>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.

>Bharti Remains a Buy on 3 Key Reasons

I. Business trends should improve longer-term
We remain confident on the outlook for the Indian telecom sector longer-term with the heavy spectrum outgo for 2G likely to temper competitive intensity. While the staggering of spectrum payments will help blunt the blow, the outgo will still be substantial, translating into much more rational behavior by most operators. 

The operating leverage from the resultant uptick in rev/min (either through reduced discounting or absolute hike) will benefit everyone. Bharti, being the largest operator with the strongest balance sheet, is most leveraged to this trend. A 1p increase in rev/min results in ~6% wireless EBITDA and 3% consolidated EBITDA upgrade. It also results in a 6% increase (Rs20/sh) in Bharti’s fair value.


II. Material earnings downside unlikely but priced in
The required run rate to meet street expectations on financials now appears in line with recent operating trends. However the stock price seems to imply a further deterioration. We believe this reduces the probability of any major disappointment on earnings hereon.

We believe the current intensity in competition (largely led by incumbents) will continue for some time and put pressure on rev/min in the near-term. However, we also believe that: i) the declining trend is unlikely to be a prolonged one and will (eventually) reverse in the long run; and ii) a large part of this near-term pain appears largely factored in the estimates though we would stop short of calling this a bottom – in case the current phase is prolonged beyond our expectations (low probability, in our view).


III. Multi-year low valuations and declining ownership provide downside support
Moderate expectations combined with the sharp underperformance (43% YTD), multi-year low valuations (1.7 std dev below mean on EV/EBITDA) and falling ownership levels (institutional ownership is down 400bps from Dec-08 till Jun-12) provide downside support. That said, we do believe that near-term stock performance will remain subdued until evidence of underlying business (and profitability) stabilization.

To read report in detail: BHARTI AIRTEL
RISH TRADER

>INDIA GAS SECTOR

Down…But Not Out


 PLNG: Future perfect; near-term regulatory risks reduced — With the regulation of mktg margins virtually ruled out in the near term following the HC ruling on IGL as well as the oil min’s comments (source: ET) that marketers may be free to negotiate mktg margins for gas sold at mkt rates (à la LNG), PLNG arguably faces the least near-term regulatory headwinds among its peer set. Longer term, we remain sanguine about the prospects of LNG usage in India, which should benefit PLNG.


 GSPL: Offers best value — While GSPL’s upcoming tariff review continues to be viewed with caution, our view remains that downside, if any, is not very meaningful. This would make GSPL the most attractive investment opportunity in the space, trading at an adj. EV/CE of 1.1x vs. 1.5-1.9x for peers (P/E of 8x vs. 12x for GAIL).


 IGL: Oversold; price hike reduces near-term earnings risk — With the 8% CNG price hike just announced, IGL has belied market concerns on its ability to pass on higher input costs given regulatory uncertainty. We believe the stock is pricing in sustainable ROEs of a mere ~12% (post-tax ROCE of ~9%), which does not compensate it adequately for the risks inherent in the city gas business. Our new TP of Rs300 is based on sustainable ROEs of ~16% (~12% ROCE). We, however, acknowledge uncertainty on tariff evolution and maintain our High Risk rating.


 GAIL: Dearth of catalysts; buy another day — Earnings disappointments and lack of vol growth (with risks of degrowth) are yet to be fully factored in, in our view. While 1Q could sport a sharp (albeit unsustainable) recovery, we maintain Neutral.


 LNG demand hits a brief lull, but should recover in 2H — The bounce in Asian spot prices through 1H (Japanese demand, supply disruptions, production delays – highlighted in our May 8 ‘Upgrade to Buy’ on PLNG) and the sharp fall in liquid alternatives (crude weakness) has impacted spot LNG demand in India, which could cap 1Q vol gains for PLNG, GAIL, GSPL. However, with Japan restarting its nuclear plants, new production (Aus./Angola) coming shortly, and crude down sharply (LNG typically follows with a lag), spot prices to India have come off sharply in recent weeks, from >$15 to <$13 levels which should drive a pickup in 2H.


 Long-term prospects remain sound — Longer term, we remain sanguine about prospects for LNG in India, and are enthused not only by expansion plans of several players (capacity to grow ~4x in 5 yrs; PLNG to control ~50% of this), but also of the capacity that GAIL/GSPL are building to transport this gas to new areas.

RISH TRADER

>FACEBOOK INC: Initiating With Neutral & $35 PT – Easy To “Like,” Hard To Love

 Significant Long-Term Potential Offset By Medium-Term Risk — Facebook has established itself as an Internet Utility. It could become the largest ‘Net Platform one day in terms of Revenue & Profits, given the size & engagement of its user base and its biz model. But with a 50X 2013 P/E, much of this potential has been priced in. Further, FB appears to have hit a Fundamentals Air Pocket, given its decelerating MAU growth (27% in ’12 vs. 48% in ’11 -- law of large numbers) and its softening ARPU growth (2% in ’12 vs. 27% in ’11 – economy, unmonetized Mobile channels, and correctly conservative Monetization strategy). Super-high multiples & Deceling growth don’t mix well. Add a limited visibility Biz Model & an unproven Team and you have a Neutral.


