Thursday, February 16, 2012

>ASEAN EQUITY STRATEGY: Impact of Ownership Levels on Fund Flows

 Investment conclusion: The key investor concern during our recent meetings was related to the high level of ownership in ASEAN, particularly Indonesia (351 bps OW ASEAN and 199 bps OW Indonesia compared to the MSCI benchmarks). We believe that fundamentals should drive flows/ownership levels and not vice versa. Our analysis suggests that FII flows do not seem to be entirely contingent on ownership levels, as MSCI weights have undergone paradigm shifts driven by underlying changes in economic and capital market fundamentals. In this report, we assess flows and ownership levels in detail. We reiterate our order of country preference as Indonesia followed by Thailand, and Singapore as least preferred.

■ Learning from India’s experience: In 1996, MSCI India’s weight at 4.5% was actually lower than MSCI Indonesia’s 5.8%. But in the next 10 years, India’s weight rose to 13.1% in 2006, whereas MSCI Indonesia’s weight fell to 2.2%. In 2002, Indonesia received USD 864mn of FII inflow, 17% higher than what India received in that year. However, in the subsequent five years, India received a cumulative FII inflow of around USD 52.3bn which was nearly 7.4x Indonesia’s FII inflows. Even though investor OW position (based on EPFR data) was high, at 261 bps at the end of 2009, India’s net FII inflows still peaked out only in 2010 at USD 29.3bn.

■ Learning from Indonesia’s experience: MSCI ASEAN weight in AxJ shrank from 37.4% in 1990 to 13.9% in 2010. However, MSCI Indonesia’s weight in MSCI AxJ has risen from 1.8% to 3.8% during 2000-11, and its weight in MSCI ASEAN has risen from 8.1% to 24.1%. During the last 5 years, despite the average OW position of 110 bps in Indonesia compared to the MSCI benchmark weight, the average annual FII inflow has been USD 2.2bn p.a., as Indonesia’s MSCI weight climbed steadily from 2.7% to 3.8% and its OW position climbed from 139 bps to 199 bps. Interestingly, Indonesia’s market is not the most OW within ASEAN. Based on the most recent EPFR data, investor OW position at 684 bps in Thailand is highest, followed by Singapore and Indonesia, at 208 bps and 199 bps, respectively.

To read full strategy:  ASEAN EQUITY STRATEGY

>NIIT TECHNOLOGIES: Low valuations; High potential

We initiate coverage on NIIT Technologies (NITEC) with a Buy rating and one-year Target Price of `290. In our opinion, the current stock prices do not factor in the growth potential and visibility provided by the increased order book. NITEC has been benefiting from its long-term focus on niche verticals of BFSI and transportation, an evidence of which is visible in its marquee client base and recent large-sized deals won by the company. We expect revenues (in US$ terms) and earnings to grow at CAGR of 18% and 15%, respectively over FY12-14E, with stable profit margins. We believe the current valuations of 7.1x and 6.0x its FY12E and FY13E earnings, respectively are inexpensive with a 3.4% dividend yield offering further comfort.

 Valuations not factoring growth opportunities
The CMP of `233 ascribes a meager 22% value to future growth opportunities for NITEC. This is materially lower when compared to large as well as mid-tier peers in the industry. In our opinion, the market expectations of low growth in NITEC’s future earnings are unduly pessimistic, especially considering an order intake of US$361mn in 9MFY12 compared to US$266mn in entire FY11. More importantly, the order book executable over the next 12 months has risen from US$169mn at the beginning of FY12 to US$245mn at the end of Q3FY12. Historically, the ratio of revenues to the order book executable at the beginning of the year has been in the range of 1.8x to 2.6x.

■ Long-term client relationships with niche vertical focus
Since its inception, NITEC has had an exclusive focus on BFSI and transportation verticals. Revenue contribution from these verticals has been gradually increasing and was ~73% in FY11. The company has established long-term relationships with marquee clients in these verticals which include names like British Airways, Sabre, SEI, Cathay Pacific, Virgin Group, ING and AXA. NITEC has also been diversifying its client base as number of clients contributing >US$1mn in revenues has increased from 32 in FY10 to 56.

■ Healthy revenue and earnings trajectory
Driven by strong order book, we expect revenues (in US$ terms) for the company to grow at a CAGR of 18% over FY12-14E. Our FY13E revenue estimate of US$397mn is 1.6x (vs the 1.8x-2.6x historical range) the executable order book of US$245mn at the end of Q3FY12. EBIT margin is expected to remain stable in 15-16% range with multiple levers like increasing share of non-linear offerings, offshore leverage and broadening of employee pyramid. After a muted performance in FY12 because of higher tax rates, we expect earnings to grow at a CAGR of 15% over FY12-14E. We have assumed exchange rate of `48.5/US$ and `47.5/US$ for FY12E and FY13E, respectively. Our conservative revenue and margin estimates provide room for upward revision in estimates in future.

