Friday, July 27, 2012

>SUGAR INDUSTRY: Is Sugar cycle near bottom for next Structural up move!

Sugar cane crop in the country appears to have reached near peak level: Major
upside potential for sugar cane crop from current level of 343mnt appears limited. Negligible
addition to cultivated land, rising profitability of farmers from other competing crops, increased
cane arrears during SY12 in UP will limit further addition to cane cultivation and stable drawal
rate. Below average monsoon expectation in Maharashtra and high cane arrears in UP likely to
affect sugar cane production mainly in SY13e.

Steadily rising demand vs. near stable crop: SY12 sugar production of 26mnt appears to
be near peak level considering stagnant acreage towards cane and stable drawal rate. Going
forward we expect sugar production go down to 23.5mnt in SY13e level. Sugar demand is
steadily rising at 3% reaching 22.5mnt in SY12. Reducing demand supply gap within domestic
market will reduce inventory level within system. However with somewhat lower crop in SY13
season and expected reduction in drawal rate, we expect sugar inventory to reduce from
current level of 5.9mnt to 5.7mnt by FY13e and 5.0mnt by SY14e. This is likely to push prices
upward going forward over next 1-2 years.

Levy quota likely be withdrawn or lowered: Much hyped positive expectation for the
industry is de-control of the industry wherein, near term possibility is withdrawal of levy quota
or lower % of levy sugar as per production and stocks available with government. Currently
sugar companies are selling 10% of their production at `1970/qtl which is 35% below market
price. There is expectation that Govt. will likely lower levy quota by atleast 5% or may
withdraw completely. This will benefit around `1200-2500cr to the industry.

By-products profitability: Power and distillery play very important role in improving
profitability of the mills. Rising import bill makes ethanol blending attractive thus, improving
demand prospects for distillery. Prolonged coal deficit in the country is shifting focus towards
alternate fuels improving prospects for co-generation. Most of sugar refineries have signed PPA with State Electricity Boards (SEBs).

Exports: India is likely to export around 3mnt of sugar in SY12e. Out of this, industry has
already expected around 2.5mnt by June 2012. Exports of around 5mnt over last two years
helped reducing countrywide sugar inventory which has prevented sugar prices sliding down.

Conclusion: It appears that worst for domestic sugar industry is over and sugar prices have upside potential from current level over long term. Domestic sugar cane crop appears to have reached peak level with marginal upside due to limiting factors such as limited addition to cultivated land, rising profitability of alternate crops and stable drawal rate. It also faces near term challenges in terms of below average expected monsoon for 2012 and rising cane arrears in UP.

Domestic consumption of sugar is rising at a steady pace of 3% reaching 22.5mnt in SY12. Surplus in the domestic market during last two years is absorbed globally with exports reaching around 3mnt in SY12. Thus, country is likely to end SY12 with inventory level of 5.9mnt. Reducing production and rising consumption to reduce inventory level to 5.7mnt and 5.0mnt in SY13e and SY14e respectively.  Reducing inventory level is likely to push sugar prices upward in the long term. Sugar companies stock prices are at trough level discounting major concerns thus, any positive would lead to re-rating of the stocks. We have a long term POSITIVE view on the sector. Companies which we prefer in the sector are: 1. Balrampur Chini Mills Ltd. 2. Dhampur Sugar Mills Ltd. 3. Triveni Engineering & Industries Ltd.

To read report in detail: SUGAR INDUSTRY



In the face of the volatility in the economic environment and currency, 2011 recorded steady growth for technology and related services sector, with worldwide spending surpassing USD 1.7 trillion, a growth of 5.4% over 2010. Software products, IT and BPO services continued to lead, accounting for over USD 1 trillion - 63% of the total spend. IT-hardware spend of USD 645 billion, accounted for the balance 38% of the worldwide technology spend in 2011. The year saw renewed demand for overall global sourcing, which grew by 12% over 2010, nearly twice the global technology spend growth.

India’s share in global sourcing stood at 58% in 2011, up from 55% in 2010. Indian IT-BPO exports continued on the growth path in FY12, as it is estimated to have grown by 16.3%. IT services has been exhibiting the robust growth at 19%, BPO growing by 13% & ER& D by 15%. Transformation, new business models are driving organization wide efficiencies

While the growth in IT-BPO spend is expected to be gradual over the next three years, global sourcing spend is seen to outpace this growth. IT outsourcing market is set to grow at a CAGR of about 8% over 2011 to 2013, while BPO off shoring is expected to grow at a little over 7% during the same period. Costs still remain essential for global sourcing, industry expertise and innovation is expected to drive future sourcing requirement. In addition, rate of introduction of new technology is much faster now and is expected to continue to be even faster in future. There is a strong correlation between technology adoption rate and investment rate. The year 2011 was the year of mobile adoption, where tablets and smartphones sales growth, by volume and by percentage, outpaced the shipment of desktop and laptop market. This mobile revolution witnessed spending by organizations in developing both consumer apps and enterprise apps.