 Biggest Investment Positives Are… — 1. Substantial Market Opportunities – incl. a Global Internet Ad market that should reach $130B by 2015; 2. An Almost Unassailable Position As THE Social Networking Leader – 900MM+ MAUs & 525MM+ DAUs; 3. Significant Network Effects advantages – probably greater than any ‘Net company; 4. Major Monetization Potential – currently generating less than $5 in annual Revenue per MAU; & 5. Platform/Option Potential – with a massive, highly engaged user base, FB has the potential to layer in more Revenue streams over time…Ad Network, Transactions/Subscriptions revenue share, Digital Media sales, etc…


 Biggest Investment Risks Are…— 1. Dual-Class Stock Structure – with questions about mngmt’s views towards public shareholders; 2. Limited Appeal To Advertisers Today – based in part on our 800-person Ad Age Citi Panel survey; 3. Unclear Mobile Monetization – 30%+ of total usage today may not generate meaningful Revenue for a long time; 4. Zero Presence In Largest ‘Net Market – China; and 5. Lockup Expiration/Stock Supply Risk – which has materially impacted every other ‘Net IPO.


 Deriving Our $35 PT – We use a combination of P/E (40X our 2014 EPS of $0.85), EV/EBITDA (15X our 2014 EBITDA of $5.0B), and DCF. These are Premium Multiples, but we view the company’s growth rate (30% EPS CAGR thru 2015) and Option Potential as supporting them.


 What Would Make Us… -- Bullish? A material correction vs. our PT, clear signs of Mobile Monetization, evidence that Advertisers are aggressively engaging with FB, and the development of new Revenue streams. Bearish? Material appreciation above our PT, clear signs of FB user fatigue, lack of monetization improvements.


To read report in detail: FACEBOOK INC

>SUNTECK REALTY

Significant Revenue Pickup in FY13


 Reiterate Buy — We maintain a Buy on Sunteck Realty given its city-centric asset base (~90% of NAV is from Mumbai). With revenue recognition based on the conservative project completion method and ~1 msf projects coming on stream in FY13, we expect a significant pickup in revenues.


 Increasing TP to Rs455 — We incorporate some execution delays and roll forward our NAV to Mar'13E (Sep'12E earlier) – increasing base NAV marginally to Rs650 (from Rs647). In light of the continuing strategy by the company/competitors to sell selectively at premium realizations, we reduce the probability of price cuts to nil. Our TP continues to be at ~30% discount to NAV.


 Update on BKC Assets — BKC residential projects account for ~44% of gross NAV. Signature Island – 14th habitable floor completed and 3 more slabs remain to be completed. Sales have been slow in this project – management commented that it is not pushing sales here (following more of a pull-strategy, given the project stature). Targeting project completion in FY13 – minor delays v/s earlier target of FY12.


 Gearing up for launches in FY13 — (1) Goregaon – Management expects to receive the commencement certificate for its Sunteck City project (~0.65msf) shortly and is planning to launch the project in July. (2) Sunteck hopes to launch ~10msf in Thane/Mulund over FY13, post receipt of necessary approvals. (3) Strategic acquisitions on the anvil – ~30 proposals from various developers under consideration.


 Other key updates — Rentals are expected to be stable (strategy is to have rentals cover the total overheads) with Grandeur/Kanaka expected to be on the sale model. The company is not looking to change its revenue recognition policy with recent ICAI guidance note – it believes the current policy is conservative. Sunteck has aggressively ramped up its leasing/sales team from ~40 employees in 2010 to ~65 now – plans to increase overall employees to 250 by 2014.


 Limited track record — Given Sunteck's limited execution/management track record, we prefer Phoenix Mills and Oberoi Realty. Potential downside risks also include (1) potential conflict of interest with JV/JD partners – e.g. Piramal Group's 3-year non-compete agreement expired early 2010 and could impact future growth through their JV (2) lumpy earnings due to project completion accounting (3) sedate sales in some projects nearing completion (4) sector-wide risks.


RISH TRADER

>INDIAN REAL ESTATE

Stay Selective: Improving Execution Is Key

 Valuations limit downside; focus on visibility. B/S strength — With the real-estate sector having underperformed the Sensex by 40% in the past two years, we believe that most of the sector challenges are priced in. We see the most significant upside in stocks where 1) large part of NAV is front loaded and transparent 2) balance sheets are healthy 3) micro market demand and pricing are healthy. Our top picks are (1) Phoenix Mills (~80% of NAV on the ground and rental annuities are steady); and (2) Prestige Estates (Bengaluru exposure, good execution/disclosures).

 Pockets of resilience amid broader slowdown — The sector has been out of favour in the past 3-4 years due to execution delays, stressed balance sheets, increasing interest burdens, cost inflation and slowing absorption. While these headwinds will still take time to resolve, the landscape has its bright spots e.g. resilient prices (especially in Mumbai) and steady absorption in Bengaluru/Chennai on higher end-user demand.

 Higher asset turnover is key to longer term — On our analysis, lower RoE for leading Indian developers (DLF/Unitech) compared to peers in Brazil and China (~3% v/s 15%) is mainly due to lower asset turnover ( ~17% v/s ~45%+). But large land banks and approval/execution delays in India constrain any pick-up in the near term.

