Thursday, March 1, 2012


Why are we adding Dish TV to our mid-cap list?
• Amongst the biggest gainers from ongoing digitization in India - We expect DTIL to grow its gross subscriber base at a healthy CAGR of 18.9% from F2012-14 to reach 19.8mn by F2014. Also, if the government were to diligently enforce the digitization rollout, there could be a potential upside to our growth assumptions.

• We expect the valuation to see upside based on improving ARPU and cost trends, which will drive margin expansion for DTIL.

– Competitive pressures have led to tepid ARPU growth over the last six months for DTIL. We expect other DTH players to shift their focus toward profitability at the same time we expect greater consumer willingness to pay for digital content. This is expected to drive ARPU growth. We expect ARPU CAGR of 12% over F2012-14.

– We expect DTIL's cost structure to be rationalized as it is spread over an increasing subscriber base. Programming cost as a % of revenue is expected to drop to 30% in F2014 from 35% in F2011 and 32% in F2012e.

– We expect an EBITDA CAGR of 45% from F2012-14e.
• Currently, the stock trades at an EV/EBITDA of 8.3x based on our F2013 estimates.

Why are we adding Infotech Enterprise to our mid-cap list?
• Risk-reward remains favorable: Infotech stock is currently trading at 8.6x F2013e EPS, ~20% discount to its 8-10 year historical average. This may reflect concerns that USD revenue growth would slow down significantly to 14-15% yoy in F2013e (vs. 25% in F2012e) based on consensus estimates. We expect Infotech to continue to deliver strong USD revenue growth of ~19% in F2013, helped by stable 2012 budgets for its clients, expectations of price increases in the current environment, and ramp up of new accounts. Overall, we expect Infotech to grow revenues and earnings at a CAGR of 20% over F2012-14.

Infotech stock has risen ~36% YTD (vs. the 15% gain in the Sensex). However, over the last year, the stock is still underperforming Sensex and its other mid-cap peers. The stock is up 17% (vs. ~8% for the Sensex) since announcing its F3Q12 results (January 18, 2012) as concerns about margins eased after it reported stronger than- expected margin improvement. We believe Infotech stock has further upside potential and should continue to outperform once
revenue growth concerns ease for the company over the coming quarters.

• Improved volume growth, robust hiring in 4Q (strongest in the last few quarters) and a stable hiring outlook for F2013 are the key catalysts that should help ease concerns on revenue growth, in our view.

Focus List and Sector Model Portfolio Performance
• Year to date, our sector model portfolio has outperformed the MSCI India index by 13bp and our Focus List has outperformed the BSE Sensex by 375bp. Our mid-cap list has outperformed BSE Midcap by 104bp.

• We are not making changes to our sector model portfolio. We are Overweight Consumer Discretionary and Technology and Underweight Financials, Industrials, Materials and Telecoms. We are Neutral on Consumer Staples, Energy, Healthcare and Utilities.

To read the full report: INDIA STRATEGY

>India’s exports grew by 10.1 percent in January 2012 from a year earlier, after increasing by 6.7 percent in the previous month

India's exports grew by 10.1 percent YoY in January 2012 to USD25.35 billion despite weak demand in the Western markets. Exports had grown by 6.7 percent YoY in December 2011. In value terms, Exports increased to USD25.35 billion in January from USD25.02 billion in December 2011. Exports were USD23.02 billion in January last year. However, in INR terms, exports decreased to INR1,301,290 million against INR1,317,760 million in December 2011. Before showing the uptick, exports growth has slipped from a peak of 82 percent YoY in July 2011 to 44.3 percent YoY in August 2011, 36.4 percent YoY in September 2011, 10.8 percent YoY in October and 3.9 percent YoY in November 2011.

India's total exports for the first ten months (April-January) of FY2011-12 stood at USD242.79 billion (INR11,538,000 million) against USD196.63 billion (INR8,965,180 million) in the corresponding period of last year, registering a growth of 23.5 percent in USD term. During this period (from April to January FY2011-12), sectors such as engineering has done exceedingly well (USD49.7 billion) with growth of 21 percent over April – January of last year; followed by petroleum & oil products 50.1 percent YoY (USD48.9 billion); Gems & Jewellery 33 percent YoY (USD37 billion); Drugs and pharmaceuticals 21.1 percent YoY (USD10.20 billion).

On the other hand, pushed by expensive crude oils and vegetable oils, India’s imports grew by 20.3 percent in January 2012 from a year earlier to USD40.11 billion against USD37.75 billion in the previous month. India’s Imports were USD33.35 billion in January last year. In INR terms, imports stood at INR2,059,110 million against INR1,988,730 million in the previous month. For the first ten months of FY2011-12, Imports totaled at USD391.46 billion compared with USD302.53 billion in the same period of previous year, resulting a growth of 29.4 percent. Sectors which reported healthy imports growth during April – January FY2011-12, include POL 38.8 percent YoY (USD117.9 billion) and gold and silver 46.6 percent YoY (USD50 billion).

