Wednesday, September 19, 2012

>Adding to Cyclicals as Market Heads for Life High in 2013

Quick Comment – Cyclicals look cheap relative to defensives: We have already pointed out in our August 13 note Cyclicals Approaching Ultra Cheap Territory that cyclicals look ultra cheap relative to defensives (Exhibit 1). The decisive policy action at home (reduction in subsidies and opening up of FDI) and, more crucially, concerted action by European and US central banks have reduced India’s tail risk linked to poor macro stability (twin deficit). Our preference for quality cyclicals is already expressed in our Focus List. We now put money to work on cyclicals in our sector model portfolio (Exhibit 2). Accordingly, we go underweight consumer staples and raise energy and materials to overweight, as well as taking industrials to neutral. We are also trimming technology by 100 bps. Consequently, our average sector position has expanded, and we see this as our emerging strategy, as the average correlations of stocks to the market appear to be falling and no longer merits extreme focus on stock picking.

25% upside to Sensex to Dec-13: We are expecting Sensex earnings growth at 10% and 19% in F2013 and F2014. Significantly, broad market earnings may have troughed or could trough in the current quarter. We have seen M1 growth put in a firm base in and revenue growth should slowly accelerate in the coming months. Margins could rise in the coming months with a favorable base effect driven by the relative movement in the current and fiscal deficit. Interest rates are already down YoY, and that should stem the steep rise witnessed in interest costs in the previous 12 months. The risk to earnings is that the investment rate collapses, although recent signals suggest that the public sector is starting to spend money. We roll our market target to Dec-13. Our target of 23,069 implies that the market will be trading at 14.9x our F2014e Sensex earnings in Dec-13 (Exhibit 5).

New bull market? Conditions for a new bull market are getting slowly satisfied. The yield curve has stopped supportive and profit margin expansion is a growing possibility in the coming months. The market is likely to form a new base with positive developments on domestic policy. Key risks are that commodity prices rise quickly, bringing inflation pressures to the fore, and/or global risk appetite wanes as global policy makers slip into another cycle of complacency. Mid-term polls are also a possibility, but we do not necessarily see that as a downside risk to equities. flattening, liquidity is improving, valuations appear

To read report in detail: INDIA STRATEGY

>FDI in retail aviation and broadcasting are probably the biggest and toughest reform initiatives that the UPA Government

Shrugging off its image of being in a state of ‘policy paralysis’, Government of India unleashed a blitz of reforms late last week, including diesel price hike and opening up FDI in several key sectors. Though many will argue that these measures will have limited impact, we believe that 51% FDI in multi-brand retail and 49% in airlines are probably the biggest and toughest reform initiatives that the UPA Government has taken in its tenure of eight years. We believe that it will have significantly positive implications for the economy and the market.

FDI in retail (51%), aviation (49%) and broadcasting (74%)
FDI will bring much needed funding options for domestic players. We see Pantaloon, being the largest player, a key beneficiary of FDI in retail as it will strengthen its back end operations and inventory management, which in our view has been one of the most challenging areas for the company. We believe increased FDI is very positive for the broadcasting industry. With nearly 90m households and top five players having market share of 50%, the market is fragmented. FDI, coupled with digitalization, will lead to consolidation, benefiting larger players. We remain positive on both cable and DTH. Our top picks are Hathway and Dish. On the other hand, Spicejet is among the biggest beneficiaries of FDI in civil aviation due to significant market share (~18%) and relatively better balance sheet.

Rate cut hopes: Not unfounded
With falling GDP growth and dwindling capex cycle, need for sustained rate cuts is more
than ever before. We believe that the Government has initiated small yet meaningful steps,
such as diesel price hike and divestments of certain PSUs, to bring down cost of capital. We
believe that banks, particularly PSU banks, will be key beneficiaries of rate cuts, as it will
arrest formation of NPAs in the system. SBI is our top pick among banks. Lower rates,
coupled with PM’s concerted efforts to revive infrastructure investments, will also boost growth
outlook for large infra-plays. We like L&T and IRB Infrastructure in this space. We
believe that stocks like Maruti (demand outlook may improve, lower import bill) and PFC
(Wholesale funded NBFCs key gainers of rate cuts) will also see significant re- rating, following
rate cuts.

