Monday, February 6, 2012

>INDIA STRATEGY: The “seven sins” of the Indian market!

"Seven sins” of the Indian market!
  • Delays in government decision making!
  • Tepid foreign inflows!
  • Wild fluctuations in domestic currency!
  • Longest stretch of high inflation ever!
  • Aggressive monetary policy stance!
  • Corporate earnings on a downtrend!
  • Sharp de-rating of market valuations!

‘Singular’ factors drove global bear markets in the past…

To read the full report: INDIA STRATEGY




1. Offering one-stop solution for corporate finance services
2. Knowledge of regulatory environment in offering customized financial solutions
3. Needbased fund based offering
4. Proven track record of servicing large sized corporate houses
5. Flat structure enabling quick turnaround of transactions

1. Major dependence on Credit Syndication and Debt Capital Market
2. Presence primarily indomestic market

1. Continued economic growth would provide multiple opportunities for the Company's business model, which encompass offerings from advisory services to fund based activities.
2. The lean team with quick decision and operation turnaround time will be in better position to close transactions faster
3. Cross selling of service offerings will help the Company t have larger share of the Clients' servicing requirements

1. Attrition of key team members
2. Fortunes linked with the movements in the economy

OUTLOOK: The Bond Market in India with the liberalization has been transformed completely. The bond market has immense potential in raising funds to support the infrastructural development undertaken by the government and expansion plans of the companies. In a bid to boost investment in the infrastructure sector, in March 2011 the Reserve Bank of India has raised the limit of FII investment in listed non-convertible debentures and bonds issued by core segment companies by $20 billion. In view of these developments, Bond Markets in India is all set to unveil immense growth opportunities benefiting the financial services sector. Money Matters as an active intermediary is well positioned to benefit from the unfolding opportunity.

The Company will also undertake cross selling of its offering to increase its revenues from advisory as well asset financing business. This enviable product offering will also provide an unique opportunity to the Company.


>MAHINDRA & MAHINDRA: January volume – UVs/pick-ups post strong growth, tractor sales muted

Total sales up 12% yoy. M&M’s Jan 2012 sales grew 12% yoy to 64,072 units led primarily by strong UV sales (+15% yoy) as well as strong pick-up sales (+35% yoy) even as tractor sales declined 6% yoy.

Auto segment sales up 22% yoy. Total auto segment sales grew 22% yoy in Jan 2012 to 44,718 units led by strong UV / pick-up segment sales. While UV sales grew 15% yoy to 18,446 units, pick-up sales grew 35% yoy to 13,725 units. Verito sales continued its steady uptrend and posted 37% yoy growth to 1,529 units over a low base. The 3W segment sales remained flat yoy at 6,126 units.

Tractor sales decline 6% yoy. Tractor sales for Jan 2012 declined 6% yoy to 19,354 units. This is the third consecutive month of muted tractor sales. Also alarming was the fact that domestic tractor sales declined 8% yoy to 17,950 units. Exports, however, grew 31% yoy to 1,404 units.

■ Valuation. Disappointing tractor sales for the third month in a row only highlights concerns of a slowdown in the industry which has witnessed strong volume off-take for the last 2 years. Thus, despite strong auto segment volumes, muted tractor offtake may limit overall growth. Also, rising cost pressure is likely to lead to margin pressure going forward. Further, slower growth from other business segments (like IT, Real Estate, ancillary, etc) is expected to keep consolidated earnings muted. Maintain In-Line with a price target of Rs729.

To read the full report: MAHINDRA & MAHINDRA

>STERLITE INDUSTRIES INDIA LIMITED: Metal czar’s steep discounting to end as concerns recede; Main reasons for underperformance are -

Sterlite Industries India Ltd (SIIL) which provides diversified exposure to major base metals, silver and power and boasts of a promising future on the back of organic growth across assets has been trading at a big discount to its fair value during the last one year, thereby underperforming the benchmark Nifty by over 25%. The main reasons for this underperformance in our view has been i) VAL’s expansion and backward integration plans going for a toss due to government intervention and subsequent huge losses by VAL wiping out SIIL’s invested equity ii) delay in expansion project of BALCO and SEL and shortage of coal for running captive and merchant power plants and iii) pumping of excessive cash by SIIL into Vedanta owned VAL which has resulted into poor returns for SIIL shareholders and raised investor concerns.