■ Asset heavy and working capital intensive deals pose a risk
NITEC participates in deals that involve takeover of existing technology infrastructure assets and workforce. The company also participates in government deals that require it to supply technology hardware for the project. The execution risk profile and working capital requirements in such deals are higher than normal IT services projects. The company saw its FY11 working capital rising because of such deals.

 A preferred play in mid-tier space; initiate with Buy
We have valued the company at 7.5x its FY13E earnings yield at one-year Target Price of `290. We expect the company to announce a dividend per share of `8 for FY12 resulting in a lucrative dividend yield of 3.4%. In our view, strong growth visibility coupled with attractive valuations makes NITEC a good investment candidate amongst mid-tier technology companies. Hence, we initiate coverage on NITEC with a Buy rating and a Target Price of `290.

To read full report: NIIT TECHNOLOGIES

>AUROBINDO PHARMA: 3QFY2012 Result Update

Performance boosts sequentially
Key highlights of the result

■ Better than expected 3QFY2012: Aurobindo reported better than expected top-line growth of 17.7% yoy (19% qoq) led by low margin ARV API (up 106% yoy) and healthy formulations growth in EU and ROW markets (up 45.1% yoy), partially aided by weak INR. The US formulations grew 14.9% qoq despite the ban on non-betalactum plant, which is commendable. The licensing income remained low at Rs22.8cr.

 Margins improved sequentially: Despite higher contribution from the low margin ARV tender business, the gross margins improved 60bp qoq to 44.1%. Further, favorable currency led the EBITDA expansion by 400bp at 13.3% qoq as exports remain unhedged.

 APAT up 10.2% qoq: Aurobindo reported net loss of Rs28.5cr in 3QFY2012, affected by USFDA issues and forex loss of Rs144.5cr on account of loan restatement. Adjusting for the one-time expense, the APAT stood at Rs116cr, above our estimate.

 Concall takeaways: (1) The Company expects USFDA inspection by March, 2012 for Unit III and by June, 2012 for Unit VI, (2) It has guided for 25 product launches in US out of which 11 from Unit III and 14 through Unit VII post USFDA resolution in FY2013E, (3) AstraZeneca contract is likely to start from October, 2012 and it expects to launch ~80 products (worth US$30-50mn) by December, 2013, (4) Pfizer contributed Rs67cr in 3QFY2012, expected to double in 4QFY2012, (5) Company guided to improve margins by cost saving of US$1.5mn per quarter on Unit VI, (6) Capex guided at Rs200cr for the next 2 years, while, tax rate at 20% for FY2013, (7) Gross debt stands at Rs3,360cr, cash at Rs225cr.

Outlook and Valuation
Aurobindo’s 3QFY2012 performance reflected strong growth traction on a sequential basis. New launches in EU and ROW markets, gradual improvement in US through shift of products from affected units and favorable currency led to better than expected quarter. Despite management’s encouraging picture of strong visibility (US$2bn sales guidance by 2015) led by new launches in US, ramp up in filings in niche OCs and OTC segments, pick up in Pfizer and AstraZeneca sales and sustained growth in EU and ROW, we believe that the growth would remain under pressure until the USFDA resolution is obtained. We factor in the sequential improvement of the company and revise our EPS to Rs13.3 (Rs11.9 earlier) and Rs14.5 (Rs13.9 earlier) for FY2012E and FY2013E respectively.

The stock has corrected 51% in the last 1 year due to slippages in growth affected by import alert on manufacturing plants and high forex losses. Further, high fixed costs relating to facility up-gradation and import alert on Unit VI impacted its operating performance. CBI raids with regards to financial misdeeds by promoter also added to its woes. We believe that stock correction is overdone (up by 25% in the last 3 months) and a likely rebound in growth and margins would drive growth. Hence we maintain Hold with a price target of Rs139.

To read full report: AUROBINDO PHARMA

>HEIDELBERG CEMENT INDIA LIMITED: Favourable Regional Exposure - CAUT of 97%

Heidelberg Cement came out with lower than expected set of numbers on the back of sharp rise in input costs. Although topline increased by 36% YoY & 25% QoQ to INR 2570 mn, HCIL recorded a net loss of INR 18 mn in Q4CY11. Strong demand in Central & western region enabled the company to operate at 97% capacity utlisation levels. Its expansion plans remains on track and HCIL is all set to double its cement capacity to 6 mtpa by H1CY12. We introduce CY13 estimates and maintain a BUY rating on the stock with a target price of INR 61/share.

