Wednesday, August 22, 2012


To read report in detail: INDIA INSURANCE


>STRATEGY: Silver linings aplenty, but cloud lingers on

A small reversion in the P/E and stable earnings growth could lift the Nifty by 20% within four quarters. However, uncertain macroeconomic trends and government policies tend to hold down the valuation. Silver linings are held out by the resilience in FY12 earnings growth and, the yield‐gap to the Libor nearing the low end. Twice within three quarters, FII buying rose when the gap fell near its low. Another protective factor is the cyclical high in interest rates and inflation, and low in industrial growth. In the near term, sectors with strong earnings momentum during FY12 may extend their run. Over the next four quarters, a few more ‘non‐defensive’ sectors could outperform; we advise an overweight position on Construction, Telecom and Utilities, and select segments in Banks, Automobiles and Oil & Gas.

Triple deficits; policy measures hold key to next rebound in P/E
The large potential rebound in the Nifty depends upon the resolution of challenges posed by deficits in the budget, current account and monsoon rains as well as by inflation, interest rates and exchange rates. Earnings growth has lesser influence on the P/E than feared, as indicated by the lower contraction in the P/E, even as forecasts fell in the last six quarters.

Resilience in profits of vulnerable sectors is a positive
Three sectors with a strong link to industry and infrastructure, viz., Automobiles, Cement and Financials drove a late rebound in consensus forecasts for FY12 earnings growth of the Nifty to c9%. The pessimism on 1H2012 earnings growth coincided with the gloom cloaking most aspects of India. However, the diversity of businesses saw the weakness in a group of sectors, viz., Utilities, Telecom and Construction, being more than offset by the strength in the above three. This indicates that businesses and companies represented in the index are capable of protecting earnings during tough times.

Gap with USD Libor has set bottom of range, also precedes FII rebound
Relative to the Libor, the Nifty P/E is much closer to Feb09’s eight‐year low compared to local yields. The yield gap to the one‐year USD Libor indicates that the Nifty is barely 10% above a level that corresponds to this worst case. We also find a surge in the FII purchase of Indian equities soon after the yield gap nears this low. Over the medium term, this metric may point to a likely low point in the valuation as well as a likely revival in FII inflows.

Select ‘non‐defensives’ outperform; may expand over four quarters
Over a four quarter horizon, we advise an overweight position on stocks within Construction, Telecom, Utilities, and select segments within Banks, Automobiles and Oil & Gas. The 2012 year‐to‐date outperformance in Cement, PSU Banks, Construction, among others, indicates that a swing towards ‘nondefensive’ sectors is under way. Our top picks for the near term are ACC, Ambuja, UltraTech Cement, Torrent Pharma, Unichem, NTPC, Tata Power, HDFC Bank, LICHF and RECL. Over the next four quarters, our top picks are SBI, Axis Bank, Maruti, Tata Motors, BPCL, Cadila, L&T, Wipro, Bharti and Tata Steel.

To read report in detail: STRATEGY


>DEN NETWORKS: Q1FY13 results

Den Networks’ (Den) reported Q1FY13 results were in-line with estimates. Below are key takeaways of the results and our interaction with the management.

Revenue isn’t comparable with prior reporting due to accounting policy change: Den’s Q1FY13 total revenue stood at Rs 1.95bn. This isn’t comparable with prior reported revenues, as the company has now started reporting MediaPro revenue on a net basis (Gross revenues less cost of distribution rights paid to broadcasters). Earlier Media-Pro income was reported on a gross basis and content cost was included in operating expenditure. This move will however have no impact on EBITDA and profitability.

Cable income and EBITDA driven by STB sales: Den’s Cable business revenue stood at Rs 1.9bn, up 1% QoQ and 21% YoY. The company seeded 0.29mn Set Top Boxes (STBs), earning Rs 180mn of activation revenue. This led to overall business EBITDA margin improving to 19.8%, from 10.5% in Q4FY12 and 6.8% in Q1FY12.

STB seeding sluggish, but Den believes that phase I deadline will be met: Den has seeded ~70,000 STB’s in July 2012. Management acknowledged a slight dip in rate of seeding since the announced delay, but maintains that digitization will happen on time as the government is serious about digitization and is regularly monitoring stakeholders (demanding status reports during weekly and ad-hoc task force meetings). We highlight that Den has digitized ~0.7mn of its 2mn phase I subscribers, and now needs to seed 0.4mn subscribers/month to meet the deadline.

Digitisation progress on-track, maintain BUY: Considering the pack and STB rate increases by DTH peers, we upgrade our estimates for Den, factoring in ARPU increases and STB subsidy reduction going forward. Our DCF implied target price of Rs 150 implies an upside of 23% over the current price. Maintain BUY.

