Wednesday, May 23, 2012


Mahindra Satyam reported Q4FY12 numbers, which were marginally  above our estimates. Reported revenues/PAT of | 1666 crore/| 534 crore  were in line/ahead of our | 1653 crore/| 217.1 crore estimate. US$ revenues grew 3.7% QoQ while volumes grew ~ 1.9% QoQ. Q4 EBITDA  margins improved 132 bps QoQ while FY12 EBITDA margins improved  800 bps YoY. Management commentary suggests deceleration in  discretionary spending in the US and Europe and could likely pressure  pricing in the near term. Consequently, we maintain our HOLD rating.

  Earning summary
Q4FY12 US dollar revenues grew 3.7% QoQ to $337 million ($325 
million in Q3) while those in rupees declined 3% QoQ (3.8% decline estimate) to | 1666 crore (| 1653 crore). PAT increased by 73.2% to | 534.2 crore from | 308.4 crore in Q3 and above our | 217.1 crore estimate. Note that reported PAT was aided by exceptional items (| 109.4 crore) and tax write back (| 91.3 crore). Quarterly performance  was also aided by 10% reduction in the operating expenses to | 353.9 crore (| 399.1 crore in Q3) led by cost rationalisations.

  Operating metric highlights
Across geographies, revenues from North America (51% of Q4FY12 
revenues), Europe (24%) and rest of world (25%) grew 5.8% QoQ,  declined 0.5% QoQ and grew 3.7% QoQ, respectively. Telecom, media and entertainment grew 14.6% QoQ, whereas manufacturing, 

retail and healthcare grew 3.7% each. Note that BFSI had a  sequential decline of 6.2%QoQ.

We expect FY13E US$ revenues to grow 11% while rupee revenue/EPS could grow/decline 13%/18%, respectively. Further, we model revenues/EPS to grow 12%/8% in FY14E. This translates to revenue  CAGR of 16% during FY11-14E period. Further, we expect EBIT margins  to improve by 120 bps in FY13E. We assign a lower target PE multiple of 8x (our CY13E estimate) vs. 9.1x (FY13E estimate) to account for the  mediocre earnings growth. Consequently, we value the company at 8x our CY13E EPS estimate of | 9.6 and maintain our | 75 target price.

>RELIANCE CAPITAL: One-time gains on stake sale provide fillip…

Barring general insurance, all subsidiaries including life insurance, AMC and commercial finance have reported profitable trends. The life insurance company made a profit of | 370 crore in FY12, of which | 346 crore was achieved in Q4FY12. The AMC also made its highest profit at 308 crore. General insurance reported a loss at the PBT level of  341 crore for the full year. As life insurance becomes fully profitable, the company Viscount Management Alpha, holding a 22% stake in Reliance Life, has been merged with the parent leading to the consolidated entity now holding a 38% stake directly against 16% earlier. This gives 38% share in Life’s total profit i.e. | 136 crore, adding to consolidated profit.

Consolidated PAT in FY12 surged 100% YoY to | 457 crore lower than Idirect estimate of | 565 crore, due to higher GI losses. Capital gains, from the life insurance stake sale, to the tune of ~| 450 crore only was routed through P/L as estimated. Rest of the gains, revaluation & merger effect was routed through reserves leading to total reserves surging by ~| 3890 crore in Q4FY12. Hence, total net worth has now reached | 11700 crore.

Lower forward return ratios and higher book value are due to inflated reserves on account of merger. We remain positive on the stock.

Other key highlight at consolidated level
Reduction in debt via life insurance stake sale proceeds to cushion PAT…
Capital gains proceeds to the tune of | 2700 crore have been used to repay debt. Both transactions merger increasing reserves and debt payment improved the debt equity ratio from 2.14x in FY11 to 1.56 x in FY12. The benefit of the same should accrue in FY13.

As profit starts accruing from all businesses, the outlook turns quite positive for the stock. We have revised our profit estimates to incorporate insurance. However, the share of AMC is declining. Hence, factoring in reduced economic interests in both life and AMC businesses, we have revised our SOTP target price to | 381 from | 419 on FY13E basis. Rolling all valuations to FY14 can offer further upsides up to | 435. We recommend a BUY rating on the stock with a strong conviction.



