>ELECTROSTEEL CASTINGS LTD: Mining its way ahead

Kolkata-based Electrosteel Castings Ltd (Electrosteel) is a market leader in the ductile iron (DI) pipe industry; these pipes are used for water transportation. Though the industry is facing tough times due to overcapacity and increasing input cost, Electrosteel is better placed than peers owing to product quality and vast clientele especially in export market. With its steel project near completion and mining of coking coal and iron ore making progress, we expect considerable improvement in the earnings. We reaffirm a fundamental grade of 3/5, indicating that company’s fundamentals are good relative to other listed securities in India. Thrust on water infra to boost demand but overcapacity will constrain profitability


Electrosteel is expected to benefit as the new 12th plan is expected to increase allocation for water infrastructure. The demand for DI pipes is likely to increase at a CAGR of 15-17% over FY12-14. The domestic DI pipe industry is reeling under significant capacity additions by existing and new players. The total installed capacity for DI pipes is expected to increase to ~1.8 mn TPA in FY13 (vis-à-vis 1.2-1.3 mn TPA demand). But profitability will remain under pressure. Electrosteel’s strong presence in the export market (~50% of sales during 9MFY12) has helped it perform better compared to its peers.


Captive mines-Coking coal and Iron ore to improve margin in the medium term
Electrosteel’s captive coking coal mine has started production and is expected to ramp up over the next two years following the degassing of its underground reserve. The iron ore mine has received stage one clearance after a long wait and we expect the same to be operational by Q4FY13. Overall, we expect the full benefit of the two mines to accrue from FY14 after which the company’s margin will increase significantly.


Substantial investment in Electrosteel Steel (ESL); stabilisation a key monitorable
With cost overruns and project execution delays, the steel project through ESL has witnessed some hiccups. However, as the project is to be completed by H1FY13, the company’s ability to stabilise such a large capacity and market products in a new business is a key monitorable now.


Standalone revenues to increase at a CAGR of 9% in FY11-14
We expect standalone revenues to increase to Rs 22 bn in FY14 from Rs 17 bn in FY11. EBITDA/tonne declined in FY12 owing to increasing input cost and competition. However, profitability will improve by FY14 due to cost benefits from captive mines and better industry scenario. Also, adj. PAT will increase in FY14 to Rs 2.7 bn. ROE is expected at 13.5% in FY14, up from 2.5% in FY12.




Valuations – the current price has ‘strong upside’
CRISIL Research has used the sum-of-the-parts method to value Electrosteel and arrived at a fair value of Rs 45 per share. At the current market price of Rs 17, our valuation grade is 5/5.
RISH TRADER

>IPO NOTE: Multi Commodity Exchange of India Limited (Press Release) & Detailed Grading Rationale

CRISIL Research has reaffirmed CRISIL IPO grade of ‘5/5’ (pronounced ‘five on five’) to the proposed initial public offer (IPO) of Multi Commodity Exchange of India Ltd (MCX). (CRISIL Research has undertaken a fresh grading exercise for MCX as the grade assigned to the company on June 15, 2011 had expired.) This grade indicates that the fundamentals of the IPO are ‘strong’ relative to other listed equity securities in India. However, this grade is not an opinion on whether the issue price is appropriate in relation to the issue fundamentals. The grade is not a recommendation to buy, sell or hold the graded instrument, or a comment on the graded instrument's future market price or its suitability for a particular investor.


The grade reflects MCX’s leadership position in the Indian commodity futures market over the past four years, with ~82% share of the overall traded turnover in FY11. It is a leader in the trading of bullion, crude oil, copper and natural gas (accounting for ~85% of MCX’s traded turnover in FY11). Historically, metals and energy commodities have also witnessed lower regulatory intervention. With a strong technologybacked trading platform and infrastructure (supplied by its promoter Financial Technologies India Ltd, or FTIL), MCX has been able to provide high liquidity and low impact cost of transactions – key criteria for the success of any exchange. The grade also draws support from MCX’s strong management team and its
ability to attract talented and experienced personnel. Further, while new commodity exchanges have been set up over the past few years, they have not been able to nudge MCX from the top. However, given the high profitability and cash-churning nature of the business, we expect competition to intensify in the future.