Though we agree these concerns are valid, we also infer that the discounting done by the market for valuing SIIL stock has been more than pessimistic and does not capture the full value of zinc businesses nor does it account for the future volume growth across assets and future positive triggers. We have seen a smart upmove in the stock recently and believe that SIIL stock ‘s discount to its fair value has come to an end on account of i) better clarity from management on cash use through increased dividends ii) volume growth across assets and improving profitability ahead and iii) positive triggers from possible minority stake buyouts and starting of BALCO captive coal block.

With SIIL’s expansion pipeline across assets coming on-stream by FY13E, we expect sales volume CAGR of 7.4%, 45.3% and 9.7% across zinc & lead, silver and aluminium operations during FY11-14E. We expect net sales and EBITDA CAGR of ~12% and ~16% during FY11-14E. We initiate coverage on SIIL with a Buy rating and a SOTP target price of Rs 149.

 Zinc: domestic – best in class, international – shows potential: Domestic zinc operations under HZL remain best in class with low cost, increase in volumes of lead and silver and robust balance sheet. We expect HZL to register EBITDA CAGR of ~11% during FY11-14E. International assets have stable operations and show potential for future with increasing exploration at Scorpion & Lisheen and from the proposed 400 ktpa new project at Gamsberg.

 Aluminium: mixed bag with high costs and VAL: SIIL’s aluminium operations remain a mixed bag with high COP at BALCO and losses at VAL. With expansions in aluminium and power at BALCO in FY13E, we expect EBITDA CAGR of ~13% during FY11-14E. We see VAL retaining PAT losses on account of non-integration, high raw material costs and very high interest.

 Power: lacks steam sans coal, but growth seen ahead: Power portfolio lacks steam without captive coal but volume growth is seen ahead despite challenges with expansions coming on-stream by FY13E and coal feed from linkage and e-auctions. We expect ~15.3bn units of power sales from BALCO and SEL in FY14E. Starting of captive coal block of BALCO would be the key trigger.

 Positive triggers in store: We see the possibility of positive triggers for the stock from successful minority stake buyouts in BALCO and HZL and starting of captive coal block of BALCO going ahead.

 Valuations – trading at discount, BUY: We see SIIL trading at a sharp discount to fair value. We see earnings growth ahead driven by volumes and value the stock on a SOTP basis giving no value to its investments in VAL. We initiate coverage on SIIL with a Buy rating and target price of Rs 149.

■ Key Risks: Lower sales volumes on project delays, drop in LME prices, higher losses in VAL and ineffective use of the cash pile.

To read the full report: STERLITE INDUSTRIES

>BIOCON LIMITED: Atorvastatin bulk supply to one partner is expected to begin in the US

■ Biocon reported net profit of INR848m for 3QFY12 (-14% yoy excluding AxiCorp), lower than our estimate of INR950m. Sales came in at INR5.2bn (+1.5% yoy), lower than HSBCe of INR5.5bn owing to lower biopharma sales (INR3.7m for Q3FY12 versus our estimate of INR4.1bn) and licensing income. Licensing income was INR292m in this quarter, of which only INR30m flows into net profit. EBITDA margins at 24.9% were below estimate; they were mainly hit by lower sales and higher other expenses, which included higher promotional expenses for insulin pens. The tax rate was low at c12%. Branded India business and contract research were the only positives in 3QFY12: Biopharma sales excluding branded formulations declined 5% qoq (-13% yoy) because of the absorption of capacities by ongoing research development programmes for biologics. India branded business was up c50% yoy. Contract research services were up c43% yoy with a 10% benefit from INR depreciation. The company plans a Syngene listing over the next 12-18 months.

■ Atorvastatin bulk supply to one partner is expected to begin in the US post expiry of exclusivity in May 2012. Fidaxomicin build-up is on track and Optimer’s EU launch expands the opportunity.

■ Maintain N with a revised TP of INR305 (from INR310): Despite a stock correction of
c23% over the past three months, we remain unclear about potential near-term catalysts in
the atorvastatin and fidaxomicin sales ramp-up. While the company maintains that
simvastatin sales hold ground, we believe the stock price reflects concerns of a possible
decline in simvastatin. While Biocon may be successful in capturing atorvastatin sales, we
are cautious on pricing amidst high competition. As a result, we cut our FY13 and FY14
earning estimates by 3.5% and 1.1%, respectively. We continue to value the stock at 15x
September 2013e EPS of 20.3x to derive our new TP of INR305 (previously INR310).
Key downside risks are a decline in core biopharma business (statins) and failure of any
ongoing R&D programmes. On the other hand, any possible tie-ups in oral insulin/anti-
CD6 could be a potential upside trigger.