From IT industry perspective - the market for enterprise mobility solutions alone is expected to grow to USD 17 bn by 2015, presenting a huge opportunity to increase revenue from this segment at a pace of triple-digit growth. Clearly, the future of technology services industry is beyond services - it will be a combination of services, solutions and platforms. Indian IT
organizations are investing in building platforms to drive future growth opportunities. These domain solutions and technology platforms will offer improved revenue leverage versus talent employed in the industry and will also significantly increase the intellectual property base of the Indian IT industry. The industry can take a clue from the fact that public cloud services
spending is expected to outpace growth of the overall IT spend by about four times between 2012 and 2015.

To read report in detail: IT INDUSTRY

>STERLITE INDUSTRIES: Expansion update

Sterlite Industries India’s (SIIL) 1QFY13 EBITDA was 5%/7% below our/street estimates, while PAT was 1%/5% above our/street estimates, respectively, due to higher other income and lower tax despite being hit by forex loss. Power segment posted a strong performance, while other segments like aluminium, zinc and copper witnessed minor pressure. SIIL will witness multiple expansion projects getting commissioned in the next one year, which would ensure healthy growth. We retain our Buy rating, earning estimates as well as the TP on SIIL of Rs138. Our TP is based on the combined entity, Sesa-Sterlite’s valuation. 

Power segment gives a positive surprise, aluminium and copper drags: Driven by lower costs due to higher power generation and better coal availability, the power segment was able to post EBITDA margin of 37.6% versus 32.4% in 4QFY12 and 27.0% in 1QFY12. Power realisation per unit increased 1% QoQ, while costs/unit dropped 6% QoQ. Aluminium segment, particularly BALCO, continued to witness high costs to the tune of 17% YoY and 7% QoQ in rupee terms due to tapering of coal linkage and higher costs of alumina due to low grade of bauxite. Copper segment also disappointed due to lower Tc/Rc margin and higher production costs. 

Expansion update: BALCO is likely to start metal tapping operations at its 325,000tn smelter from 3QFY13 onwards, while the first 300MW unit of its 1,200MW power plant is set for synchronisation in 2QFY13 (deferred by a quarter). SEL’s fourth unit is under trial run and the same is likely to start commercial power generation in 2QFY13. After getting environmental clearance, SIIL is looking at obtaining stage-II forest clearance for 211mt BALCO coal block, but we expect a major delay. Talwandi Sabo plant is progressing well and its first unit of 660MW is set to be synchronised at the end of 4QFY13, although we expect a delay of 3-6 months. SIIL has indicated that the new expansion plan for HZL is being prepared and would be presented in due course. 

Other highlights: SIIL started an additional 700MW power transmission capacity in 1QFY13, while, it expects to commission another 1,000MW transmission capacity by 4QFY13, taking the total capacity to 2,850MW. SIIL has responded to Coal India’s offer of supplying pit-stock inventory (logistics arrangements have to be made by the buyer) at the administered price. It expects 2-3mt of additional coal from this route.

To read report in detail: SIIL


Continues to impress with yet another quarter of strong results
Yes Bank’s reported PAT of Rs.290.1 cr in Q1FY13 resulting in a growth of 34.3% on a YoY basis and 6.7% on QoQ basis.

Loan book growth moderates
Yes Bank loan book grew at 16.4% YoY and 1.4% on a QoQ basis in Q1FY13. Total Customer Assets (Loans + Credit Substitutes) grew by 32.4% to Rs 49,340 cr in Q1FY13. The bank expects to grow ~30-35% in its total customer assets. We have factored in growth of 34.5% for customer assets in FY13E and 25.7% in FY14E.

CASA momentum continues
CASA deposits increased by 71.5% YoY and 10.5% QoQ to Rs 8,170 cr taking the CASA ratio to 16.3% in Q1FY13 up from 10.9% in Q1FY12. The Bank continues to witness increased traction in CASA on the back of enhanced Savings Rate offering and improvements in productivity. We expect CASA ratio to be at 17.5% and 18.4% in FY13E and FY14E.

Cost to income ratio remains elevated
The bank added 25 new branches and added approximately 540 employees in Q1FY12 which resulted in higher operating expenses. The cost to income ratio stood fairly stable at 39.5% in Q1FY13 as compared to 39.8% in Q4FY12 and broadly within the Management’s targeted levels. We expect cost to income ratio to be at 39.3% and 39.2% for FY13E and FY14E.

Non- interest income continues to impress
Non Interest Income grew a whopping 74.3% YoY and 8.2% QoQ to Rs 288.1 cr in Q1FY13. Financial Markets increased almost 2.5x to Rs 95 crs which has been the highest level since Q1FY10 primarily due to Rs 30 cr of treasury gain. Management does not expect these levels of growth to be sustainable going forward. We expect non-interest income to grow 29.7% and 27.3% for FY13E and FY14E.

Asset quality remains stable
Gross NPA increased 30.6% QoQ to Rs.109.5 Cr in the quarter ended June 2012. Gross NPAs and Net NPAs stood at 0.28% & 0.06%, respectively as on June 2012. The bank’s restructured assets stood at 0.51% of gross advances at Rs 196.5 cr in Q1FY13. Provisioning coverage ratio of the bank (including technical write off) stood at 78.3% in Q1FY13. We expect Gross NPAs to be at 0.39% and 0.42% for FY13E and FY14E and Net NPAs to be at 0.07% and 0.08% for FY13E and FY14E.