■ Volume & Realisation driven growth
HCIL reported a revenue growth of 36% YoY & 25% QoQ to INR 2570 mn on the back of 14% YoY increase in sales volumes to 0.74 mn tn (18% QoQ) & 19% YoY improvement in realisations to INR 3450/tn. Volume growth was led by pick up in demand post monsoons, thereby enabling the company to hike prices.

Revenue grew by 14% in CY11 aided by 9% growth in volumes to 2.92 mn tn & 4% improvement in realisations to INR 3361/tn. Going forward we expect HCIL to clock volume CAGR of 29% over CY11 - CY13E led by increased capacity from H2CY12.

■ Favourable Regional Exposure - CAUT of 97%
Robust demand in its key markets of Central & Western India resulted in capacity utilization of ~97% in Q3FY12 as against 74% utilization of cement sector on pan India basis. While pan India cement demand growth was ~6% in 9MFY12, demand remained robust in the Western and Central regions that grew by ~17% and 8% YoY respectively.

■ Cost pressure denting profitability
EBITDA grew at slower than expected pace to INR 65 mn in Q4CY11, due to sharp increase in input costs. Power & Fuel cost increased by 21% YoY to INR 832/tn due to price hikes by Coal India. Freight cost continued to spike up on the back of an increase in diesel prices and railway freight rates. EBIDTA/tn stood at INR 41 as against loss of INR 91 in Q4CY10 & INR 102 in Q3CY11. In addition to increase in operating costs, 13% surge in depreciation expenses resulted in net loss of INR 18 mn in Q4CY11 as against loss of INR 55 mn & INR 82 mn in Q4CY10 & Q3CY11 respectively.

■ Expansion plans on track
Its expansion plans of setting up 1 mpta grinding unit in Damoh (MP) 1.9 mtpa grinding unit in Jhansi (UP) remains on track and are scheduled to go on stream by the end of Q2CY12. It is also setting up a conveyor belt from limestone mines to the clinkerisation unit, which will lead to reduced freight cost. HCIL has already incurred a capex of ~INR 10.5 bn on these plans and will further incur ~INR 0.5-1.0 bn in CY12.

■ '15:15' vision on course
HCIL continues to work on its '15:15' vision wherein it has envisaged being a 15 mt company by 2015. The company is looking at both organic and inorganic route to achieve this target. It has ready buyout targets in some pockets of India and it is currently in talks with them, though nothing has been fructified yet.

Outlook & Valuation
We remain positive on the cement sector and HCIL which has strong foothold in Central & Western India, is well placed to benefit from the growth opportunities in these regions. Increasing cement capacity, higher utilisation levels, parental support from third largest cement company globally, deleveraged balance sheet and superlative return ratios presents attractive investment opportunity. Subsequent to dismal performance registered by HCIL, we have reduced our CY12E EPS estimates to INR 1.31. Further, we have introduced CY13E estimates and maintain our BUY rating on the stock with a target price of INR 61/share. At the CMP of INR 38, the stock trades at CY13E P/BV of 0.9x & PE of 13.3x and EV/tonne of US$42 its CY13E capacity.

To read full report: HEIDELBERG CEMENT


GIL recently reported its Q3FY12 results, which were below street estimates. Given below are some of the key highlights, which we came across while reviewing the results.

Key highlights of Q3FY12 results:
 GIL reported higher sales at Rs.6,260.1 cr on account of higher cement and chemical volumes. Though VSF realisation improved 4.4% y-o-y led by Rupee deprecation, VSF
volumes declined 7.6% impacted by sluggish demand across markets particularly in EU.
 Q3FY12 EBITDA stood at Rs.1,413 cr, up by 18% y-o-y despite cost pressures. This was possible as GIL managed to pass the cost hikes to the consumers thereby improving
margins to 22.6%, up by 40 bps y-o-y.
 Net profit stood at Rs.669.1 cr up by 33.3% y-o-y on account of higher operating profit, higher other income, fall in interest, in depreciation costs and in tax rates.

Performance of business divisions:
■ Q3FY12 ended on a weak note supported by weak demand conditions. After witnessing an upturn in September, Textile Value Chain adopted cautious approach amidst Euro
zone and other uncertainties affecting the business sentiments and therefore demand for VSF. Realisations remained subdued in global markets aided by fall in cotton prices.

 Input costs continue to rise coupled with rupee depreciation. Operating margins were impacted. Standalone PBIDT lower by 29% due to lower volumes and high base in
corresponding quarter. Profit of JVs was affected due to higher input cost. Consolidated PBIDT for VSF Business was lower by 28%. Domsjo performance improved q-o-q despite
fall in pulp realisation. Forex losses reduced substantially. However, plant shutdown and related cost affected Q3FY12 too.