MCX’s financial performance in the past three years indicates healthy revenue growth and profitability. Operating revenue has grown at 32% CAGR over FY09-11 with EBITDA margin and adjusted PAT margin averaging ~58% and ~37%, respectively. In the medium term, MCX’s strong market position and continuous focus on product innovation will act as growth drivers. In the long term, the introduction of new instruments (like options) and participation by institutional players, once the necessary regulatory reforms take place, are likely to spur growth.


About the company and the issue
MCX was incorporated on April 19, 2002. It is promoted by FTIL with a pre-IPO stake of 31.18%. FTIL is a software developer and a technical service provider of automated electronic solutions for foreign exchange, commodities and equities. The proposed IPO is in the form of an offer for sale of 6.4 mn shares by the promoters and some of the investors. Subsequent to the IPO, the promoters' stake in the company will reduce to 26%.


Around 85% of MCX’s traded turnover comprises metal and energy commodities, which are benchmarked to international prices. Globally, MCX is the largest silver exchange; the second largest gold, copper and natural gas exchange; and the third largest crude oil exchange in terms of the number of contracts traded in each of these commodities (in CY10). It is also the sixth largest commodity exchange globally in CY10 and fifth largest during the six months ended June 30, 2011, in terms of the total number of contracts traded
(Source: Futures Industry Association, websites of relevant exchanges).




About CRISIL IPO Grading
CRISIL IPO (Initial Public Offering) Grading is an opinion on the fundamentals of the graded issue that reflects CRISIL's independence and expertise. This opinion is expressed as a relative assessment in relation to other listed equity securities in India. The assessment is based on a grading exercise carried out by industry specialists from CRISIL Research. A CRISIL IPO Grade 5/5 indicates strong fundamentals and a CRISIL IPO Grade 1/5 indicates poor fundamentals. CRISIL IPO Grading reflects its assessment of the graded company's equity fundamentals as distinct from an assessment of debt fundamentals. A CRISIL IPO
Grade should not be construed to mean a comment on the price of the graded security nor is it a recommendation to invest or not to invest in the graded security.



Grading summary
CRISIL Research has reaffirmed CRISIL IPO grade of ‘5/5’ (pronounced ‘five on five’) to the proposed initial public offer (IPO) of Multi Commodity Exchange of India Ltd (MCX). (CRISIL Research has undertaken a fresh grading exercise for MCX as the grade assigned to the company on June 15, 2011 had expired.) This grade indicates that the fundamentals of the IPO are strong relative to other listed equity securities in India. However, this grade is not an opinion on whether the issue price is appropriate in relation to the issue fundamentals. The grade is not a recommendation to buy, sell or hold the graded instrument, its future market
price or suitability for a particular investor.


The grade reflects MCX’s leadership position in the Indian commodity futures market over the past four years, with a share of ~82% of the overall traded turnover in FY11. It is a leader in the trading of bullion, crude oil, copper and natural gas (which accounted for ~85% of MCX’s traded turnover in FY11). Historically, metals and energy commodities have witnessed lower regulatory intervention. With a strong technology-backed trading platform and infrastructure (supplied by its promoter Financial Technologies India Ltd), MCX is able to provide high liquidity and low impact cost of transactions – key criteria for the success of any exchange. The grade takes into account the benefits that MCX will derive from amendments to the Forward Contracts (Regulation) Act, which will allow trading of options and indices, and participation by institutional investors, leading to increase in the traded turnover on commodity exchanges. The
 grade also draws support from MCX’s strong management team and its ability to attract talented and experienced personnel.


While new commodity exchanges have been set up over the past couple of years, they have not been able to nudge MCX from the top. However, given the high profitability and cash-churning nature of the business, we expect competition to intensify in the future.