Strong execution but weak margins…
Kalpataru Power and Transmission (KPTL) reported its Q4FY12 results that were largely in line with our estimates. Execution remained robust with the topline coming in at | 1061 crore (I-direct estimate: | 1052 crore), up 20% YoY. EBITDA margins remained subdued at 8.8% owing to higher raw material cost and forex impact. Consequent to a lower operating margin, the bottomline came in at | 56.7 crore (I-direct estimate: | 63.4 crore), down 5% YoY. A lower debt burden (down 35% QoQ) eased the finance costs by 31% on a sequential basis.

Reasonable order book amid change in margin profile…
With order inflows of | 2000 crore in the quarter, total standalone order book is at | 6,100 crore (up 11% YoY). This implies a book to bill of 2.0x, providing ample revenue visibility for the coming two years. On a consolidated basis, total order book stands at | 11,600 crore. Of the
standalone order book, more than 90% is transmission orders (domestic 40% & international 50%) while remaining 10% consists of infrastructure & distribution orders. The key surprise was the adverse impact on margins due to a changing order backlog mix and inability to pass on higher raw material costs. We believe, going ahead, margins would hover between 10% and 10.5% in FY13E as execution will be more skewed towards international orders. JMC Projects (KPTL’s 69% subsidiary) reported healthy revenues at | 703 crore, up 44% YoY. EBITDA & PAT margins were at 7.4% and 3.3%, respectively. Total order book for JMC stands at | 5,500 crore, implying a book to bill of 2.6x on a TTM basis.

At the CMP of | 82, the stock is trading at 7.1x and 5.7x its FY13E and FY14E EPS, respectively. Even though there will be a structural shift in the margin profile of the standalone business, ~20% decline in the stock price over past month has discounted this negative. A pick-up in execution and orders will drive the re-rating. We have valued KPTL at 103 (8xFY13E EPS for base business + ~70% stake in JMC projects) and have assigned a BUY rating to the stock.


>TATA MOTORS: Buying Opportunity & Evoque demand (CLSA)

JLR’s Apr shipments saw a bigger seasonal drop than its German peers with non-Evoque sales showing particular weakness, triggering a 7% stock price correction. We believe that there are seasonal factors at play here and don’t see any evidence of a broad-based demand weakness. Our sensitivity analysis for JLR’s non-Evoque sales growth suggests favourable risk-reward. 4Q results on May 29 are likely to be strong and we expect a consol net profit of
Rs42.7bn – up 70% YoY. We see multiple positive volume and cost triggers in

JLR going forward and maintain BUY on Tata Motors.
JLR underperforms German peers in Apr with larger seasonal drop JLR’s Apr sales rose 29% YoY to 25K units but fell a sharp 31% MoM. While April is a seasonally weak month, JLR seems to have fared worse since BMW and Daimler saw a lower 21% MoM drop in Apr. The difference is even more acute if we look at JLR’s non-Evoque sales, which dropped a sharp 39% MoM and were 14% lower YoY, which is a cause for concern. Even China volumes fell 17% MoM.

No evidence yet of any underlying demand weakness
Management attributes the weak Apr sales numbers to seasonality and higher discounting by competitors in US and Europe (which has come down in May). The UK market always sees a large seasonal drop in sales in April and JLR has a higher UK exposure than its German peers, which is another possible explanation here. We note that JLR has seen an average drop of 30% in volumes from Mar to Apr in the last 10 years, though the drop has been a lower 22% in the last two years. We were expecting a lower MoM drop this year due to strong Evoque demand. Tata is not seeing any signs of demand weakness in any geography and continues to guide for 100-110K Evoque volumes for FY13 and 4-6% growth for non-Evoque
industry sales, implying FY13 volumes of 370K-385K (we are at 390K).

