Thursday, October 11, 2012

>Manmohan’s Tryst With Reforms

PM redeems his pledge to revive animal spirits, not wholly or in full measure, but very substantially

Slowing revenue growth but rebound in EBITDA and net profit growth: Revenue growth of Nifty companies is expected to fall to a ten-quarter low of just 13.4% YoY (the previous time it had fallen lower than this was in Q3FY10 at 9.9%). Revenues excluding Oil & Gas are expected to fall at 10.5%, again a ten-quarter low. EBITDA growth, on the other hand, is expected to bounce back strongly by 12.4% YoY (excluding Oil & Gas by 14.5% YoY). Similarly, PAT growth will bounce back by 16.4% YoY (excluding Oil & Gas by 16.4% YoY). Moderation in input price inflation on a YoY basis and strengthening of rupee leading to near-absence of foreign exchange losses has been responsible for this uptick in net profit growth. Revenue and PAT growth for all the companies under PL’s coverage universe are expected to grow YoY by 12.4% and 2.9%, respectively and de-grow QoQ by 0.1% and 7.5%, respectively. EBITDA margin (excluding BFSI) is expected to decline YoY by 1.01% and 0.08% QoQ. Corporate India continues to encounter headwinds in the form of slowing demand due to uncertainty in macro-environment and high interest rates.

Strong performance from Cement, Pharmaceutical and Banking & Financial Services sectors: Strong growth in realizations offsetting a tepid volume growth, observance of strict discipline by various players in the sector helping to maintain prices, healthy balance sheets and lower leverage levels due to strong cash flow generation will lead to a stellar performance by cement companies. Strong growth in the US, better operational performance and boost provided to net profits due to expected forex gains on hedges & foreign loans due to favorable currency movements will underpin pharmaceutical sector’s earnings. It is a story of contrasting halves in the Banking & Financial sector. Private Banks and NBFCs would report strong operating performance helped by easing of wholesale rates and retail asset quality holding up well. PSU Banks, on the contrary, will be impacted by muted loan growth and continuing pressure on slippages in bad & restructured asset book. Banks with overseas exposure could see contraction in their international book due to 5% rupee appreciation during the quarter.

Metals, Power, Construction and Real Estate continue to be laggards: Deteriorating global demand environment raising downside risks to spreads, weak domestic demand and excess supply in the domestic market will put pressure on earnings in metals sector. Power sector will continue to reel under increased fuel and interest costs causing delays in execution. Rising debt levels would continue to strain balance sheets and raise questions on viability of some power projects. No significant pick-up in order inflows, earnings impacted due to large interest burden as a result of high debt levels and no improvement in working capital cycle will put pressure on construction sector. Challenging macro-economic environment with no respite from high interest rates and no significant drop in prices impacting buyer affordability will continue to impact the performance of the real estate sector.

To read report in detail: INDIA STRATEGY


  • Overall
  • Government
  • Household
  • Financial 
  • Non financial 

To see presentation:  WORLD DEBT GUIDE

>GRASIM INDUSTRIES: Global fiber consumption in a new mega-trend

Grasim’s growth profile to witness a marked change, led by VSF business We expect Grasim’s VSF business to drastically alter Grasim’s growth profile. Unlike its past performance, which was largely dominated by the cement business, we expect its VSF business to meaningfully contribute to earnings, going ahead. Grasim’s standalone VSF revenues grew at tepid pace of 9.6% CAGR over FY08-12 on the back of severe capacity constraints restricting volume growth to 3.6% CAGR. However, with Grasim’s VSF capacity expansion (~50% of current capacity) nearing completion, we see its standalone financials witnessing a dramatic shift in growth profile.

Global fiber consumption in a new mega-trend- 9% CAGR in VSF demand Over the last decade, global fiber demand has grown at a 4% CAGR, higher than the 3% CAGR registered in the decade earlier. During 1990-2000 period, synthetic fibre manufacturers, on the back of lower crude oil prices and significant spare capacity, reduced prices and gained market share. Consequently, synthetic fibres registered demand CAGR of 7% over 1990-2000 while MMCF and cotton saw negative growth. However, global fiber consumption over the last decade has undergone a dramatic change with a shift in favour of Man Made Cellulosic fibers (MMCF) like viscose (VSF) driven by 1) rising demand for cellulosic fiber and 2) stagnant cotton production failing to meet incremental cellulosic fiber demand. This is evident from the 6.8% growth in VSF
demand (VSF+Filament+Tow) over the last decade. In fact, over the last 5 years, this shifting trend in favour of MMCF has gained further pace with VSF demand registering a steeper 9% CAGR over CY06-11, clearly outpacing growth in cotton (CAGR of 0.3%) and significantly higher than the 4.9% CAGR in synthetic fibers.

VSF demand outlook remains optimistic –Expect 8% CAGR over 2010-15E Though global fibre demand is expected to witness slower growth over medium term as compared to last decade, the fact that resource constraints will continue to hamper cotton production (cotton is estimated to grow at a CAGR of ~1.5% over 2010-15) means that even a 3% CAGR for global fiber demand over 2010-15, (as compared to CAGR of 4% in 2001-2010) could result in an 8% CAGR for VSF demand.

To read report in detail: GRASIM INDUSTRIES

>MADRAS CEMENT: Completion of Capacity Expansion from 10.49 MTPA to 12.49 MTPA

Strong Growth delivered in FY12 & Encouraging Return Ratios. The company has registered a strong financial growth in FY12. It’s Net sales increased by 24% to INR3278 crore and PAT improved by 82% to INR386 crore. Its EBITDA margin also improved from 24.6% to 29.3%. ROE of the company came at 20.4%. Its total D/E ratio also came down marginally from 1.1 to 1.0. Madras cement’s financial ratios are strong and are very much in line with top cement players like Ultratech Cement, ACC and Ambuja Cement.