MCX’s operating income has grown at a CAGR of 32% over FY09-11, with healthy profitability. EBITDA margin and adjusted PAT margin were 60.4% and 39.4%, respectively, in FY11.

To read the full report: MCX

RISH TRADER

>NTPC: fixed return on equity

NTPC is the largest power producer in India with 28.6% share in generation.

The company has a stable business model earning fixed return on equity along

with efficiency incentives based on normative parameters. We maintain our

fundamental grade of ‘5/5’, indicating that its fundamentals are ‘excellent’

relative to other listed securities in India.

To read the full report: NTPC

>Hindusthan National Glass & Industries Limited

Hindusthan National Glass & Industries Ltd (HNGIL) registered stable revenue growth of
10.8% y-o-y to Rs 3.6 bn in Q1FY11 primarily on account of volume growth. However,
PAT dipped 45% y-o-y to Rs 313 mn primarily on account of lower EBITDA margins, which
declined to 20.9% as against 28.3% in Q1FY10 due to higher fuel costs. Although the
company has the bargaining power to pass on any increase in costs, there is a time lag in
doing so and, hence, there is a temporary impact on margins.

CRISIL Equities expects margins to recover in the subsequent quarters since the company
has raised prices by ~6% with effect from August 1, 2010. Increase in realisations will also
have a positive impact on the overall revenue growth for the year. Although the y-o-y
revenue growth of 10.8% in Q1FY11 was lower than our forecast of 15.8% for the full year,
we believe that given the recent increase in realisations, the company will make up for this
lower growth in the subsequent quarters. We continue to remain positive on the growth
prospects of the company driven by its leadership position in the container glass industry
and strong management capabilities. We maintain the fundamental grade of ‘4/5’,
indicating that HNGIL’s fundamentals are ‘superior’ relative to other listed equity
securities in India. We assign a valuation grade of ‘5/5’, indicating that the market price
has a ‘strong upside’ from the current levels.

EBITDA margins revised downwards
HNGIL reported an EBITDA margin of 20.9% in Q1FY11, which was significantly lower
than CRISIL Equities’ full-year estimate of 25.0% for FY11. The variation was mainly on
account of higher power and fuel costs following the rise in international crude oil prices.
Even though we expect margins to recover in the following quarters given that the
company has raised its prices by ~6% with effect from August 1, 2010 the impact of lower
margins in the first quarter will have some bearing on the margins for the full year. We are,
therefore, revising our operating margins downwards by 150 bps to 23.5%. We also revise
our EBITDA margins for FY12 to 24.1% as against our earlier estimate of 25.5% as there
is some delay expected in shifting its two plants – Neemrana and Nasik from fuel oil to
natural gas.

Lack of clarity on the float glass business
HNGIL recently entered the float glass business through HNG Float Glass Ltd, where it
holds a 36% share. The production of float glass began in February 2010 and it reported
revenues of Rs 500 mn and a loss of Rs 70 mn at the EBITDA level for the two months
ended FY10. However, there is a lack of clarity on the performance of the float glass
business in Q1FY11, as the company does not disclose the results of HNG Float Glass on
a quarterly basis; only the consolidated results are available at the time of financial year
ending.

Valuations – strong upside from the current levels
We initiated coverage on HNGIL (dated March 2, 2010) with a fair value of Rs 314. With
the downwards revision in EBITDA margins for FY11, we have arrived at a fair value of Rs
292 per share. The implied PER at the revised fair value estimate is 13.0x FY11 and 11.4x
FY12 earnings. This translates into a valuation grade of ‘5/5’, indicating ‘strong upside’
from the current levels.