To read report in detail: DEN NETWORKS


Homegrown smartphone industry on track, Rmb500 smartphone emerging

Made-in-China smartphone shipment on track to reach 170MM in 2012, or 25% of global shipment. Smartphone production volume of Chinese vendors in 1H12 reached 70mn, according to HQ Research. Top 3 vendors (Huawei, ZTE and Lenovo) accounted for 42% of total units in 1H12, vs 60+% in 2011. This is driven by 1) MTK/QRD lowering barriers to entry in R&D; 2) Chinese telcos warming up to low-tier brands and 3) Huawei/ZTE focusing on profitability rather than volume. Vendors gaining market share include China Wireless, Gionee and OPPO. We maintain our smartphone shipment units by Chinese vendors at 170MM in 2012, but we cut shipment units of Huawei/ZTE by 11%/13% to 40MM/28MM (Table 3).

Asian chipset vendors continued to gain market share in June. Total smartphone chipset shipment to Chinese handset makers reached 75-80MM in 1H12. MediaTek’s smartphone chipset shipment in June amounted to 8mn (nearly half are EDGE/TD/EVDO), exceeded Qualcomm’s shipment in China for the first time. Spreadtrum’s smartphone chipset shipment reached 1mn (including TD and EDGE) for the first time in June and is poised to ramp up quickly to 3mn per month by August. Meanwhile, price competition intensified further – ASP of low-to-mid end smartphone chipset is now touching US$6 – putting pressure on margins of chipset makers.

Chinese telcos and open channels ready to push Rmb500 smartphone in 2H12. In the open channel, we found 18 smartphone models with 3+’’ touch screen priced at Rmb500 or below at, a popular website on handsets. Chinese telcos will start to push Rmb500 smartphone in 3Q12. For example, multiple smartphone models including Lenovo A288t, Huawei 8808D and K-touch 800A will be launched for China Mobile in July-August period. China Unicom continues to focus on the Rmb800-1,500 segment but will launch Rmb500 models as well. We summarized China Unicom’s planned smartphone specifications (screen, CPU, RAM, ROM, camera, sensor and others) in 5 price categories in Table 4.

Whitebox tablet – a passing fad or here to stay? Whitebox tablet shipment in 2012 could exceed 40MM, according to EE Times and several industry sources. In 2Q12 whitebox tablet shipment was 9-10MM vs 11-12MM in 1Q12. The 20% drop qoq is mainly due to high inventory level at the end of 1Q12. Major chipset makers for whitebox tablets include Rockchip, Allwinner, VIA, Infotmics and Amlogic. These are mostly 7'' ones with FOB price of US$50. They are mainly replacing multiple devices such as MP4s, PDAs and DVDs in emerging markets. Vendors are aiming to launch 5'', 6'', 8'' and 9'' products entering 2013. We’ll follow the space closely to see whether whitebox tablet will start to impact PC and smartphone market then.

Stock implication: We maintain our positive view on MediaTek and Spreadtrum as they will continue to ride the wave of low-price smartphones.

To read report in detail: CHINA TECHNOLOGY

>CEMENT SECTOR: 3 favorable trends, 3 positive expectations; Upgrading EPS 4-6%; potential for further 10-20% upgrade

Trend #1 Strong realizations across companies, beating estimates by wide margins
Trend #2 In-line costs, with no major surprises; cost push showing signs of moderation
Trend #3 Meaningful upgrades across companies; street yet to catch up

Expectation #1 Stabilizing cost factors should assuage cost inflation
Expectation #2 Strong realizations even in monsoon season to drive further upgrades
Expectation #3 Meaningful upgrades in consensus estimates to drive stock prices

Prefer Ambuja and UltraTech/Grasim among large-caps, and Shree Cement among mid-caps.

1QFY13 numbers decipher more positives, no negatives
The cement majors have reported strong numbers for 1QFY13 (EBITDA 9-18% ahead of estimates), amidst a mixed bag of expectations – improvement in operations coupled with regulatory concerns post the adverse verdict by the Competition Commission of India (CCI). The robust performance is attributable to (1) strong QoQ improvement in realizations (6-8%), and (2) in-line volumes and cost push (which has been showing signs of stabilization). Given our positive outlook, we have upgraded our earnings estimates (4-11% for ACC, Ambuja and UltraTech), backed by 10-12% upward revision in realization assumptions.