Completion of Capacity Expansion from 10.49 MTPA to 12.49 MTPA to add to Topline once the demand improves: Madras Cements has completed the capacity expansion of its cement plant of 2MTPA (million Tonnes Per Annum) capacity at its Ariyalur plant in Tamil Nadu to increase the total capacity from 10.49 MTPA to 12.49 MTPA. This capacity expansion will help in increasing its topline and meeting the demand which is expected to improve after the monsoon departure and government’s thrust on infrastructure revival. Also the company is expected to add another 45MW of captive power taking its total captive power capacity to 157 MW which will further reduce its power cost.

Pick up in Cement prices by INR25-30 per bag after the monsoon season: Cement prices in the Andhra Pradesh market have started to pick up after the correction witnessed in the earlier 3 months time. Prices of cement have gone up by INR25-30 per bag of 50 kg in AP in October after hovering around a level of INR230-240 per bag. Cement companies, which have been going through a bad patch, see not just a recovery of prices, but growth with demand increasing, as the monsoon season is just over and construction movement is showing signs of improvement.

To read report in detail: MADRAS CEMENT

>SANOFI INDIA: Acquisition of UMPL business

Sustainable growth
Sanofi India (SIL) is a leading MNC pharma company with strong product portfolio in the domestic market. Five of its ten major brands are growing faster than the market and are likely to drive future growth. Three of the company’s major brands contribute 23% of total revenues. In Nov’11, SIL acquired the generic neutraceutical formulation business of Universal

Medicare Private Limited (UMPL) for Rs5.61bn. Thebacquisition would result in a sustainable growth. SIL is unlikely to get majorly impacted by National Pharmaceutical Pricing Policy (NPPP). We initiate coverage on the company with a Buy rating and target price of Rs2,729 based on 24x CY14 earnings.

Strong product portfolio: As per IMS-MAT June’12 data, ten of the company’s brands appear in the list of top 300 products. The top 10 brands contribute ~51% of its revenues. We expect these brands to drive the future growth.

Acquisition of UMPL business: In Nov’11, the company acquired 40 neutraceutical brands of UMPL for Rs5.61bn. These brands had sales of Rs1.1bn in FY11. The acquisition was made at 5.1x of their revenues. With this acquisition, SIL has entered into the OTC segment. We expect these brands to deliver higher growth from the marketing thrust from SIL.

No major threat from NPPP: Currently, four major products of SIL are under price control. Under the NPPP provisions Amaryl M and Clexane would be under price control. However, if the combinations with NLEM drugs are excluded, Combiflam and Amaryl M would be outside the purview of price control.

Debt-free cash rich company: SIL continues to be a debt-free company even after the Rs5.61bn acquisition of UMPL business in Nov’11. The company had cash of Rs2.34bn (Rs102 per share) as on 31st December’11. We expect SIL to continue the debt-free status due to the descent cash flow from operations.
Initiate coverage with a Buy rating: We expect SIL to report 18% CAGR in revenues and 19% CAGR in net profit over next 3 years from the strong growth of its brands in niche therapeutic segments and acquisition of UMPL business. At the CMP of Rs2235, the stock trades at 25.3x CY12E EPS of Rs88.3 and 19.7x CY13E EPS of Rs113.7. We initiate coverage on the company with Buy rating and target price of Rs2,729 (based on 24x CY13E EPS of Rs113.7) with a 22.1% upside over next 12 months.

Wednesday, September 19, 2012

>Adding to Cyclicals as Market Heads for Life High in 2013

Quick Comment – Cyclicals look cheap relative to defensives: We have already pointed out in our August 13 note Cyclicals Approaching Ultra Cheap Territory that cyclicals look ultra cheap relative to defensives (Exhibit 1). The decisive policy action at home (reduction in subsidies and opening up of FDI) and, more crucially, concerted action by European and US central banks have reduced India’s tail risk linked to poor macro stability (twin deficit). Our preference for quality cyclicals is already expressed in our Focus List. We now put money to work on cyclicals in our sector model portfolio (Exhibit 2). Accordingly, we go underweight consumer staples and raise energy and materials to overweight, as well as taking industrials to neutral. We are also trimming technology by 100 bps. Consequently, our average sector position has expanded, and we see this as our emerging strategy, as the average correlations of stocks to the market appear to be falling and no longer merits extreme focus on stock picking.

25% upside to Sensex to Dec-13: We are expecting Sensex earnings growth at 10% and 19% in F2013 and F2014. Significantly, broad market earnings may have troughed or could trough in the current quarter. We have seen M1 growth put in a firm base in and revenue growth should slowly accelerate in the coming months. Margins could rise in the coming months with a favorable base effect driven by the relative movement in the current and fiscal deficit. Interest rates are already down YoY, and that should stem the steep rise witnessed in interest costs in the previous 12 months. The risk to earnings is that the investment rate collapses, although recent signals suggest that the public sector is starting to spend money. We roll our market target to Dec-13. Our target of 23,069 implies that the market will be trading at 14.9x our F2014e Sensex earnings in Dec-13 (Exhibit 5).

New bull market? Conditions for a new bull market are getting slowly satisfied. The yield curve has stopped supportive and profit margin expansion is a growing possibility in the coming months. The market is likely to form a new base with positive developments on domestic policy. Key risks are that commodity prices rise quickly, bringing inflation pressures to the fore, and/or global risk appetite wanes as global policy makers slip into another cycle of complacency. Mid-term polls are also a possibility, but we do not necessarily see that as a downside risk to equities. flattening, liquidity is improving, valuations appear

To read report in detail: INDIA STRATEGY

>FDI in retail aviation and broadcasting are probably the biggest and toughest reform initiatives that the UPA Government

Shrugging off its image of being in a state of ‘policy paralysis’, Government of India unleashed a blitz of reforms late last week, including diesel price hike and opening up FDI in several key sectors. Though many will argue that these measures will have limited impact, we believe that 51% FDI in multi-brand retail and 49% in airlines are probably the biggest and toughest reform initiatives that the UPA Government has taken in its tenure of eight years. We believe that it will have significantly positive implications for the economy and the market.