To read the full report: HNGIL

>JM FINANCIAL LIMITED: Q1FY11 result analysis

JM Financial Ltd’s revenues recorded an increase of 57.2% y-o-y to Rs 1.9 bn in Q1FY11,
backed by healthy growth in the investment banking and securities funding businesses.
However, PAT dipped by 2.4% to Rs 304 mn due to poor performance of the securities
broking business. Intense competition in the broking business and preference for lowyielding
options vis-a-vis the cash segment has put significant pressure on brokerage yields.
However, JM Financials’ diversified business model has buffered the impact and helped it
report stable earnings. We maintain our fundamental grade of ‘4/5’, indicating JM Financials’
fundamentals are ‘superior’ relative to other listed equity securities in India.

Q1FY11 result analysis
• The investment banking and securities businesses reported revenue growth of 44.1% y-oy
to Rs 1.1 bn in Q1FY11. The investment banking division completed six deals worth Rs
70.6 bn in Q1FY11. However, the performance of the broking business was impacted by a
dip in brokerage yields and an increase in costs related to scaling up of the institutional
desk. As a result, segmental profit declined by 50.6% y-o-y to Rs 94 mn in Q1FY11.
• Revenues from the securities funding business increased 156% y-o-y to Rs 651 mn in
Q1FY11. Earnings growth was lower at 10% y-o-y to Rs 198 mn due to a higher mix of
borrowed funds resulting in increased interest cost.
• The asset management (AMC) segment’s revenues increased by 17% y-o-y to Rs 91 mn
supported by higher average AUM at Rs 77.2 bn (14% y-o-y) in Q1FY11. This helped the
company cut losses from Rs 19.3 mn in Q1FY10 to Rs 11.7 mn in Q1FY11.

• The alternative investment segment registered a 73.6% y-o-y increase in revenues to Rs
176 mn while profit increased by 122.5% y-o-y to Rs 112 mn in Q1FY11. The alternative
AUM stands at Rs 17.2 bn and has recorded an increase in quality investment
opportunities, which will support good performance.

Scaling-up of institutional business to drive growth
During the quarter, JM Financial got empanelled with few more institutional clients. The
company’s research coverage has increased to 132 companies. We expect the business to
take around 12 -15 months to start contributing to the overall profitability.

Downward revision in FY11 and FY12 estimates
We have revised our top line forecast downward by ~3% each for FY11 and FY12 to reflect
the pressure on brokerage yields. The hardening in the yield curve will result in increased
funding cost to support the securities funding book. However, we expect the funding
business to do well and support JM Financials’ overall performance. Accordingly, we have
revised PAT estimates downwards by 18% and 14%, respectively, for FY11 and FY12 to
account for the pressure on brokerage yields and increased interest cost.

Valuations – strong upside from current levels
In line with the earnings revision, we have lowered our fair value estimate for JM Financials
from Rs 50 to Rs 45 per share. We maintain our valuation grade of ‘5/5’, indicating that the
stock has ‘strong upside’ from the current level of Rs 35.8 (as on August 11, 2010).

To read the full report: JM FINANCIAL

>DOLPHIN OFFSHORE LIMITED: Starts FY11 in the red

Dolphin Offshore Ltd (Dolphin) reported a net loss of Rs 123.1 mn in Q1FY11 as against a net profit of Rs 120.1 mn in Q1FY10, which was well below CRISIL’s estimates. During the quarter, the company undertook significant additional work resulting in extra time and cost for two EPC contracts. However, the company has not booked the revenue against this as it is yet to receive change orders for such work. The company’s order book has increased by just around 4 per cent in Q1FY11 over the previous quarter due to the slow tendering process of its major client
– ONGC. This slow pace of order book addition has led us to lower our yearly projections for FY11. Assuming that the management will quantify and receive claims for the change orders for additional work done in the remaining quarters of FY11, we continue to assign Dolphin a fundamental grade of ‘3/5’, indicating that its fundamentals are ‘good’ relative to other listed securities in India. However, given its client concentration risk any delays in receipt of change orders or order book could result in a revision of its fundamental grade. We assign a valuation grade of ‘4/5’, indicating the market price has upside potential from its current level of Rs 273 (August 12, 2010).