 In the present macro economic conditions, demand could remain volatile. Profitability in such scenario could be governed by the prices of competing fibres, input and energy
costs. New coal pricing mechanism could increase energy cost substantially. Further reduction in international prices of pulp could boost standalone profits. Inventories of VSF in
the system, input cost rise and forex fluctuations remain key issues.

 GIL could emerge stronger from the present challenging times with high level of integration and continued focus on cost and operating efficiency improvement.

 The VSF expansion projects at Vilayat, Gujarat (120,000 TPA) and Harihar, Karnataka (36,500 TPA) are on track. Civil work has commenced at both the locations and will be in
full swing post monsoon. Both these projects are slated for commissioning in FY13. A total capex of Rs.2,450 cr has been earmarked for the VSF business. This comprises of
Rs.2,110 cr for expansion projects and Rs.340 cr towards modernization. Post this expansion GIL’s VSF capacity would jump by 50% to 490,000 TPA by end of FY13 with focus
on specialty fibres. GIL also plans to set up a Greenfield VSF project of 180,000 TPA in Turkey in JV with group companies.

 In the next 18-24 months, new cement capacities could be commissioned across various regions and this could put pressure on prices and margins. However, fresh capacity
additions for GIL are also coming on stream and that will cater to high growth North and Central regions.
■ Lower demand offtake for VSF and cement could be a threat.
■ Sustained rise in input costs like pulp, coal, energy, fuel etc could pose a threat. Rupee depreciation could impact cost of imported coal.
■ Delay in execution of GIL’s proposed capacity expansions.

Conclusion & Recommendation
GIL’s Q3FY12 operating results were below street estimates on account of lower VSF volumes and margins. Demand for VSF has started picking up due to inventory depletion in
the value chain. GIL has highlighted uncertainty in global demand conditions going forward, especially from the current difficulties in the Euro zone. Along with this, cotton production
during this year could also be a key deciding factor about pricing going ahead.

The new coal pricing mechanism by Coal India has brought further uncertainties for the cement and VSF industries. Cement players will try to pass on the cost increase resulting
from the new pricing policy adopted by Coal India w.e.f. January 1, 2012.

The month of January 2012 has witnessed prices in Northern region come under pressure as the demand was affected due to severe cold while South continues to sustain its price
levels led by strict production discipline. Eastern, Central and Western regions saw a slight uptick in prices in anticipation of demand momentum picking up towards the month end
though certain pockets have shown slight improvement in offtake over the last month.

Though cement prices have started recovering post monsoon but demand continues to remain weak. Demand is expected to recover during H2FY12 and oversupply situation could
subside over the next 2-3 years with expected growth of 8% in demand. The management has indicated that cost pressures could continue to hurt the industry.

The chemical division is expected to do well going ahead given the increased off take from the aluminium industry.

Being the largest player with total capacity of 51MT (existing capacity) under control and highest organic growth visibility, GIL could be biggest beneficiary of any further increase in
cement price.

To read full report: GRASIM INDUSTRIES

>MAHARASHTRA SEAMLESS: Will commence production at its 2,00,000 tonne mill in Q4FY12

Results inline with estimates, higher volumes compensate for lower margins
 Maharashtra Seamless (MSL) Q3 FY12 profits ` 810mn (DCe: ` 805mn) primarily due to higher than expected volumes however EBITDA per tonne at `12272 per tonne for seamless pipes was lowest in 16 quarters
 Net sales increased 6.9% QoQ/52.2% YoY) to ` 6.17bn (DCe ` 5.7bn) primarily due to higher volumes and better realisations. Sales volumes in seamless pipes at 70936 tonne (+0.3%QoQ/46%YoY) and ERW pipes at 33755 tonnes (+6.7%QoQ,40.7%YoY) witnessed strong traction. However EBITDA per tonne continue to decline for seamless pipes and were at lowest in 16 quarters at ` 12,272 (DCe ` 14000 per tonne) due to issues regarding the billet availability leading to higher cost. EBITDA per tonne in the ERW segment increased by 54%QoQ/3.4%YoY to 4467 per tonne (Dolat Est `N 3000 per tonne). EBITDA fell by 4.7% QoQ to ` 1.02bn on back of lower margins at 16.6%.
 MSL will commence its new pipe mill capacity of 200000 tonnes in Q4FY12 which will drive volume growth over FY12-14E.
 MSL’s order book remained flat sequentially at ` 5.51bn despite strong demand environment. Export order book remains strong and currently constitute 50% of its order book.
 MSL is facing margin pressure in domestic markets due to increase in competition from the Chinese players and Indian players.
 We expect MSL earnings to grow at 13%CAGR over FY12-14E primarily led by volumes. Demands for seamless pipes continue to remain strong given the high oil prices. We believe MSL, with a strong balance sheet is well-placed to capitalize on the strong demand for seamless pipes. MSL is currently trading at 4.6xFY12EV/EBITDA and 4xFY13EV/EBITDA. We maintain our Buy rating on the stock with a price target of ` 421 (5x FY13 EV/EBITDA).

