Sunday, November 2, 2014

>RANBAXY LABORATORIES: Q2 – ahead of expectation driven by gDiovan (NOMURA)

Ranbaxy’s Q2 performance was better than our and consensus expectations on account of better-than-expected sales in its US business. In July 2014, the company launched generic Diovan in the US with six-month exclusivity, which was the key reason for the positive surprises on sales (~5%) and
EBITDA (~33%), in our view. We estimate Diovan sales at ~USD 110-120mn for Q2 vs our expectation of USD 76mn. Sandoz has also indicated generic Diovan sales at more than USD 100mn for the quarter, which holds similar market share as Ranbaxy. Also, we think that the EBITDA margin of Diovan came in significantly higher vs our estimates.

Sales in most of the other geographies ex India were below expectation, mostly on account of (a) API supply constraints from the Devas and Toansa facilities, and (b) lower tender (ARV) business.

With the announced merger with Sun Pharma (every shareholder of RBXY will receive 0.8 shares of SUNP), its share price is more linked to SUNP’s share price. Our target price of INR 694 is on based on 0.8x SUNP’s TP (based on the merger ratio) of INR 868.

Key highlights from Q2 results
 Consolidated revenue was ~5%/9% ahead of our/consensus expectations. This was on account of better-than-expected sales in the US driven by gDiovan.

 Material cost as a % of sales came in at 31.3%, lower than our expectation of 33.9% on account of higher sales of gDiovan having high gross margin. Other expense was ~4% below our expectation on account of cost control measures taken by company.

 EBITDA came in at INR 8.79bn, which was significantly above our estimate of INR 6.6bn and consensus expectation of INR 4.8bn on account of higher sales and lower other expense. Reported EBITDA implies margin of 27.3% vs our expectation of 21.5% and consensus of 16.1%.

 Reported PAT at INR 4.8bn was ~31% ahead of our expectation of INR 3.66bn and significantly ahead of consensus of INR 2.7bn.

 Regional performance –
o US business – US reported strong sales-driven launch of generic Diovan with six-month exclusivity in July 2014. US sales were ~24% ahead of our expectation. Q-Q, US sales were up USD 109mn, which we believe was largely driven by gDiovan. This corresponds to our estimate of USD 76mn.
We believe a significant part of the exclusivity sales is booked in the quarter.

o India business (including consumer healthcare) reported sales growth of 12% y-y, better than IPM growth. Company India sales were in line with our expectation. Though sales of consumer healthcare has declined y-y over last three quarters, management expects sales to pick up as excess inventory in the channel gets consumed.

o Eastern Europe and CIS - Sales in Q2 declined ~15% y-y and were ~15% below our expectation. This was on account of lower ARV sales in Russia and Romania. Geopolitical instability affected sales in Ukraine.

o Western Europe – Sales in this region grew ~15% y-y and was marginally below expectation. The company reported strong growth in UK, Germany, Spain and North Europe.

o APAC and Latin America reported sales declined ~18% y-y and were ~22% below our expectation. This was on account of (a) change in business model in Thailand, and (b) API supply constraints from the Toansa and Devas facilities, which affected sales in Malaysia and Brazil.

o Africa and ME reported sales declined ~4% y-y and sales were ~8% below expectation. As per management, this was on account of lower tender (ARV) business.

Key takeaways from the conference call
Nexium exclusivity – Company has reiterated it has six-month exclusivity in Nexium and will launch in the US market after approval.

Derivative position – Total outstanding derivative contracts stand at USD 373mn at end of Q2FY15 vs USD 470mn at end of Q1FY15. As per the company, currently contracts worth ~ USD 32mn mature every month, but this run rate will decline going forward.

Mohali facility – As per management, the Mohali facility will be the first facility to be remediated. The Mohali facility is currently under import alert from the US FDA.

Toansa and Devas facilities – As per management, API production at these two facilities have started after company voluntarily suspended supply to all markets in February 2014. These two facilities are under import alert from the US FDA.

 Net debt stood at USD 739mn at end of Q2FY15.


>YES BANK (HDFC Securities)

Granularity missing

YES reported better than estimated results with core/net earnings beat of 9/6%. Pick-up in loans (+30% YoY), 20bps NIM improvement (aided by recent fund raise) and continued traction in other income were key positives. On the other hand, the sluggish CASA progress (mere +18bps QoQ), sharp rise in wholesale deposits, decline in PCR with rise in slippage (1% ann.) and increasing timeframe for any visible improvement in granularity were the disappointments.

After factoring better than estimated 2Q, we revise our net earnings estimates by 3% for FY15/16E. However, we largely retain our ABV estimate as we continue to factor high slippages given the large share of wholesale book & exposure towards stressed segments. Despite the bulky nature of B/S & expected decline in systemic interest rates, we believe scope for further NIM improvement in unlikely given the pricing pressure & relatively weak franchise. Further, current high contribution from bulky fees & lower provisioning looks unsustainable and might add volatility to earnings going ahead.

Further, the recent outperformance vs. peers and banking indices makes us maintain our NETURAL rating. Revise TP to Rs 650 (2x FY16 ABV).
 Favorable base and improved sentiment resulted in loan growth of 30/5% YoY/QoQ, driven by large corp segment (+25% YoY; 71% of loans). Improvement in CASA (%) further moderated to a mere +18bps QoQ (slowest in last 11 qtrs) to ~22%. Despite increasing its presence & adding retail products, granularity within B/S is yet to show any visible improvement.

 Combination of (a) rise in CD ratio (b) impact of capital raising (c) gradual decline in low yield credit substitute and (d) part effect of lower wholesale deposits share in previous qtr drove NIM (3.2%, +30/20bps YoY/QoQ). We have factored NIMs of 3.1% over FY14-16E.

 Slippages were higher QoQ at Rs 1.5bn (1% ann.), though NPA sale of Rs 400mn restricted rise in NPLs. G/NNPA increased 12/26% QoQ to 36/9bps of loans. We were negatively surprised with the 260bps decline in coverage ratio to 76%, despite strong earning cushion. Restructured book stood at Rs 1.2bn (19bps). We factor slippages/LLP of ~85/35bps over FY15/16E.


>CROMPTON GREAVES: Lower-than-expected EBITDA; board approves demerger

Consolidated 2QFY15 EBITDA at Rs1.7bn (up 4% YoY) was 12% below our estimates, as revenue at Rs34.3bn (up 7% YoY) and gross margin at 31.8% (up 30bps YoY) came 7% and 70bps below our estimate respectively. EBITDA margin at 4.9% (down 10bps YoY) was 30bps below our expectation. Higher tax rate at 46% (vs our estimate of 30%) led to PAT of Rs570mn, 28% below our estimate. We do not change our estimates for FY15, as we expect strong growth in the consumer business in 2HFY15 (led by strong festival demand) and pick-up in execution of high margin order backlog in the power business. The board approved the demerger of the consumer business, with Crompton
holding 25% in the proposed consumer company; balance by the existing shareholders. Whilst the demerger will unlock value, we believe the CMP already factors in this; our TP of Rs185/share values the consumer business at Rs102/share, implied FY16 P/E of 21.4x (6% discount to Havells). We remain concerned around the rising share of MNCs in domestic power, rising competitive intensity in fans, and a fragile recovery in Europe.

Results overview: Consolidated revenues at Rs34.3bn increased 7% YoY led by 13% YoY growth in consumer products. EBITDA increased by only 4% YoY due to a 21% YoY increase in other expenses. Consequently, EBITDA margin declined 10bps YoY to 4.9%. However, PBT increased by 16% YoY to Rs1.3bn due to a 39% YoY increase in other income. The higher share of profits in associates led to PAT increasing by 20% YoY to Rs696mn.

Within the segments, on a consolidated basis, the major revenue driver was the consumer products business which reported a YoY revenue growth of 13% led by strong growth of fans (up 13% YoY) given the extended summer. Pumps and Lighting grew by 7% YoY and 5% YoY. The Power and industrial segment’s revenue grew 5% YoY. A margin improvement was seen on a consolidated basis across segments. Whilst consumer business’ EBIT margin improved 30bps YoY to 12.0% led by
operating leverage, power and industrial systems’ margin improved 20bps YoY and 160bps Yoy to 2.2% and 9.2% led by improvement in the margin of the international power (up 80bps YoY) and industrial (up 690bps YoY) businesses.

On a standalone basis, revenues registered a meagre growth of 8% at Rs19bn led by a 13% YoY increase in the consumer durables business; revenues of power systems increased 6% YoY and industrial system increased 7% YoY. EBITDA increased by only 5% YoY to Rs1.7bn due to a 13% YoY increase in employee expenses. Consequently, EBITDA margin declined 20bps YoY to 8.7%. However, PBT declined by 1% YoY to Rs1.8bn due to a 10% increase in depreciation. Increase in tax rate from 24% in 2QFY14 to 28% led to a 7% decline in PAT to Rs1.3bn.

Demerger approved by board: CRG’s board approved the demerger of the consumer business to Crompton Consumer Products Ltd (CCPL) with effect from 1 April 2015. Upon the completion of the demerger process, CRG would hold a 25% stake in the proposed CCPL and the balance would be held by the existing shareholders of CRG. The shareholders of CRG would be allotted 3 shares of CCPL for every 4 shares held in CRG. CCPL would be listed on the BSE and NSE. Note that there is no change in the shareholding of the minority holders in the demerged entity, as no strategic shareholder has been brought in.