FDI in retail (51%), aviation (49%) and broadcasting (74%)
FDI will bring much needed funding options for domestic players. We see Pantaloon, being the largest player, a key beneficiary of FDI in retail as it will strengthen its back end operations and inventory management, which in our view has been one of the most challenging areas for the company. We believe increased FDI is very positive for the broadcasting industry. With nearly 90m households and top five players having market share of 50%, the market is fragmented. FDI, coupled with digitalization, will lead to consolidation, benefiting larger players. We remain positive on both cable and DTH. Our top picks are Hathway and Dish. On the other hand, Spicejet is among the biggest beneficiaries of FDI in civil aviation due to significant market share (~18%) and relatively better balance sheet.

Rate cut hopes: Not unfounded
With falling GDP growth and dwindling capex cycle, need for sustained rate cuts is more
than ever before. We believe that the Government has initiated small yet meaningful steps,
such as diesel price hike and divestments of certain PSUs, to bring down cost of capital. We
believe that banks, particularly PSU banks, will be key beneficiaries of rate cuts, as it will
arrest formation of NPAs in the system. SBI is our top pick among banks. Lower rates,
coupled with PM’s concerted efforts to revive infrastructure investments, will also boost growth
outlook for large infra-plays. We like L&T and IRB Infrastructure in this space. We
believe that stocks like Maruti (demand outlook may improve, lower import bill) and PFC
(Wholesale funded NBFCs key gainers of rate cuts) will also see significant re- rating, following
rate cuts.

Re unlikely to fall further; Can appreciate buoyed by inflows
FII investment in India has already crossed US$10b, YTD. Historically, strong reform initiatives
by government have led to improved foreign capital inflow. We believe that appreciation of
INR vs. US$ will significantly benefit a host of companies, exposed to imports. This will also
help curtail oil import bill, thereby further helping fiscal situation. We like JSW energy,
which operates 2.6GW of power plant, and meets its coal requirement through imports. JSW
Energy will benefit from appreciating INR, apart from falling international coal prices.

To read report in detail: FDI

>INDUS IND BANK: Suzuki two-wheelers and IndusInd bank tie up for retail finance; IndusInd Bank launches Indus Forex Card & Opens its first Currency Chest

Latest Updates
• Net Profit was Rs.2362.60 mn as against Rs. 1801.80 mn in the corresponding quarter of the previous year up by 31%.
• Total deposits as on June 30, 2012 were at Rs. 450758.60 mn as compared to Rs. 352640.60 crore in the corresponding quarter of the previous year, up by 28%.
• CASA for Q1 FY13 stood at 27.86% as against 28.20% in Q1 FY12. CASA showed an increase of 26% in absolute numbers on Y-O-Y basis.
• Bank’s Capital Adequacy Ratio registered at 13.42% as on 30.06.12.
• IndusInd Bank Ltd increased network to 421 Branches, and 735 ATMs as against 326 Branches and 633 ATMs as on June 30, 2011.

• Suzuki two-wheelers and IndusInd bank tie up for retail finance
Suzuki Motorcycle India Pvt. Ltd. (SMIPL), a subsidiary of one of the world’s leading two-wheeler manufacturers Suzuki Motor Corporation, Japan, entered into a preferred tie-up with IndusInd Bank to extend retail finance to Suzuki two-wheeler customers across all 250 SMIPL dealerships. The preferred tie up will provide Suzuki customers an easy retail finance option.

• IndusInd Bank launches Indus Forex Card
IndusInd Bank launches foreign currency pre-paid travel card – the Indus Forex card that is designed to offer travelers all the convenience and a secure way of carrying foreign currency abroad. The Indus Forex card comes with an array of exciting features which have been tailor-made to ensure utmost comfort and convenience to the customers. It is available in 6 leading currencies - US Dollar, Euro, Sterling Pound, Singapore Dollar, Australian Dollar and Saudi Riyal. These cards can be used to withdraw cash from ATMs as well as to pay at Merchant Outlets. Customers can track spends or check the balance of Indus Forex card
through multiple convenient options. IndusInd Bank has partnered with ElectraCard Services (ECS), a leading provider of software solutions for electronic payment systems to launch the Forex card program.

IndusInd Bank opens its first Currency Chest
IndusInd Bank opened its first Currency Chest in Mumbai at the Bank’s Thane Branch. The Currency Chest has been setup with most modern, state-of-the-art machines available today in note counting, sorting and counterfeit detection. Also, it is strategically located to provide easy access to our clients and branches lined across both Western and Eastern Express Highways as also other areas around Mumbai. The Bank’s second Currency Chest is coming up at New Delhi and would be made operational by the end of this financial year.

To read report in detail: INDUSIND BANK


In order to delve into the reasons for the resilient growth witnessed by the highly penetrated laundry and soaps category and assess its future prospects, we conducted an extensive survey covering the entire supply chain. We did a 360 degree survey, wherein we met/spoke to sales
managers and distributors of soaps and detergent companies across regions. This was also done with the intention of demystifying the inconsistency between research firm’s estimation for market growth and that reported by leading companies.

■ Volume growth remains resilient in branded S&D category but value growth to moderate owing to cap on further price hikes and base effect kicking in. Growth could normalize to 16-17% in laundry category and 10-12% in soaps category

 Branded players’ gained share at the expense of small/fringe regional players. Significant presence of regional players still exists (players with strong brand recall), but any incremental
share gain would be at higher associated costs

■ Southern and Eastern India have received sufficient rainfall, thereby dealers/sales managers from South and East were fairly confident of limited impact of deficient monsoon. Whereas, North and West were unable to guess the course of growth

 Laundry: New product launches will drive higher ad spends. Renewed vigor witnessed in Tide naturals. However, not much change witnessed in market share differential between HUL and P&G. Also, Ghadi detergents have deepened their penetration in Maharashtra

 Soaps: Lux and Rexona are witnessing de-growth and losing out to Santoor and Godrej No.1. HUL plans to refocus on Rexona and Lux - initiate trade promotions. Godrej Consumer reactivated Cinthol portfolio and also launched rosewater and almond variant in Godrej No. 1 soap