 DLF downgraded to Neutral (from Buy) — DLF has outperformed BSE Realty over the past year on hopes of debt reduction and a turnaround. But non-core asset sales over the next 5-6 months will likely help only at the margin (~Rs48bn over FY10-12 has not cut debt materially due to continued capex of ~Rs3-4bn/qtr). We downgrade to Neutral − and await a pick-up in execution/sales/margins to become more constructive.

 Adjusting NAVs — Our NAVs now (1) roll forward to Mar'13E (Sep'12E earlier) (2) do away with our earlier probability-weighted blended NAV methodology (assuming 15% price cut) given recent price hikes, partly inflation-led (3) factor in further execution delays (4) marginally adjust cost of capital assumptions (in some cases).

 Transfers of coverage — With the report, we transfer coverage of Ascendas India

Trust, DLF, Oberoi Realty, Phoenix Mills, Prestige Estates, Sunteck Realty and Unitech to Atul Tiwari from Surendra Goyal.

RISH TRADER

>BGR ENERGY SYSTEMS

 4QFY12 in line with expectations —BGRL’s 4QFY12 PAT at Rs672mn down 32% YoY was in line with CIRA at Rs677mn. In FY12 sales were down 27% YoY, margins expanded 234bps and PAT at Rs2.2bn was down 31% YoY.


 B/S stress visible — While W/C intensity (measured by [NCA – Cash] Days of Sales) has improved to 210 days vs 289 days at the end of 1HFY12 it has deteriorated vis-àvis that of 103 days at the end of FY11. The company CFO was -3.5bn in FY12 vs - 2.2bn in FY11. We expect the B/S to deteriorate further as the company embarks on the construction of the BTG factories from July 2012. It is pertinent to note that this might not have a P&L impact till FY16E when these facilities get comissioned.


 Guidance for FY13E and visibility for FY14E — BGRL expects Rs43bn of sales in FY14E. The company has Rs103bn of orders and expects the remaining bulk orders of Rs48bn soon, taking the tally to Rs151bn. Out of these bulk orders, Rs85bn will not be booked revenues in FY13E. Of the remaining Rs66bn, Rs43bn will be booked in FY13E, and Rs23bn will be booked in FY14E. 10% of bulk orders (Rs8.5bn) could be booked in FY14E, taking FY14E revenue visibility to Rs31.5bn currently.


 Targets Rs150bn of orders in FY13E — BGRL already has Rs48bn of orders in the bag. Beyond this the company expects to win an additional Rs100bn of orders out of the 5.3GW (Rs220bn) pipeline by Dec12 and the 3.3GW (Rs138bn) pipeline by Mar13.


 Maintain Sell (3H) — Given we expect: (1) margins to decline structurally (314bps in next three years), (2) structurally declining RoEs FY11 - 39% to FY15E – 15%, (3) EPS decline of 8% over FY11-14E vs 55% growth over FY08-11.


 Target price cut to Rs252 — From Rs272 earlier to factor in (1) EPS cuts of 11-18% over FY13E-14E, (2) target P/E of 8.5x (v/s 8x earlier) and (3) P/E pegged at average EPS over FY13E, FY14E and FY15E (v/s FY13E earlier).


RISH TRADER

>HINDALCO INDUSTRIES: Intention to withdraw from the Evermore recycling JV (55.8% stake) with Alcoa

■  4Q adj. EBITDA/t down 10% yoy — Novelis’ adj. EBITDA fell 17% yoy to $233m (Citi est $256m) largely due to an 8% yoy fall in volumes on destocking (weakness in electronics business) and higher operating costs. EBITDA/t was $316 vs. $350 last year and $312 in 3QFY12 (seasonally weak). FY12 adj EBITDA/t was $353 (+2% yoy). Management has indicated that demand should grow and expects FY13 adj EBITDA to be higher than $1.05bn reported in FY12. Novelis’ focus on technically complex products, strong customer relationships and pass through model should result in steady earnings in forthcoming quarters.


■  Demand muted in 4Q; 1Q to be better — 4Q volumes fell 8% yoy at 738kt due to inventory destocking. Total volumes in FY12 were 2.98mt (-4% yoy) due to falling demand in cans (-1%), light gauge and industrial products; auto demand improved. FY12 trends: 1) Shipments fell 4% yoy in N. America (36% of volumes) on lower can demand − market softness and contract transitions partially offset by higher auto volumes; 2) Europe (32%) shipments fell 3% due to lower demand for industrial/light gauge/foil while can/auto segments improved. Sale of non-core operations and focus on recycling should help going forward. 3) Shipments from Asia (17%) fell 8% due to global uncertainty and fall in electronic products (export
slowdown); can volumes were flat. 4) S. America (14%) volumes were flat.


■  Restructuring — Continuing its restructuring, Novelis has announced: (1) Intention to withdraw from the Evermore recycling JV (55.8% stake) with Alcoa; (2) Closure of its Saguenay plant in Canada effective Aug 12; (3) Divesture of three foil mills in Europe by mid-2012; (4) Novelis now owns 99% in Novelis Korea after it acquire 31.2% for $343m in 3QFY12.