To read full report: EXPORT-IMPORT

>Debt burden of State Governments remains considerable; however, a back-ended repayment pattern would support liquidity in the medium term (ICRA)

The debt stock1 of Indian States has risen sharply in recent years, following a weakening of their fiscal health since 2008-092. This note discusses the trends regarding the relative debt levels of various States in India, the altered composition of their debt stock and the repayment pattern of the latter, focusing on the State Governments of Andhra Pradesh (AP), Gujarat, Karnataka, Maharashtra, Punjab and Tamil Nadu (TN)—States in which ICRA has rated the debt instruments of a number of Government entities.3

Following the recommendations of the Twelfth Finance Commission (TwFC), the Central Government disintermediated from the borrowings of State Governments from 2005-06 onwards, resulting in a sharp decline in the inflows of loans from the Centre in the subsequent years. Loans from the National Small Savings Fund (NSSF) formed a substantial source of funding between 2003-04 and 2006-07, declining substantially thereafter. As a result, State Governments have increasingly contracted market borrowings in the form of State Development Loans (SDL) from 2007-08 onwards. Consequently, the composition of the debt stock of the States in the ICRA sample has altered considerably between 2004-05 and 2009-10, with a rise in the proportion of SDL, a marginal decline in the proportion of loans from the NSSF and a considerable decline in the share of loans from the Centre.

The long tenure of loans from the NSSF (25 years, with repayment to be made in 20 equal instalments from the sixth year onwards), results in limited redemption pressure. Although SDLs have a shorter tenure of 10 years, given that substantial funds were raised through this source from 2007-08 onwards, the redemption pressure is likely to be relatively low until 2017-18. Hence, the maturity profile is fairly back-ended across the States, which is a positive from the liquidity perspective in the medium term.

ICRA’s expectations regarding the debt levels of the Indian States etc. in the near-to-medium term are as follows:
■ Performance on various leverage indicators is likely to be somewhat inferior to the Budget Estimates (BE) for 2011-12 on account of a modest expansion of tax revenues, which is likely to dampen the growth of overall revenue receipts.

 Notwithstanding some improvement in certain leverage indicators, Gujarat and Punjab are likely to remain more indebted than the other States in the ICRA sample. Nevertheless, the magnitude of their debt stock at an absolute level is likely to remain smaller than other States, particularly Maharashtra and AP.
■  Given the modest anticipated inflow of funds under the NSSF and the likely moderation in tax revenues in the current fiscal relative to the BE for 2011-12 , issuances of SDLs are likely to remain substantial in February-March 2012.
■  The anticipated easing of policy rates from Q1, 2012-13 onwards would increase the attractiveness of various small savings schemes thus boosting NSSF inflows.
■  However, with the planned reduction in the minimum share of States in the net small savings collections to 50% from 80% at present, the magnitude of funds to be raised by State Governments through SDL is likely to remain large in 2012-13.

Background: Weakening fiscal health since 2008-09 prompted a Sharp Rise in the Debt Stock of the States in the last three years

Following the global economic crisis that set in during 2008-09, the fiscal health of the Indian States deteriorated to an extent in the ensuing period. This was led by a number of factors, including a slowdown in the growth of tax revenues following the economic slowdown that set in during 2008-09; an increase in employee costs in a number of States (with the Sixth Central Pay Commission as well as State Pay Commissions recommending increases in pay and pension); and a rise in food and power subsidies. A widening of the financing gap4 of the States enlarged their borrowing requirements. Accordingly, the debt stock of the Indian States expanded considerably in recent years (refer Chart 1). The debt liabilities expanded at a faster pace in the period between 2008-11 as compared to 2005-08 for all the States in the ICRA sample (in terms of the compounded annual growth rate or CAGR).

To read the full report: PUBLIC FINANCE


>CUMMINS INDIA: New emission norm and Bio-fuel boosts FY14/15 outlook

■ Bullish outlook, but disappointing new export policy
Cummins India reassured investors in the recent analyst meeting with guidance of over 15% revenue growth in CY12. The company also mentioned that Cummins Inc Group in India aims to grow at 25% CAGR and achieve US$7bn sales by 2016. In our opinion, however, it disappointed with the disclosure that Cummins Inc will manufacture new 60litre engine independently and Cummins India will not get to export these.

■ Demand has bounced back but has no near term upside
We are positively surprised by the pace of recovery in the sales of heavy engines and genset. The company reported 10% m-o-m growth in genset sales for the last three months from the low of Nov 2011. While the recovery has been quite swift, the company may not raise production of 30/50ltr engine from 18/day now in the next six months, as it expects demand to remain at current level.