 On a positive note, soaps and laundry category is not witnessing downtrading like personal product category n Positive in S&D category is offset by negatives brewing in PP category - earning upgrades for companies like HUL and GCPL unlikely

 We might have underestimated the consumer buoyancy (or bit early) as consumer demand continues to be robust – until August 2012. We intend to repeat this exercise in October
(around festive season)

 Until then, retain negative bias as valuations do not offer comfort and earnings upgrades unlikely. We maintain HOLD rating on HUL and GCPL with price targets of Rs415/Share and
Rs580/Share respectively

To read report in detail: SOAPS & DETERGENT SECTOR

>MAHINDRA SATYAM: Large deal wins at Tech Mahindra (Contracted revenue from the captive acquisition)

With increasing participation in the US, traction continues to improve for Mahindra Satyam (M Sat). Further, we understand that M Sat’s internal margin thresholds for new deals are higher now, indicating a high focus on profitability. Tech Mahindra, on the other hand, is benefiting from many large deal wins. Moreover, while the perception is that of Tech Mahindra having ‘bought revenue’, our analysis shows that the company’s cash generation has been on par with larger vendors. Even its recent acquisition of a captive is cheaper than other captive acquisitions over the past two years. Consequently, we continue to be positive on M Sat/Tech

Incremental positives at M Sat: Our channel checks indicate that M Sat’s internal margin thresholds for new deals have increased in the recent past. This, along with steady renewals and increasing participation in US-related deals, gives us comfort over sustainability of margins and revenue growth.

Tech Mahindra has not ‘bought revenue’: Tech Mahindra’s large deal wins have been strong over the past year. Moreover, our analysis shows that in deals where Tech Mahindra had paid upfront, its cash generation has been on par with larger vendors. Further, for its recent
acquisition of a captive, implied valuations were cheaper than other captive acquisitions over the past two years.

Cheap valuations: We believe stable renewals, improving traction in the US, and margin levers will continue to result in robust Ebitda growth for M Sat. Tech Mahindra is benefiting from an improving market for telecom IT services and a buoyant and large deal pipeline. Almost all uncertainties related to M Sat’s legal liabilities have been addressed. Valuations of the combined entity continue to be cheaper than even some of the mid-tier IT companies at ~11x FY13ii PER. We are increasing our target price to Rs122. Re-iterate BUY.

Large deal wins at Tech Mahindra:
Tech Mahindra is benefiting from an improving demand for telecom related IT services and a robust large deal pipeline. Our channel checks indicate that Tech Mahindra has won two large deals in the past two months. This is in addition to the ~US$845m of contracted
revenue from the captive acquisition.

To read report in detail: MAHINDRA SATYAM


>Tech Mahindra acquires 51% stake in Comviva (JM Financial)

Comviva to strengthen mobile VAS offerings

Tech Mahindra acquires 51% stake in Comviva: Tech Mahindra has announced the acquisition of 51% stake in Comviva Technologies for a total consideration of `2,600mn. This includes upfront payment of `1,250mn and deferred payment of `1,350mn over a period of 5 years based on performance targets. Comviva had FY12 revenues of US$70mn with mid-teen
EBITDA margins. The transaction values Comviva at 1.3x FY12 EV/Sales and 8.6x FY12 EV/EBITDA assuming 15% EBITDA margins. Management expects the deal to be EPS accretive for Tech Mahindra. As per our calculation, the transaction adds c.1.5-2% to FY14 EPS.

Strategic intent of the acquisition: Comviva provides solutions in mobile data, integrated messaging, mobile payments etc. Acquisition of Comviva is in-line with TechM’s strategy of (a) investing in emerging areas such as Network, Mobility, Analytics, Cloud and Security, and (b) focusing on nonlinear growth. TechM already has presence in mobility solutions through its
subsidiary CanvasM, which contributes c.2% to total revenues currently. Comviva acquisition should further strengthen TechM’s VAS offerings particularly in the field of VAS infrastructure management and Mobile payment and platforms. The acquisition will also enable TechM to cross-sell Comviva’s offerings to its telecom clients.

Other details: The acquisition will add c.1,500 employees to TechM. Airtel is the largest client of Comviva and top-10 clients contribute c.85% to total revenues. Comviva derives c.30% revenues from VAS managed services and c.70% from platform-based solutions. Post deal closure, TechM will own 51% stake in the company, Bharti group 20%, PE firms 9% and employees the balance. Comviva had cash and cash equivalents of c.`320mn at end-Jun’12.
Maintain BUY rating with target price of `1,260 based on 12x 1 year forward P/E.


Saturday, September 15, 2012

>10 grams of GOLD price history for the last 86 years


>FY 12 - Z SCORE ANALYSIS - The story so far

What is Z score?
Z score is a financial model developed by Dr. Altman to represent the probability of a company entering bankruptcy within the next two years. It is the sum of five financial ratios each multiplied by a predetermined weight. The Z score formula is:

To read report in detail: Z SCORE ANALYSIS

>INDIA STRATEGY: Peak of NPA cycle still not behind us

We revisit our banking theme “Slippage not the only thing, new risks are emerging, May 2012” to assess the endurance of the rising NPA cycle and conclude that structural (and also cyclical) factors that sustained decline in NPA ratio during 1994-2008 are now receding, leading way for longer and structurally higher GNPA ratios. Inclusive of GNPAs and restructured asset, the stressed assets for the banking system have risen to 9% of total lending or equivalent to GNPA ratio seen during early 2000s. We see the ballooning GNPA cycle rooted to an overleveraged banking system and weak macro conditions. Sustenance of higher elasticity of GNPA/Credit
growth at 3.4x post 2008 and decline in credit growth in response to credit risk concerns will imply GNPA growth sustaining at 40% implying

GNPA/Advance rising to 4-6.5% in the next two years.
Ballooning NPAs rooted to the lack of countercyclical buffer
In our view, the fulcrum of the current NPA upsurge, steeper than in the late 1990s, can be
attributed to overleveraged banking system reflected in renewed weakening of counter
cyclical buffer which reversed the readjustment for the credit boom during FY04-07
instilled by decline in credit growth during FY08-FY10. The deleveraging process was cut
short by the lagged impact of liberal credit restructuring and fiscal & monetary expansion
in FY10. Phases of overleveraged banking is followed by multi-year moderation in credit
growth and cyclical upsurge in GNPA (FY86-FY89, FY97-FY00, FY008-FY10 and FY12).