■  Recycling capacity — Novelis has increased recycling content in products from 33% in FY11 to 39% in FY12. Its target is to reach 50% recycling by 2015. To this end Novelis: (1) has commissioned a new recycling center at Alunorf in Europe in Mar 12; (2) plans to invest $250m in Germany for a 400kt recycling facility; (3) plans to expand recycling capacity in Brazil and South Korea.


■  Expansions — Expansion plans include taking Novelis’ effective capacity from 3.3mt to ~4mt by FY16: (1) ~220kt by end CY12 in Brazil to 600kt; (2) ~350kt by end CY13 to take capacity to ~1,000kt in South Korea; (3) ~200kt by mid CY13 at Oswego, NY; (4) ~120kt automotive sheet plant in China by end-CY14. Capex is estimated at $650-700m in FY13 vs $516m in FY12.


To read report in detail: HINDALCO INDUSTRIES
RISH TRADER

>HAVELLS INDIA: Sylvania first debt tranche has been refinanced

■ FY13E sales growth guidance of 15%-20% and EBITDA margin of 13%-13.5% —
Given 9MFY12 performance (revenue/EBITDA/PAT growth of 25%/ 34%/44% and 90bps margin expansion in 9MFY12) and traction in lighting and consumer durable businesses (20%+ growth), FY13 guidance looks easily achievable with high possibility of actual results being closer to the higher end of guidance.


■ Sylvania first debt tranche has been refinanced — First tranche of Eur40mn due in April 2012 has been refinanced and negotiations are on for a second tranche of Eur50mn due in April 2013. With current EBITDA run rate of EUR35-36mn (which is growing) and net debt of ~Eur125mn, Sylvania is self sufficient and can service the debt over a slightly longer time horizon.


■ Raising target price to Rs633 (from Rs554) — We roll over India business P/E multiple of 18x and Sylvania EV/EBITDA of 5x from March 13E to September 13E. We have also raised our India business EPS estimate marginally by 4%/5% in FY13E/FY14E to factor in slightly higher revenues and 25bps higher EBITDA margin.
There is no change in Sylvania estimates.


■ Maintain Buy — Havells has outperformed Sensex by 46%/ 12% over the past 6 months / 3 months respectively. However, business momentum remains robust with healthy EPS growth, cash flow generation and high RoEs. We believe the stock has plenty of steam left and maintain our Buy rating.


■ Risks — Downside risks to our target price include poorer performance from Sylvania, higher commodity prices, unsuccessful new-product launches, increase in competitive intensity and demand slowdown in India


To read report in detail: HAVELLS INDIA
RISH TRADER

>MULTI COMMODITY EXCHANGE LIMITED: Initiate at Buy; Scarce Commodity

■  Initiate at Buy: Structural growth opportunity — We initiate on MCX at Buy with a Rs1,580 target price based on 22x 1yr fwd PE. MCX is the dominant exchange (over 86% market share) for commodity derivatives trading in India. It has a highly scalable business, high returns and strong execution track record, and it looks well positioned to benefit from the industry’s strong growth potential long-term.


■ India’s unique, competitive industry structure — a) Commodity exchanges distinct from stock exchanges with a separate regulator; b) Multiple competitors (five national exchanges); c) Closely regulated list of products and participants; and d) Pricing is low and based on turnover rather than number of contracts. It is still evolving in structure (regulations, products, competition) and has high growth potential. While this is likely to throw up significant opportunities, there will also be some challenges.


■ Why we like MCX? — We believe MCX management is a step ahead in innovation, product mix and business volumes, and should retain its potent mix of high returns and potentially high growth. Key reasons for our positive bias: a) Rise in market share to 86% (FY12) from 45% (FY06) despite increase in competitive intensity; b) Strong turnover growth (59% CAGR over FY06-12) even amid declining commodity prices; c) High profitability (EBITDA margins of 59% in 9MFY12) and profit growth (36% CAGR over FY06-12); and d) Cash surplus, with no debt/capex requirements in near future.


■ Key stock drivers — We believe key catalysts for the stock could be: a) Continued high turnover growth (we believe 20-25% growth sustainable without regulatory opening up); b) Hike in dividend payout; c) Regulatory changes allowing new products (options, indices, intangibles) and participants (FIIs, domestic institutions) – though timing is uncertain; and d) Potential value unlocking from strategic stakes in DGCX, MCX-SX (we assume nil value currently).


■ Key risks — a) Cyclical business; b) Mono-line business segment and high concentration; c) High commodity prices; d) Competitive industry; e) Regulatory changes, and f) Potential conflicts of interest with parent and technology provider, FT.


To read report in detail: MCX
RISH TRADER

>BHUSHAN STEEL: Initiate at Sell: Strong Business; But Leveraged and Expensive

■  Outperformer, TP Rs310 — We initiate coverage of Bhushan Steel (BSL) at Sell. BSL has
outperformed the Sensex (+19%) & our metal index (+26%) over the past six months, and
now appears expensive at 8.5x Sep13 EV/EBITDA (domestic peers at 5-6x). We believe
historical premium (40-55%) vs. peers should moderate 1) as BSL transforms from being a
steel processor to a steel producer; 2) earnings growth at 8% in FY11-14 is more tepid vs.
33% in FY08-11 & EBITDA/t is range bound; & 3) potential value for captive raw material assets may be overdone given socio/political risks. A premium should remain, but with the convergence of business model, net D/E at 3x & a muted steel outlook, we expect it to narrow.