Where do we go from here? Despite revenue and EBITDA being 7% and 12% below our estimate, we are not changing our estimates for FY15, as we expect strong growth in the consumer business in 2HFY15 (on the back of strong festive demand) coupled with pick-up in execution of high margin order backlog in the power business. Note that CRG has bagged recent orders at higher margins, part of which are likely to be booked in 2HFY15 and this should help in margin improvement. For the full year, we model in revenue growth of 14% YoY (vs 8% YoY in 1HFY15) and EBITDA margin
expansion of 150bps YoY in FY15 (vs 20bps in 1HFY15).

However, we remain concerned about the following factors:

■ Europe recovery likely to be fragile: The GDP growth outlook for Europe has been deteriorating with the IMF doubling the probability of the Eurozone re-entering into a recession to 38% in October 2014 from 19% in April 2014. If Europe continues to disappoint, the turnaround of international subsidiaries may get delayed further and the international franchise’s losses may widen. Note that the European region contributed to ~35% of consolidated revenues in FY14.

■ Competition increasing in the consumer business: Within the domestic consumer segment in India, Crompton has a strong presence in the fans segment, which contributed to ~40% of consumer products’ revenues in FY14. However, competition intensified in FY14 with the entry of five new players (Polycab, Schneider, Luminous, Surya and RR Kabel). Competition has increased due to: (1) attractive margins (more than 13% in the premium decorative segment), (2) healthy 24% volume CAGR over FY09-12, (3) rising share of premium and decorative fans (now accounts for 50% of
the market as compared to a fifth five years ago), and (4) shortening replacement cycle (now five years as compared to 7-8 years five years back, as RPMs have increased to 380 from 200 earlier and share of pedestal, wall and table fans which have to be replaced after 2-3 years has increased to 40% as compared to 30% three years back). Given Crompton’s market leadership in this segment, any disruptive strategy adopted by these new players (like cutting prices) could hurt its fan margins.

■ Rising competition in Indian power business from foreign players: Rising competition from foreign players that are competing for Power Grid (PGCIL) tenders and the dismal balance sheets of SEBs have hurt CRG’s power franchise. Its EBITDA margins declined to 11% over FY12-14 vs 14% in FY06-10 and revenue CAGR slowed down to 3% in FY12-14 vs 10% over FY08-12. With foreign players now setting up manufacturing base in India (TBEA and Toshiba), competition should further intensify and this would hurt CRG.

■ Feeder separation, a negative catalyst for the power franchise
The Rs430bn and Rs326bn Union allocation for feeder separation and strengthening of the grid should help in restructuring the balance sheet of SEBs. However, this may not be a positive catalyst for Crompton as any improvement in the balance sheet of SEBs will invite competition from the foreign players. Thus, whilst we assume a pickup in revenue CAGR for Crompton to 16% over FY14-16 (vs 3% in FY12-14) as the balance sheet of the SEBs improve, we assume a margin improvement of only 40bps to 9.1% over FY14-17 vs FY12-14. This is far lower compared to the 13.3% margins reported during FY09-11 when Crompton did not face any competition.

■ Punchy valuations; impact of demerger already priced in: At CMP of Rs191/share, CRG is trading at 15.9x FY16 P/E, a 3% premium to its five-year oneyear forward P/E. Our SOTP value of Rs185/share implies an FY16 P/E of 15.4x. We value the consumer business at Rs102/share (implied FY16 P/E of 21.4x), the standalone power business at Rs31/share (implied FY16 P/E of 17.3x), the standalone industrial business at 20/share (implied FY16 P/E of 11.3x) and international subsidiaries at Rs18/share (15.7x FY16 P/E).

Our implied multiple for the consumer business is at a 6% discount to Havells. We believe the discount is justified given Havells strong consumer franchise, superior range of products with higher revenue CAGR of 18% (vs CRG’s 12%) over FY11-14, and higher average EBIT margin (adjusted for unallocable expenses) at 11.4% (vs CRG’s 9.7%) over FY11-14. We value the standalone power business at a 56% discount based on FY16 P/E to its capital goods peers such as BHEL, Siemens, ABB and Alstom T&D and the standalone industrial business at a 45% discount to capital goods peers such as Cummins, Kirloskar Oil Engines and KSB Pumps. We believe such a steep discount is justified given CRG’s weak power franchise and inferior management quality. Also, we believe CRG’s standalone industrial should trade at a discount to peers given the commoditised nature of CRG’s portfolio.



Conference call takeaways

Bajaj Auto continued to record strong growth in 2QFY15 across most of its business segments, namely export markets (management expectations of 20% volume growth for FY15 driven by healthy growth across most of the export countries) and domestic three-wheelers (on the back of new permit
issuances from Hyderabad, and Delhi). Within domestic motorcycles, whilst Pulsar and Platina continue to do well, there are early signs of recovery in Discover sales (helped by launch of Discover 150). We retain our positive view on Bajaj Auto on the back of its strong and growing exports franchise, opportunity to regain market share in domestic motorcycles (market share perked up to 18.8% in September 2014 vs 16.6% in April-August 2014) and its diversified business model. We marginally upgrade our estimates (FY15 and FY16 net earnings by 3%/2%) and valuation to Rs2,600 (vs Rs2,500 earlier), implying 15.0x one-year forward net earnings.

Key takeaways from the earnings call
■ Domestic motorcycle industry: The management expects domestic motorcycle industry to witness 10-12% YoY growth in 2HFY15. The industry volume growth has been around 12% for Navratri. Furthermore, Diwali is also expected to witness a similar volume growth. Whilst Pulsar and Platina continue to clock healthy volume growth, the management is hopeful of recovering market share in Discover. The recently launched Discover 150 has seen a good opening and currently it retails around 25k units/month. Furthermore, the company plans to launch new variants of Platina and Pulsar by end-FY15.

■ Domestic 3W volumes: The domestic 3W volumes witnessed a strong growth of 39% YoY in 2QFY15. This was mainly driven by new permits as well market share gains for Bajaj in the diesel 3W segment (32% currently vs 25% last year). On the back of new permit issuances in Delhi and Hyderabad, the management expects to sustain a monthly run rate of 26k-27k units in the domestic 3W space for 2HFY15 (vs 22k units/month in 1HFY15 and 15k units/month in 2HFY14). Quadricycle RE60 is slated for launch in 4QFY15 in the domestic market (followed by launch in the export markets).

■ Exports: The company is witnessing strong growth across most of the export geographies. Whilst big existing geographies are clocking in healthy volume (exports to Nigeria increased by 30% YoY in 1HFY15), volume growth in newer geographies such as Mexico has also been strong. The export volumes in 1HFY15 contained an order of 40k units of Discover from Sri Lanka which has been completed. Overall, the company expects export volumes to grow around 20% YoY for FY15. Over the next 4-5 years, export volumes are likely to witness a CAGR of 15%.

■ Realisation: The strong improvement in average realisation (6% QoQ and 5% YoY) was on account of: (a) higher share of 3Ws and better mix within motorcycle and (b) INR depreciation; average export currency realisation was Rs61.5/USD in 2QFY15 vs Rs59.9/USD in 1QFY15. Going forward, the management expects export currency realisation to improve further to Rs61.9/USD in 3QFY15 and Rs62.5/USD in 4QFY15.

■ Margin: The company’s raw material costs as a percentage of sales declined from 69.5% in 1QFY15 to 68.6% in 2QFY15. Whilst commodity prices are likely to remain stable, conversion costs (such as labour) may increase at the vendor level. As a result, material costs may inch up marginally in 2HFY15. The increase in ‘other expenses’ (15% YoY) after adjusting the MTM loss and contribution towards Corporate Social Responsibility (CSR) was due to: (a) increase in packing, forwarding and freight expenses (by Rs370mn) due to higher export volumes; and (b) higher advertisement spends during the quarter (Rs220mn) attributable to the launch of Discover 150. Going forward, the management expects advertising and marketing spends to continue given the launch of new variants of Platina and Pulsar by 4QFY15.

■ Where do we go from here?
We retain our positive view on Bajaj Auto on the back of its: (a) strong and growing export franchise (45% of 2QFY15 revenues); (b) opportunity to regain market share in domestic motorcycles (already the company has witnessed an uptick in market share to 18.8% in September vs 16.6% in April-August 2014); and (c) its diversified product portfolio.

In view of a much better-than-expected realisation in 2QFY15, we revise upwards our average realisation estimates for FY15 (by 1%) and FY16 (by 2%). This also results in a 30bps upgrade to our EBITDA margin estimates for FY15 and FY16. Our absolute EBITDA estimates are upgraded by 3% each for FY15 and FY16. Overall, we upgrade our net earnings estimates for FY15 and FY16 by 3% and 2%, respectively.


>TATA MOTORS : Land Rover registers 7.8% decline, Jaguar declines by 11.2% YoY (MOTILAL OSWAL)

Land Rover registers 7.8% decline, Jaguar declines by 11.2% YoY

 JLR Sep-14 sales declined by 8.4% YoY (+3.8% MoM) to 32,858 units (est. 38,256 units), driven by decline in both Land Rover and Jaguar.
 Our interaction with management indicates healthy demand environment. Decline in sales have been primarily due to production constraints on account of transition to upcoming launches of Jaguar XE, Discovery Sport and start of China JV in 4QFY15.