Rising NPA also reflect weakening in macro conditions
The linkage of the macro economic conditions to the elevated leveraging in the banking
system is embodied in multiple variables including decline in domestic saving rate (public,
household and private), impairment of productivity growth due to persistently high inflation,
commodity prices & revenue deficit and decline potential GDP growth.

Post 2008 inverse GNPA/Credit elasticity has risen sharply
GNPA/Credit elasticity has risen to 18-year peak with six year rolling elasticity rising to (-)
3.1. As current level of GNPA excludes restructured assets, expected moderation in credit
growth will imply further and substantial rise in GNPA going forward.

To read report in detail: INDIA STRATEGY

>GREED & FEAR: China’s technical signal

The Eurozone newsflow has not deteriorated dramatically as yet even though the holiday
season is formally ending. Still GREED & fear remains suspicious of further substantive equity
market advances from here. Stock markets want to see the ECB buying periphery sovereign
bonds now. But it looks like they will have to wait, with the latest news reports that the ECB will
defer any announcement until after the German Constitutional Court ruling on 12 September.
Still so long as hopes of the ECB bond buying programme are not dashed completely, markets
can remain hopeful which should prevent a significant decline. It is also likely that Eurozone
leaders will cut some slack to the pleas of Greek leader Antonis Samaras for more time in
meeting its fiscal deficit target. Such a development will in turn reduce near term fears of a
Greek exit. In GREED & fear’s view it remains the case that the German political establishment
does not want to risk a Greek exit for fear of opening Pandora’s Box.

To read report in detail: GREED & FEAR

>SESA GOA: Iron ore mining suspended in Goa

Goa government suspends iron ore mining in the state …
The state government of Goa has suspended iron ore mining in Goa, as recommended by the Justice Shah committee constituted earlier to probe the allegations of mining irregularities. Please note that the government has allowed movements of iron ore already produced and stored at ports or in transit.

Little impact on steel production in India – majority of iron ore was exported
Goa produced close to 50mn tonnes of iron ore in FY11, of which 40-45mn tonnes were exported, as per industry sources. Not more than 2-2.5mn tonnes of iron ore produced in Goa are for domestic use (largely
for sponge iron).

Therefore we believe the impact of mining ban in Goa will be different from that in Karnataka, as domestic steel production would be largely unaffected by this. Indeed, seeing the global iron ore scenario we believe the event could help to provide temporary support to global iron ore prices which in turn may help steel prices.

Closure of mines in Goa may be short lived unlike Karnataka
Our interactions with industry sources suggest that iron ore mining suspension in Goa is likely to be short lived and mining should start in the next 1-2 months. The key reasons for the above belief are: 1) mining irregularities reported are not as severe as in Karnataka; and 2) iron ore mining is much more important for Goa compared to Karnataka.

Goa has total GDP of close to USD6.5bn and iron ore exports tend to contribute near 50% of it. At the same time the ban has been imposed by the current government which will be affected more by popular sentiment (which supports mining).

Negative SESA GOA, but no major value impact
In our opinion, the news is certainly negative for SESA GOA, given that the company will not have any operational iron ore mine now under the new directive and its Karnataka mines are yet to restart production. 

The iron ore business, which is close to 15% of total EBITDA and 19% of total profit of the merged SESA Sterlite, will now cease to contribute to earnings.

Since we don’t expect the ban to continue for long and thing are improving in Karnataka, we believe value impact from the above would not be significant. Our interactions with traders in Goa suggest that SESA GOA’s mines would not be involved in any major irregularity and hence we don’t expect any loss of reserves for the company.

The iron ore business contributed INR40/share to our target price of INR220/share (of the merged entity SESA Sterlite).

To read report in detail: SESA GOA


Friday, September 14, 2012

>GREED & FEAR: Front running Mr Flexible

As the August stock market rally has proceeded in ever more desultory trading volumes, so the grinning talking heads appearing on CNBC have become increasingly bold in proclaiming that the Eurozone is finally getting its problems “sorted”. GREED & fear should make it clear that such is not the view here. Rather the base case is for renewed risk aversion heading into the fourth quarter.

The reason for the increasingly upbeat mood is clear and was discussed here at some length two weeks ago (see GREED & fear – The road to euro quanto easing, 9 August 2012). That is that Flexible Mario has set out a road map to quanto easing and Frau Merkel has not immediately disassociated herself from his comments. Still that does not mean that the ECB has already embraced quanto easing or, indeed, has already committed itself to purchase Spanish government debt, a development that might be assumed given the dramatic decline in two-year and 10-year Spanish bond yields in the last four weeks (see Figure 1). For such developments hinge critically on the key Berlin-dictated Eurozone concept of conditionality.

This week has seen the first stirrings of reality as European politicians return from holiday,
including Frau Merkel. Thus, the ECB felt it necessary to issue a statement on Monday denying
a Der Spiegel weekend report that the ECB was considering committing itself to capping yields on targeted purchases of specific Eurozone periphery bonds. While GREED & fear has little doubt that Ever Flexible Mario would love to perform that sort of manoeuvre such an ECB
approach, in GREED & fear’s view, would be anathema to Merkel since it would remove all
incentive on the relevant periphery country to get its affairs in order; be it in terms of meeting
fiscal targets or pursuing structuring reforms. True, Merkel does not seem to agree with the
Bundesbank approach which is to oppose ECB purchases of sovereign bonds on a point of
principle. But she will certainly demand a certain due process. This is also why Spanish pleas
for an open-ended commitment by the ECB to purchase Spanish debt would seem to have no
hope of being met right now, most particularly given the current lack of a market panic.