To read the full report: BIOCON LIMITED

>ALLAHBAD BANK has once again reported strong PAT

Allahabad Bank has once again reported strong PAT of Rs 5604.3mn, up 34.8%YoY which was way ahead of our estimates of Rs 4697.6mn. NII for the quarter grew by 31.3% YoY ahead of our/street estimates while NIMs of the bank was maintained at 3.5%. Higher increase in profits was also supported by sharp increase in other income by 35.2% to Rs 3484.1mn. ALBK reported slippages to the tune of Rs 5.9bn while restructured assets stood at Rs 10.5bn. GNPA and NNPA of the bank increased by 9bps and 10bps to 1.9% and 0.8% respectively.

The stock is currently trading at 0.7x of its FY13E ABV. We value the standalone business at 0.9x of its FY13E ABV at Rs 217.6 and maintain our buy rating on the stock with Target Price of Rs 196.

Key Highlights
■ Lower tax rate boost profits: ALBK has provided lower tax rate of 7.9% since it has not availed tax benefits earlier on certain items like rural advances, priority sector advances, MIS, etc. which has helped to boost profits above our expectation. Also, management has guided in the last concall to avail Rs 3bn of tax benefits which will translate into 21% tax rate for the full year FY12 as compared to 26% in FY11.

■ Advances grew sequentially; NIMs remain stable: Advances for the quarter grew 4.9% sequentially to Rs 1tn due to strong growth in agri and corporate advances while deposits for the quarter grew by 2.3% sequentially thereby improving CD ratio to 69.1%. In addition, NIMs of the bank remained stable at 3.5%.

■ Asset quality remains stable, restructured assets rise significantly: Asset quality of the bank remained stable with Gross NPA and NNPA at 1.8% and 0.7% respectively. Slippages during the quarter stood at Rs 5.9bn which includes one big account from footwear industry situated in North of Rs 1.2bn. Major chunk of slippages was from priority sector lending which constituted 60% of the slippages. Management has denied having any exposure to Kingfisher or GTL. The total outstanding restructured advances stood at Rs 38.2bn in which Rs 2.6bn have slipped into the NPL category. Total restructured amount during the quarter stood at Rs 10.5bn. No restructuring took place for the SEBs. However, management has indicated to restructure Rs 6bn of Rajasthan State Electricity Board in the coming quarter.


>MARICO INDUSTRIES: Robust operational performance; RM tailwinds ahead

 Strong operational performance; 16% domestic volume growth: Marico reported strong operational Q3Y12 performance, with 16% domestic volume growth (13% overall) and 300bps gross margin expansion being the key highlights. Notwithstanding the price hikes in its core brands and general inflationary headwinds to consumer wallets, volume growth of 16% reinforces MRCO’s dominant brand franchise. Sales, EBITDA and PAT came in at Rs10.56bn (up 29% YoY), Rs1.22bn (up 22.1% YoY) and Rs841m (up 21%YoY), against our expectations of Rs10bn, Rs1.19bn and Rs810m, respectively. Recurring PAT adjusted for exceptional grew solid 25%. Parachute, Saffola and Value-added hair oils posted 13%, 15% and 2% volume growth, while Kaya reported 15% same store clinic growth. International division delivered 16% organic revenue growth.

 Softening in RM and price hikes boost gross margins: With high RM in the base and softening in Copra (down 9% QoQ), standalone as well as consol gross margins expanded 300bps (consol gross margins up 120bps YoY). Like to like EBITDA margins (adjusting for Rs96m as excise provisioning in Q3FY11) contracted ~200bps driven by higher ad-spends (up170bps). Current quarter also contains a charge of Rs129m in Kaya Middle East, pertaining to misstatement of expenses related to earlier years, thus, resulting in
consequent overstatement of Kaya profitability in the relevant period. As per the management, appropriate action has been taken for this lapse and monitoring process has been further strengthened.