 Land Rover declined by 7.8% YoY to 27,143 units (est. 31,497 units), while Jaguar declined by 11.2% YoY to 5,715 units (est. 6,760 units).

 As per the regional retail sales performance data released, China grew at the highest rate of 25.3% YoY. The UK and Europe grew by 9.3% and 21.1% YoY respectively, while the AsiaPacific grew by 24.5%. All major markets registered growth, except US and RoW which declined by 12.3% and 2.5% respectively.

 Commenting on the September performance Andy Goss, Jaguar Land Rover Group Sales Operations Director said: "Jaguar Land Rover has delivered continued solid growth in September. Our investment in new products continues with the debut of the Land Rover Discovery Sport and the Jaguar XE this month, giving us a very strong, desirable range of products appealing to more customers than ever before - and many more new models in the pipeline."

Valuation and view
 We believe JLR is on the strategic path and is investing in the right areas, resulting in its evolution as a much stronger and balanced player in the luxury vehicle market.

 Domestic business is expected to bounce back strongly along with an economic recovery and favorable product lifecycle in the PV division.

 The stock trades at 7.7x/5.7x FY15E/FY16E consolidated EPS.

 Maintain Buy with a target price of INR620 (FY16E SOTP-based) for ordinary shares and INR372 for DVR (~40% discount to the target price for ordinary shares).


> Grasim Industries: RESULTS REVIEW 2QFY15 (HDFC Securities)

Softer pulp drives VSF margins

Grasim Industries’ standalone numbers were inline (EBITDA Rs 2.1n vs. est 2.2bn). New capacities continue to drive volume growth (101kt, +9% YoY). Standalone margins improved in 2Q, led by weakening RM costs on account of cheaper pulp (VSF PBIDT/kg : Rs 15/kg). Realisations held on at roughly same levels QoQ (Rs 125/kg), despite softening in global VSF pricing. Chinese cotton unwinding, which has driven cotton pricing downwards, has not effected VSF globally and the prices are at par with cotton for 1st time since FY13.

Trial runs for the remaining VSF capacity at Vilayat (43 ktpa specialty fibre) are underway and the new capacity should further boost volumes in FY16 (FY15 end capacity 490 ktpa). Thus Grasim is well set to reap the benefits of any demand revival in VSF globally, whenever that happens. We have a BUY on the stock with a revised TP of Rs 3,850 (UltraTech stake at 20% holding company discount, standalone business at 5.0x FY16E EV/EBITDA).

 2QFY15 highlights : Consolidated EBITDA was ahead of estimates driven by UltraTech surprise (EBITDA at Rs 8.3 bn vs Est 7.3 bn). Despite robust revenue growth (16.0% YoY), EBITDA growth was restrained due to weakness in VSF (Stlone. EBITDA down 22.8% YoY). JPA acquisition by UltraTech and higher debt led to 44% YoY higher interest cost. Combined with higher depreciation on account of new commissioning, APAT was down ~12%. In Parent entity, chemicals business continues to do well despite realisation decline (EBITDA margins at 23%) due to higher imports. This is driven by ramp-ups at Vilayat caustic plant and the epoxy facility.

 Outlook and view : We have tweaked our estimates marginally (EBITDA -6.2%/-2.2% for FY15/16), mainly on account of revision in UltraTech nos. Despite correction recently, UltraTech continues to trade at rich valuations (12.0x FY16 EV/EBITDA) with an added overhang of a likely acquisition overseas. Grasim remains undervalued, even on our target valuation for UltraTech (Rs 1,960/sh), and is preferable for an exposure to the cement business. Holding company discount should reduce as VSF prospects improve.


Friday, October 31, 2014


Outlook positive, maintain Buy with a revised price target of Rs3,600

Maruti Suzuki India (Maruti) posted an impressive volume growth of 16.8% in Q2FY2015. A favourable currency impact aided in a 68BPS sequential expansion in OPM to 12.4%. A fall in the tax rate to 20.2% as against 24% in the previous quarter resulted in a 28.7% Y-o-Y increase in the net profit to Rs863 crore as against our estimate of Rs784 crore.

Maruti’s management has maintained its guidance of a 10% volume growth for FY2015 and reiterated that the discount push was necessary to sustain the current trend which remains unstable. The urban volume growing at 10% is the key positive and a sign of better times ahead for the industry. Maruti meanwhile continues to consolidate its leadership position with its market share touching a four-year high of 45.2%. A spate of new launches coupled with refreshes to the current line-up is targeted at further consolidating the pole position.

We have tweaked our volume estimates for FY2016 and FY2017 given the deferment of the launch of XA-Alfa in FY2017 instead of FY2016 earlier. We have also reduced our tax rate estimate given the lower rates for the quarter and further benefit due to the expenditure on research and development. Consequently, earnings estimates for FY2015-16 are marginally higher, while FY2017 earnings estimates have been raised by 4.6% given the dual benefit of higher volume and lower tax rate. We continue to remain positive on the stock and reiterate a Buy recommendation with a revised price target of Rs3,600 (earlier Rs3,500) discounting FY2017E EBITDA 10x.



Stable quarter; Expansion plans to weigh on margins, Hold

Just Dial's 2QFY15 revenues grew 31% YoY to INR1.5bn, ~8% below our estimate. Increase in revenues was on the back of healthy growth in paid campaigns, which grew 6.5% sequentially to 296,100, and increased realisations per paid campaign. EBITDA came in at INR426m, in line with
our estimate. Margins declined 237bps YoY to 29% for the quarter, due to a one-off expense of INR32m towards employee stock options. Adjusting for this one-off, margins remained flat YoY. EBITDA margins were ~200bps higher than our estimate, led by lower-than-anticipated one-offs and higher estimated revenue base for the quarter. PAT came in at INR315m versus our estimate of INR366m, led by lower other income (INR85m). Listings increased 44% YoY to 14.5m. Search Plus currently offers 20 live services. However, most are on a trial basis and are yet to be monetised. We expect Search Plus to start contributing from FY16e and meaningfully from FY17e. Cash and investments stood at INR7.4bn as on 2QFY15 vs INR5.7bn as on 2QFY14. The board of directors recently approved a resolution to raise INR10bn to plough in inorganic expansion opportunities. The company has pushed its mass communication campaign for Search Plus Services to 4Q. The stock
trades at 55x FY16e earnings, which is rich in our view. We maintain our estimates for FY15e and FY16e and retain our Hold rating on the stock with a target price of INR1,650 per share.

Revenues grow 31%, margins better-than-estimated
2QFY15 revenues grew 31% YoY to INR1.5bn. However, the same was below our estimate as we factored in higher monetisation of the 2.3m business listings acquired last quarter. Growth in revenues was underpinned by: 1) Healthy uptick in paid campaigns, which grew 6.5% sequentially; and 2) Increased realisations per paid campaign. Margins were weighed down 237bps YoY to 29%, led by an INR32m one-off spend towards employee stock options. Adjusting for one-offs, EBITDA margins were flat YoY and better-than-expected as there was no one-off spend towards advertising on Search Plus Services as anticipated earlier. Margins are expected to remain subdued this fiscal on account of increased advertising spends and expansion-related investments.

Lower-than-expected paid campaigns
Paid campaigns for 2Q, though healthy, were lower than our estimate. It continues to comprise only ~2% of business listings vs 2.4% in 2QFY14. Listings remained soft and grew 3% sequentially to 14.5m during 2Q. Growth in business listings continues to outpace growth in paid campaigns, signalling conversions are increasingly hard to come by.

Fund raising on the anvil
The board of directors recently approved an enabling resolution to raise up to INR10bn. The management is presently looking at organic and inorganic expansions in international markets like the UK, US, Canada, and other emerging markets. These markets are highly competitive and regulated, thereby increasing uncertainty. Any meaningful inroads would entail significant investments and drag margins lower.

Valuations and outlook
The stock trades at 55x FY16e for 31% earnings CAGR over FY14-16e. We find valuations rich and maintain our earnings estimate for FY15e and FY16e. We retain our Hold rating on the stock, as the upside from current levels is limited, growth in paid campaigns tapering off, and increased capital/operating expenditure that would be required to enter new geographies.


>Exide Industries Limited: 2QFY15 RESULTS REVIEW (ANTIQUE)

Margins set to recover from 3Q itself

Exide Industries' (EXID IN) 2QFY15 adjusted earnings rose 6% YoY but was down 32% QoQ to INR1.3bn, way below consensus estimates of INR1.5bn. Margins fell 340bps QoQ and 230bps YoY to 11.8%, due to weaker scale, larger fuel and freight costs, and higher technology upgradation-related expenses. On account of weak seasonality in industrials, revenue contraction was broadly in line with estimates, down 8% QoQ to INR17.6bn. An 80bps QoQ decline in gross margins and higher other expense, as a percentage to sales, of 170bps QoQ led to a negative surprise in terms of EBITDA margin at 11.8% as against expected levels of ~14%.