Indeed renewed market panic is probably required to apply the necessary pressure to give the
Spanish what they want. In the absence of such a panic the focus of policymakers will be on
conditionality and what the Spanish must agree to in return for a ECB commitment to purchase
their sovereign debt at the short end of the curve, which is what Draghi has indicated.

To read article: GREED & FEAR


Debt levels stay high, operating cash flow sparse to service interest
DLF’s net debt increased to ~INR227bn in FY12 as against ~INR214bn in FY11 despite the asset monetization of INR17.74bn. The company’s operating cash flow (estimated at INR15.3bn, ex–land sales) remained insufficient to service interest and dividends (INR36bn) and capex (estimated at INR8.7bn), leading to higher net debt.

Focus on asset divestment to accelerate cash flows
Interest payment of ~INR30bn in FY12 has eaten away the operating cash flows (exland sales) of ~INR15.3bn. The company has plans to cut debt by ~INR50bn in FY13 through non-core sales which would then help ease the interest burden. 

Outlook and valuations: Deleveraging the trigger; maintain ‘BUY’
DLF’s operating cash flows in FY12 were insufficient to service interest payments due to a weak approval cycle between Q1FY11 and Q2FY12. DLF has set out to reduce debt by ~INR50bn in FY13 driven by non-core asset sales which will ease the interest burden. Further, expected launch of Magnolias Phase II in H2FY13 will strengthen its operating cash flows. We value the company at INR263/share, implying that the stock is trading at 18% discount to its fair value. Maintain ‘BUY/Sector Performer’.

To read report in detail: DLF


Sufficient iron ore to meet FY13 production guidance
As per the management, JSW has sufficient iron ore to meet its FY13 crude steel production guidance of 8.5mt (our assumption 8mt). With restart of category A mines in Karnataka (mining at first mine has commenced), the company expects a total of 17 mines to start operations till December 2012 with a total capacity of 7mt. The pending auction of ~4mt of iron ore inventory and possibility of blending low grade iron ore lends further visibility to iron ore availability. With possible restart of category B mines, JSW expects ~25mt of iron ore (including NMDC) to be available in FY14. We are keeping our FY14 production estimate unchanged at 9.7mt.

JSW Ispat: Turnaround story in two years
Ispat is currently operating at an EBITDA run rate of INR12bn p.a. However, with expected benefits of INR3bn from power plant and other projects (55MW plant to commission by January 2013), INR2bn from coke oven batteries (expected  commissioning in September 2013), and INR10bn from the pelletisation plant (expected by March 2014), the EBIDTA will surge to over INR27bn. The project capex is expected to yield high RoE of ~25%.

Outlook and valuations: Retain estimates; maintain ‘BUY’
We maintain that the restart of mining in Karnataka will be a key trigger for JSW. We continue to value JSW at 5.5x and Ispat at 4.0x FY14E EV/EBITDA which yields target price of INR868. Maintain ‘BUY/Sector Outperformer’. At CMP, the stock trades at 3.1x FY14E EV/EBITDA of our pre-merger financials.

To read report in detail: JSW STEEL

>MEDIA SECTOR: Cable TV digitization is accelerating

Gearing Up for Digitization;
Assume with Attractive View

Cable TV digitization is accelerating, with MSOs and DTH companies promoting the effort with ads and by seeding STBs. We expect Hathway to benefit most, followed by Zee, while more intense MSO competition could limit Dish’s EBITDA growth.

We forecast a 26% subscription revenue CAGR, F2012-15, for the industry. We believe MSOs will benefit most, achieving a 33% revenue CAGR as cable subscribers turn digital. We forecast a 21% revenue CAGR for DTH companies. A June 2012 survey by TAM Media Research showed high DTH penetration in Delhi and Chennai, and high cable STB penetration in Mumbai and Kolkata. For all four cities, it also revealed consumers’ ‘overwhelming intent’ to buy cable STBs.

Hathway’s earnings and cash flow could rise, in our view, as more of the company’s subscriber universe is captured as ‘paying’ customers. We estimate a 32% EBITDA CAGR, F2012-15, versus 19% for Dish.  Hathway is trading at par with Dish on F2015 EV/EBITDA, on our estimates. Valuation may offer more upside for Hathway; we see scope for margins to widen,
and the pace of digitization could increase.

Zee is likely to benefit from digitization, too, on rising subscription revenue. We expect a 12% total revenue CAGR, F2012-15, led by 14% subscription revenue growth and 11% ad revenue growth. We project a 17% EBITDA CAGR, surpassing 11% for F2009-12. Dish should also benefit, but not as much as MSOs. We expect analog cable subscribers to migrate to digital
cable given the lower entry price and better value for money on monthly subscriptions.

Where we could be wrong: Any slowdown in the digitization process could hurt investor sentiment. Also, INR depreciation against the USD could hurt MSO and DTH company cash flows because of higher capex on STBs, since these costs are USD-denominated.

To read full report: MEDIA SECTOR

>Steel Authority of India Ltd: Commissioning of projects key to re-rating

SAIL announced August crude steel production growth of 7% y/y with YTD FY13 production growth of 3% y/y. We view the higher production and pick up in communication by the company positively as it gets closer to the commissioning of its projects (ISP and RSP over the next 6 months). The Aug production release also highlights the improvement in productivity parameters that had adversely impacted costs for the company during last year (Operating cost/MT in FY12 increased 17% y/y).

 August production data shows improvement in parameters: Aug crude steel production at 1.16MT highlights a significant improvement. Based on JPC data for July of SAIL, Aug crude steel production is up 3% m/m and is the highest monthly production since Mar-12. The company indicated that continued focus on techno-economic parameters to improve SAIL’s cost competitiveness has helped production. Blast furnace productivity in Aug was up ~9% y/y and concast production as a % of crude steel also improved by 4%. In our view, the commissioning of coke oven batteries, sinter plant, and other units in ISP and RSP should help drive continued improvement in productivity and lead to significant cost reduction for SAIL in 2HFY13.