To read report in detail: CEMENT SECTOR

>PRIME FOCUS: Q1FY13 Result Update

Operationally a strong quarter
Prime Focus posted Q1FY13 operating results in line with expectation. Apart from the post production business which got impacted in UK, we believe the 2D to 3D conversion business along with PFT would be future growth drivers for the company. Forex gain of Rs125mn boosted PBT while higher tax muted profitability. We maintain our BUY rating.

Q1FY13 results in line with expectations: Prime Focus posted Q1FY13 results inline with expectations. Topline was at Rs1882mn (up 12.4% YoY) 1.4% below our expectations while operating profit was at Rs572mn (up 24.3% YoY) on the back of higher forex gain and margin expansion while PAT was at Rs210mn, down 16.4% (down 26% YoY) from our expectations due to higher than expected tax rate.  Post production business under pressure: Post production business was under pressure and down 41% QoQ following the slowdown in Europe and UK. Olympics further impacted TV advertising and triggered a marked downturn in expected activity levels across the post-production industry in UK. This impacted the profitability of its UK subsidiary which posted losses during the quarter and is expected to be under pressure for the next couple of quarters.

2D to 3D conversion continues to expand: This segment grew by 60% QoQ to 

Rs832mn on the back of a strong pipeline of movies. The company is currently  working on Wizard of Oz and Star Wars 2 & 3. Prime Focus delivered close to 400  shots for the recently released Total Recall, endorsing its ability to cross-sell VFX  services to the 3D conversion client base in Hollywood. We believe VFX would help  the company to gain more business and increase margins going forward.

PFT continues to gain traction: Company engaged with Sony Music to transition  its video operations to the Cloud on the CLEAR platform and had several client wins in South Africa including becoming the leading TV Spot Distribution supply chain solution in that market. It has also extended its content localization offering- Language Dubbing services, complementing its existing subtitling/captioning service offering. During the quarter PFT business was up 16.8%QoQ and is expected to post revenues of Rs789mn in FY13E.

Maintain BUY: The stock is currently trading at 5.2x and 3.8x FY13E and FY14E EPS 
of Rs8.76 and Rs11.9 respectively. We believe the company is at an advanced stage  to repay the FCCB of USD79mn which we believe is the biggest hangover on the stock. Post this we expect the stock to re-rate given its strong business model and global dominance in 2D to 3D conversion. Hence we maintain BUY rating on the stock.



We hosted HCL Tech on an NDR in Asia last week. The management team was represented by Mr Anant Gupta (President & COO), Mr Anil Chanana (CFO) and Mr Sanjay Mendiratta (Head of IR). The key takeaways from the NDR were: 1) significant market-share shift opportunity over the next 2.5 years, when ~USD140bn worth of deals come up for renegotiation, 2) overall spending remains soft, however, market-share gains are possible from vendor churn (which has increased from ~15% to ~35% over the past 3-5 years towards newer players), 3) expects significant deals to be decided in 2Q/3QFY13F and 4) confidence in maintaining EBIT margins at FY12 levels of ~16%. HCLT remains our top pick in IT, we maintain BUY. Continued outperformance on revenue growth and margin stability, in our view, can lead to a further re-rating.

Big window of opportunity over next 2.5 years from vendor churn
The company sees ~USD140bn worth of deals coming up for renegotiation in the total outsourcing space (source TPI) over the next 2.5 years. This is coupled with vendor churn increasing from 15% to 35% over the last 3-5 years. This, in our view, lends a USD40bn+ opportunity for HCLT to target. The company has seen successes in the past in winning large deals (USD2.5bn+ over last 3 quarters) with Astra Zeneca, Statoil, UPM, Blue Cross and Blue Shield Association etc. The company, in conjunction with participating in churn, is also focussing on cross selling and tracks the service adoption at its clients very closely.

Vendor churn in BFSI an opportunity
While overall spending in BFSI remains constrained, the company sees vendor churn opportunities over the next 6 quarters (HCLT signed USD1b+ of deals in BFSI over last 3 quarters). This is an opportunity for the company to get into blue chip clients, which it was shut out from due to limited participation in the Y2K boom and strong deal ramp-ups in the 2003-05 period.

Reasons for churn and key success factors
The company sees vendor churn because of: 1) dissatisfaction with existing vendors on rigidity in cost structures and limited flexibility, 2) availability of more innovative cost structures, 3) the need to delink technology and services, and 4) greater stability of technology over time reducing input costs and change in importance of systems as business requirements change. The key success factors according to the company are: 1) an ability to showcase a business case with savings of at least 10-15% being imperative for a client to look for churn, 2) zero defect transitions (as extensions are costly and there is a set timeline to
shift from one vendor to another), 3) reference-ability and 4) the availability of alternatives like HCLT to take up large total outsourcing deals, which wasn’t available previously when these deals were signed.