To read report in detail: YES BANK



Vardhman Textiles’ (Vardhman) Q1FY13 numbers were a mixed bag – revenues came in marginally lower than our expectation but EBITDA and PAT surprised positively. The company reported a robust expansion in operating margins (both sequentially and YoY) led by healthy improvement in realisations (sequentially) and substantial reduction in input costs YoY. The company is on track with expansion plans and is also going ahead with the expansion of 55,000 spindles that it had put on hold. Even in a bleak economic situation, the company is going ahead with the expansion plans as it is unable to cater to the customer demands completely and has, hence, laid out a capital expenditure of | 1,800 crore during FY12-14E. Considering the uncertainty over the profitability scenario in H2FY13E we have not revised our estimates. During FY12- 14E, we expect sales, EBITDA and PAT to grow at a CAGR of 16.0%, 18.4% and 30.0%, respectively. However, the current valuations do not provide comfort. Therefore, we maintain our HOLD rating on the stock.

Operating margins – a positive surprise…
Vardhman’s Q1FY13 revenues remained flat both YoY and QoQ, at | 939.6 crore as against our estimate of | 1,008.2 crore. The yarn segment de-grew 4.6% to | 804.5 crore while the fabric segment grew marginally (up 2.0% YoY) to | 314.8 crore. Operating margins were up 1424 bps YoY to 18.1% as the company had taken a one-time inventory write-off in the corresponding quarter last year.

…but an uncertain H2FY13 prevents change in estimates
Even though the company has positively surprised us on the operating profit front we have not increased our earnings estimates as we are apprehensive about the profitability situation in H2FY13E. With a lower cotton crop expected in cotton season 2012-13, prices of cotton are likely to remain firm or trend upwards, thereby pressuring the profitability.

Uncertain times and a weak past lead to discomfort with valuations 
Vardhman is recovering well from a painful FY11 with demand picking up and also an improvement in margins (due to favourable realisations and input prices). However, we feel the current stock prices factor in the positives and see limited upside from current levels. We maintain our HOLD rating with a target price of | 229 (based on an average arrived at by assigning a multiple of 0.7x FY14E book value and 4.5x FY14E EPS).

To read report in detail: VARDHMAN TEXTILES


Sanofi India's (SANL) 2QCY12 operational performance was in line with our expectations. Key highlights:

 Net sales grew 23.5% YoY to INR3.74b v/s our estimate of INR3.7b. We believe topline growth has been led by strong growth in domestic revenue on consolidation of Universal Medicare acquisition. Exports are also likely to have grown during the quarter.

 EBITDA grew 22% YoY to INR522m v/s our estimate of INR537m. EBITDA margin contracted 10bp to 14% v/s our estimate of 14.5%.

 Adjusted PAT declined 18.5% YoY to INR405m and was lower than our estimate of INR442m due to higher amortization cost relating to the brands and technical knowhow acquired from Universal Medicare in 2011.

 SANL has, in the past, indicated that for the domestic business, the rural and OTC segments will be the key growth drivers, and that it is likely to incur extra expenditure to establish its presence in these segments. This is likely to pressurize short-term profitability.

We believe SANL will be one of the key beneficiaries of the patent regime in the long-term. The parent has a strong R&D pipeline with a total of 61 products undergoing clinical trials, of which 18 are in Phase-III or pending approvals. Some of these are likely to be launched in India. However, SANL's profitability has declined significantly in the last five years, with EBITDA margin declining from 25% in CY06 to 14.3% in CY11, mainly impacted by discontinuation of Rabipur sales in the domestic market, lower export growth and higher staff & promotional expenses. RoE has declined from 28.6% to 17.3% during the period. The stock trades at 29.9x CY12E and 23.8x CY13E EPS. We believe that the stock performance will remain muted in the short term until clarity emerges on future growth drivers. Maintain Neutral.

To read report in detail: SANL

>BIOCON: Fidaxomicin launched in Europe

Biocon’s revenues for Q1FY13 were in line with our expectations but EBIDTA margin and net profit were below our expectations. The company reported 30%YoY growth in revenues, 400bps fall in EBIDTA margin and 12%YoY growth in net profit. The sales growth was across all verticals. Notably among them were: 52%YoY growth in branded formulations-India and 40%YoY growth in contract research. The company has completed global Phase I clinical trials for biosimilar glargene. Biocon’s Itolizumab has completed Phase III clinical trials and is likely to be launched in India. The company has plans to outlicense this molecule. We have a Buy rating for the scrip with a target price of Rs344 (based on 16x FY14E EPS).

Excellent sales growth: Biocon reported 30%YoY growth in revenues from Rs4.43bn to Rs5.77bn. About 16% of the growth was attributed to rupee depreciation. The biopharmaceutical business (64% of revenues) grew by 23%YoY from Rs2.99bn to Rs3.68bn. Its domestic formulation business (15% of revenues) grew by 52%YoY from Rs567mn to Rs860mn. The contract research business (21% of revenues) grew by 40%YoY from Rs874mn to Rs1,224mn. Margin under pressure: Biocon’s margin for 1QFY13 declined by 400bps from 25.3% to 21.3% of net sales due to the overall increase in costs. Its material cost increased by 60bps from 47.8% to 48.4% of net sales due to the rise in imported raw material cost. Other expenses went up by 340bps from 12.4% to 15.8% due to the rise in R & D expenses.