Sensitivity analysis suggests favourable risk-reward
Our estimates build in a growth of 8% for non-Evoque sales in FY13. If we assume just 0% growth here, our FY13-14 EPS will drop by 8% and our target price will drop to Rs340. Given that the stock is 21% below our pessimistic scenario valuation, we view risk-reward as favourable post stock correction. Multiple positive triggers still intact; reiterate BUY

We continue to like Tata Motors given multiple volume triggers in the form of Evoque ramp-up and the launch of the new Range Rover platform by end-CY12. The latter has the potential of meaningfully lifting FY14 volume expectations for JLR. Multiple cost initiatives are underway, which together with an improving regional sales-mix and favourable currency trends, should drive strong margins. 4Q results on May 29 are likely to be strong as well and we expect a consol net profit of Rs 42.7bn – up 70% YoY (consensus is at Rs38.7bn). We maintain BUY.

To read report in detail: TATA MOTORS

>STATE BANK OF INDIA: Surprise Victory over NPAs

India’s largest bank took the street by surprise by reporting asset quality which was much better than expectations. Key factors which helped the bank to report strong performance in Q4 were:

■ Strong focus on recoveries and better risk management helped in curtailing slippages to 2.3% vs. 4.5% in Q3.

 NPA provision declined 13% YoY and 6% QoQ to Rs 28.4 bn. However, the bank provided Rs 13 bn on certain NPAs which led to increase in provision coverage ratio to 60% (68% including technical write off) from 53% a quarter ago.

 Restructured book at 4.1% of advances saw addition of ~Rs 51 bn, which was lower than expectation.

 Management guided for lower slippage of ~Rs 20 bn in Q1FY13 along with marginal addition to restructured book.

 The bank abstained from high cost bulk deposits (~11% of advances), which supported NIM at 3.8%.

 Tax rate declined to 36% vs. 44% in FY11. Management indicated 34% tax rate in FY13.

Q4 highlights: Q4 PAT at Rs 40.5 bn, was above our estimate of Rs 37.5 bn led by strong other income growth (up 148% QoQ), which is usually lumpy in Q4. Business growth was muted at 13% YoY due to lower deposit growth at 12% YoY.

Maintain BUY with TP of Rs 2,324 – upside of 15%
We expect SBI to now focus on growth, as recovery mechanism is in place. However, we maintain our growth estimate at 15% and slippages at 2.7% for FY13 as the operating environment remains challenging. Maintain BUY with TP of Rs 2,324 [1.4 x FY14E ABV of Rs 1,331 (adj. for value and cost of invt) + Rs 461 value of invt].

To read report in detail: SBI

>BIOCON: PFE deal termination was a body blow; Concerned with AxiCorp

BIOS’ shares have had an uninspiring run post the termination of the PFE deal, which dealt a body blow to its biosimilar insulin aspirations. Whilst the deal is now terminated, it will continue to throw its shadow over future earnings, thanks to an aggressive accounting policy that will see BIOS shift biosimilar insulin R&D costs off the P&L. This, along with use of a creative transaction structure for AxiCorp, leaves us frustrated with corporate governance standards at the company, and we downgrade our accounting and corporate governance rating from AMBER to RED. Stripping out biosimilar insulin (90% valuation haircut) and Dificid, BIOS is currently trading at ~12x FY13E EPS. We cut our FV by 47% to Rs. 186 (from Rs.350 earlier) and switch to SELL.

PFE deal termination was a body blow
Earlier in the year, BIOS’ biosimilar insulin aspirations were dealt a body blow following the termination of its global development and commercialization deal with PFE. This sent the shares down by ~10% on the day, with shares continuing to drift post Q4’FY12 results earlier in the month. Post the deal’s termination, the focus now shifts to BIOS’ internal progress on the biosimilar insulin program.

Another incidence of aggressive accounting policies
There has been considerable confusion over the timing and accounting treatment of PFE milestones through the P&L, as BIOS currently has deferred revenues of ~Rs.4930m on the balance sheet. In our experience, globally, post a deal termination, the balance of deferred revenues lying on the balance sheet is typically recognised in year-1 as a one-off revenue item. This is in line with matching principle as the revenues from a terminated deal should not ideally be matched against costs of another deal (internal or external). Based on the guidance provided by the management, we believe that the company is likely to recognize the deferred
revenue in line with R&D costs associated with biosimilar insulin program in a particular year. We see this accounting policy as aggressive (the auditors have drawn an emphasis in this regards). This marks the third instance of aggressive accounting with regards to recognition of income/costs for biosimilar insulin. We believe it will lead to consistent over-reporting of EPS (and potentially over-valuation) to the tune of 20% every year during FY13-15 while also leaving investors blind-sided with the clinical spend and progress in biosimilar insulin development.