 Maintain ‘Accumulate’: MRCO’s continued strong volume driven performance, despite the aggressive price hikes (taken in 2HFY11) and turn-around in RM dynamics, creates a good tailwind for EPS upgrades, going forward. However, current valuations at 23.6x FY13e is fair, in our view. Maintain ‘Accumulate’, with a revised Mar-13 TP of Rs170. Turnaround in Copra price trajectory is the key risk.


>BANK OF BARODA: 3QFY12 earnings surprised

■ 3QFY12 earnings surprised on the downside across most operating metrics, be it margins, CASA or provisions, except other income which saw sizable trading gains. As a result, the stock ended down 1.2% over yesterday but almost 3% down from pre-results levels today.

■ Highlights: While loan growth came in surprisingly high at 26% driven partly by a translation
effect of the international book and by corporate and farm credit, CASA mix came off
marginally to 27.2% as did margins down 8bp to 2.99% (in fact, domestic margins came off
16bp to 3.51% led by flattening yields but a continued rise in funding costs). Gains on sale of
liquid mutual fund holdings and FX gains along with muted opex growth helped boost
operating profits. However, a significant 27% sequential increase in restructured loans
(telecom infra sector) as well as rising slippages to 1.6% - the highest in the last 3 years – put a dampener on stock sentiment, although pre-tax earnings grew at a reasonable 14% yoy.

■ Earnings outlook: We factor in 20-22% loan growth with slightly lower margins and rising
credit costs up to FY13e, resulting in 14% and 15% earnings growth in FY12e and FY13e.
However, growth recovers to 26% yoy in FY14e. Clearly, restructured loans are likely to be in
focus for most PSU banks with specific sectoral issues facing the power, airlines and exportrelated sectors.

■ We downgrade to N from OW with a TP of INR889 from INR961: BoB is currently trading at FY13E multiples of 5.6x PE and 1.1x PB, a c9% and 26% premium to its peers (ex- SBI). Given the macro uncertainty and unfolding asset quality risks, we are cutting our target PE and PB multiples to 5-year average levels of 5.5x and 1x respectively from 6.3x PE and 1.2x PB earlier. Our revised price target is INR889, implying potential return (including dividends) of 15.1%. We downgrade the stock from OW to Neutral. We expect the valuation premium to peers will compress as Bank of Baroda’s relatively better-than-peer book quality is showing chinks in the armour. Key downside risk: Management change in Nov-12 

(Chairman retiring). Key upside risk: Fewer asset quality issues than expected.



Grasim Industries’ Q3FY12 consolidated results were largely in line with our estimates with EBITDA at Rs13.9bn, 6.4% above our estimates and adjusted PAT at Rs5.6bn, 3.4% lower than estimates. On standalone basis, the operating margin (22.7% vs. 29.9% in Q3FY11) was under pressure primarily due to decline in VSF sales (7.6% YoY decline) and increase in input costs. Though VSF prices improved 3.1% QoQ to Rs128.5/kg, it could be under pressure going forward if the demand condition does not improve. The management has given a cautious outlook for both the key businesses Cement (surplus scenario to exist for 2-3 years and overall margins are under pressure due to rising input costs) and VSF (In the short-to-mid term, demand is expected to be volatile due to macro economic conditions and Euro Zone uncertainties). Considering the cautious stance of the management and the absence of near-term catalysts, we retain our Hold rating on the stock with TP of Rs2,377.

 Improvement in consolidated profit led by strong growth in the cement business: Consolidated revenue increased 16.3% YoY to Rs62.6bn led by strong 23.1% growth recorded in the cement business by its subsidiary, Ultra Tech. Driven by higher domestic realization (20.1% YoY) of cement, consolidated EBITDA increased 16.9% YoY to Rs13.1bn and adjusted PAT increased 12.4% YoY to Rs5.6bn.

■ Operating margin under pressure in the VSF business: Revenue from VSF segment declined 3.9% YoY to Rs10.9bn primarily due to 7.6% YoY decline in VSF sales volume to 78,215tonnes. VSF realization increased 4.4% YoY (and 3.1% QoQ) to Rs128.5/kg. Led by lower sales volume and higher input costs (sulphur price and energy cost), EBITDA from VSF segment declined 28.5% YoY to Rs2.8bn. EBITDA margin from VSF segment declined 9pp YoY to 25.3%.