Fidaxomicin launched in Europe: The Fidaxomicin partner Optimer Pharma, US has launched the product in Europe and Canada in June’12. We expect Fidaxomicin supplies to Optimer to be major growth driver for Biocon. 

Domestic formulations: Biocon reported 52% growth in domestic formulations led by oncology, diabetology and comprehensive care. The management expects this business to cross Rs5.0bn revenues by FY15.

Valuations: We expect Biocon to benefit from the strong growth in domestic formulations, contract research and insulin businesses. At the CMP of Rs239, the stock trades at 13.9x FY13E EPS of Rs17.2 and 11.1x FY14E EPS of Rs21.5. We have a Buy rating for the scrip with a target price of Rs344 (based on 16x FY14E base EPS of Rs21.5) with an upside of 43.9% over CMP.

To read report in detail: BIOCON

>JSW STEEL: Resolution of iron ore crisis on the horizon

Resolution of iron ore crisis on the horizon: JSW Steel has indicated that a sizeable number of mines had their reclamation and rehabilitation (R&R) plans approved and these mines should start production in the next one-two months. Though we believe it may take three-four months to start production, JSW Steel has built in sufficient amount of inventory to take care of its needs in the interim period. 

Operational performance remains strong: JSW Steel achieved 27% YoY and 4% QoQ jump in steel production due to higher utilisation. The company posted a 4% QoQ surge in realisation, which helped it to achieve a 17% QoQ jump in EBITDA/tn. Overall, the company was able to achieve 33% YoY and 1% QoQ (4QFY12 had an exceptional gain of US$36mn made by the US subsidiary) jump in consolidated EBITDA. 

Performance update of subsidiary and associate companies: US operations reported EBITDA of US$6.4mn in 1QFY13 compared to US$3.6mn in 1QFY12. The Chilean subsidiary reported EBITDA of US$8.5mn compared to US$12.7mn in 1QFY12 and US$0.9mn in 4QFY12. JSW Ispat reported EBITDA of Rs4,490mn compared to Rs2,907mn in 4QFY12. In calculating the profit of associate companies, JSW Steel has not considered deferred tax credit and therefore it reported a loss of Rs1,496mn despite JSW Ispat reporting a profit of Rs4,782mn during the quarter.

To read report in detail: JSW STEEL

>HARD NUMBERS: Asia and the middle income trap

 Despite rising prosperity, slowing growth in Asia has raised concerns that the region might fall into the middle income trap
 As measured over the last four decades, a number of markets have indeed failed to lift income relative to the United States
 Despite rapid growth in the last ten years, further gains will be harder to achieve as productivity gains slow across the region

It gets harder over time
Investors are nervous about Asia. Impressive story, sure. But growth is slowing. Questions abound. Is this just a cyclical downturn that can quickly be cured with an adequate dose of policy easing? Or is there a deeper malaise? Will we have to get used to more subdued rates of growth than in the past? Ponderous stuff.

In reality, the answers strike middle ground. Asian economies will respond to policy easing in the coming months, but a return to the heady growth rates of the last decades appears hard to achieve. A number of reasons come to mind, including demographic forces and evidence that productivity growth has slowed (see Frederic Neumann and Tushar Arora, Asia’s shifting demographics, 24 February 2012; Frederic Neumann and Sanchita Mukherjee, Is productivity growth slowing in Asia? Parts 1, 2, and 3, April 2012). Asia’s growing challenges are not terribly surprising. As economies mature, they tend to slow down. It is easier to grow fast when poor. Harder to do so when rich.

Lurking beneath all of this is the middle income trap. History shows that in some countries growth slows so much as they mature that they never break onto higher ground, forever stuck in a range where per capita income doesn’t rise meaningfully further. Hence the question nagging investors: Is Asia at risk of getting caught as well?

Clear-cut answers are impossible. Much depends on policy. In the early phase of development, growth is usually driven by pumping cheap labour from farms into cities. Productivity gains are also easily attained as foreign technology is imported or imitated, and evident inefficiencies eliminated. With time, however, growth becomes more dependent on sustaining efficiency gains, not least because the supply of rural migrants dries up and wages rise. Productivity growth also becomes harder to achieve as countries catch up to international standards. At this point, policy becomes decisive. Further advances depend largely on efficient administration.

We will have much more to say on the subject in the coming months. For now, however, let’s look at where the region currently stands.

To read report in detail: HARD NUMBERS


Lower enrolments impact Q1 performance

NIIT’s Q1FY13 performance was below our expectations. The Individual Learning Solution (ILS) segment witnessed a decline of 8.3% YoY which led to lower than expected performance in ILS and affected the overall performance of the company. Also, the high fixed cost model had a negative impact of 726bp in operating margin for the ILS segment. We downgrade our rating to Neutral (from Buy) on the stock considering the pressure on the ILS segment in FY13E and its impact on overall margin of the company. Accordingly, we revise our earnings assumption downward by ~30% at EBITDA levels.

Lower than expected performance in Q1: Though we were expecting a weak performance considering the seasonal impact and challenging macro environment, it was much below our expectation in ILS. On a like to like basis, the revenue grew by 3.9% YoY to Rs2.3bn. EBITDA margin contracted by 260bp on yoy basis to 5% (our expectation of 8%) mainly due to the fixed cost model in ILS segment.