 Lower coking coal costs to further help 2HFY13 margins: While there are concerns on steel demand, we believe that seasonal improvement in the 2HFY13 should help drive volume growth for the steel. Further, coking coal prices continued to remain depressed and steel companies have indicated that quarterly contract price for Oct-Dec quarter is ~$169-170/MT. Assuming INR remains at current levels, we believe that the decline in coking coal costs should benefit SAIL’s margins from Nov onwards (assuming 1-1.5months of inventory).

 Commissioning of projects key to re-rating: The commissioning process of the multi-billion dollar capex has commenced, with the start of coke oven battery at IISCO. Over the next few quarters, we believe investor focus should shift to how quickly the facilities stabilize. SAIL's
volume increase from capacity expansion is still a few quarters away and hence the real stress would emerge if the domestic demand does not improve by FY14E.

 P/BV valuation at GFC lows: SAIL is trading at 0.68x FY14 P/BV, which is lower than the GFC lows with absolute stock price close to GFC levels as stock have declined sharply over the last month. As highlighted in our recent note (link), similar valuation in Nov-Dec-11 was followed by a rebound. Iron ore price stabilization should also help SAIL’s stock price to rebound.

To read report in detail: SAIL


"Best fit on the consumer discretionary space‟ 
Revenues have grown at~35% CAGR between FY04-12, supported by volume and realization improvement. Jockey brand has been positioned in the premium segment, which accounts for ~37% of the Indian Innerwear market. We believe rising income level, under penetrated market and growing urbanization will lead to up-trading from mass market brands to premium brands. We expect the premium segment to grow faster than the overall innerwear market. We believe Page Industries is best suited to benefit from this trend, as it holds a long term exclusivity to manufacture and distribute the Jockey brand (CY2030) and Speedo brand. Given its focus on branding (ASP cost: ~5% of revenue), high return ratio, high payout ratio with a decade of dividend paying history makes Page industries a „Best fit on the consumer discretionary space‟. We expect Page Industries top line and bottom line to grow at a CAGR of 22.9% and 30.2% between FY12-14E respectively. 

Strong top line growth 
Page Industries revenue grew at CAGR of 42% from INR 3,393mn in FY10 to INR 6,834mn in FY12. The growth was driven by volume (~23% CAGR) and realization improvement (~15% CAGR). Volumes in men‟s wear, women‟s wear and leisurewear segment grew 19%, 27% and 41% CAGR respectively. Going forward, we expect Page Industries to grow at ~23% CAGR over FY12-14E supported by volume growth of 16.8% and 5.3% blended realization improvement. 

Outlook & Valuation 
Page Industries, at CMP trades at 28.2X and 22.3X to its FY13 & FY14 earnings respectively. Though the valuation appears high on a P/E basis, it is supported by high EPS growth. We assign a target multiple of 25X FY14E (PEG of 0.83) and rate Page Industries as an “OUTPERFORMER” with a target price of INR 3,420. We believe the valuation is justified given the immense potential of India‟s consumption story, fast growing market, strong brand recall and healthy financial position. Key Risks to our recommendation include company not being able to pass on the cost increase on a timely basis, leading to crunch in margin and consumers down trading due to uncertainty in the economy and job environment.


Wednesday, September 12, 2012

>CAIRN INDIA: Media articles suggest production may be restricted to 175 kb/d in FY2013

Follow-up actions and expectations. We have revised our EPS estimates of Cairn
India by +4-6% over FY2013-15 to reflect (1) weaker Rupee forecasts of our Economists team and (2) slower ramp-up in oil production from the Rajasthan block. We maintain our ADD rating on the stock with a revised 12-month forward target price of `375 (`360 previously). In our view, more visibility on (1) higher reserves and (2) production ramp-up would be critical to stock performance.

Media articles suggest production may be restricted to 175 kb/d in FY2013
As per recent media articles, the management committee of Cairn’s Rajasthan block has decided to limit oil production to 175 kb/d in FY2013, lower than the company’s earlier guidance of 190-200 kb/d by 4QFY13. Apparently, DGH and MOPNG have raised concerns about (1) lower-than anticipated production from Bhagyam field and (2) delays in augmentation of pipeline capacity. We note that Cairn’s oil production from the Rajasthan block increased to 172.8 kb/d in July 2012 from 171 kb/d in May-June 2012; however, it remains lower than the targeted 175 kb/d.

Expect delays in production ramp-up versus ‘aggressive’ guidance
We do not rule out slower ramp-up of oil production from the Rajasthan block in the medium term versus Cairn’s original guidance of ~240 kb/d by end-CY2013, given (1) unexpected behavior of the Bhagyam field, which may require drilling of more wells to achieve peak production of 40 kb/d, (2) inordinate delays in debottlenecking the pipeline and (3) likely delays in approvals from Government/DGH for higher oil production, which will be contingent on reservoir performance.

Cash utilization will determine growth beyond the Rajasthan block
We expect Cairn India to generate US$5.1 bn of free cash flow, over the next four years, led by a gradual ramp-up in oil production from the Rajasthan block. We believe effective utilization of cash will be critical to stock performance in the medium term: (1) re-investment of cash in value accretive E&P opportunities will be positive, (2) dividend payout will be neutral to shareholders and (3) any ‘movement’ of cash to Group entities other than dividends will be negative.

To read report in detail: CAIRN INDIA


• Apollo Tyres is India’s second largest tyre producer with subsidiaries in Europe & South Africa. Improving South African operations and stable demand in Europe would in our view drive volumes for Apollo Tyres and easing rubber prices coupled with a pick-up in the domestic replacement market would help sustaining EBIDTA margins of 10%

• We like the business model of Apollo Tyres having an ROCE of 30% and despite the present subdued demand from domestic OEM’s in the Truck & Bus Radial segment, we believe that the capex cycle has peaked and with the ramp up of its Chennai facility slated for December 2012, the company would be in a position to bring down its gearing from present levels of 0.75x to 0.35x next fiscal by virtue of its robust free cash generation.