We leave unchanged our revenue and margin estimates for FY15e/FY16e, factoring a revenue CAGR of 19% over FY14-16e, on the back of low base in industrials in FY14 and a cyclical recovery in the original auto equipment manufacturer segment. We also retain our margin estimates at 14.4%/15.2%
for FY15e/FY16e, respectively. On the back of a cyclical recovery in the automotive segment, leading to better scale; price hikes in the inverter segment by ~5%; and incremental 10% correction in lead prices over 1Q levels to ~USD2,000 per tonne, we are confident of EXID achieving over 15%
margin levels by 4QFY15 itself. The management is guiding at a capex of INR5.5bn over FY15-16e to enhance automation, technology, and capacity in some segments. After incurring losses in FY14, due to currency volatility, the smelter subsidiaries are expected to improve profitability in FY15e, thus contributing to consolidated earnings. The company's insurance business had already turned profitable in FY14, with a PAT of INR0.5bn. It is expected to improve its performance further this fiscal.

We upgrade the stock to Buy but maintain our price target at INR179 per share, based on 17x FY16e battery business EPS of INR9.8 and value the insurance business at INR13 per share. With capital efficiency recovering to over 20%; strong earnings visibility of ~31% CAGR over FY14-16e, led by
demand recovery across segments and stable margins ~15%, we do not foresee any reason for EXIDE to trade at a significant discount to its long-term mean traded core earnings multiple of 18x.

Key takeaways from the management interaction:
􀂄 Price hike of 5%, effective November, in the inverter segment, presently contributing close to 30% of overall revenues, to drive partial margin recovery next quarter. A QoQ decline of ~10% in lead would get reflected in gross margin from 4Q onwards. Drop in crude prices is set to partially impact raw material prices, as other than lead, crude derivatives too form a chunk of raw material expenses for manufacturing battery casings.
􀂄 Drop in diesel prices will reduce freight expenses in addition to other fuel-related expenses at the plant level. The management is focusing on reducing charging-related expenses too going forward. Technology upgradation-related expenses will increase the element of automation. Productivity improvement has risen this quarter in the form of consultancy charges and is set to persist for a few additional quarters. The company is also trying to reduce its lead content per battery to improve margins down the line. It is targeting a
250bps structural improvement in gross margins over the next two-to-three years.
􀂄 The management is content with its present market share in the replacement market and looking forward towards margin improvement strategies like controlling dealer incentives. It does not foresee any major price war with its largest competitor, which is adding new capacity in the coming quarter. EXIDE broadly operates at 83% and 79% utilisation in the two- and four-wheeler segments, respectively.
􀂄 The company is confident of achieving 15-17% margin in FY16e, and would move towards that trajectory from next quarter itself. Despite 3Q being another weak quarter for industrials, the management is certain of a substantial improvement in margins. In the longer run, we do not see any hurdles towards a low double-digit sustainable growth in the auto battery replacement market.

We upgrade EXID to Buy from Hold, leaving our price target unchanged at INR179 per share, based on 17x FY16e core business earnings and value the insurance business at INR13 per share. With visibility of enough drivers for margins to recover from the seasonally weak level of 11.8% back towards 15%, we leave our margin estimate unchanged at 15.2% for FY16e, amid a cyclical recovery in overall volumes.


>Grauer and Weil (India) Ltd: Investment Rationale & SWOT Analysis (EAST SECURITIES INDIA LIMITED)

Grauer & Weil (India) Ltd (GWIL), incorporated in 1957, is a market leader in Rs 7000 mn electroplating chemical industry with 38% market share. GWIL is the only company in India and one of few in the world, which offers as wide an array of surface treatment products and solutions under one roof - Chemicals, Equipments, Paints & Lubricants. GWIL had a large tract of 10 acres Surplus land in Mumbai's western suburb Kandivali, which has been developed into a Mall - Growel’s 101, which is a highly valuable asset generating significant cash flows for the company. This will grow significantly over next couple of years as they utilize the balance development potential (only 60% of the development potential utilized till now). Over the years, the company has paid most of the debt that was taken to develop the mall and GWIL is all set to become a debt free company by FY16.
GWIL's sales & profits have grown, 13% CAGR and 17% CAGR during FY10-FY14 despite slowdown in the economy. Low gearing & no major capex required in next 2 to 3 years coupled with the recovering economic condition and good growth in auto and auto ancillary companies (main drivers of chemical business), GWIL is all set to generate healthy free cash flow in next couple of
years. Revenues from real estate business will also see a sharp jump as renewal of ~ 40% of lease, due next year, and is likely to happen at ~75% increment We initiate coverage on Grauer and Weil India Ltd (GWIL) with BUY rating and DCF valuation based price target of Rs 28 (11.2x to FY16 EPS).

Investment Rationale
One-stop-shop for various surface protection solutions with extensive dealer network
• GWIL manufactures more than 600 chemicals which includes pre treatment chemicals, general plating, conversion coating, speciality chemicals and basic chemicals. GWIL offer wide array of chemical products which make them unique in electroplating industry.
• The Company has well organized dealer network and strong distribution system in multiple locations in India which covers the major states such as Maharashtra, Gujarat, Madhya Pradesh, Uttar Pradesh, Haryana, Rajasthan and west Bengal. Together these states contribute 85% of business.
• The wide array of surface treatment products with well organized dealer networks and strong distribution system in multiple locations, GWIL enjoys advantageous geographical and customer mix which reduce the risk of high dependency on limited buyers and improve the pricing power of organization.
• All these help the company not only grow its business but also do the business in a profitable manner.

Very strong revenue visibility
• Stable economic condition and good growth in auto and auto ancillary companies which are the main drivers of chemical business, are expected to boost the segment revenue at a CAGR of 19% over a period of FY14-FY16.
• The order book at the Engineering Division is reasonably encouraging stood at Rs 420 mn, out of which 95% would be executed during this fiscal. Also, the enquiries under discussion hold lot of promises.
• The renewal of old lease agreement would propel rental income from Growel's 101 Mall at a CAGR of 24% over the period FY14-FY16.
• On the consolidated basis, we expect top-line and bottom-line numbers to grow at a CAGR of 15% and 23% respectively, over the same period.

Growel's 101 - high asset valuations with potential to propel the Margins
• Under the real estate segment company owns and manages the 10 acres of land with 0.47 mn Sqft of Mall (Usable area ~ 0.28 mn Sqft) & a development potential to construct additional 0.25 mn usable area. At present the leasable area is 0.25mn Sqft of which 85% is occupied.
• The renewal of its 9 year old lease agreement with Big Bazaar & Cinemax, due next year, should happen at ~75% increment.
• Recovery in economy & consumer sentiment should improve the occupancy ratio which would further improve the margins.

Relocation of paint manufacturing plant would help improve the margins
• The existing paint manufacturing plant is in Mumbai, has heavy octroi duty which increases the cost of materials. Plus, the labor charges at Mumbai plant are also higher which adversely impact the margins.
• Shifting of paint manufacturing plant from Mumbai to J&K would improve the margins on account of absence of octrai duty and low labor charges.
• The company will get some more benefits like tax exemption, low cost of power, free water availability etc in new location.
• All this would help the company increase its profitability in the long run.

New technical collaboration should improve the export further
• The company enjoys several foreign technical collaborations.
• Foreign collaborations not only help the company to gain more technical know-hows but also help increase its footprints in the overseas markets.
• We believe that several strong collaborations would continue to help the company grow its business in domestic as well as overseas markets.

All set to become zero debt company
• GWIL had taken debt to fund their Mall expansion projects few years back which will be fully repaid within next 2-3 years.
• The management has strong focus on repayment of debt which would continue to improve the PAT margin.
• Repayment of debt and strong cash positions in the coming years would lessen the financial risk in the business.

Outlook & Valuation
Recovery in the economy and early good signs from auto industry definitely bode well for GWIL. Its market leadership position in the surface protection business puts the company on the strong footing to capitalize on the improving business scenario. The mall business is doing well and going to be stronger in the future. Hence, we find the company's growth prospect very sound in the coming years.
We initiate coverage on GWIL with BUY rating, having DCF valuation based price target of Rs.28 per share (11.2x to FY16 EPS) over a period of 15 to 18 months, representing the potential upside 101%.

Risk & Concern
• Low cost products from Chinese market are the major concern in chemical business. This may hurt the margin profile of the company.
• Online shopping and heavy discount on products while doing e-shopping may hurt the growth prospect of the mall business.

SWOT Analysis

• Well diversified in chemical, engineering and real estate segment
• Market leader in Rs 7000 mn electroplating chemical industry with 38% market share
• Manufacturing more than 600 chemicals under one roof
• Well organised dealer networks & strong distribution system in multiple locations across India
• By FY16, net of cash, the company would be almost debt free
• Strong R&D with innovation and addition in product

• Small size of mall with single location
• Slow down in economy will adversely impact chemical as well as mall business

• Has potential to construct additional 0.25 mn usable area in Growel’s 101 mall
• New technical collaboration should improve the export further

• Online shopping and heavy discount on products via e-shopping may change the dynamics of mall business unfavorably.
• Low cost products from Chinese market are the major concern in chemical business.


Thursday, October 30, 2014

> Can Swiss bank money solve the FX problem? (MERRILL LYNCH)

■ Bottom line: No immediate impact; RBI to hold Rs58-62/USD
Can unearthing "black" money Indians have allegedly stashed away in Swiss banks help the Reserve Bank of India (RBI) raise FX reserves? We do not see any immediate FX impact given the legal issues involved, although the Supreme Court has yesterday asked the government to pass on information of Indians holding Swiss bank accounts to it today. Reports place Indians' deposits in Swiss accounts in an astonishingly wide range of US$2bn-2trn. In this report, we have worked with
an estimate of capital flight of about US$200bn based on a recent research study. If even half of this is unearthed, it could add US$30-35bn (three to four months of current import cover) to FX reserves over time, if taxed at, say, 30-35%. In the meanwhile, we calculate that the RBI will need to buy US$30-35bn to maintain eight-month import cover by March 2016. On balance, we continue to expect it to hold Rs58-62/USD assuming that the EURUSD remains around current levels. Our
Asia FX strategist, Adarsh Sinha, forecasts Rs61/USD in December.

