S homes are Analog cable, forming a major chunk of the C&S base, 30% are DTH subscribers and 4% subscribe to Digital cable. Though up to now the growth in Digital cable penetration has been slow, the off take of the mandatory digitisation bill will provide an
opportunity for cable operators to convert the 88mn analog base into digital cable and DTH.
DTH penetrated into urban and rural markets registering a robust 83% CAGR over 2007-2011 to reach 41mn gross subscribers in November, 2011, from a mere 2mn subscribers in 2007.
Latest offerings such as High Definition(HD), Set Top Boxes(STBs) with recording facility,
Movies on demand, interactive learning, gaming and mobile TV are other innovations which
provides digital viewing an edge over analog and has led to an evolution in the TV and broadcasting industry. The 12mn non cable TV homes and 90mn non TV homes highlight the potential for further cable penetration and ample growth opportunity.

Outlook for the Industry
With a strong distribution networks spread across the country, cable and satellite has penetrated to 92% of TV homes to reach 136mn homes in 2011 at 16%CAGR (2007-2011). Total C&S homes are expected to reach 166mn by 2015. Analog cable penetration of C&S homes is expected to decrease from 65% currently to 50% by 2015E. Much of the growth will come from Digital cable which is expected to increase its penetration from 4% in 2011 to 12% by 2015E reaching ~20mn subscribers. Mandatory digitisation will provide a thrust to digital cable to increase its reach. The deep penetrated analog reach will help digital cable operators capture this opportunity much faster. Digital cable subscriber base should witness 31%CAGR over 2012-2015. DTH has been growing fast as the 6 players (excluding DD Direct) are strongly competing to gain market share. Aggressive advertising and attractive promotional offers have led to the DTH industry penetrate 30% into C&S homes. The DTH subscriber base is expected to grow from 41mn in 2011 to 64mn by 2015 at 15% CAGR(2012-15). With digital cable we will also see a ramp up in broadband subscription reaching 3mnsubscribers by 2015E. Broadband subscriber base will grow considerably led by bundledoffering of digital cable with broadband.


>HAWKINS COOKER LIMITED: Peer Group Comparison - Varun Industries, TTK Prestige & La Opala RG

■ Q2 FY12 Results Update
Hawkins Cookers Ltd disclosed results for the quarter ended Sep 2011. Net sales for the quarter increased by 15% to Rs.985.40 million as compared to Rs.854.34 million during the corresponding quarter last year. During the quarter, the company has reported Net Profit increased to Rs.93.27million from Rs.80.39 million in previous year same quarter. The Basic EPS of the company stood at Rs.17.64 for the quarter ended Sep 2011.

■ Break up of Expenditure
Expenditure for the quarter stood at Rs.843.97mn, which is around 15% higher than the corresponding period of the previous year. Consumption of Raw Material cost of the company for the quarter accounts for 34% of the sales of the company and stood at Rs.335.15mn from Rs.278.81mn of the corresponding period of the previous year. Purchase of Traded Goods cost increased 83%YoY to Rs.102.85mn from Rs.56.13mn and accounts for 10% of the revenue of the company for the quarter.

 Board recommends Dividend
Hawkins Cookers Ltd has recommended a dividend of Rs. 40 per equity share of paid-up and face value of Rs. 10 each, which if approved, shall amount to Rs.2115.1 lakhs.


>HINDUSTAN UNILEVER LIMITED: Premiumisation in urban and rural penetration are two biggest opportunities

 Strong Portfolio of Brands covering the entire consumer pyramid: HUL is well placed to maximize on the opportunity in a growing market like india with the help of its sustained brand power. The company has increased sharp focus on the needs of its consumers and has build a solid distribution network to support it.

 Premiumisation in urban and rural penetration are two biggest opportunities in india that will propel HUL’s future sales growth. While 60% of the market is still at the bottom-of-the-pyramid, premiumisation is the most prominent trend across categories of foods and personal care.

■ Expansion of Outlets with improved visibility and availablity of its products. HUL increased its direct retail coverage by adding 600000 outlets and improved the visibility of its products through opening up of ‘Perfect Stores’. Increasing Innovation in the product line is the ‘mantra’ for growth in HUL

■ Almost 35% of its turnover in FY11 has come though innovation. HUL focuses on consumer insight and use of breakthrough technology to deliver better and bigger innovations to the consumers. For Eg. Dove shampoo in superior packaging, Brooke Bond Sehatmand delivering vitamins in tea , Project Shakti &; Shaktiman etc.

At the CMP of INR419, the stock is currently trading at a P/E of 39.7x. It discounts its FY12E EPS of Rs.11.64 by 36x and its FY13E EPS of Rs 13.9 by 30x. We value the stock at a target P/E multiple of 36x based on its FY13E EPS to arrive at the Target price of INR500.