 New emission norm and Bio-fuel boosts FY14/15 outlook
Cummins India could benefit from (1) tightening of emission norm for genset in 2013 that could lead to 20-30% price hike, and (2) stronger demand for its new bio-fuel genset having business potential of over US$200mn. However, it is too early to factor in the benefit as the emission norm change may get delayed. Also its peers don't see prices rising by more than 5-8%.

■ Margin peaks off & capex surge to hurt
Currently Cummins India is trading at the higher end of its valuation with FY13E PE being 19x. Recent bounce back in the stock reflects the recovery in business. Likely decline in margin owing to absence of FX gain that had boosted Q3FY12 by 100bp could hurt stock. Also 4 fold jump in capex to Rs1.6bn in 2012-15 will hurt ROE and likely de-rate the stock.

To read full report: CUMMINS INDIA

>SHREE RENUKA SUGARS: New crushing season commenced

■ Shree Renuka Sugars' (SHRS) reported 11% YoY growth in EBIDTA to INR3.3b for 5QFY12 (change in accounting year to April-March from October-September). Revenue declined 9% YoY to INR20.5b, while PAT surged 4x to INR3.4b due to forex gain of INR4.3b on USD/Real dominated liabilities. The forex gain was due to adoption of revised accounting standard to amortize change in long term foreign exchange liabilities over the tenor of the liability.

 Standalone EBITDA slipped by just 3% YoY, despite the huge 37% YoY decline in revenue (on account of lower sugar sales and trading revenue). Expansion in EBITDA margin is attributed to the improvement in realizations across all segments. The company expects its refinery business to improve over next couple of quarters due to (1) favorable sugar spread; and (2) substantial availability of domestic raw sugar.

 In Brazil, numbers remained steady on a YoY basis, although margins improved on account of higher sugar realization. However, higher realization was offset by lower volumes on account of adverse weather that impacted crushing volume of Renuka do Brasil (RDB). After the severe impact on cane yield in 4QSY11, the management expects yields to recover to ~65t/ha going forward.

■ During 5QFY12, SHRS has achieved its plantation target of ~25,000 ha (20,045ha at RDB and 5,136ha at VDI). We expect re-plantation to lower average age of crops and improve productivity/yield.

 The company's net debt increased by ~INR7b to ~INR90b due to the increase in working capital debt in Indian operations. The management guided the divestment of co-gen business (138MW at Equipav) to be concluded by Feb-end. We believe this event would be a key trigger for the company's re-capitalization target.

 Going forward, key triggers for the stock's would be: (1) turnaround in volumes and cane yield of its Brazilian operations, (2) upswing in international sugar prices, and (3) reduction in debt.

 The stock trades at 5.8x FY13E EPS of INR7, and EV/EBITDA of 5.2x FY13E. We continue to value SHRS at 6x EV/ EBITDA, leading to a lower target price of INR50. Maintain Buy.

To read the full report: RENUKA SUGARS

>PUNJ LLOYD: Reported Q3FY12 profit of Rs703 mn

■ What surprised us
Punj Lloyd reported Q3FY12 profit of Rs703 mn, which included Rs840 mn of accounting gains on write-backs from the deconsolidation of the Simon Carves subsidiary. Adjusting for this, profit for the quarter was below our estimate, primarily due to higher than expected contractor charges. However, revenue for the quarter at Rs27 bn was 7%/5% above GSe and Bloomberg consensus estimates. Order inflow at Rs42bn was 20% ahead of our estimate, resulting in closing order book of Rs283bn being up 31% yoy – highest growth among the stocks within our coverage. Auditor qualification has also come down by Rs5 bn on account of the ONGC dispute and stabilization of the political situation in Libya.

■ What to do with the stock
We retain our Neutral rating on the stock, as despite these positives of: (1) Strong order inflow over the past 9M, which is 124% above the entire FY11’s inflow; (2) reduction in auditor qualification; and (3) close to historical trough valuations, we continue to be concerned over: (1) uncertainty on margin stabilization; (2) our assumption that new projects will likely deliver lower margins being they are competitive bids and given the geographical spread; and (3) uncertainty over potential treatment of the outstanding auditor qualifications.

We adjust FY12E EPS to Rs3.96 from Rs1.59 based on Q3 results and the writeback, and increase FY13-14E EPS by 31%-39% on higher order inflow and stabilization of execution. We also increase our P/B-based 12m TP to Rs57 (from Rs48 at 0.5X FY13E P/B) – now valued at 0.6X FY13E P/B – justified in our view given our expected ROE of about 6% in FY13E. Risks: Upside: lower commodity price and interest rate; downside: lower order inflow and project delays.

To read full report: PUNJ LLOYD