 MSL’s net sales increased by 6.9% QOQ to ` 6.17bn. Sales volumes increased 0.3% QoQ and 6.7% QoQ to 70936 tonnes and 33755 tonnes in seamless and ERW pipes respectively. Seamless pipes realizations were increased by 5.8% QoQ at ` 62857 per tonne whereas for ERW pipes it rose by 4.2% to ` 45099 per tonne.
 EBITDA per tonne on seamless pipes decreased 14.6% QoQ/36.2%YoY to ` 12,232 due to higher cost raw material and increase in Chinese competition post the withdrawal of the anti dumping duty application on China.
 EBITDA per tonne in ERW pipes increased sequentially by 56.2% to ` 4467 as it had an inventory loss due to a decline in steel prices. We now expect MSL margins to be in the range of ` 2500-3000 per tonne as against the earlier `3000-3500 due to increase in competitive intensity.
 EBITDA declined 4.7% QoQ despite 25% volume growth as the margins dipped in seamless pipes segment.
 Other income declined 5.8% QoQ to ` 138mn (Dolat est: ` 150mn) as MSL has invested in FMPs whose gains will be booked in March 2012.
 PAT was flat sequentially at ` 810mn as margin fall was compensated by higher volumes.

Demand strong but margins under pressure.
MSL expects demand to remain strong for seamless pipes with the prevailing high crude oil prices (USD 115 a barrel) and increase in rig counts. MSL also expects strong demand from the boiler segment due to large capacities being added in the power sector. MSL’s order book remained flat sequentially to ` 5.51bn despite strong demand environment. Seamless pipes contribute 76% of the order book whereas rest is contributed by ERW pipes. Export order book remains strong and currently constitute 50% of its order book.

We expect MSL earnings to grow at 13%CAGR over FY12-14E primarily led by volumes. Demands for seamless pipes continue to remain strong given the high oil prices. We believe MSL, with a strong balance sheet is well-placed to capitalize on the strong demand for seamless pipes. MSL is currently trading at 4.6xFY12EV/ EBITDA and 4xFY13EV/EBITDA. We maintain our Buy rating on the stock with a
price target of ` 421 (5x FY13 EV/EBITDA).


>DHANUKA AGRITECH: Aims to launch 7 products over next 4 years

Q3FY12 results miss estimates; disappointing operational performance dents earnings growth
 Topline for Q3FY12 de-grew by 3.7% YoY to ` 1.1bn, mainly on account of 6% decline in volume off-take due to poor northeast monsoons.
 Rainfall in key regions of Andhra Pradesh, Karnataka and Maharashtra recorded 40% decline, impacting the revenue contribution from these markets.
 For 9MFY12, herbicides and fungicides portfolio has shown a muted growth of 5% YoY while the insecticides and PGR portfolio grew by 14% YoY.
 Top five products for 9MFY12 contributed 31% to the topline. The company's flagship brand Targa Super contributed 14.6% (YTD) to the topline and witnessed a decline of 61% during the quarter.
 EBITDA margins have declined by 530bps YoY to 11.5% led by higher raw material cost at 52.6% of sales (up 750bps YoY). Lower employee cost (down 40bps YoY) and other expenses (down 190bps YoY) restricted margin contraction to some extent.
 Lower acreages, increasing fertilizer prices and falling produce prices have reduced average farmer’s propensity to spend on specialty products. The resulting shift in focus towards generic products has dented EBITDA margin.
 Interest expense fell by 3.4% YoY to ` 19mn. Gross debt as of December 2011 stood at ` 400mn. Depreciation too declined by 36.5% YoY to ` 12mn.
 Tax rate stood lower at 19.5% (Q3FY11: 20.7%). PAT declined by 37% YoY to ` 78mn.

Financial highlights
 Revenue for the quarter declined by 3.7% YoY led by a 6% decline in volume offtake. This was primarily on account of poor northeastern monsoons. The management indicated of a slowdown in herbicide and fungicide product segment during the quarter.

 For 9MFY12, insecticides, herbicides, fungicides and PGRs/others contributed 48%, 30%, 12% and 10% to the topline respectively. This implies that herbicides and fungicides portfolio has shown a muted growth of 5% YoY while the insecticides and PGR portfolio grew by 14% YoY.