■  We like model, but in the price — 1) Strong EBITDA ($250-275/t) despite no captive
raw material currently is buoyed by BSL’s value chain: slabs/HR/CR/ galvanized/color
coated (and more); 2) European HR prices have risen 12% in 3m; Indian prices are up
5-10%. Stable/strong prices, improving domestic demand augur well as BSL is more
than doubling capacity to 4.7mtpa by 2HFY13; 3) It has captive iron ore (70mt) and
thermal coal (325mt), both to start in 2yrs and 89% in Bowen Energy, Australia (coking
coal in 4-5yrs); making it a more conventional play with raw material security.


■  Valuation — We value Bhushan Steel at 7x EV/EBITDA at a discount to its 5-yr trading
average of 11x – in line with domestic peers’ 5-yr average of 7-8x. We think the market
is overestimating earnings growth from capacity additions and raw material integration.
We assume expansion by Dec12 and ascribe 7x multiple on FY14 EBITDA (capture
both EBITDA and project related debt) and discount the resulting equity value @ 15%
to Sep13 to arrive at a TP of Rs310. At our TP, BSL would trade at 6x Sep13 PE.


■  Muted steel outlook — Despite stable prices and rising margins, we have a muted
outlook. Chinese steel production started the year on a weak note, implying 600-620mt
of annual production. CISA data for 10 days of March suggest a yearly production of
693mt, +1% yoy. To be more positive, it is vital to see a U-turn in Chinese construction.
European auto demand fell in Jan12 and construction is only likely to recover in 2013.


■ Upside risks — Higher volumes/steel prices, faster raw material integration, FX gains.


To read report in detail: BHUSHAN STEEL
RISH TRADER

>INDIA STRATEGY: 4QFY12 Earnings Preview: V are in a U

■ V Market, U Earnings — India’s market recovery was fairly V shaped in the quarter (+12.6% in 4Q): but you should expect a more U shaped recovery in earnings: +7% yoy (Sensex-ex Oil), 7.5% (CIRA ex-energy), and largely in sync with the earnings performance over the first 3 quarters of the year. We do not believe there are big bottom up expectations for the quarter, but it should have greater skews, bigger surprises and an elevated focus on management guidances. We also believe you should expect only modest earnings revisions post the results, with FY13 earnings growth estimates remaining in the 14-15% level.


■ Margins over sales should continue — Sales should continue to moderate (17% yoy, CIRA ex-Reliance) while margins should continue their qoq rise (after reversing a falling trend in 1HFY12). This trend, we believe, is a reflection of slowing demand, and a combination of easing cost pressures/rising profit focus of corporates. This trend (profit over growth – almost alien to corporate India over the last decade) will need a catalyst – mix of lower rates, higher confidence in government and strong global markets, to reverse. This quarter’s results are unlikely to be that change/catalyst.


■ Bigger sector and stock skews — Over 50% of CIRA coverage companies will report a +/- 20% growth in the quarter; there will be a high share of one-offs (in this qtr or in the base), and big sectors (Banks/Mining) and big stocks (SBI/Coal India/Reliance) will drive these swings. The Banks, Automobiles, Consumer and Pharma sectors should lead while Metals, Media, Telecom and Real Estate should lag.


■ Quarters' question, Stock Selection — Will the quarter meaningfully alter market direction? We think not (the Credit policy with rising rate cut expectations probably more decisive, and will have a bearing on management commentary). We maintain our 18,400 Sensex Target for December 2012. We see potential upside surprises for SBI, Bharti and HCL Tech, and downside ones for Coal India, TCS and Grasim.


To read full report: INDIA STRATEGY
RISH TRADER

>CAIRN INDIA: Alert: Second KG Onshore Discovery; Encouraging Prospects

■ KG basin discovery: +ve, but materiality to be established over time — Cairn has announced its second oil discovery (out of 6 wells drilled) in its onshore KG basin block KG-ONN-2003/1 (Cairn – 49%, ONGC – 51%). As per management, this represents the largest onshore discovery in the KG basin, and total oil in-place from both discoveries is expected to be in excess of c550 mmboe. However, given the tight reservoir, recovery factors are likely to be low (c10%), which could increase over time with fracking. Management indicated that the good quality of crude (light oil, low viscosity) could aid in development and recovery, though the decision to go in for development, and eventually production, could still be some time away. Based on an EV/boe of US$7-8 (we now value Rajasthan upsides at US$8.5/boe, a 25% discount to the imputed EV/boe for core MBA), this could add ~Rs5-6/sh to our NAV for Cairn.


■ Rajasthan production potential of 500 kbpd? — As per a press article (source: Hindustan Times), Vedanta Chairman Mr. Anil Agarwal has written to the Prime Minister’s principal secretary Mr. Pulok Chatterjee that production from Rajasthan could reach c500 kbpd in the next few years (c150 kbpd currently). At this stage, these targets appear fairly ambitious to us, with several imponderables (geology being the primary one), and we would refrain from getting overly excited at this stage. Cairn India's guidance now stands at peak production of c240 kbpd (with a ‘significant part’ of this from MBA), while Cairn Plc has in the past indicated that this could potentially go up to c300 kbpd. Our current forecasts assume peak MBA production of 230 kbpd (by Dec’13E). Nevertheless, production growth of the envisaged magnitude, if indeed possible, would not only be an obvious +ve for longer-term volume growth but would also likely require significant incremental capex, potentially partially mitigating longerterm concerns on use of cash.