ILS segment business under pressure: Decline of 13% enrolment in India IT training business led to a fall of 8.8% YoY in revenue to Rs1.1bn and accordingly due to higher fixed cost, the operating margin witnessed 726bp decline to 2.3% on YoY basis. Lower hiring from IT companies resulted in lower demand for its courses and it is going to be difficult for company to get enrollment in the 9M period.

Corporate Learning Solution (CLS) showed strong performance and helped the company deliver YoY revenue growth. CLS segment registered 20% YoY growth in revenue to Rs730mn. Better revenue mix in favour of managed training services helped expand EBITDA margin by 887bp to 10% (on like to like basis). We believe that the company’s decision of selling Element K business was very apt as it helped improve topline and margins.

Concall highlights: Challenging macro environment led to lower than expected performance in the IT training enrollment. Going forward, the company indicated it would double its efforts on NIIT Insights which is into the colleges segment, increase offerings on cloud, push for advanced high tech courses and non-IT training courses to improve enrollment growth. During Q1, the company made certain provisions with regard to the Element K transaction including vendor claims. This could see a reversal. Also, the company has seen tax write back this quarter on account of lower tax liability on Element K deal.

We downgrade the stock to Neutral rating (from Buy) considering the pressure on ILS segment in FY13E and its impact on overall margin of the company. Based on weak performance in the ILS segment, we revised our earnings assumption downward. We expect 30%/300bp fall in EBITDA/EBITDA margin in FY13E and FY14E on account of pressure on IT training business. The company would be able to make profit mainly due to the share of profits coming from NIIT Technologies investment. At the CMP, the stock is trading at 10.9x FY13E and 8.3x FY14E earnings estimates. Based on current financial estimates and business outlook, we revise our target price to Rs36 (from Rs54 earlier).


>LARSEN & TOUBRO: Adj. PAT slightly ahead; orders disappoint

L&T’s1QFY13 reported results were marginally ahead of estimates after adjusting for several one-offs reported during the quarter — namely, higher other income, forex loss on unhedged foreign currency loan liability and compensation for voluntary retirement scheme. Revenue growth surprised positively at 26% y-y, even as order inflow disappointed marginally at INR195bn (vs. Nomura est of INR200bn). Adjusted for the one-offs, results were slightly ahead of our and consensus estimates.

Other highlights of the result are as follows:
 Reported EBITDA at INR10.9bn for 1QFY13 was below estimates. However, as per the CFO’s comments on CNBC earlier today, LT has accounted for mark-to-market provision on the unhedged portion of its foreign currency loans of ~INR1.6bn. CNBC further cited additional forex loss (possibly on trade positions) for ~INR1.07bn for the company in 1QFY13. Adjusted for these, EBITDA margin was in-line with expectations at 11.3%.

 However, we note that SG&A expense historically has been around 4.75% of sales compared to 4.8% this quarter (despite including FX loss). Net of FX loss of INR2.67bn, SG&A expense would have been 2.52% of sales, which is amongst the lowest in the past 5 years.

 Net income was boosted by strong other income at INR6bn vs INR3bn a year ago. Management cited higher dividends from subsidiaries and treasury gains as key reasons for growth.

 Order inflow at INR195bn was below our estimate and led by the transportation and buildings & factories segments. Net of chunky orders received from L&T IDPL and Reliance Infra, as well as spilled over orders from FY12, the sustainable run-rate of order inflow is much lower at INR100-120bn per quarter, based on our calculations.

 Management attributes the y-y revenue drop in machinery and industrial products to restructuring of the welding products division into a subsidiary.

 Management maintained its guidance for 15-20% growth in FY13 both in revenues and order inflow.

Management’s conference call is scheduled at 5pm IST today, and we look for commentary on revenue execution, slow-moving orders, SG&A expense and other income break-down, margin outlook and order breakdown.


>CAIRN: Q1FY13 Result Update

Pipeline debottlenecking to watch out for
Cairn reported a stellar performance inQ1 buoyed by higher crude production volumes, higher net realisation for Rajasthan crude, higher forex gains and lower tax outgo. The company reported PAT of Rs38.3bn which included Rs8.7bn forex gains. But for forex gains PAT would have been Rs29.6bn. Following government approval, the company has been producing 175,000bpd since mid-April averaging at 167,146bpd in Q1. Pipeline constraint is likely to keep the current production level stagnant over the next couple of quarters. Hence production upside can be envisaged only from Q4FY13 during which the company is also expected to commence production from its Aishwariya field.

Rajasthan production at 175,000bpd: Cairn received approval to increase Mangala production to 150,000bpd in early Q1 which led to average production during the quarter to 167,146bpd. Gross production from all assets of Cairn stood at 206,963bpd while net was at 127,226bpd during Q1.

 Rajasthan crude fetches only 7.3% discount: Rajasthan crude fetched only 7.3% discount to Brent during Q1 and netted US$100/bbl benefitting revenues and profitability. Average crude realisation during Q1 was at US$101.0/bbl while average natural gas realisation was at US$4.5/mmbtu.