Re unlikely to fall further; Can appreciate buoyed by inflows
FII investment in India has already crossed US$10b, YTD. Historically, strong reform initiatives
by government have led to improved foreign capital inflow. We believe that appreciation of
INR vs. US$ will significantly benefit a host of companies, exposed to imports. This will also
help curtail oil import bill, thereby further helping fiscal situation. We like JSW energy,
which operates 2.6GW of power plant, and meets its coal requirement through imports. JSW
Energy will benefit from appreciating INR, apart from falling international coal prices.

To read report in detail: FDI

>INDUS IND BANK: Suzuki two-wheelers and IndusInd bank tie up for retail finance; IndusInd Bank launches Indus Forex Card & Opens its first Currency Chest

Latest Updates
• Net Profit was Rs.2362.60 mn as against Rs. 1801.80 mn in the corresponding quarter of the previous year up by 31%.
• Total deposits as on June 30, 2012 were at Rs. 450758.60 mn as compared to Rs. 352640.60 crore in the corresponding quarter of the previous year, up by 28%.
• CASA for Q1 FY13 stood at 27.86% as against 28.20% in Q1 FY12. CASA showed an increase of 26% in absolute numbers on Y-O-Y basis.
• Bank’s Capital Adequacy Ratio registered at 13.42% as on 30.06.12.
• IndusInd Bank Ltd increased network to 421 Branches, and 735 ATMs as against 326 Branches and 633 ATMs as on June 30, 2011.

• Suzuki two-wheelers and IndusInd bank tie up for retail finance
Suzuki Motorcycle India Pvt. Ltd. (SMIPL), a subsidiary of one of the world’s leading two-wheeler manufacturers Suzuki Motor Corporation, Japan, entered into a preferred tie-up with IndusInd Bank to extend retail finance to Suzuki two-wheeler customers across all 250 SMIPL dealerships. The preferred tie up will provide Suzuki customers an easy retail finance option.

• IndusInd Bank launches Indus Forex Card
IndusInd Bank launches foreign currency pre-paid travel card – the Indus Forex card that is designed to offer travelers all the convenience and a secure way of carrying foreign currency abroad. The Indus Forex card comes with an array of exciting features which have been tailor-made to ensure utmost comfort and convenience to the customers. It is available in 6 leading currencies - US Dollar, Euro, Sterling Pound, Singapore Dollar, Australian Dollar and Saudi Riyal. These cards can be used to withdraw cash from ATMs as well as to pay at Merchant Outlets. Customers can track spends or check the balance of Indus Forex card
through multiple convenient options. IndusInd Bank has partnered with ElectraCard Services (ECS), a leading provider of software solutions for electronic payment systems to launch the Forex card program.

IndusInd Bank opens its first Currency Chest
IndusInd Bank opened its first Currency Chest in Mumbai at the Bank’s Thane Branch. The Currency Chest has been setup with most modern, state-of-the-art machines available today in note counting, sorting and counterfeit detection. Also, it is strategically located to provide easy access to our clients and branches lined across both Western and Eastern Express Highways as also other areas around Mumbai. The Bank’s second Currency Chest is coming up at New Delhi and would be made operational by the end of this financial year.

To read report in detail: INDUSIND BANK


In order to delve into the reasons for the resilient growth witnessed by the highly penetrated laundry and soaps category and assess its future prospects, we conducted an extensive survey covering the entire supply chain. We did a 360 degree survey, wherein we met/spoke to sales
managers and distributors of soaps and detergent companies across regions. This was also done with the intention of demystifying the inconsistency between research firm’s estimation for market growth and that reported by leading companies.

■ Volume growth remains resilient in branded S&D category but value growth to moderate owing to cap on further price hikes and base effect kicking in. Growth could normalize to 16-17% in laundry category and 10-12% in soaps category

 Branded players’ gained share at the expense of small/fringe regional players. Significant presence of regional players still exists (players with strong brand recall), but any incremental
share gain would be at higher associated costs

■ Southern and Eastern India have received sufficient rainfall, thereby dealers/sales managers from South and East were fairly confident of limited impact of deficient monsoon. Whereas, North and West were unable to guess the course of growth

 Laundry: New product launches will drive higher ad spends. Renewed vigor witnessed in Tide naturals. However, not much change witnessed in market share differential between HUL and P&G. Also, Ghadi detergents have deepened their penetration in Maharashtra

 Soaps: Lux and Rexona are witnessing de-growth and losing out to Santoor and Godrej No.1. HUL plans to refocus on Rexona and Lux - initiate trade promotions. Godrej Consumer reactivated Cinthol portfolio and also launched rosewater and almond variant in Godrej No. 1 soap