■ Government passes Swiss a/c holder names to Supreme Court
The Supreme Court has yesterday ordered the government to pass on information of Indians holding Swiss bank accounts to it today. Finance minister Jaitley immediately told the media that the government will comply with the Supreme Court's directive. Attorney general Mukul Rohatgi also said that a list of 600-odd names in a sealed envelope will be handed over to the Supreme Court. This has just been done. The Supreme Court has asked the Special Investigation Team (SIT), headed by Justice (retd) Shah, to submit a report by November 30.

The story so far: The Supreme Court order is the culmination of a March 2009 public interest litigation filed by leading lawyer Ram Jethmalani seeking judicial intervention to bring back Rs700bn (US$11bn) of black money allegedly stashed away in foreign banks by Indians. It had ordered the institution of a SIT to probe black money in July 2011. The previous UPA government had submitted names of 26 Indians having accounts in in a Lichenstien, bank, of which eight were found legitimate. In May 2014, the just-elected Modi government paved the way for the SIT. In October, it committed to reveal all names against whom prosecution is launched but endorsed the previous UPA's stand that Swiss confidentiality clauses prevented it from making all names public. On Monday, the government disclosed names of three such account holders.

Estimates vary between US$2bn-2trn
Media reports place Indians' deposits in Swiss accounts in an astonishingly wide range of US$2bn-2trn. The Swiss National Bank has itself placed funds owned by Indians and entities at CHF1.95bn. This does not include the money Indians may hold in other names. In a recent study, Raghbendra Jha and Duc Nguyen Truong, of Australian National University, estimated total capital flight at US$186+bn during 1998-2012.

Unearthing capital flight can add US$30bn to FX reserves
We estimate that the government can add US$30-35bn to FX reserves, over time, if it is able to unearth some of Indians' "black money" abroad. In this report, we have worked with an estimate of US$200bn based on Prof Jha's estimate of capital flight. If even half of this is unearthed and taxed at 30-35%, this could add three to four months of current import cover to FX reserves, over time, when import cover is running low at 8.3 months

■ Tax amnesty scheme unlikely for Swiss bank funds
The Modi government is unlikely to announce a tax amnesty scheme to bring back Indians' "black" money stashed in Swiss banks based on a statement by Nirmala Sitharaman, minister of state for finance, in Parliament. In our view, VDIS schemes discriminate against the honest tax payer, although they allow the government to quickly raise revenue. At the same time, the government proposes to re-launch the Kisan Vikas Patra, which has had relatively relaxed know-your-customer norms but no fiscal incentives in the past.

We fully agree with Nirmala Sitharaman, when she tells Parliament that "...the experience shows when you bring in VDIS (Voluntary Disclosure of Income Scheme), it discriminates against genuine taxpayers. Those of you who pay taxes are goes against honest taxpayers... It may not be a conducive path for recovering more taxes..."

India has announced several amnesty schemes to allow citizens to disclose their "black" money after paying the prevailing income tax. The 1997 VDIS scheme taxed this “black” money at 30% for individuals and 35% for corporates.


>INR: An exciting range (MERRILL LYNCH)

  USD/INR: A range trade with opportunities
We continue to expect USD/INR to maintain a 58-62 range but believe there will be  opportunities to accumulate carry despite the risks from a stronger USD. Our analysis suggests positioning is less extreme, hedging activity is INR-supportive and carry remains extremely attractive, particularly for short EUR/INR. We expect  USD/INR to end the year at 61 (previously 60) despite a strong USD, and revise our end-2015 forecast to 60 (from 64) to factor in a stronger balance of payments (BoP) outlook.

  RBI’s range of tolerance: Rs58-62/USD
The Reserve Bank of India’s (RBI) range of tolerance for USD/INR and its intention to build reserves will be the single-biggest driver of the exchange rate over the forecast horizon, in our view. We expect it to buy US$35-40bn by March 2016 to maintain 8-month import cover. We see the 58-62 range breaking sustainably under  two scenarios: 1) sufficient FX reserves, (> 10 months import cover) which looks unlikely until 2016; or, 2) a much stronger USD than even we (as USD bulls) expect.

 ► Two medium-term positives
We expect the BoP to be INR-supportive, albeit highly dependent upon oil and gold prices. Our estimates place India’s current account deficit at 1.7% of GDP in FY15 and basic BoP deficit at roughly 1% of GDP by FY16, consistent with a stronger level of the INR. We also believe the RBI will maintain its inflation credibility with a 
likely peak in inflation reducing the need for a nominal depreciation ofthe INR. This should allow the RBI to cut rates 75bp in 2015 and encourage portfolio inflows.

 ► Risks from the stronger US Dollar
A stronger USD is a clear downside risk for the INR but our estimates suggest the sensitivity to the DXY index has fallen. While the RBI is unlikely to fight a much stronger USD, it would take sizeable appreciation to move USD/INR sustainably above 62. Moreover, FII portfolio inflows – that are more skewed towards equity than bonds – should react favorably to any RBI rate cuts and thereby be less vulnerable to a narrowing rate differential if the Fed begins hiking in June 2015 (asour US economists expect).


Wednesday, October 29, 2014

>HERO MOTO CORP LIMITED: Launching a new model in 3Q post recent launch of Splendor Racer, a variant of Xtreme & Production at Nemrana plant started

Core business earnings in line with estimates; exports all set to pick up

Hero MotoCorp (HMCL IN) adjusted operational earnings came broadly in line with our estimate of INR7bn, though reported earnings at INR7.6bn was higher led by a one-off other income to the tune of INR0.68bn. Blended realisation was flat QoQ and up 2% YoY with mix broadly remaining the same leading to a revenue growth of 21% YoY at INR69bn, broadly in line with estimates. EBITDA
margin at 13.5% too was in line with estimates and flat QoQ despite higher staff costs on account of commencement of production at Nemrana plant from July led by slight improvement in gross margin QoQ. We believe with the excise duty disparity in Hardwar plant impacting margin by ~130bps getting away from equation possibly from 4QFY15 onwards along with rising scale and rising impact
of internal cost cutting strategy, we expect margin to inch up a notch towards 14-14.5% in FY16e. With scooter capacity set to ramp up to 100k units by January 2015 and to 150k by mid-FY16 from 75k now, we believe attaining the short term target of 250k exports would get easier. First time motorcycle buyers have come back in the scheme of things after a long break in recent months boosting overall industry demand along with HMCL maintaining share around 54%. With couple of new launches in the scooter portfolio along with continuous launch of variants across the motor cycle portfolio on and above higher exports, we are confident of a 12% volume CAGR in FY14-16e resulting in a volume of 7.85mn in FY16e. We are maintaining our volume and margin estimates for FY16e resulting in a robust earnings CAGR of 32% in FY14-16e.

Conference call highlights
􀂄 Festive season demand going on pretty strong and HMCL is confident to close festive season with 10-11% growth this year. With inventory being pretty much in control amid high competitive intensity we believe HMCL has done a commendable job of maintaining market share despite a high base.

􀂄 Launched 2 new variants in Maestro, both have seen good response from the market. Have 75k unit scooter capacity currently and will take capacity to 100k by January 2015 and plan to increase to 150k by mid-FY16. Planning a couple of new scooter launches in the next one year with focus towards the 125cc segment.

􀂄 Target of exports at 250k unit in FY15 with higher scooter capacity helping to boost exports soon. Have vision to export to 50 countries by 2018 from 20 markets presently. Got a large order of 45k unit of scooters in export markets and will be executed by November only.

􀂄 Launching a new model in 3Q post recent launch of Splendor Racer, a variant of Xtreme.

􀂄 Production at Nemrana plant started July onwards and is expected to ramp up production this quarter itself with peak capacity of 1.2mn.

We maintain our Buy on HMCL with a price target of INR3,151 based on 18x FY16e core EPS of INR161 and INR255/share of cash and equivalents. We believe interim dividend of INR30/ share this quarter along with visibility of annualized payout of 55-60% signifying a FY16e DPS of ~INR100, implies HMCL is trading at an attractive dividend yield of ~3-4%.


>Market Outlook (MICROSEC)

Indian market is likely to remain volatile due to Global market volatility which is led by fears of Global Economic slowdown led by Europe and China. Election results slated to be announced on Oct 19 in two key states will further decide Governments strength in framing bold policies.

There are many low hanging fruits like insurance bill which need to be cleared in the winter session of parliament. Lower CPI and WPI may create conducive environment for RBI to cut interest rates by end of the CY14 or early next year. Geopolitical issues, China slowdown, weakness in global markets and US Fed may indicate hiking rates sooner will prompt some investors to remain cautious. Indian
PM visit to US was successful in many ways if one takes a macro view and specially strengthening the defense sector by inviting manufacturing in India to US INC. Earning season has started which would emphasize on stock specifics according to the performance. Markets in the past has performed on beaten down stock valuation but henceforth, earnings accretion would bring new run in markets in
few upcoming quarters rather than P/E expansion. Favorable outcome on assembly results towards Central ruling party would enthuse markets in its ability to clear key bills in upper house of parliament.