Significant forex gains add to bottom-line: Opex (incl. pipeline transportation) for Q1 stood at US$2.3/bbl and DDA was lower at US$7.0/bbl owing to higher crude production. The company also reported forex gains of Rs8.7bn on forex deposits and receivables. Tax rate also favored Cairn which remained low at 4.7%. Higher crude volumes, lower opex and DDA, higher forex income and lower tax rate led to 40.4% YoY and 75.0% QoQ jump in bottom-line at Rs38.3bn despite higher cess.
Augmenting pipeline capacity would be the near term objective: Devoid of incremental pipeline capacity, Cairn’s crude production is likely to stagnate at 175,000bpd over the next couple of quarters. The company has also guided for delayed commencement of Aishwariya production from end CY12 to Q4FY13 (delayed by a quarter). Instead of adding pumps to raise the pipeline capacity (capex of over US$100mn+), the company is going ahead with a cost effective method of using drag reducing agents which would debottleneck the existing capacity from current 175,000bpd to 300,000bpd eventually. We believe the augmentation of pipeline capacity would be a trigger for the stock going ahead. The company has also indicated capex of over US$2.0bn for FY13E and FY14E of which 60% will be utilised for exploration and
development of Rajasthan assets while the rest would be invested in other exploration programs and matured assets. We remain optimistic on Cairn’s ability to increase production from current 175,000bpd to 300,000bpd over the next 2-3 years given the successful track record in development of Rajasthan field (contingent on government approvals). We thus maintain our ‘Buy’ rating on the stock with a price target of Rs387.



Competition keeps RPM low

Idea Cellular’s (Idea) Q1FY13 was a tad lower than our expectation and also that of the street. While we were lowest in terms of revenue estimation, it was better than our estimates due to adjustments in revenue recognition in the tower segment (Indus). Net profit was down due to lower EBITDA margin, higher interest expenses and oneoffs. We maintain our neutral rating considering 1) prevailing competition in the industry which is resulting in pressure on revenue per minutes (RPM) to maintain market share and 2) regulatory uncertainty and its likely pressure on Idea Cellular.

Lower than expected Q1 performance: As against our revenue expectation of Rs54.45bn, the revenue (reported) was up 2.9% QoQ to Rs55bn on the back of 1) 5.3% QoQ minutes of usage growth of 131bn min.; 2) 2.4% QoQ revenue per minute decline (lower than our expectation of 1%) and 3) adjustment in revenue recognition of Indus towers (now Indus reports revenue on gross basis including power fuel charges). Net profit was lower than our expectation by 22.4% QoQ to Rs2.3bn due to lower EBITDA margin, higher depreciation and interest expenses. The company changed the asset duration resulting in higher depreciation to the tune of Rs480mn and reported forex loss of Rs245mn.

Established circles showed expansion in margin: Revenue growth was 2.2% QoQ (lower than the voice business growth of 2.5% QoQ) on the back of minutes of usage growth. EBITDA margin improved 121bp to 31.7% on the back of scale benefit in our opinion.

Minutes of usage coming in at a price: Subscriber addition of 4.5mn in Q1FY13 was the weakest in the last 11 quarters. Minutes of usage growth of 5.3% QoQ to 131bn min was on the back of 2.4% QoQ to 41.2paise.

Concall highlights: The competitive intensity is high among players. The management expects losses to continue in newer circles as the gestation period has elongated in the current environment. The company is working on improving data services revenue by focusing on new delivery platforms and increasing 3G penetration. During Q1FY13, the incremental ARPU from 3G was Rs88 with subs base of 3.1mn. Capex guidance for FY13E remains at Rs35bn and changes in depreciation policy would result in increase in depreciation by Rs1.8bn.

Earnings revision: We have revised our earnings estimate to factor in changes in accounting adjustments during the quarter such as tower business revenue recognition and depreciation expenses.

Upside capped, maintain Neutral rating on stock: We believe that the current valuation of 6.1x FY13E and 4.7x FY14E EV/EBITDA captures the growth potential and regulatory challenges would restrict stock outperformance in our opinion. We maintain our Neutral rating on the stock. Risk to our call would be an increase in revenue per share in 2G voice that could lead to outperformance in stock. However, we do not foresee this in the near term as the competitive intensity is high and there is regulatory uncertainty.



Asian Paints reported disappointing set of numbers for Q1FY13 on the back of meagre volume growth. Company reported consolidated sales of INR 25,479mn, a YoY growth of 12.72% largely led by price increases. EBIDTA margin improved by 18bps YoY to 17.53%. PAT grew by 9.38% YoY to INR 2,884mn which was below our expectation. We expect volume growth to pick in next quarter; however, improvement in monsoon and stable exchange rate would be the key catalyst for the company's performance. We expect consolidated sales and PAT CAGR of 16.77% and 18.62% over FY12-14. At CMP, stock is trading at 30x FY13E EPS, which in our view is high on the backdrop of falling demand and continued pressure on margins. We downgrade to SELL.

Disappointed volume growth
Company's domestic decorative paints (standalone) business grew by 11.24% (after adjustment for shift in industrial business from standalone to subsidiary) representing a meagre volume growth of ~1% which is quite low compared to ~14% CAGR in last 2 years. The lower growth in volumes is attributed to higher stocking by dealers in previous quarter and lower consumer confidence in weak macro-environment which was also dented by ~25% cumulative price hikes taken by the company in last two years. However, we expect volume growth to pick up from next quarter onwards albeit at slower pace.