• Apollo Tyres by virtue of its timely capacity expansion and brand image is ideally positioned to leverage the potential in export markets. Buy Apollo Tyres trading at 6.5x one-year forward earnings with a price target of Rs115

To read report in detail: APOLLO TYRES

>BHEL: Coalgate, fake orders and then some more

Action: Execution outlook worsens, while stock seems fairly valued 

Recent news flow regarding several private sector power producers being implicated in the ‘coalgate’ scandal, some of which are BHEL’s existing customers, has negative implications for BHEL’s execution outlook. We estimate that ~28% of BHEL’s existing order book is at risk now (compared to ~19% earlier) and this drives our earnings cuts over the next few years. Simultaneously, several other private power developers have allegedly placed fake orders with power equipment companies in order to boost their chances of securing coal mines in India. Such issues question the credibility of the 115GW equipment orders placed in the system and raise the possibility that post clean-up of some of these orders (through cancellation/forfeiture), new order activity could revive sooner than earlier expected, albeit likely to be in 2-3 years, in our view. In the medium term, we believe the outlook remains highly uncertain as the clean-up of existing orders will bring accompanying pain for the incumbents.

Catalysts: Orders, results and sector concerns Execution and order inflow/cancellation clarity are key stock catalysts.

Valuation: Cut FY13F-14F earnings estimates 1-8% and TP to INR199 We continue to value BHEL based on a DCF methodology (Ke 13.5% and terminal growth of 4%). Our TP of INR199/share factors in deteriorating margins (down to 12-14% levels post FY14 and 8% post FY17) and 6GW p.a. coal-based order inflow over the medium term. Given ~0.5% potential upside from current levels, we maintain our NEUTRAL rating.

To read report in detail: BHEL


Debt levels stay high, operating cash flow sparse to service interest
DLF’s net debt increased to ~INR227bn in FY12 as against ~INR214bn in FY11 despite the asset monetization of INR17.74bn. The company’s operating cash flow (estimated at INR15.3bn, ex–land sales) remained insufficient to service interest and dividends (INR36bn) and capex (estimated at INR8.7bn), leading to higher net debt.

Focus on asset divestment to accelerate cash flows
Interest payment of ~INR30bn in FY12 has eaten away the operating cash flows (exland sales) of ~INR15.3bn. The company has plans to cut debt by ~INR50bn in FY13 through non-core sales which would then help ease the interest burden. Outlook and valuations: Deleveraging the trigger; maintain ‘BUY’

DLF’s operating cash flows in FY12 were insufficient to service interest payments due to a weak approval cycle between Q1FY11 and Q2FY12. DLF has set out to reduce debt by ~INR50bn in FY13 driven by non-core asset sales which will ease the interest burden. Further, expected launch of Magnolias Phase II in H2FY13 will strengthen its operating cash flows. We value the company at INR263/share, implying that the stock is trading at 18% discount to its fair value. Maintain ‘BUY/Sector Performer’.

To read report in detail: DLF

>Draghi’s announcement of Open Market Transactions (OMT) to support sovereign short-end bond markets

Key Takeaway
Following Draghi’s announcement of Open Market Transactions (OMT) to support sovereign short-end bond markets, global equity stock prices and volumes roared. The jump in share turnover after weeks of moribund activity signalled that investor conviction over a euro break-up and peripheral contagion has receded. However, the ECB did not cut rates and GDP forecasts
both for 2012 and 2013 were lowered.

Longer term, it is supply side reforms that both Draghi and equity investors will need to see, in the short-term, the ECB has bought the most precious commodity of all, time. We are reinstating our Long EuroStoxx short German bund trade. We continue to believe that the Scandinavian and Swiss markets will outperform the EU region as their central banks loosen rates faster to counteract the slowdown in economic growth. Investors appear to have missed
that Sweden cut rates again last week while Denmark flirts with negative nominal rates (see Scandinavia: Embracing unorthodox monetary policy, 3 September, 2012).

“It is easier to rob by setting up a bank than by holding up a bank clerk”, Bertolt Brecht
The disappointing US August nonfarm payrolls data (96,000) puts the spot light back on
the Fed’s meeting this week with the likelihood of extended rate guidance and possibly a
MBS QE program. We continue to recommend a long position in the S&P homebuilders
and building materials (see US: For the price of one HK carpark you can buy 5 US homes,
6 August, 2012). The weakness in Asian economic data has been reflected in Korean and
Taiwanese industrial production for some time but the evidence of an unwanted inventory
build-up seems to have been overlooked by investors. The week-end’s release of August
Chinese industrial production (8.9% y-y) and inflation data points (CPI 2% y-y, PPI -3.5% yy)
to further softness in GDP data and trade data for the rest of Asia. There is plenty of room
for Asian central banks to cut rates and of course for the BoJ to follow suit.

For the first time in many months, it was a bad week for bonds. It was a good week for stocks and more importantly for equity volumes. Draghi essentially took away the tail risks of an imminent currency crisis with the backing of all but one dissenting EU central bank. Although the EU sovereign crisis is far from over, Draghi has bought time for the EU to undertake the supply side reforms to manage the fiscal crisis. While he did not commit to yield or spread targets, the markets appear to have missed that once again he reduced collateral rules and made further comments towards inflation targets. While the EU crisis has manifested itself as a fiscal problem, the reality is that there has been underlying balance of payments crisis. Ultimately, Europe like the US and the UK is going to have to run negative real interests for some time. Financial repression will be good for real returns of stocks versus government bonds, difficult for financials but extremely good for the lowest cost operators in each sector (see The long run, the short run and the in-between, 3rd Quarter 2012 outlook). Much like the transfer payments made between the core rich Europe to the periphery via TARGET 2, financial repression ultimately means changes in competitiveness between countries. Aside from changes in the exchange rate, higher inflation rates will ultimately erode competiveness if companies cannot make productivity gains quickly enough.

To read report in detail: INDIA STRATEGY