Sharp decline in input prices across industries like crude oil, rubber, cotton yarn, copper will improve fundamentals across OMC’s, Auto-ancilliaries, Textiles and Consumer durable. These sectors may continue to outperform in Oct 2014. Nifty EPS(E) for CY15 is currently at ~571, Bloomberg consensus. On that basis we believe Nifty is likely to trade 13.66-14.18x CY15(E) earnings which makes a range of ~7800-8100 for October 2014. Engineers India, Dredging Corp, Max India,
Finolex Cable, CCL Product, Crompton Gr, IDFC, Tide Water, IL&FS Transportation, Blue Star, UPL Ltd., Bharat Electronics, Archies Ltd, Exide Ind, Lloyds Electric, M&M, L&T, Tata Motors, TCS, INFY, RIL, SBI, ONGC may remain strong.


> Pennar Industries Ltd. (IndiaNivesh)

CMP Rs. 52 |P/E (FY15E) 9.7x | P/E (FY16E) 6.5x Target Rs. 81

Investment Rationale

 Moving from commodity to value added products: Pennar Industries is moving from pure commodity player to value added player with its range of engineering products. This transition is helping the company improve its consolidated margin as company has added many high margin segments in its portfolio.

 Direct Play on overall macro-economic recovery: As company caters to the large part of economy’s sectors like Automobile, Infrastructure, Railway etc, it is well placed to take the advantage of any economic uptick through its diversified business portfolio.

 High Operating leverage and Low Financial leverage provides high upside and limited downside potential: Muted economic environment has reduced capacity utilization for Pennar Industries in last couple of years. With likely economic cycle revival, increase in capacity utilization will act as major margin booster for the company. On the other hand delay in revival should not be major concern as company has low financial leverage and large part of its debt is working capital debt.

 Subsidiary PEBS is Key Growth Driver: Other major growth driver for the company will be PEBS, which is amongst top 5 players in India. As the concept of pre-engineered building products (PEBS) is catching up fast in India; anyone setting up an industry now would look for early commissioning of plants, PEBS is poised for abnormally strong growth. A corporate action by the company on getting this subsidiary (PEBS) separately listed on exchanges could be the additional trigger for the stock.

 At CMP of Rs.52, Pennar Industries is trading at P/E multiple of 9.7x FY15E and 6.5x FY16E earnings estimate, which is well below 14.3x – three year historical average. Average ROE for the company is past 3 year has been 12.9%. In FY15E and FY16E, the ROE of the company is likely to improve to 16.4% and 20.3% respectively on back of increased capacity utilization and margin expansion. We value this company at conservative PE multiple of 10x to FY16E EPS (Rs.8.1), which gives the target price of Rs 81. RISH TRADER

>Meghmani Organics Ltd. (IndiaNivesh)

CMP Rs.17 | EV/EBITDA (FY15E) 5.4x | (FY16E) 4.8x Target Rs.34 (5.9x FY16E P/E)

Investment Rationale
 Absence of incremental growth capex from here on could lead to higher free cash flow generation, repayment of debt (paid Rs.500 mn in Oct-2014) and better net profit margin.

 Investments in pollution control equipment and permissions in place from state level pollution control board. This could result in higher plant utilization and margin expansion.

 Given that all safety and environment certifications are in place, MOL could attract new order wins and also remain eligible for contract manufacturing order from MNCs .

 All newly commenced facilities both in Pigments & Agrochemical segments are stabilized and ready to deliver higher revenue growth going ahead. 

At CMP of Rs.17, the stock is trading at EV/EBITDA multiple of 5.4x FY15E and 4.8x FY16E estimates. In our view, the current valuations are significantly below 7.5x global peer average. On back of various triggers like: (1) debt reduction, (2) margin expansion, and (3) higher plant utilization the stock is poised for re-rating. We have assigned 5.9x EV/EBITDA multiple (21% discount to global peers) to arrive at FY16E based price target of Rs. 34/share with BUY rating.


>Ashiana Housing Ltd. : CMP Rs.155 |P/E (FY15E) 19.9x | P/E (FY15E) 7.8x Target Rs. 202 (IndiaNivesh)

Investment Rationale
 Developer with Unique Business Model: Ashiana Housing Ltd. (AHL) is a unique asset light developer, with strong focus on pursuing Real Estate business in Tier II and III cities. AHL has unique business model, (1) where land cost as % of construction cost is lesser (vs. their listed peers), (2) does not build huge land banks, (3) does in-house construction as well as sales, & (4) consistently explore the alternative of deploying lower capital across projects. This asset light strategy and focus on cash flow generation has helped AHL remain debt free and experience above industry level Internal Rate of Returns (IRRs) of >30% across most of the projects.

 Highest Return Ratios in the Industry: AHL is the only listed developer, which has consistently maintained >25% RoE as well as RoCE for last few years (with exception of FY13 & FY14). Sudden drop in FY13-14 return ratios is owing to company’s strategy to shift its accounting methodology. With most of the ongoing projects reaching completion, we expect AHL to report FY16E RoE and RoCE of 35.0%, each.

 FY15-16E to see strong earnings growth: AHL is likely to report ~149% top-line CAGR during FY14-16E (to ~ Rs 6.9 bn), on the back of 3 projects entirely getting completed (Tree House, Utsav and Anantara) and some phases of remaining 7 projects getting completed (Ashiana Town, Rangoli Gardens, Aangan, Gulmohar Gardens, Navrang, Vrinda Gardens, Dwarka and Umang). We expect AHL to report ~192% PAT CAGR during FY14-16E (to ~Rs 1.8 bn; PAT margins would expand from 19.8% in FY14 to 27.1% in FY16E). 

With substantial chunk of ~6.8 mn sq. ft. of ongoing projects reaching revenue recognition threshold, we expect revenue visibility to sharply improve from here-on. With debt free balance sheet, at CMP of Rs 155, AHL is trading at FY15E and FY16E, EV/ EBITDA multiple of 17.6x and 5.7x, respectively. We have valued AHL using Sum-of-the-parts (SoTP) basis to arrive at FY16E based price target of Rs 202.


>LUPIN: Out performing due to good growth of Kyowa (CENTRUM)

Consistent all round growth

We maintain Buy rating on Lupin with a price target of Rs1,680 (earlier1,670) due to its good performance in Q2FY15. Lupin reported 19%YoY growth in revenues, 150bps improvement in margin to 26.2% and 55% growth in net profit. Major growth of 23%YoY came from US formulations and domestic formulations grew by 20%YoY. The company’s RoW formulation business also had good growth of 16%. Our target price is based on 23x September’16E EPS of Rs73.0. Key risks to our estimates are regulatory issues for its manufacturing facilities and slowdown in the domestic market.

Strong sales growth of 19%YoY: Lupin reported 19%YoY growth in revenues due to good growth of 23%YoY in US and European formulation business (44% of revenues). This business grew to Rs13.59bn from Rs11.09bn. Its domestic formulation business (26% of revenues) grew by 20%YoY to Rs7.99bn from Rs6.64bn despite price reduction by NPPA. The company’s Japanese business (11% of revenues) grew by 12%YoY to Rs3.46bn from Rs3.09bn due to good growth of Kyowa. Its API business (10% of revenues) grew by 11% to Rs3.18bn from Rs2.86bn.

► Margin improves by 150bps: Lupin’s EBIDTA margin grew by 150bps YoY to 26.2% from 24.7% due to reduction in other expenses. The company’s material cost grew by 220bps to 33.7% from 31.5% due to the change in product mix with higher growth in regulated markets. Personnel cost was maintained at 13.8%. Other expenses declined by 370bps to 26.2% from 29.9% due to yield improvement and cost rationalisation initiatives. There was a forex gain of Rs170mn at net profit level of which Rs847mn is included in other income and the balance under other line items. The management has guided EBIDTA margin of 28-30% for FY15.

 US business to drive growth: Lupin is the market leader in 31 out of 75 products in the US generic market. The company’s 54 products are among the top three in the US generic market. It has a basket of oral contraceptive (OC) products for the US market. Lupin launched 3 new products in the US during the quarter and has plans to launch 10 products during H2FY15. The management has indicated they were looking for brand acquisitions in the US, Europe and Japan. We expect the US
market to drive future growth of the company.

►  Consistent performance: We expect Lupin to report consistent performance due to strong growth in the US, India, Japan and RoW markets. We have enhanced our EPS estimates for FY15 and FY16 by 4% and 1% respectively. We have valued the stock at 23xSeptember’16E EPS of Rs73.0 and arrived at a target price of Rs1,680 with a 23.7% upside from CMP. Lupin continues to be our top pick in the pharma sector. Key risks to our estimates would be regulatory issues for its manufacturing
facilities and slowdown in the domestic market.


Tuesday, October 28, 2014

>The world’s greatest stock picker? Bet you sold Apple and Google a long time ago. - JOHN MAULDIN

My good friend Barry Ritholtz, famous for launching The Big Picture blog (and since graduating to being a regular Bloomberg columnist as well as writing a weekly column for the Washington Post), is well-known for being a contrarian. Barry is a regular dinner partner when I get to New York, and he also participates in the annual Maine fishing trip. We frequently trade information … and barbs. The word colorful affectionately comes to mind when I think of Barry (and maybe opinionated would work).