Price hikes supported margin expansion
Effective price hikes of ~5% YTD in decorative paints business supported by lower cost inventory helped company to improve its standalone EBIDTA margin by 343bps QoQ and 112bps YoY to 19.68%. However, the margin expansion in Q1FY13 in our view is not sustainable and is likely to contract in next quarter. Continued pressure on international and industrial paints business resulted in consolidated EBIDTA margins to improve by 249bps QoQ and 18bps YoY, lower than standalone. INR depreciation bereft company to take benefit of fall in international prices of key RM like TiO2 and crude derivatives.

Other business, a mixed bag
Other businesses including international and industrial paints business grew by ~32% YoY. International business reported good growth on the back of continued growth momentum in South Asian markets (except Nepal) and improved macro-environment in Middle East. Industrial paints business though reported growth in revenues but inability to pass RM inflation to institutional clients resulted in margin erosion. Growth in international and industrial paints business is expected to come down on the back of overall slowdown in Global economy and industrial sector.

Bad monsoon could be a damper
Company saw slowdown in rural demand owing to high inflation and delayed monsoon. In the event of bad monsoon, there could be risk to demand scenario particularly in rural markets which currently contribute ~50% to decorative paints revenue.

Outlook & Valuation
After considerable slowdown on volume front from ~16% in FY11 to ~11% in FY12 and ~1% in Q1FY13, we expect the downward trend in demand to continue. Lower demand also reduces the scope for any price hikes which would continue to put pressure on margins on the backdrop of high RM cost pressure. Poor monsoon and INR depreciation (against USD) could pose further risk to the overall performance of the company and therefore are key watchable. We downgrade the rating on the stock to SELL with target price of INR 3,336 (18 months) discounting FY14E EPS at 23x.


Results in-line; Maintain Neutral

Ashok Leyland’s (ALL) 1QFY13 operating results were largely in line with our expectations with EBITDA margins at 8.0%, identical to our estimate. Revenues at Rs.30.1bn (our est. Rs.9.3bn) registered a YoY growth of 21% and sequential drop of 30%. PAT stood at Rs.669mn, in line with our estimate of Rs.665mn but significantly lower than street estimate of Rs840mn. Though we continue to see macro headwinds impacting volume growth in CVs which can surprise on the downside, we believe that at these valuations (post correction in the stock price), it factors in the macro concerns. As a result, we maintain our Neutral
rating on the stock with a revised target price of Rs23.7.

Operating performance in line: Revenues stood at Rs.30.1bn compared to our estimate of Rs.29.3bn. The drop in NSR was lower than our expectations (down 10% QoQ v.s Est. 12%) resulting in better than expected revenue growth by 2.5%. Lower realization was expected due to higher contribution from Dost to overall volumes at 36% in 1QFY13 compared to 16% in 4QFY13. Also, increase in discounts largely neutralized the positive impact of price hikes. As expected, interest burden was on the higher side due to increase in borrowings to support the higher working capital requirement.

Conference call highlights: 1) the management expects overall M&HCV industry growth to remain flattish for FY13E. However, overall volume growth for AL will be around 7-8% for M&HCV segment. 2.) Overall borrowings increased to Rs.47.5bn in 1QFY13E largely on account of short term borrowing increasing by Rs.13bn due to higher working capital needs. 3.) Inventory as on 1QFY13E stood at 10,000 units; the management indicated about 25% cut in production in July and expects the inventory to correct to 6,000-7,000 units. 4.) The company incurred a capex of Rs.1.6bn in 1QFY13E and has scaled down overall capex for FY13E to Rs4.5bn from Rs.6.5bn earlier 5.) Discount has gone up by Rs.10-15k QoQ and now stands at Rs60-65k per vehicle.

Valuations and Recommendations: At the CMP of Rs22.6, the stock trades at 11.7x FY13E EPS of Rs1.9 and 9.2x FY13E EPS of Rs2.4. We continue to maintain Neutral rating on the stock with a revised target price of Rs23.7 (based on 6.0x FY13E EV/EBITDA and Rs2.7 per share as value of investments in JVs at 50% discount).



1. What is the face value of the Warrants?
Warrants have no face value.

2. On which stock exchanges are the Warrants listed?
The Warrants are listed on BSE Ltd and National Stock Exchange of India Ltd.

3. What is the lot size for dealing in the Warrants on the stock exchange(s)?
The lot size for dealing in Warrants on stock exchange(s) is of 1850 Warrants.

4. How many Warrants can be exchanged with Equity Shares at one time?
There is no limit on the number of Warrants that can be submitted for exchange.
5. Where should the Warrant Exercise Form be submitted for exchange with equity shares of the Corporation?
The Warrant holder can download the Warrant Exercise Form from the website of the Corporation ( and submit the same duly filled and complete in all respects along with at par cheque/demand draft and prescribed documents to the Registered Office or to the Investor Services Department of the Corporation, between 9.30 a.m. upto 5.00 p.m. at the following addresses. Please note that the last date for submission of
the form is Friday, August 24, 2012, in Mumbai.