 On a positive note, soaps and laundry category is not witnessing downtrading like personal product category n Positive in S&D category is offset by negatives brewing in PP category - earning upgrades for companies like HUL and GCPL unlikely

 We might have underestimated the consumer buoyancy (or bit early) as consumer demand continues to be robust – until August 2012. We intend to repeat this exercise in October
(around festive season)

 Until then, retain negative bias as valuations do not offer comfort and earnings upgrades unlikely. We maintain HOLD rating on HUL and GCPL with price targets of Rs415/Share and
Rs580/Share respectively

To read report in detail: SOAPS & DETERGENT SECTOR

>MAHINDRA SATYAM: Large deal wins at Tech Mahindra (Contracted revenue from the captive acquisition)

With increasing participation in the US, traction continues to improve for Mahindra Satyam (M Sat). Further, we understand that M Sat’s internal margin thresholds for new deals are higher now, indicating a high focus on profitability. Tech Mahindra, on the other hand, is benefiting from many large deal wins. Moreover, while the perception is that of Tech Mahindra having ‘bought revenue’, our analysis shows that the company’s cash generation has been on par with larger vendors. Even its recent acquisition of a captive is cheaper than other captive acquisitions over the past two years. Consequently, we continue to be positive on M Sat/Tech

Incremental positives at M Sat: Our channel checks indicate that M Sat’s internal margin thresholds for new deals have increased in the recent past. This, along with steady renewals and increasing participation in US-related deals, gives us comfort over sustainability of margins and revenue growth.

Tech Mahindra has not ‘bought revenue’: Tech Mahindra’s large deal wins have been strong over the past year. Moreover, our analysis shows that in deals where Tech Mahindra had paid upfront, its cash generation has been on par with larger vendors. Further, for its recent
acquisition of a captive, implied valuations were cheaper than other captive acquisitions over the past two years.

Cheap valuations: We believe stable renewals, improving traction in the US, and margin levers will continue to result in robust Ebitda growth for M Sat. Tech Mahindra is benefiting from an improving market for telecom IT services and a buoyant and large deal pipeline. Almost all uncertainties related to M Sat’s legal liabilities have been addressed. Valuations of the combined entity continue to be cheaper than even some of the mid-tier IT companies at ~11x FY13ii PER. We are increasing our target price to Rs122. Re-iterate BUY.

Large deal wins at Tech Mahindra:
Tech Mahindra is benefiting from an improving demand for telecom related IT services and a robust large deal pipeline. Our channel checks indicate that Tech Mahindra has won two large deals in the past two months. This is in addition to the ~US$845m of contracted
revenue from the captive acquisition.

To read report in detail: MAHINDRA SATYAM


>Tech Mahindra acquires 51% stake in Comviva (JM Financial)

Comviva to strengthen mobile VAS offerings

Tech Mahindra acquires 51% stake in Comviva: Tech Mahindra has announced the acquisition of 51% stake in Comviva Technologies for a total consideration of `2,600mn. This includes upfront payment of `1,250mn and deferred payment of `1,350mn over a period of 5 years based on performance targets. Comviva had FY12 revenues of US$70mn with mid-teen
EBITDA margins. The transaction values Comviva at 1.3x FY12 EV/Sales and 8.6x FY12 EV/EBITDA assuming 15% EBITDA margins. Management expects the deal to be EPS accretive for Tech Mahindra. As per our calculation, the transaction adds c.1.5-2% to FY14 EPS.

Strategic intent of the acquisition: Comviva provides solutions in mobile data, integrated messaging, mobile payments etc. Acquisition of Comviva is in-line with TechM’s strategy of (a) investing in emerging areas such as Network, Mobility, Analytics, Cloud and Security, and (b) focusing on nonlinear growth. TechM already has presence in mobility solutions through its
subsidiary CanvasM, which contributes c.2% to total revenues currently. Comviva acquisition should further strengthen TechM’s VAS offerings particularly in the field of VAS infrastructure management and Mobile payment and platforms. The acquisition will also enable TechM to cross-sell Comviva’s offerings to its telecom clients.

Other details: The acquisition will add c.1,500 employees to TechM. Airtel is the largest client of Comviva and top-10 clients contribute c.85% to total revenues. Comviva derives c.30% revenues from VAS managed services and c.70% from platform-based solutions. Post deal closure, TechM will own 51% stake in the company, Bharti group 20%, PE firms 9% and employees the balance. Comviva had cash and cash equivalents of c.`320mn at end-Jun’12.
Maintain BUY rating with target price of `1,260 based on 12x 1 year forward P/E.