 EBITDA margins have declined by 530bps YoY to 11.5% led by higher raw material cost at 52.6% of sales (up 750bps YoY). Employee cost and other expenses declined by 40bps YoY and 190bps YoY and stood at 9.3% and 26.6% of sales respectively. Lower revenue contribution from specialty products
impacted profitability.

 Interest expense fell by 3.4% YoY to ` 19mn. Gross debt as December 2011 stood at  400mn.

 Depreciation too declined by 36.5% YoY to ` 12mn. The company incurred ` 400mn of capex during 9MFY12.

 Tax rate stood at 19.5% (Q3FY11 – 20.7%). PAT de-grew 37% YoY to ` 78mn.

Key takeaways from the conference call
 All India rainfall data showed 48% drop during the quarter. Rainfall in key regions of Andhra Pradesh, Karnataka and Maharashtra recorded 40% decline.
 Unfavourable weather conditions have led to lower crop acreage and pest incidence, impacting demand for pesticides. Further, increase in fertilizer cost and decline in produce prices has reduced the farmers’ propensity to invest in specialty products. The resulting shift towards to generic products has dented Dhanuka’s operating margins.
 Sales in Andhra Pradesh contribute 22% to the topline. With increasing revenue contribution from eastern zone, this figure is expected to decline in future.
 Top five products for 9MFY12 contributed 31% to the topline. The company's flagship brand Targa Super contributed 14.6% (YTD) to the topline and witnessed a decline of 61% during this quarter.
 Slowdown in operations has led to inventory pile-up which the management expects to ease out by Q1FY13E. The management does not foresee any decline in industry prices for pesticide due to excess inventory in the system.
 No new products were introduced for the quarter. However, the management has indicated of seven new product launches over CY12E-15E (one insecticide in CY12 and two each in CY13E-15E).
 Gross debt on books as of December 2011 stands at ` 400mn, of which `298mn is secured and the balance is unsecured in nature.
 The management has guided for a topline growth of 6-7% for FY12E.
 Capex guidance for FY13E is ` 50-60mn.
 Tax rate is guided to be 22%-23% for FY12E and FY13E. The Udhampur facility enjoys 100% tax benefit which will reduce to 30% FY14E onwards.
■ The management has guided for an improvement in operations after the Kharif season.

Long term growth drivers include strengthening its seeds portfolio (scouting for acquisition) and manufacturing selective technicals, leading to backward integration. DAL enjoys high return ratios owing to its asset-light model.

However, given the eminent slowdown in the agrochem industry and slower off-take of high-margin specialty products, we have revised our FY12E/FY13E earnings estimate downwards by 20.5%/19.1%. At CMP, the stock trades at 9x FY12E and 6.9x FY13E earnings. We recommend Accumulate with a revised target price of `100 (8x FY13E earnings).



Standalone in-line; JLR ops exceeds expectations
The overall results for Tata Motors (TAMO) for 3QFY12 reflected the same trend seen in 1HFY12. The standalone operating performance continued to remain under pressure with EBITDA margins at 6.4%, the lowest in the last 10 quarters, impacted by elevated marketing spends and pricing pressure in the PV business. The management expects standalone margins to remain under pressure. JLR performance in turn was significantly ahead of our expectations with EBITDA margins at 18.9% compared to our estimate of 15.3% driven by better than expected ASPs (up 1% QoQ vs. our expectation of 2% drop), largely driven by higher contribution from Evoque at 34% of LR volumes v/s 14% in 2QFY12 and lower contribution from Freelander at 13% of LR volumes v/s 22% in 2QFY12 coupled with favourable F/X impact of £60mn. Also regional mix continued to remain strong with China contributing 17.2% vs. 16% in 2QFY11 and 13% in 2QFY11. Response to Evoque continues to remain strong and management was optimistic on volume traction going forward. Though, we continue to like the JLR story, the recent run in the stock (up 60% over last 45 days) leaves limited absolute upside from current levels. Hence, we are downgrading the stock to “Hold” from “Buy” with a revised target price of Rs.300 (earlier Rs.234).

 JLR ops surprise; standalone margins in-line: JLR reported revenues £3.75bn, EBITDA of £752mn and PAT of £440mn. Higher ASPs (driven by favourable product mix change), positive F/X impact, coupled with better regional mix helped strong operating performance. Standalone operating margins at 6.4% were in line with our estimate of 6.4%.