■ Reiterate Buy — Our target price of Rs380 is based on an average of Citi’s crude forecast-based NAV (crude at US$125/120 over CY12/13E; long-term of US$80), which yields a value of Rs383/sh, and the forward curve-based NAV, which yields a value of Rs414/sh. We build an additional 5% discount to NAV to account for uncertainty regarding use of cash. We reiterate Buy on the stock which, in our view, offers the best hedge against crude, currency, and (to some extent) inflation. Key near term catalysts are approvals for Mangala ramp-up and expected dividend policy announcement. Cairn remains our top large-cap pick in the sector.


To read full report: CAIRN INDIA
RISH TRADER

>BHARAT HEAVY ELECTRICALS LIMITED: Introducing CIRA's new rating system

■ Downgrade to Sell — We resume coverage on BHEL with a Sell rating and a target
price of Rs250. Severe coal/ gas shortages, high international coal prices, poor SEB
financials and land acquisition/ environmental delays have shrunk the India BTG
market. Over the last 5-6 years BHEL has faced competition from Chinese suppliers.


■ ….. and the problem has been compounded — The rise of domestic equipment suppliers, such as L&T-MHI, Toshiba-JSW, Bharat Forge-Alstom, BGR-Hitachi, shows the Indian power BTG market is just like any other industry: an incumbent making super normal profits attracts new competitors, leading to overcapacity/ pricing collapse.


■ Barriers and pricing are falling — Once BHEL gets the last of the reserved bulk orders in FY13, every incremental order should be a hard-fought battle. Import duties can perhaps provide a sentiment +ve, but we wonder if it will make any difference as: (1) XIIth Plan (FY13E-17E) ordering is over and (2) lack of fuel visibility implies XIIIth Plan (FY18E-22E) ordering will not start in a hurry. BGR-Hitachi’s winning bids in the recently concluded bulk tender are not too far off vis-à-vis Chinese pricing. 


■ Target price Rs250 — Based on P/E of 10x Sep13E and set at ~ 30% discount to
 historical average ~14x given BHEL’s (1) declining backlog ,(2) EPS CAGR of -4% over FY12E-14E and (3) RoEs falling from FY11 - 31% to FY15E - 17%. Our EPS estimates are not conservative as they assume (over next three years) (1) inflows of Rs400bn/year, (2) gross margins contracting only 66bps, (3) execution speed improving from 30% to 48% on expanded capacity and (4) maintenance capex Rs3bn/year.


■ Introducing CIRA's new rating system — In Oct 11 CIRA announced its new stock rating system. CIRA's investment ratings are Buy, Neutral and Sell. Our ratings are a function of analyst expectations of expected total return and risk. Risk rating takes into account price volatility and fundamental criteria. Stocks will either have no risk rating or a High risk rating. The sidebar and table on this page show our new rating, target price, and estimates for BHEL. See “Guide to CIRA Fundamental Research Investment Ratings” in the Important Disclosures section of Appendix A1 of this report for a description of our rating system.


To read report in detail: BHEL
RISH TRADER

>ASIA MACRO & STRATEGY OUTLOOK: We face a dichotomy of US growth optimism & China growth pessimism

Shifting Sands in Expectations


■ We face a dichotomy of US growth optimism & China growth pessimism — We don’t think expectations can diverge too much for too long – US growth optimism and China pessimism may both be too elevated – our US growth forecast only modestly upgraded, while in China’s case, data may need to get worse before policy easing picks up, and we expect that should be forthcoming soon.


■ Manufacturing recovery provides support for many smaller open economies — Many of our smaller open economies are expected to post quarterly expansion in 1Q 2012 onwards, with the help of tech-led recovery and brighter US growth prospects, with inventory de-stocking risk looking manageable. On the other hand, China’s elevated PMI Finished Goods Inventory could highlight waning IP momentum in the near term.


■ Most Asian CBs agree with us – less concerned with growth risks vs. inflation — Policymakers are weighing US growth upside risk more than China growth downside risk in the backdrop of sticky core and inflation expectations and oil risks. Many have already shifted tone from earlier dovish to more neutral (e.g. Indonesia, Philippines), neutral to slightly more hawkish (Korea, Malaysia), and even from previously slightly dovish to slightly more hawkish (Singapore, Thailand).


■ India, Vietnam and China are exceptions — India and Vietnam have hiked policy rates a lot and have more room to ease, though in India’s case, less room than before given oil/subsidy risks. China is another exception – growth/inflation/inflation expectations have come off significantly – and it is likely to use RRR cuts as a monetary easing tool, but if easing is delayed and inflation is coming off to the sub 3% range, an asymmetric rate cut cannot be precluded.