Q1FY11 result analysis
- Dolphin’s Q1FY11 revenues declined by 51% y-o-y and 30% q-o-q to Rs 802 mn as
the company has not booked revenue against additional work done during the quarter
on 2 EPC contracts on which it is yet to receive change orders.

- The company’s EBITDA margins for Q1FY11 were in negative at around 12% as
against a positive 6% and 13.9% in Q4FY10 and Q1FY10 respectively.

- Dolphin registered a net loss of Rs 123 mn in Q1FY11 as it incurred heavy marine
spends on the additional work against which it couldn’t book revenues.

Order book growth remains subdued, increased competition to impact margins
- As on June 30, 2010, the outstanding order book of the company is Rs 2.4 bn - a net
addition of Rs 100 mn during Q1FY11. This was largely due to a delay in the
tendering process from ONGC, its major client.

- ONGC is expected to invite tenders for contracts worth Rs 30 bn in FY11. We expect
Dolphin to bag around 16% of these orders.

- Although we assume that the management will quantify and receive claims for the
change orders for additional work done in the remaining quarters of FY11, the lower
visibility on the company’s order book compels us to revise our revenue forecasts
downwards.

- Further, on account of the steep decline in oil prices and the BP oil spill, there has
been a slowdown in the global oil field equipment and services market. As a result, lot
of overseas assets are lying idle and owners of these assets have been putting
pressure on prices in India to try and pick up work and get deployment. These factors
are expected to put pressure on the company’s margins in FY11 and FY12. These
factors have led us to reduce our EPS estimates for FY11E and FY12E by 10% and
6% to Rs 24 and Rs 35, respectively.

To read the full report: DOLPHIN OFFSHORE

>LAKSHMI ENERGY & FOODS LIMITED: Q3FY10* margin disappoints

To read the full report: LAKSHMI ENERGY

>NTPC LIMITED: Muted operational performance

To read the full report: NTPC

>ZYLOG SYSTEMS LIMITED: Q1FY11 results beat expectations

Zylog Systems Ltd’s (Zylog’s) Q1FY11 results beat CRISIL Equities’ expectations. While consolidated revenues were marginally higher than our forecast, the 103% y-o-y growth in
consolidated PAT was a surprise. Q1FY11 consolidated PAT accounts for 27% of our
existing full-year forecast. We will revise our estimates following our discussion with
the company management on key issues such as revenue growth drivers in
Q1FY11, expected salary hike, the likely employee mix and progress on the
integration of Brainhunter. Our back-of-the-envelope analysis suggests that we may
have to raise our FY11 PAT forecast by 10-15%. We continue to maintain the fundamental
grade of ‘3/5’, indicating that Zylog’s fundamentals are ‘good’ relative to other listed equity
securities in India.

Q1FY11 (standalone) result analysis
- Zylog’s Q1FY11 standalone revenues were up 3.5% q-o-q and 22.4% y-o-y at Rs 2.2
bn. The reported revenues for the quarter are 22% of our existing full-year forecast.

- The reported EBITDA margin was 24.4%, up 130 bps q-o-q and up 610 bps y-o-y
mainly on account of lower software development cost, which declined 24.5% q-o-q
and 31.5% y-o-y. Software development cost as a percentage of revenue for the
quarter was 8.7%, down by 320 bps q-o-q and a steep decline of 690 bps on a y-o-y
basis.

- Q1FY11 PAT was Rs 345 mn compared to Rs 266 mn in Q4FY10 and Rs 199 mn in
Q1FY10. The q-o-q growth in PAT would have been higher but for a 470 bps
increase in the tax rate to 21.1%. The reported PAT for the quarter is 31% of our
existing full-year forecast.
Q1FY11 (consolidated) result analysis

- Zylog’s consolidated revenues for the quarter were up by 139% y-o-y to Rs 4.6 bn.
Information about Q4FY10 is not available as the company has started reporting
consolidated quarterly results only from Q1FY11. The reported revenues were
marginally higher than our forecast, accounting for 25% of the existing full-year
forecast.