I can usually count on him to find at least a few things to disagree with me on at our dinners. No matter what devastating arguments I produce to demonstrate the errors in his thinking, he conjures up new facts to support his flawed positions. We have had a few of these episodes as members of a panel in front of a large public audience, much to the amusement of the spectators (and watching Barry can be an entertaining spectacle). My only real frustration with Barry is that he is mentally faster than I am and he seemingly remembers every obscure data point from the last thousand years. I consider it a triumph if I merely hold my ground.

But one thing we do agree on and are both passionate about is that we human beings were not designed for these modern times. As I so often say, we evolved on the African savanna dodging lions and chasing antelopes. We have converted those survival instincts into an unwieldy approach to dealing with financial markets, which is not the optimal way to approach investing. Both of us write a great deal about behavioral investing and the foibles of human nature.

I was struck by the insights of Barry’s latest Washington Post column. How difficult it is for us humans to hold on in the middle of dramatic volatility. Don’t you wish you had held Apple for the last 10 years? A 1000-bagger is not to be sneezed at. But dear gods, the volatility! And what about the stocks that once looked like a better bet than Apple that went to zero? How do you decide when to hold and when to fold? (Cue Kenny Rogers.)

This is a short Outside the Box, but it’s one that should make you think, which is the purpose of this letter.

And in a departure from my usual close, I want to offer two links. The first is to a fascinating web post at something called of 52 colorized historical photos. You have seen most of these photos in black and white (or at least you have if you have reached my advanced age). Seeing them in color is quite another story.

Second, and not for the faint of heart, is a link to a rather heated exchange between Ben Affleck and Bill Maher over radical Islam and Islamaphobia. I generally find Maher annoying, sometimes in the extreme. But this “conversation” is instructive. It illustrates the tensions in the Western world around dealing with Islamic beliefs and the religion in general. The other guests chime in with fascinating anecdotes. You can decide for yourself who wins this argument, but it is one that is increasingly important in our world. And I am not sure anyone will be comfortable with the answers. This is courtesy of my friends over at Real Clear Politics.

I am still luxuriating in the aftermath of my birthday party on Saturday night. Friends flew in from all
over the country (and from around the world) and surprised me. Too many to mention, but I was deeply honored and humbled. My staff and friends and family put the whole thing together (huge thanks to Shannon and Mary and Shane and my kids). My daughter Melissa put together a playlist on Spotify of all the songs she has heard me listening to over the years. Three and a half hours of one hit after another. We are working on making it available to those of you who are already on Spotify.

And just for the record, that morning I did 66 consecutive push-ups on my 65th birthday. I then went on to do a total of 360 push-ups (50×5+44) in less than two hours, with the help of an Avacor machine to cool me down between sets, in a workout that included a similar number of abs, lat pulldowns, arm exercises, etc. Knock on wood, I do not plan to go gently into that good night. As a geek, I am coming late in life to loving the gym. But better late…

It is time to hit the send button. I am off to the Great Investors’ Best Ideas Symposium here in Dallas.

It is a who’s who of famous investors, all of whom agreed to speak and to give one investment tip to aid a great charity. Bill Ackman, David Einhorn, Paul Isaac, Bill Miller, Ray Nixon, Richard Perry, T. Boone Pickens, Michael Price, Tom Russo, and moderated by Gretchen Morgenson. Have a great week while thinking about how to get your human nature under control.

Your more human that I want to admit analyst,




>M&M Financial Services: Increased efforts on recoveries (CENTRUM)

Inline results; recovery efforts underway

MMFS' Q2FY15 results reflect the management’s positive efforts on recovery highlighted by mere 5% sequential increase in GNPA to Rs21.3bn (our / consensus estimates at +8-10%). Collections have improved and the management expects limited accretion to NPAs in H2FY15. Q2 NII at Rs7.4bn / net profit at Rs2.1bn were in line with estimates. AuM growth came in lower at 14.6% yoy and we have accordingly tweaked our estimates for FY15E. Well-diversified loan mix with improved reach and benign interest rate regime bode well for MMFS enabling it to leverage on growth opportunities during the auto industry up-cycle. Retain Buy with a revised target price of Rs325.

 Results in line with estimates: In MMFS’ Q2FY15 results, NII at Rs7.4bn (+9% yoy) and net profit at Rs2.1bn (-6% yoy) were largely in line with our estimates, though below consensus estimates. AuM grew 14.6% yoy, while value of assets (VoA) financed declined 7% in H1FY15. Recovery efforts as envisaged by the management resulted in limited accretion to bad assets during the quarter. GNPA at Rs21.3bn grew 5% sequentially vs 44% qoq increase in Q1’15 and 6% qoq increase in Q2’14. Our channel checks suggest NPA accretion was from CV’s especially the LCV segment and tractor portfolio.

 ■ Recovery efforts underway: Increased efforts on recoveries by the management in the past two-quarters seem to be working. Collection has improved 5-6% for the quarter and the management expects limited accretion to NPAs in H2FY15. In the up-cycle of FY09-13 GNPAs halved to 3.2%. This was partly supported by buoyancy in rural income. With focus on recoveries and balance sheet growth over FY16-17E, we expect overall GNPA (currently at 6.3% in H1FY15) to decline to 4.9% by end- FY17E. Provisioning coverage ratio at 53% was the only negative.

 ■ AuM grows 15% yoy; borrowings skewed towards bank route: Lower than expected AuM growth during the quarter could be attributed to the slow-pace of growth in auto industry. While segments of cars and tractors continue to see lower growth, MMFS has seen good traction in the pre-owned vehicle segment. Management expects AuM growth to gather momentum in H2FY15 and we have accordingly revised our FY15 estimates lower. With improved reach and respectable market share across all OEMs, MMFS is well-positioned to leverage on the growth opportunity. Borrowing mix remains skewed towards banks (~50%).

■ Valuation, view and key risks: We have tweaked our estimates and now factor in 18% CAGR in NII / 19% CAGR in profits over FY14-17E. Renewed thrust on recoveries (over balance sheet growth) will enable MMFS contain asset quality risk at comfortable levels. This, coupled with benign interest rate regime, will ensure stable margins and sustainable 2.8% / 19.2% (average) RoA / RoE over FY14-17E. We retain Buy with a revised target price of Rs325 (valued at 2.8x Sept’16E ABV). Failure on the recovery front or lower than expected pick-up in industry-wide auto volumes remains key risks.


BIOCON: Malaysian facility for insulin poised for good growth (CENTRUM)

Affected by capacity constraints

We maintain Buy rating on Biocon with a revised target price of Rs570 (earlier Rs660) based on 18xSeptember’16E EPS of Rs31.7. Biocon’s results were below our expectations and were impacted by capacity constraints and geo-political situation in the Middle East and North Africa. The company reported 17%YoY growth in domestic formulations and 2%YoY in research service segments. Higher personnel cost led to 100bps margin decline during the quarter. With registration of rh-insulin in over 55 countries, it is poised for good growth when its Malaysian facility for insulin is expected to go on steam by the end of FY15. Key risks to our assumptions are slowdown in the biopharma segment and delay in the implementation of Malaysian insulin facility.

 ■ Formulation business to drive growth: Biocon reported sales growth of 2%YoY driven by domestic formulations. The company’s biopharma business (59% of revenues) declined by 1%YoY to Rs4.42bn from Rs4.47bn. Domestic formulations (15% of revenues) grew by 17%YoY to Rs1.16bn from Rs989mn higher than the industry growth of 11.6%. Biocon’s CRAMS business (26% of revenues) grew by 2%YoY to Rs1.92bn from Rs1.88bn. We expect CRAMS business to report good growth due to its association with major global clients BMS, Abbott and Baxter and extension of BMS contract for five years. We expect Domestic Formulations business to drive future growth.

 Malaysian facility to improve margins: Biocon’s EBIDTA margin declined by 100bps to 22.0%% from 23.0% due to the increase in personnel expenses. The company’s material cost declined by 80bps to 46.9% from 45.7% due to the change in product mix. Personnel cost grew by 270bps to 16.7% from 14.0% due to the addition of 590 employees during the year. Biocon’s other expenses declined by 290bps to 14.4% from 17.3%. Its R & D expenses increased by 25%YoY to Rs559mn from Rs446mn. We expect margin improvement going further due to higher growth in formulation business and commencement of insulin facility in Malaysia.

Net profit maintained: Biocon’s net profit for the quarter was maintained at Rs1.02bn. The company’s other income grew by 24%YoY to Rs231mn from Rs187mn.Biocon’s interest cost went up by 1,567% to Rs50mn from Rs3mn due to temporary borrowings. Its tax rate declined to 16.9% from 23.9% of PBT. We expect improvement in net profit due to margin improvement and debt-free status of the domestic entity.

■ Recommendation and key risks: We maintain Buy rating on the scrip with a revised target price of Rs570 based on 18x September’16E EPS of 31.7 with an upside of 20% from CMP. We have lowered our FY15 and FY16 EPS estimates by 13% and 14% respectively. Key risks to our assumptions are slowdown in the biopharmaceutical segment and delay in the implementation of Malaysian insulin facility.