■ FX as a policy easing tool? — We doubt RMB is “close” to fair value (though likely “closer” to fair value than before), given our expectation of resumed FX reserve accumulation, albeit at a slower pace. Nonetheless, we think by keeping it in a tight range, it is being used as a policy easing tool, which on top of JPY weakness, will undermine the Asia FX outlook, especially for trade-dependent countries which compete with these countries and have weak domestic demand.


■ Risk to further back up in US yields complicate our view on assets — Heavily owned fixed income markets – Malaysia, Indonesia, and to a lesser extent Korea – could be relatively vulnerable. MGS has already outperformed swaps by a decent margin over others and could be a source of relative vulnerability. We still prefer PHP bonds to IDR local government bonds. On external debt, higher yielding sovereigns/quasi-sovereigns (e.g. Sri Lanka, Vietnam) offer better cushion than lower yielding Indonesia and Philippines.


To read full report: STRATEGY OUTLOOK
RISH TRADER

>BHARTI AIRTEL: Any slippage in Africa however carries the maximum downside

■ Have expectations finally moderated? – Consensus has continued to miss and moved down. Bharti has clearly under delivered over the last 8-9 qtrs. That’s a problem but at the stock level it’s been compounded by the fact that the expectations have tended to be very high, reflected in the 3-5% downgrade in EBITDA and 26-41% in EPS for FY12/13 in the last 12 months. We believe, looking at Street estimates 9 quarters ahead and our own proprietary model, that it is no longer the case.


■ But what could still be at risk? – We think its rev/min and tower tenancy. Continuing price arbitrage could undermine the 2p increase in rev/min that the market is currently factoring in. We also believe that the tenancy, assumed to increase to 2.5x, could be on the higher side. If these risks were to materialize - there could be a 4-7% downside to consensus.


■ Where are expectations high but not at risk? – That’s in Africa where expectations are of a 3-4% increase in topline per quarter which, barring the odd quarter, the company has managed to deliver. This is backed by a 9% increase in EBITDA margins – reasonable given the likely increase in network utilization and benefits of cost control. Any slippage in Africa however carries the maximum downside.


■ Which segments have some cushion? – Expectations from other businesses – fixed line and enterprise look fine in our view with a 2-4% increase in topline per quarter accompanied with reasonable margins.


■ Where are we vs. consensus – We are 4-7% below on EBITDA and there could possibly be some downgrades but we believe the 10% underperformance since Feb (16% YTD) prices in the negatives. Market has got too attuned to look at surprises on the downside; any upside surprise should result in material outperformance and that could come from 1) faster-than-expected reversal in rev market losses and 2) wireless
margin expansion.


To read full report: BHARTI AIRTEL
RISH TRADER

>Higher Crude to Worsen Under-recovery Situation; Prefer BPCL- CITI GROUP

■ ONGC: defensive appeal, emerging out of no-growth phase, but subsidy imponderables — With technical overhang of the share sale now behind us, we expect investors’ focus to shift to two key fundamental drivers – subsidy and production growth. Subsidy remains a persistent concern, albeit largely factored into valuations. On the +ve side, however, after several yrs of stagnant production (10-yr CAGR of -0.2%), ONGC finally seems to be at the cusp of delivering core domestic growth, with FY12-14E vols (ex-JV) expected to grow by ~3% CAGR (albeit largely back-ended). ONGC’s attractiveness rests primarily in its defensive appeal, esp. for longer-term investors, ably supported by ~4% div. yield, combined with the aforementioned core growth prospects.


We rate ONGC as Buy, although subsidy imponderables amidst the worsening underrecovery situation could keep near-term performance in check, and realisation of fair value (Rs321 TP based on 9x core FY13E P/E) could be more gradual and back-ended.


■ BPCL: preferred PSU pick — Our preference for BPCL is predicated on its material E&P value (contributes Rs203/sh to our Rs842 TP), which has been underpinned by reserve upgrades (esp. in Mozambique) and the level of interest being displayed by global majors in procuring some of these assets. In the aftermath of the disappointing state election results for the ruling party, reforms could at best be piecemeal. In this scenario, BPCL is not only our preferred OMC but also our preferred PSU pick.


■ Oil India: maintain Neutral — We maintain our Neutral with a Rs1,297 TP, and reiterate our preference for ONGC over OIL amongst upstream PSUs, given the former is expected to demonstrate relatively better production growth over FY13-14E, combined with earnings support from its international operations at high crude prices. Lesser proportion of ‘deregulated’ earnings makes OIL more vulnerable to negative surprises on the subsidy front led by high crude prices, where risks lie to the upside as geopolitical tensions keep
the oil market supported from a sentiment as well as fundamental standpoint.


To read full report: CRUDE OIL
RISH TRADER

>Earnings Surprise by Country / Sector Breakdown for 2011 Q4

Earnings, Sales and Implied Margin Surprises


■ 4Q Reporting Season Review — In this review, we look at both the Top Line (Revenue) and the Bottom (Earnings). To date, 54.5% of Asian companies have beaten sales estimates with 40.4% beating earnings estimates. Despite more companies beating sales estimates than not, the aggregate surprise was negative US$19.6 billion.


■ Implied Margin Surprise — Given Top and Bottom Line surprises we can compute the Margin surprise. Missing sales but beating earnings is a positive margin surprise, while beating sales yet missing earnings is a negative surprise. Negative margin surprises in Asia outnumbered positive surprises 2:1, indicating Asia still has less pricing power.