- EBITDA margin declined by 100 bps y-o-y due to the consolidation of Brainhunter,
which has lower EBITDA margin compared to the parent company.

- The consolidated PAT for the quarter more than doubled to Rs 353 mn vs. Rs 174
mn in Q1FY10 and accounts for 27% of our existing full-year forecast.
Likely earnings upgrade of 10-15% post interaction with the management
We will revise our estimates after we get clarity on key issues such as revenue growth
drivers in Q1FY11, expected salary hike, the likely employee mix and progress on the
integration of Brainhunter

To read the full report: ZYLOG SYSTEMS

>TELECOM SECTOR (CRISIL)

■ Mobile segment adds 20.3 million subscribers in March 2010.

■ Fixed wireline segment remained stable at 36.96 million in March 2010.

■ 3G spectrum auction is still underway

■ RCOM unveils new voice packs for CDMA subscribers

■ Videocon Telecom launches GSM mobile services in Gujarat, Punjab and Kerela.

To read the full report: TELECOM SECTOR

>PLETHICO PHARMACEUTICALS (CRISIL)

Plethico Pharmaceuticals (Plethico) is engaged in the manufacturing of herbal formulations, nutraceuticals and allopathic products. We assign Plethico a fundamental grade of 3/5, indicating that its fundamentals are ‘good’ relative to other listed securities. We assign a valuation grade of 4/5, indicating that the current market price of the stock has ‘potential upside’ from the current levels. We have arrived at a one-year fair value of Rs 458 per share.

Global nutraceutical market is emerging from the nascent stage
We expect the global nutraceutical market to grow at a CAGR of 9% during CY08-13 on the back of an increase in awareness of lifestyle-related health issues and a rise in disposable incomes. We expect Plethico, with around 90% exports, to grow at a faster rate due to increased penetration into new geographies.

Natrol acquisition has strategically enhanced Plethico’s value.
We believe that this acquisition has provided the following benefits to Plethico:

i) It has strengthened Plethico’s product mix and enabled its foray into the US and the UK.

ii) Successful leveraging of Natrol’s products in the non-US markets: In CY09, Plethico introduced Natrol’s products to the non-US markets, pushing up revenues from $ 101 mn to $ 114 mn.

iii) Cross-selling of products: As Plethico and Natrol cater to different geographies, Plethico now plans to cross-sell products to strengthen its position in those markets. It also plans to enter new territories.

CRISIL Equities is of the opinion that the management has successfully leveraged on the Natrol acquisition so far.

Restructuring of manufacturing operations to boost profitability
Plethico has incurred a capex of Rs 2 bn towards setting up a manufacturing facility near Dubai, UAE entitling the company for a 50-year tax holiday. With the commercialisation of the plant in August 2010, Plethico plans to re-organise its manufacturing operations. It will significantly reduce the cycle time, thus saving on costs and taxes. We expect the benefits of the restructuring exercise to accrue by CY12 and project an increase in EBITDA margins from 15.8% in CY11 to 19.2% in CY12.

We expect Plethico’s revenues to grow at a two-year CAGR of 26% from CY09 to CY11. We foresee a growth of 19% in PAT in CY10 and 6.5% in CY11. Due to the Rs 2 bn capex and restructuring of operations, we expect RoE to decline from 23% in CY09 to 22% in CY10 and further to 19% in CY11 before improving to 23% in CY12.

Key risks
High exposure to international markets adds to the risks involved in the operations. The behaviour of the receivables cycle and timely commissioning of the new plant are key monitorables.

Valuation: Potential upside from the current levels
Plethico has been trading at a five-year average PE multiple of 7x. We have applied a fiveyear
historical PE average of 7x to its CY10 EPS of Rs 65.5 and arrived at a one-year fair
value of Rs 458. Our discounted cash flow valuation also supports the PE-based valuation.

To read the full report: PLETHICO PHARMACEUTICALS

>POWER SECTOR (CRISIL)

HIGHLIGHTS

Capacity addition gains momentum in 2009-10.