■ Operating results for standalone business disappoints: Led by lower operating profit of VSF segment, standalone EBITDA declined 22.8% YoY to Rs2.8bn. Standalone EBITDA margin declined 7.3pp YoY to 22.7%. Despite weak operating performance, higher other income (up 35.4% YoY) coupled with lower interest burden (down 39% YoY) and tax rate (21.8% vs. 27.8% in Q3FY11) restricted marginal drop by 2.9% at PAT levels.

 Cautious management commentary on key business segments: The management gave a cautious outlook for key business segments, Cement and VSF. For Cement, it believed the oversupply will persist in the industry for the next two-three years and at the same time, rising input costs will put pressure on margins. In the VSF business, it believed that in the short-to-mid term, demand will be volatile due to macro economic conditions and Euro Zone uncertainties.

 Near-term catalysts missing, maintain Hold: At the CMP of Rs2,485, the stock trades at 11.6x FY13E EPS, 4.5x EV/EBITDA and 1.4x P/BV. The company’s both the key businesses (Cement and VSF) are under pressure and we don’t foresee any near term catalyst for the stock. Hence, we maintain our Hold rating with a target price of Rs2,377.


>Dr. Reddy's Labs: Windfall from generic Zyprexa (olanzapine); DRL launched 33 generic products in the US market

Dr. Reddy’s Labs (DRL) reported excellent results for Q3FY12 due to $99mn(Rs4.55bn) revenues from 180-days exclusivity of generic olanzapine in the US. The company’s revenues grew by 46%YoY, EBIT margin improved by 1190bps and net profit grew by 88%YoY. The company is also likely to report similar results in  Q4FY12 due to generic olanzapine opportunity. However, the company reported moderate growth in other markets. We have revised our rating from Hold to Buy with a revised target price of Rs1885 (based on 24x FY13 EPS+FTF).

 Windfall from generic olanzapine: During the quarter, DRL reported $99mn (Rs4.55bn) revenues from 180-day exclusivity of generic olanzapine in the US. The company launched 20mg version of generic olanzapine in October’11 in the US. DRL is also likely to report similar growth in Q4FY12 due to the remaining period of exclusivity. Excluding generic olanzapine, the sales growth was 22%. The company is likely to benefit from 40 Para IV and 10 FTF opportunities in the US.

 Moderate growth in other markets: DRL’s global generic business (77% of revenues) grew by 57%YoY from Rs13.59bn to Rs21.29bn. Its PSAI business (20% of revenues) grew by 12%YoY from Rs4.98bn to Rs5.56bn. DRL’s proprietary business (3% of revenues) grew by 102%YoY from Rs417mn to Rs842mn. Global generic growth rates in various geographies were: N. America 133% (due to generic olanzapine), Europe 14%, India 11%, Russia & CIS 15% and others 34%. For PSAI business the growth rates were: N. America 52%, Europe -10%, India 39% and others 7%.

 EBIT margin improves by 1190bps: DRL reported 1190 bps YoY improvement in EBIT margin from 15.4% to 27.3% mainly due to the high margin generic olanzapine opportunity in the US.

 New product launches: During Q3FY12, DRL launched 33 generic products in the US market. The company filed 7 DMFs and 16 ANDAs with US FDA. The company has one of the richest pipelines of ANDAs. It has a total of 187 ANDA filings, 79 pending ANDAs with US FDA of which 40 are Para IV and 10 FTF opportunities. DRL had strong volume growth across key products namely lansoprazole, tacrolimus, omeprazole Mg OTC in the US market. The company’s 26 products feature among the top 3 in MS in the US.

 Mexico facility still under US FDA scanner: DRL’s API facility at Mexico continues to be under US FDA scanner and awaiting re-inspection by US FDA.

 Upgrade from Hold to Buy: We have revised our EPS estimates upwards for FY12 and for FY13 by 32% and 17% respectively due to higher sales of generic olanzapine. We expect the company to benefit from the good growth of generic olanzapine in US in Q4FY12 and from 40 Para IV and 10 FTF opportunities in the US. At the CMP of Rs1670, the stock trades at 18.4x FY12E EPS of Rs90.5 and 18.6x FY13E EPS of Rs89.9. We have revised our rating from Hold to Buy with a target price of Rs1885 (based on 24x FY13E EPS+FTF).