Discretionary demand soft; growth through shift from RTB to CTB
The company sees discretionary demand to be soft and growth largely being driven by need to cut costs (e.g ERP consolidation), shorter-term ROI projects and mandatory spending (e.g risk & compliance). Investments to discretionary projects are largely through reallocation of cost saves in RTB to CTB (e.g in Europe a trend seen of EAS projects being bundled with ITO deals).

Segmental outlook: Positive on Europe, Telecom remains sluggish
The company remains confident on the growth outlook in Europe (increased cost push at clients) and expects broad-based growth across verticals with strength in manufacturing, retail, energy & utilities and healthcare (except telecom – 8% of revenue). Telecom continues to be sluggish and the company has not seen any material trends to suggest a reversal. Within Europe, the company sees Nordics to be an area of

Confident on EBIT margin stability at FY12 levels of ~16%
The company was not defensive on their lower margin profile versus tier 1 IT peers and believes that this is conscious choice, which has been made given the profile of business (total outsourcing deals) that the company chases. It remains confident on holding EBIT margins at FY12 levels of ~16% if USD-INR rates are sustained closer to 55 levels. The company ended 4QFY12 at 19% EBIT, it would face pressures on wage hikes (8% offshore and 2% onsite) and possible increases in sales expenses as big deal flow comes up for decision making by 2Q/3Q. The company sees pricing to be stable. Within BPO, the company sees it
operating closer to breakeven for a year.

Cash usage, dividends and visas
The company indicated that it has converted ~100% or higher of its net income to operating cash flow over the last 3 years and has distributed ~60% of the FCF generated to dividends. The company does not have any acquisitions or abnormal capex in the pipeline over the near term. The company does not see visas to be a material issue and remains committed to creating 10,000 incremental local jobs in US/Europe by FY15.


>OPTO CIRCUITS: 1QFY13 Result Update

PRICE TARGET………………………………………………………………Unchanged
EPS (FY12E)……………………………………………...Changed from | 22.9 to | 24.2
EPS (FY13E)…………………………………………………………………Unchanged

Performance intact amid rating concerns.…
Opto Circuits’ Q1FY13 results were above our expectations. Revenues grew 36% YoY to | 715 crore, higher than our estimates of | 643 crore on the back of 1) 38.3% growth in the medical equipment & consumables segment, 2) 34% growth in the interventional devices segment and 3) favourable currency. After a sharp decline in Q4FY12, EBITDA margins normalised during the quarter. On a YoY basis, however, EBITDA margins declined 30 bps to 27.9%, higher than our estimates of 26.5%. The effective tax rate increased by 440 bps to 9.1%, which restricted net profit growth to 26.3% at | 147.0 crore. We are maintaining our BUY rating on the stock, although we will keep a watch on Crisil’s credit rating due in September amid the Icra rating downgrade confusion.

Non-invasive segment grows 18% on constant currency basis
Revenues from the non-invasive segment grew 38% to | 583.5 crore on the back of new tenders, resumption of distribution of Powerheart AEDs in Japan and favourable currency. The invasive segment also registered healthy growth of 34% YoY to | 126 crore on the back of improved presence in geographies like China & Indonesia and favourable currency.

My Sense Heart device launch to be in current fiscal
The company is planning to launch a wearable Holter cardiac monitor MySense Heart device in the US market by the end of Q3FY13, for which it had received USFDA approval. It is also in discussions with some retail chains to market this product in the US. It is planning to set up a back end office, which is used for analysing the data from those machines.

Concerns regarding WC, ratings likely to wane, remain lightweight
We expect sales, EBITDA and PAT to grow at a CAGR of 22%, 20% and 18% (adjusted net profit base for FY12), respectively, in FY12-14E. Improvement in working capital management, which was visible in Q4, was reflected in Q1 as well, vindicating the progress on that front. New
product launches in various geographies are expected to keep the growth momentum going. The shift of production to Vishakhapatnam and Malaysia is expected to compensate the pressure on margins on account of R&D charges to P&L henceforth. We have ascribed a value of | 256, based on 9x FY14E EPS of | 28.5. We maintain our BUY recommendation with a lightweight bias.


