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

>STERLITE INDUSTRIES: News flow should improve – valuations at deep discount, reaffirm Buy

Power ramp-up a key catalyst

Action: Overly pessimistic valuation; attractive opportunity
Sterlite Industries has corrected by 40% over the past 12 months (Sensex:-26%), reflecting continuous negative news flow and concerns over a deteriorating macro environment. We believe the current stock price is building in a USD1,600/t zinc price (current: USD1,860/t), assigning no
value to the power and aluminium business, and ignoring loans to group companies. Although its 64.9% stake in Hindustan Zinc (HZ) contributes 50-55% of earnings, Sterlite has underperformed HZ by 28% over the past 12 months.

Catalysts: Improving power business and news flow
Improving utilization of power plants should be a key catalyst along with resilient earnings, we believe. Any news flow on a stake sale by the government in HZ and Balco should also be positive.

Valuation: Target price cut to INR169; reiterate Buy
We value Sterlite Industries on a sum-of-the-parts basis at INR169/share. We have cut our target price to incorporate expected lower zinc prices and higher coal costs. The stock is trading at 5.6x FY13F EPS of INR18.7 and 3.4x FY13F EV/EBITDA. The stock is trading at a FY12F P/B of 0.8x,
despite an ROE close to 14% even on our conservative estimates. We believe these are attractive valuations and reaffirm our Buy rating.

Sterlite Energy (SEL) has shown PLF improving to 60% over the past two months from near 30% in March 2011. Although coal costs have risen, we believe SEL has performed much better than expected. With a third unit of 600MW under commissioning, we expect SEL to see better performance.

To read full report: STERLITE INDUSTRIES

>CAIRN INDIA : Upgrade to reduce (Sri Lanka subsidiary notification on gas discovery)

Key takeaways from Cairn conference call on Sri Lanka gas discovery:

  • Cairn Lanka Pvt Ltd. (CLPL), a wholly-owned subsidiary notified a gas discovery in CLPL Dorado - 91h/1z well located in the SL-2007-01-00 block in Mannar basin. The well is first of three well exploration programs. Remaining two wells will be drilled by end of CY11.

  • This is the first hydrocarbon discovery in Sri Lanka. Well was drilled in 1,354m water depth. A 25m hydrocarbon column in the sandstone at depth 3,043-3,068m was found from drilling test results.

To read the full report: CAIRN INDIA