Housing Development Finance Corporation Limited
7th floor, Ramon House,
H.T. Parekh Marg,
169, Backbay Reclamation,
Churchgate, Mumbai – 400 020.
Ph: 022-66316241/242/290


Investor Services Department
Tel Rasayan Bhavan,
Tilak Road Extension, Dadar T T,
(Opp BEST Workshop Gate No. 4),
Dadar East, Mumbai 400 014.
Ph: 022-61413903/05/07/09

6. What is the amount payable for exchange of each Warrant and what is the exchange ratio?
The Warrant holder is required to pay Rs. 600 per Warrant for exchange into 1 [one] equity share of Rs. 2 each of the Corporation.

7. What are the documents required to be submitted for exchange of Warrants?

In case of individuals
· Warrant Exercise form, duly filled, in original;
· Cheque / Demand draft drawn in favor of ‘Housing Development Finance Corporation Limited’ (account no. 00600350071894) towards Warrant Exercise consideration amount;
· Self - attested copy of PAN card of all Warrant holder(s); and
· Your telephone/ mobile number.

In case of non-individuals (Body Corporate, FIIs, FIs, Custodians, Firm, etc.)
· Warrant Exercise form, duly filled, in original;
· Cheque / Demand draft drawn in favor of ‘Housing Development Finance Corporation Limited’ (account no. 00600350071894) towards Warrant Exercise consideration amount;
· Certified copy of PAN card; and
· Certified true copy of Board Resolution of the firm, stating the list of authorized signatories; or
· Attested copy of Power of Attorney containing the names of signatories authorized to execute the Warrant Exercise Form.
· Your telephone/ mobile number.

8. What is Warrant Exercise Date?
The Warrant Exercise Date refers to the date on which the Warrant Exercise Form, duly completed in all respect, is lodged with the Corporation. If the Warrant Exercise Form is lodged after the business hours of the Corporation or on a holiday, the next working date would be considered as the Warrant Exercise Date.

9. What is Warrant Exercise Period?
The Warrant Exercise Period refers to the period from August 25, 2009 up to 5.00 p.m. on Friday, August 24, 2012 i.e., up to which the Warrant holders can lodge the Warrant Exercise Form along with at-part cheque/ demand draft and prescribed documents, with the Corporation, for exchange of Warrants with corresponding number of equity shares of the Corporation.

10. What are the modes of payment of Warrant Exercise consideration? Whether fund transfer through RTGS is accepted?
The Warrant Exercise consideration can be paid only through at-par cheque or demand draft payable at Mumbai.

11. Whether consideration can be remitted through DCS/RTGS/NEFT?
No. Consideration amount cannot be remitted through DCS/RTGS/NEFT.

12. Does the Warrant holder need to transfer the Warrants to a separate Depository (Escrow) Account prior to submission of Warrant Exercise Form?
No. On receipt and verification of Warrant Exercise Form and realization of the consideration amount, the Corporation will proceed to extinguish the Warrants as stated in the Warrant Exercise Form, through a Debit Corporate Action.

13. What is the last day of the Warrant Exercise Period?
In terms of the Placement Document dated August 21, 2009, the Warrant Exercise Period extends up to 5.00 p.m. on Friday, August 24, 2012, in Mumbai.

14. What happens if the Warrants are not exercise before the expiry of the Warrant Exercise Period?
Warrants not lodged for exchange with the equity shares of the Corporation before the expiry of the Warrant Exercise Period viz. up to 5.00 p.m. on Friday, August 24, 2012, in Mumbai will lapse and shall cease to be valid and amounts paid towards it to date will stand forfeited. No further claim shall lie against the Corporation in this regard after the said date.

15. What is the record date for suspension of trading of the Warrants?
The Corporation has in consultation with the BSE and NSE, fixed Tuesday, August 21, 2012 as the record date for suspending the trading of the Warrants, so as to enable the Warrant holders to exchange the said Warrants with equity shares of the Corporation, during the said Warrant Exercise Period viz. up to 5 p.m. on Friday, August 24, 2012, in Mumbai.

16. What is the last date for trading in Warrants?
Please note that trading in the Warrants will be suspended from Friday, August 17, 2012 and consequently the last date for trading in the Warrants on the floor of the Stock Exchange would be Thursday, August 16, 2012.

17. What are the consequences of non submission of the Warrant
Exercise Forms before the expiry of the Warrant Exercise Period? The Warrants not lodged for exchange by 5.00 p.m. on Friday, August 24, 2012, in Mumbai, will lapse and cease to be valid and amounts paid in that regard, will stand forfeited. Further, thereafter such Warrants will be
extinguished by the Corporation, and no further claim shall lie against the Corporation in this regard, after the said date.

18. Will the Warrant Exercise Period be extended?
No. The Warrant Exercise Period will not be extended under any circumstances.

19. How long will it take for the equity shares to be allotted and credited to your depository participant’s account?
The entire process of exchange of Warrants with equity shares of the Corporation is subject to verification of the Warrant Exercise Form, the prescribed documents and realization of the consideration amount. Thereafter, the Corporation will engage with the Stock Exchanges/
Depositories, for extinguishing the warrants, allotting and crediting corresponding number of equity shares, receipt of listing and trading approvals, which normally takes 15 days from the date of receipt.

20. Will the equity shares allotted pursuant to exchange of Warrants be eligible for dividend, if any, declared for the FY 2012-13?
Yes. The equity shares allotted pursuant to conversion of Warrants will be entitled to dividend for the full year, if declared, for the FY 2012-13.