Concerned with AxiCorp “circular” transaction
In April ’11, BIOS sold its 77% stake in AxiCorp to existing minority investors for a ~EUR40m valuation, ~33% higher that its acquisition cost of EUR30m, and implying a P/E of ~7.4x. However, the nature and structure of the transaction raises eyebrows as BIOS used a creative deal structure at the time of acquisition that allowed it to pay ~EUR16m cash for AxiCorp but required it to transfer the rights to biosimilar human insulin and glargine for Germany to AxiCorp for EUR14m. Our analysis indicates that BIOS received only ~EUR5m in cash for the divestment, which is surprising given that AxiCorp had a net profit of ~EUR5m in FY11. Moreover, while it seems that BIOS made a profit of ~EUR10m on the transaction, in reality, there was a cash loss of ~EUR10m and a notional loss of ~EUR21m in buying back the IP rights. Despite this, the deal structure ensured that BIOS was not required to report any loss on sale in the P&L.

Cash drain not reflected in EPS – Valuing BIOS on SOTP
With the PFE deal terminated, we see little reason to own BIOS shares in the wake of only modest growth prospects for the base business. We expect the FCF generation to be further pushed out by 2-3 years resulting in a haircut of ~90% on rNPV of insulin deal from Rs.40 to

To read report in detail: BIOCON

>AXIS BANK: Key Earnings Drivers & Sensitivity

Margin pressure to weigh on earnings; downgrade to HOLD
We revise earnings down by 8% and 9% for FY13E lower NIMs (down 13bp y-y to 3.01%) as deposit cost extremely sticky (as wholesale rates have not declined whereas lending rates will need to be reduced as loan demand remains weak. Credit cost will remain stable, restricting earnings growth.

Policy reform and faster monetary easing remain key triggers
AXSB’s total power exposure (fund + non fund) stands at 10.3% 30% is operational and 70% under construction, which is prone to restructuring. The current pace of policy reforms leaves a lot to be desired and the stress on earnings reduces the margin of safety. and infrastructure-related issues will continue to remain an overhang.

Key Earnings Drivers & Sensitivity
The key macro factors that can impact AXSB’s earnings credit growth, interest rate environment and deterioration/improvement in asset quality.

In our bear case we are factoring slippages to be 35bp and 25bp higher than that in the base cases for FY13E and FY14E, respectively. In our bull case we are factoring in slippages to be 40bp and 50bp lower than the base cases for FY13E and FY14E, respectively.

To read full report: AXIS BANK

>UNITED SPIRITS LIMITED: Downgrade due to Kingfisher Airlines hangover

Downgrade due to Kingfisher Airlines hangover [EXTRACT]

 Downgrade from Buy to Neutral
We downgrade United Spirits (USL) to Neutral due to uncertainty surrounding Kingfisher Airlines (KFA). USL’s share price is down 51% since 1 January 2011, and we expect it to remain under pressure until the KFA issue is resolved. We also cut our FY12-14 EPS estimates by 18-19% to take into account its higher debt as of December 2011.

 A raw material cost reduction is possible
USL has been investing in primary distillation capacity, which should help lower its raw material costs. However, we will only incorporate these into our forecasts once the benefits kick in fully. USL is facing high raw material costs, with high energy prices boosting its system costs.

 Business is intact; underlying debt and governance are concerns
Our underlying view on USL remains resilient growth in branded spirits. We think: 1) USL should remain a beneficiary of India’s growing, young population and rising discretionary spending; and 2) USL has one of the widest and most dominant distribution networks in India, which aids its 34 ‘millionaire brands’ (brands that sells more than 1m cases annually) in the segment; and 3) USL will benefit from investments made in primary distillation capacity.

 Valuation: lower our price target from Rs850.00 to Rs780.00
We derive our price target from a DCF-based methodology and explicitly forecast long-term valuation drivers using UBS’s VCAM tool. We assume a WACC of 11.4%. We lower our FY12/13/14 EPS estimates from Rs34.47/43.90/54.85 to Rs28.25/35.22/44.31.

To read full report: UNITED SPIRITS