Essar Power Hazira achieves financial closure for Rs. 14.33 billion multi-fuel based project.

Jindal Power getd Rs 100 billion loan for 2400-MW Raigarh project.

BHEL bags Rs 63 billion contract for executing 1,600 - MW super critical thermal power project

To read the full report: POWER SECTOR

>POLARIS SOFTWARE LIMITED (CRISIL)

Polaris Software (Polaris) is an end-to-end global financial technology company with a
comprehensive suite of products and services for the BFSI sector.

■ Improved outlook for the IT sector
The outlook for global IT spend has improved since the latter part of 2009, after a brief phase of
weak demand outlook. Consequently, the outlook for Indian IT vendors has also improved which
has prompted them to set a high recruitment target for FY11. The BFSI (banking, financial
services and insurance) sector is globally the largest spender on IT. Demand improvement in
the US – largest target market – bodes well for financial technology vendors like Polaris.

■ Polaris has evolved as an end-to-end global financial technology company
Through the acquisition of Orbitech, a Citibank subsidiary, in 2002 Polaris got access to 56
software modules for the banking industry. Polaris has transformed these modules into serviceoriented- architecture (SOA). Aided by acquisitions in the insurance and India-focused banking products space, Polaris has evolved as an end-to-end global financial technology company.

■ IT products business at an inflection point
Over the past few years, Polaris has been in the process of transforming banking products into
SOA, broadening its products portfolio and building customer references. It is now at an
inflection point in its products business wherein it can capitalise from its investments made in
software development. In FY10 Polaris won 54 deals in products business as against 21 deals
each in FY08 and FY09. We forecast a CAGR of 25% in US dollar terms (21% in rupee terms)
over FY10-13 for the IT products segment and expect its revenue contribution to increase to
25% in FY13 from 20% in FY10.

■ Increasing contribution from IT products to drive margin expansion
We forecast total revenues to grow to Rs 19.3 bn in FY13 from Rs 13.5 bn in FY10 at a CAGR
of 12.4% (16.2% in US dollar terms). We expect Polaris’ EBITDA margin to increase to 19.3% in
FY13 from 16.5% in FY10 on account of: (a) increasing revenue contribution from IT products;
(b) IT products’ margins expansion to 29% from 23% currently on account of increasing
operating leverage; and (c) broadening of the employee pyramid.

■ Net profit to grow at a CAGR of 22.2% over FY10-13
After considering the impact of higher tax rates and forex gains from hedges ($170mn hedges at
Rs 48), we forecast net profit to increase from Rs 1.5 bn in FY10 to Rs 2.8 bn in FY13. We also
expect the RoE to increase to 20.2% in FY13 from 18.6% in FY10. The company has a strong
cash balance which we expect will touch Rs 10 bn in FY13, which could be used for acquisitions
aimed at client acquisition and access to intellectual property rights.

■ We assign 4/5 on fundamentals and 5/5 on valuations
Polaris’ fundamental grade of 4/5 indicates that its fundamentals are superior relative to other
listed securities in India. The grading factors in experienced management, a strong IT products
portfolio, balance sheet strength and improved outlook for the IT sector. The grading has been
tempered by dependence on the BFSI sector and high client concentration. The valuation grade
of 5/5 indicates that the current market price has strong upside to our fundamental value per
share of Rs 247.

Key stock statistics

• Fundamental value : (Rs) 247
• Current market price : (Rs, as on April 21) 186
• Shares outstanding (mn, face value : Rs 5) 99
• Market cap (Rs mn) : 18,407
• Enterprise value (Rs mn) : 13,319
• 52-week range (Rs)(H/L) : 204/60
• PE on EPS estimate (FY11E)(x) : 7.7
• Beta : 1.16
• Free float (%) : 41.1%
• Average daily volumes (last 12 months) : 1,998,306

To read the full report: POLARIS

>Draft guidelines on base rate: Impact on banks (CRISIL)

The RBI has come out with a draft circular on the base rate, which is expected to substitute the current Benchmark Prime Lending Rate (BPLR) system with effect from April 1, 2010. The base rate would act as a minimum rate for all commercial loans, including loans up to Rs 2 lakhs where the BPLR currently acts as the ceiling rate.