>INDIAN IT SERVICES: Take a Breather — Positives Priced in? (CITI)

 Moderating our bullish thesis — Following strong outperformance (~45% outperformance in two years), relatively full valuations and multiple changes in the IT landscape, we are toning down our optimism. The sector trades at ~18.5x 1-yr forward – last time it traded at that level was when the top four companies were growing at ~25% (vs now at ~10-15%). Reverse DCF suggests ~11-19% 10-year implied EBIT CAGR. We downgrade Infosys to Neutral & TechM/Mindtree to Sells.

 Macro uplift not fully translating to revenue acceleration… — Top 5 cos grew 13.4% yoy in Q1FY15 vs 14.2% yoy in Q1FY14. This could be due to the changing IT services landscape and some impact of the law of large numbers – (a) commoditization in some of the traditional service lines; (b) high market share in the applications business, particularly in US; (c) cloud/SaaS impacting enterprise solutions segment. Longer-term impact of cloud remains something to watch out for.

 …Though medium-term growth drivers remain — The industry can still grow at low double digits: (a) new markets like continental Europe offer growth opportunities (Europe Opportunity – The 'New Normal'); (b) newer technologies (analytics, mobility etc.) can become significant in the medium term; (c) penetration is still low in the relatively new services lines (including BPO/ITO); (d) better capital allocation can support growth/multiples (M&A, Capital Return the Next Potential Catalysts).

 Downgrade Infosys, TechM, Mindtree — Infosys has had a good ~15% return (10% outperformance) in the past 3m, factoring in management change and cost improvements. We see risks of volatility ahead. Tech Mahindra – expect EBITDA growth of ~5% in FY15 – difficult to justify the premium to HCLT; downgrade to Sell. Mindtree remains the best-placed mid-cap – however, the sharp rerating (valuations at ~17x 1-yr forward vs ~11x 1 year back) may be running ahead of fundamentals.

 Absolute vs relative — Our investor interactions suggest that most investors struggle with the “absolute vs relative” call given the sharp rally in the Indian markets and valuations in some sectors being even higher. While that (as well as the depreciating INR) could help the sector in the near term, the industry issues should dominate over the medium term and, given where valuations are, we would
prefer to be more stock specific – HCLT/Wipro remain Buys.

Monday, October 27, 2014

>Cairn India Limited (ANTIQUE)

Discovering value; Upgrade to Buy

Cairn India has corrected ~20% post its 1Q results, due to oil prices softening to USD85/bbl; USD1.3bn related party loans and advances; and concerns on production growth. The company has remained confident of achieving 7-10% production CAGR over FY14-17e from execution of Mangala, Bhagyam and Aishwariya enhanced oil recovery (EOR) and infrastructure projects (180-
200Mbbl/d); additional production from BH+satellite fields (10-30Mbbl/d); and development of gas potential (10-20Mboe/d). We estimate an 8% CAGR growth in Rajasthan output over FY14-17e to 230Mbbl/d (mid-range of the management's guidance) and Brent at USD95/bbl to arrive at our target price of INR315 per share, which values exploration upsides conservatively at 10% of 3bnboe exploration potential and USD3/boe. We upgrade the stock to Buy with a revised target price of INR315 per share.

Even in a worst case scenario, assuming long-term oil price at USD85/bbl and no production (190Mbbl/d) growth over the next three-years, we arrive at a DCF-based target of INR270 per share, at which it trades at an inexpensive valuation of 2.5x EV/EBITDA on FY16e EBITDA of INR101bn, with FY15-end cash balance of ~INR260bn, implying almost negligible downside from current levels.

► PAT at INR22.8bn slightly below estimate due to higher taxation
The company reported a 2QFY15 consolidated net profit of INR22.8bn, down 33% YoY, due to a 7% YoY decline in working interest production to 123Mbbl/d, on account of maintenance at the MBA terminal; 7% lower oil realisations; and 17% higher profit petroleum at INR15.4bn. Rajasthan output declined 7% QoQ to 163Mbbl/d in 2Q, led by planned maintenance shutdown at the Mangala Processing Terminal. Well interventions measures at Cambay have led to 23% YoY increase in production at CB-OS-2 field but remained flat QoQ. Average realisation was down 6% QoQ to USD91.3/bbl, while Rajasthan operating expenditure rose to USD6.3/bbl on account of maintenance.

 Significant progress in achieving 7-10% production CAGR
In Phase I, CIL has upgraded MBT fluid handling capacities, ahead of schedule, to ~800,000 barrels of fluid per day. It is also on-track for first injection of polymer in 4QFY15. Since all major equipment has been erected at the central polymer facility in MBA fields, the company is targeting 50% recovery, with a production potential of 180-200Mbbl/d. In BH+satellite fields, the company is leveraging technology and existing infrastructure to target 200-300MMboe, which is above our recoverable estimate of 165MMboe, with a production potential of 10-30Mbbl/d. It received operating committee approval to increase production at Aishwariya field up to 30Mbbl/d, while Bhagyam polymer flood EOR plan is being reviewed by its joint venture partner.

 Continued successful exploration, conservatively valued at INR28 per share
With resumption in exploration, CIL has struck 11 discoveries to establish 1.4bnboe of in place resources, out of 3bnboe exploration. While 0.6bnboe is under testing, the remaining 1bnboe is to be established during FY15/16. It has also identified 3bnboe of additional resources in Rajasthan, which raises the block's potential to ~10bnboe. While it is too preliminary at this juncture, we assume a 10% recovery, due to its tight nature (300Mmboe reserves), and USD3/boe valuation multiple estimate to arrive at a potential value of INR28 per share. The company has maintained its production and capex guidance, while final approval for nearterm triggers like Barmer Hill and Raageshwari gas development are awaited.

► Upgrade to Buy with a revised target price of INR315 per share
At long-term Brent of USD95/bbl and net recoverable resources of ~870MMbbl (MBA, BH+satellite fields), we arrive at our DCF-based target price of INR315 per share, which values exploration upsides conservatively at 10% of 3bnboe exploration potential and USD3/ boe. We upgrade the stock to Buy with a revised target price of INR315 per share.


>BHEL: Recent coal sector reforms are extremely positive (ANTIQUE)

Coal reforms a key positive

The recent coal sector reforms are extremely positive for Bharat Heavy Electricals as it stands to significantly benefit from the government's decision to allocate coal mines to central and state power generators, on a nomination basis. We maintain our view that the Indian power generation equipment market is set for a rebound, on growing concerns of a power shortage in the country over the next
three-to-five years. We see BHEL as the biggest beneficiary of a power equipment demand revival, given weakened competition, cost advantage, and high degree of localised manufacturing. We reiterate our Buy rating.

 BHEL is among the biggest beneficiaries of the ongoing reforms in the coal sector
In a key decision, the Union government recently decided to promulgate an ordinance to facilitate e-auction of coal blocks for private companies’ captive use and allot mines directly to state and central public sector undertakings. This comes in the backdrop of last month's Supreme Court order cancelling 214 coal blocks allocated to various companies since 1993. The process of auction is expected to be completed in the next three-to-four months. BHEL is the key beneficiary of these initiatives as 14 coal blocks, with 8.2bn tonne allocated to state and central PSUs, would be re-allocated and lead to higher capacity addition, with fresh equipment ordering for these capacities.

■ BHEL bagged two significant orders in the past two months
During the past few months, BHEL has bagged several orders. In the past two-months itself, the company bagged two significant orders, with an aggregate order value of INR113bn, to set-up power plants on an engineering, procurement, and construction (EPC) basis. It includes a major contract for setting up a 2X660MW supercritical thermal power plant worth INR78bn (8% of order book) at the Ennore special economic zone in Tamil Nadu from Tamil Nadu Generation and Distribution Corporation, at a healthy price of INR59m per MW, on an international competitive bid basis. BHEL also bagged an EPC order worth INR35bn from Gujarat State Electricity Corporation to set-up an 800MW power plant.

■ State electricity boards getting active to set-up capacities
Among other key developments, BHEL entered into a memorandum of understanding (MoU) with the Telangana State Power Generation Corporation to set-up 6,000MW power plants in the state. Many states are looking at aggressively building up power generation capacities, including Maharashtra, Andhra Pradesh, Telangana, and Rajasthan, which will significantly boost demand for power generation equipments over the next two-to-three years.

 Power generation equipment market set to rebound over the next one-to-two years
We maintain our view that the Indian power generation equipment market is set for a rebound on growing concerns of a power shortage in the country over the next three-to-five years. We estimate that ~64GW (only coal) of power equipment orders will be placed during FY15-18e, predominantly by central and state sectors. In the next 12-15 months, we expect 18-20GW of orders to be placed. We see BHEL as the biggest beneficiary of a power equipment demand revival, given weakened competition, cost advantage, and high degree of localised manufacturing. We expect BHEL's order intake for FY15-17e to be an average INR521bn per year as against an average INR272bn per year during FY12-14. This will ensure a sharp pick-up in revenues from FY17 onwards. We expect BHEL's revenues to grow 6% and 17% over FY16e and FY17e, respectively.

■ Earnings to sharply rebound in FY17; Near-term earnings may be under pressure
Savings in material costs and better operating leverage will help improve EBITDA margin to 12.9% and 15.7% in FY16e and FY17e, respectively, from 11.6% in FY14. We see BHEL earnings bottoming out in FY15e (INR13.4, down 5% YoY; 48% of peak EPS of INR28.8 in FY12). We expect an earnings recovery from FY16e (17%) to spread into FY17e (41%). We maintain our Buy rating with a target price of INR315 per share (20x FY16e earnings).