 Con call takeaways — 1) Given high marketing and publicity initiatives for its PV portfolio, the domestic margins are likely to remain under pressure 2) Volume growth in LCV/SCV segment to remain strong, but M&HCV outlook remains challenging 3) JLR management optimistic on volume traction for Evoque. 4) Reaffirms annual capex guidance of £1.5bn 5) Pegs net automotive debt/equity at 0.5x in 3QFY12 compared to 0.7x in 2QFY12 6) Tax shield at JLR UK over £2bn – tax rate likely to remain at similar levels to that of 3QFY12 ~21%.

 Valuations and Recommendations: At the CMP of Rs286, the stock is currently trading at 5.8x FY12E consolidated EPS of Rs35.5 and 5.1x FY13E consolidated EPS of Rs40. Though, we continue to like the JLR story, the recent run in the stock (up 60% over last 45 days) leaves limited absolute upside from current levels. Hence, we are downgrading the stock to “Hold” from “Buy” with a revised target price of Rs.300 (earlier Rs.234).


>CIPLA: Indore SEZ likely to receive US FDA approval

Cipla’s Q3FY12 results were in line with our expectations. The company’s revenue grew by 13%YoY, EBIDTA margin was up 190bps and net profit grew 16%YoY. Domestic formulations reported 18%YoY growth whereas exports grew by 11%YoY. Cipla achieved 18%YoY growth in API exports during the quarter. The company has rationalised its export business to optimise profitability. Cipla’s tax rate increased from 15.6% to 21.2% of PBT due to the expiry of EOU benefits for some facilities. We reiterate Hold rating on the scrip and maintain the target price of Rs334 (based on 21x FY13 EPS).

 Good sales growth in domestic business: During the quarter, Cipla achieved 18% YOY growth in domestic formulations from Rs7.34bn to Rs8.69bn against the industry growth of 15%. The company’s exports grew by 11%YoY from Rs7.82bn to Rs8.66bn. Exports of API were up by 18%YoY from Rs1.39bn to Rs1.64bn due to higher exports of ARV APIs.

 Margin improvement by 190bps: Cipla’s EBIDTA margin improved by 190bps from 20.4% to 22.3% due to the reduction in material cost. The company’s material cost declined by 400bps from 44.7% to 40.7% of total revenues due to the change in product mix and rationalization of exports. Personnel expenses increased by 200bps from 8.7% to 10.7% of total revenues due to the annual increments and increase in manpower. Other expenses were marginally up by 20bps from 26.2% to 26.4% due to the increase in selling expenses, professional fees and factory expenditure. Cipla reported forex gain of Rs45mn against Rs34mn. The company’s net profit grew by 16%YoY from Rs2.33bn to Rs2.70bn.

 Indore SEZ likely to receive US FDA approval: Cipla’s SEZ at Indore generated sales of Rs1.3bn during the quarter. The facility is likely to be inspected by US FDA in FY13.

■ Leading exporter of ARV: Cipla’s API exports grew by 18%YoY from Rs1.39bn to Rs1.64bn due to the rise in exports of ARV APIs. ARV constituted 25% of the API exports during the quarter. The company manufactures the entire range of ARV APIs for global requirement.

 Inhalers to drive growth: Cipla has filed 11 ANDAs for inhalers in Europe, of which 4 are approved. The management expects good export potential from this business.

 Increase in tax rate: Cipla’s tax rate increased from 15.6% to 21.2% of PBT due to the expiry of EOU benefits. The company has invested over Rs9.0bn on its Indore SEZ facility for which it has to pay tax at MAT rate.

 Reiterate Hold: We have maintained our EPS estimates for FY12 and for FY13 at Rs13.8 and Rs15.9 respectively. We expect the company to benefit from additional revenues from Indore SEZ and good growth in the domestic formulation business. At the CMP of Rs342, the stock trades at 24.8x FY12E EPS of Rs13.8 and 21.5x FY13E EPS of Rs15.9. We reiterate Hold rating with a target price of Rs334 (based on 21x FY13E EPS).


>NTPC: While the RBI guarantee for recovery of dues under a payment security mechanism is in place up to 2016

We hosted NTPC’s top mgmt for a NDR in the UK during last week. Appreciating their initiative to reiterate NTPC’s robust business model and low risk profile amidst persistent concerns in the power space, most investors still appeared to be in the ‘watch’ mode on the stock/sector. Key comments – [1] Payments within 60 days of billing cycle; APTEL’s order on tariff revisions is a potential watershed for SEBs, [2] Capacity addition, captive mining plans on track; bulk tender awards to begin in Dec-11, [3] Averse to buyback; open to crossholdings if it entails a strategic advantage. Maintain BUY.