>KPIT Cummins: 1QFY13 Results Update

Good quarter, rich valuations; Maintain HOLD

KPIT reported good 1QFY13 with an ahead-of-industry 5% Q/Q US$ revenue growth, limited margin decline despite taking wage hikes ahead of peers and healthy metrics all-across. Further, management expects growth momentum to continue driven by healthy deal pipeline. We believe that KPIT would continue to grow ahead of industry and build revenue/EPS CAGR of 27%/21% over FY12-14E. While we fundamentally like the company, valuations at P/E of 12x FY13E, are at the upper end of mid-cap trading range. Maintain HOLD with a revised Mar’13 target price of Rs130/share.

 Healthy top-line growth: KPIT’s 1Q reported USD revenue came in at USD 98.05mn up 2.8% and broadly in-line with expectations. Adjusted for the SSG divestiture, continuing business grew by a healthy 5% QoQ. SYSTIME’s revenue grew by 11.6% QoQ to USD 14.7 million. We continue to expect a healthy 3-4% CQGR throughout the year which should help deliver a 22% organic growth over full year FY13.

 Manufacturing steady; US, Europe healthy: From a vertical perspective, Energy & Utilities grew by ~22% QoQ on a low base while manufacturing was steady with 3.4% QoQ growth. Among geographies, US and Europe saw healthy growth of 6.9% and 4.2% respectively. Enterprise solutions (Oracle) mix increased to 44.4% (42.6% in Q4), while SAP mix declined to 31.9% (32.4% in Q4).

 EBITDA Margins in-line, PAT beat driven by FX gain: EBITDA margins came in at 15% down 75bps QoQ, slightly ahead of expectations. The company has given a full quarter of wage hikes of 10% offshore and 4% onsite. Margin movement breakup: growth +30bps, forex +230bps, Wage hikes -300bps and Visa costs -35bps.

 Metrics: KPIT added 3 new clients in the quarter and 1mn+ customers increased by 6 to 65. Overall head count increased by 154 in the quarter while development headcount increased by 141. Offshore utilization stayed flat at 74.1%. Debtor days were at 75. Hedges outstanding at the end of 1Q were $120mn.


>PFIZER: Q1FY13 Result Update/

Slower sales growth affects results

Pfizer results for Q1FY13 were lower than our expectations. The company reported 7%YoY decline in revenues, 270bps decline in EBIDTA margin and 41%YoY decline in net profit due to lower growth of pharma business and the divestment of animal healthcare (AHC) business. The sales growth of the pharma segment was 4%YoY due to slower growth of three key brands. The introduction of new products in the domestic market is likely to drive growth. Pfizer is a debt free company with cash per share of Rs300. We have revised the rating from Buy to Neutral with a target price of Rs1,325 (based on 17x FY14E EPS of Rs77.9) with an upside of 4.9%.

Slow domestic growth: Pfizer reported 7%YoY decline in total revenues from Rs2.61bn to Rs2.43bn due to the slower growth of pharma business and divestment of AHC business to a 100% subsidiary. The pharma business (90% of revenues) grew by 4%YoY from Rs2.10bn to Rs2.18bn. AHC revenues were ‘nil’ against Rs315mn.

Margin under pressure: Pfizer’s EBIDTA margin declined by 270bpsYoY from 16.0% to 13.3% due to the rise in personnel cost and other expenses. Material cost declined by 280bps from 32.6% to 29.8% of revenues due to the change in product mix and the absence of AHC products. Personnel cost increased by 100bps YoY from 22.3% to 23.3% due to lower sales growth. Other expenses were up by 450bps from 29.1% to 33.6% due to the additional expenses of Rs15mn related to the contract field force and brokerage of Rs20mn related to the new office.

Sale of AHC business: Pfizer sold its AHC business to a 100% subsidiary Pfizer Animal Pharma Pvt. Ltd for Rs4.24mn. The company reported a gain of Rs3.83bn from the sales. After providing for capital gains tax of 20%, the balance amount of Rs3.06bn appears as EO item. The sales proceeds are likely to generate more interest than the EBIDTA generated by AHC business.

Leading brands have slower growth: As per IMS MAT-June’12, three major brands have lower growth rates. These are: Becosules (2.2)%, Gelusil-MPS 5.6% and Magnex (2.8)%. The slowdown in Becosules is attributed to the trade scheme in Q4FY12 and that for Gelusil due to slowdown of the category.
Valuations: We expect Pfizer to benefit from good growth in the domestic market and from the introduction of new products. We have lowered our EPS estimates by 4% for FY13 and 3% for FY14. At the CMP of Rs1,263, the stock trades at 18.6x FY13E EPS of Rs68.1 and 16.2x FY14E EPS of Rs77.9. We have revised the rating from Buy to Neutral with a target price of Rs1,325 (based on 17x FY14E EPS of Rs77.9) with an upside of 4.9%