■ Country/Sector Earnings Hits/Misses — China and Korea have a larger proportion of negative earnings surprises relative to other markets. In aggregate, they reported over USD2bn less than expected. Healthcare, IT and Materials disappointed while Consumer Staples and Financials did relatively better.


■ Pre-announcement drift — Pre-announcement spread of Quintile 1 - Quintile 5 was approximately -1.9%, 10 trading days before reporting date. Seven days postannouncement, the spread is approximately 3.8%.


■ Country/Sector Margin Misses — Countries and sectors with high implied negative to positive margin ratio include Indonesia, Taiwan, South Korea, Telecoms and Utilities.


To read full report: Q4 2011 EARNINGS REVIEW
RISH TRADER

>JINDAL STEEL & POWER: Utkal mining lease to be signed soon and mining to start by Sep12

■ Maintain Buy — JSPL continues to execute in a tough environment on multiple fronts. JSPL has managed to overcome many project-related challenges over past 6-8 months which demonstrates the company’s ability to interface with government and manage its environment well. Execution capability combined with disciplined capital allocation track record and structural advantages (i.e. access to captive coal and iron ore) convinces us to retain a Buy rating despite the stock outperforming the BSE Sensex by 17.4% YTD.


■ Multiple catalysts over next 12 months — 1) JSPL has advanced CoD of Tamnar 2 unit 1 (600MW) to March 2013 from December 2013 to take advantage of the extension of section 80IA (CIRA est. – December 2013), 2) Angul project agitation has been resolved and work has resumed on ground (commissioning by FY13 end), 3) Dumka (1320MW) has received environmental clearance and is ready to place equipment orders, 4) 810MW (6x135MW) are operating at 75-80% PLF and remaining 540MW (4x135MW) will be commissioned by September 2012.


■ Steel Tailwinds — JSPL’s product mix has been improving with sale of pig/sponge iron decreasing to 14% of total volume in FY11 from 26% in FY10 and likely to be below 10% in FY12. JSPL stands to benefit from strong long product (2/3rd of output) prices (+10% since Dec11) and falling coking coal prices. Our sales volume assumptions incorporate a 13% growth in FY13 and 32% growth in FY14. Stable pricing, falling coking coal prices and strong volume growth augur well for JSPL.


■ TP and EPS change — We increase TP to Rs672 (from Rs645) and revise FY12/ FY13/FY14E EPS downwards by 2%/13%/4% as we 1) roll forward power DCF value to June12 from Dec11 and steel EV/E from Sep12 to Mar13, 2) delay Angul power/steel capacity by ~6 months which impacts FY13 numbers most, 3) no longer value Bolivia.


■ Key Risks — Negative news flow on Bolivia and delay in signing of mining lease for Utkal coal block are key risks. JSPL has invested US$70mn in Bolivia so far, hence the impact, if any, is likely to be limited. The company expects the Utkal mining lease to be signed soon and mining to start by Sep12.


To read full report: JINDAL STEEL & POWER
RISH TRADER

>LARSEN & TOUBRO: 7 Reasons to buy

■ 7 Reasons to Buy — (1) Stock trades at adj FY13E P/E of 12.0x (2) inflow guidance miss already in price (CIRA at -6% & consensus at -5% to -11% v/s guidance at +5%) (3) despite inflow miss sales set to grow >=16.5% in FY13E (4) margin contraction fears overplayed (5) rationally India does not have a choice but to revive investment capex (if not in 6 months then atleast in 1 year) (6) huge backlog and strong B/S allows L&T to withstand slowdown and (7) consensus EPS downgrades have bottomed.


■ Sales should grow 16.5%+ in FY13E — As we believe from FY13E onwards execution cycle would not decline and could actually accelerate as power as a % of total pie comes down. This implies sales growth in FY13E should be >= backlog growth in FY12E (16.5%). L&T guiding 20% sales growth in FY13E would not surprise us.


■ Margin contraction of 100bps in FY12E and nil in FY13E — Management will not compromise on margins till L&T is able to win Rs700-800bn of orders annually. Even after excluding slow moving orders (10%) backlog would stand at ~ Rs1300bn (takes care of 2 years sales). Our confidence also bolstered by: (1) 9M12 margins contracting only 88bps; (2) not under-cutting to win orders evident from NTPC-DVC bulk tender.


■ India has to revive investment capex — Firstly, the skew between consumption and capital formation could structurally add to India’s inflation problem over longer term. So this has to be corrected. Secondly, to bring down the fiscal deficit, India needs to increase gross tax revenues which are highly correlated to GDP growth and therein lies the need for policy action to resume India’s infrastructure capex.


■ Maintain Buy; Target price of Rs1642 — Adjusting our target price to Rs1642 (Rs1647) to factor in: (1) revision in parent/ cons EPS by +1% to +7% (2) parent target P/E multiple 16x (from 17x earlier). Our EPS revision factors in (1) 0-1% higher sales and (2) 20-40bps higher EBITDA margins. L&T is now our top industrial pick given our previous top picks Havells and Cummins have run up significantly.


To read full report: LARSEN & TOUBRO
RISH TRADER