Takeaways from Non-deal Roadshow in UK
We hosted the top management of NTPC – Mr. Arup Roy Choudhury (Chairman & MD) and Mr. A.K. Singhal (Director, Finance), together with Ms. Renu Narang (AGM, Finance-ISD/Bonds & PDS) – for a non-deal roadshow (NDR) in the UK last week (Nov 23-25). NTPC’s first NDR in Europe/UK seemed to be well received – clients appreciated the top brass’ initiative to be in front of investors to field queries / allay concerns and present their case on why NTPC is well positioned relative to private IPPs amidst the persistent concerns over the power sector in India.

Overall, management’s commentary on key issues (payment security, fuel security, capacity addition, funding /capex and cash deployment) was largely along expected lines. However, amidst the persistent negativity surrounding investment in Indian power utilities, management’s summary of its low-risk business model and the potential implications of APTEL’s recent court order to address the financial health of SEBs did come across as a positive surprise for a few clients. NTPC remains our preferred IPP on relative fuel/payment security; we expect FY12F-17F EPS CAGR at ~11%. Stock trades at 1.7x FY13F P/Book; maintain BUY.

Management commentary on five key issues/concerns –

[1] Financial health of SEBs and payment security
NTPC’s management reiterated that, although only a handful of SEBs were paying up within the first few days of the billing cycle, none of the SEBs had dues outstanding for more than 60 days for current billings. While the RBI guarantee for recovery of dues under a payment security mechanism is in place up to 2016, the NTPC management emphasized that recent order by the Appellate Tribunal (APTEL) ensuring annual tariff revisions by State Regulators (SERCs) is the potential inflexion point from where SEB losses will begin to get curtailed.

[2] Coal demand/supply balance for XIIth Plan project pipeline
With the backdrop of growing concern over a ramp-up of production by Coal India (CIL) and delay in restoration of captive coal blocks to NTPC by the Ministry of Coal (MoC), NTPC's coal demand/supply balance was a ubiquitous topic of discussion.

As per the NTPC management –
· Materialization of coal supply under the FSAs (for 125mtpa) and linkage (LoAs) stood at nearly 100% for NTPC; advance payment to CIL for the coal dispatches together with focused personnel on logistical issues are likely to ensure its ‘effective’ preferred customer status

· Boilers at its existing units can typically accommodate 15-20% of coal blending. However, management would strive to keep the blending at ~10% in order to minimize the rise in variable cost. As regards securing imported coal, preferred option is to enter into long-term supply agreements with mine owners.

· Although the official communiqué on restoration of the five de-allocated coal blocks is awaited, physical work on the captive coal blocks is underway. Coal production from Pakri Barwadih coal mine is on schedule to begin in 3QFY12.

· Mineable reserves in its five captive coal blocks aggregate ~2bn tons. Five additional coal blocks, which MoC has in-principle agreed to allot to NTPC would fuel ~7.7GW of upcoming capacity.

· For its FY2017 target generation capacity of 66GW (~35GW currently), NTPC would require 260-270mt of coal; supply build-up would be 125mt under FSA, ~50mt captive coal (~20% of requirement), 30-35mt equivalent imported coal (implying12-15% blending) and ~60mt incremental supply (~23% of requirement) from CIL.

In our assessment, investors remained circumspect on the ramp-up of coal production from both captive coal blocks as well as CIL’s ability to provide the additional 60mt coal supply by FY2017,

[3] Capacity addition on track; bulk tender awards expected by March 2012
Management remains confident of commissioning 4.3GW of capacity in FY12 (1.2GW commissioned so far) and maintaining a similar average annual run-rate thereafter in the XIIth Plan. On bulk tendering – 3x800MW is expected to be awarded by December 2011, remaining 6x800MW by March 2012; although the 660MW tendering is under litigation, management remains hopeful of completing the awards by March 2012 itself.

[4] Funding status, cash flows and leverage
Ruling out the need for fresh equity issuance, management emphasized that its recurring cash flows, existing cash chest and low leverage ensures that funding its target capex of ~US$40bn in the XIIth Plan Period (FY2013-17) is not a constraint. The management mentioned that it expects leverage would rise from 0.64x as of September 2011 to ~1.9x by March 2017, but comfortably below the default ceiling of 2.33x (implied by the 70:30 D/E funding mix for its projects). Highlighting its financial strength, the NTPC management reminded that its recent US$500mn Eurobond issue was oversubscribed by six-times; it has ~US$5bn of undrawn debt at this time.

[5] Crossholdings / buybacks / special dividends
As regards recent commentary by the Government on utilization of ‘surplus’ cash with public sector enterprises towards crossholding / buybacks / special dividends, the management stated – (1) Crossholdings may be considered by the Board independently, if it results in any strategic advantage for NTPC, (2) Buybacks is not a favored option, (3) Current dividend policy (payout ratio of ~40%) adequately balances growth & payout requirements.