CRISIL Research estimates the base rate for majority of the banks to be in the range of 8.0 to 9.5 per cent. Moving to a base rate system would increase transparency in lending rates. However, if the base rate were to become the minimum rate for all commercial loans, it would adversely affect the bank’s ability to extend short-term funding to large corporates.

The Reserve Bank of India has released a draft circular on the base rate, which is expected to substitute the current Benchmark Prime Lending Rate (BPLR) system with effect from April 1, 2010. Although final guidelines in this regard are awaited, the draft circular provides broad contours of the new base rate system.

Salient features of the base rate system:
1. The base rate system will replace the BPLR system from April 1, 2010 onwards.
2. Criteria for determining the base rate -

• Cost of deposits
• Adjustment for negative carry in cash reserve ratio (CRR) and statutory liquidity ratio (SLR)
• Unallocatable overhead cost for banks such as aggregate employee compensation relating to administrative functions in corporate offices, directors’ and auditors’ fees, legal and premises expenses, depreciation, cost of printing and stationery, expenses incurred on communication and advertising, IT spending, cost incurred towards deposit insurance
• Profit margin

3. The base rate will act as minimum rate for all commercial loans, including loans up to Rs 2 lakhs where the
BPLR currently acts as the ceiling rate.
4. Actual rate charged to borrowers would be the base rate plus borrower-specific charges, which will include
product specific operating costs, credit risk premium and tenor premium.
5. Base rate to be the reference rate, henceforth, for all new loans and for loans coming up for renewal. The
existing borrower could also shift to the new system on a mutually agreed rate structure between the borrower and the bank. Moreover, the base rate could act as a benchmark for floating rate loans.
6. Interest rates for Differential Rate of Interest (DRI) scheme loans will continue to be fixed without reference
to the base rate. RBI will separately announce the stipulation for export credit.
7. Banks would be required to exhibit information on base rate at all branches and post it on their respective
websites as well.

Impact on banks
CRISIL Research estimates the base rate for majority of banks to be in the range of 8.0 to 9.5 per cent. As of March 2009, around 67 per cent of outstanding advances by scheduled commercial banks (SCBs) were at sub-BPLR. Moving to a base rate system would increase transparency in lending rates. However, if the base rate were to become the minimum rate for all commercial loans, it would adversely affect the bank’s ability of extending short-term funding to large corporates. Currently, banks, saddled with surplus liquidity and lack of avenues to deploy funds, have been providing short-term loans to large corporates (with healthy credit profile) at rates as low as 5.5 to 6.0 per cent. Moving to the proposed base rate system would make it impossible for banks to provide loans at these rates, which, consequently, would lead to corporates considering alternative sources.

Background
A working group, under the chairmanship of Deepak Mohanty, was constituted to examine the lending rate practices of banks and subsequently, submit its recommendations on the same. The RBI’s guidelines (announced approximately 4 months later) are broadly in line with the recommendations of the working group.

The RBI, concerned about the sub-BPLR pricing of commercial loans by banks in India and the wide divergence in BPLRs of major banks, had constituted the working group to review the BPLR system and suggest changes to introduce greater transparency in credit pricing.

The working group was assigned to review and provide suggestions on the following:
1. Extent of sub-BPLR lending and reasons for the same
2. Wide divergence in BPLRs of major banks
3. An appropriate loan pricing system for banks
4. Administered lending rates for small loans up to Rs 2 lakh and for loans extended to exporters
5. Suitable benchmarks for floating rate loans in the retail segment
6. Consideration of any other issues relating to lending rates of banks

To read the full report: BPLR

>Vascon Engineers Limited: IPO Grading (CRISIL)

CRISIL IPO Grade ‘3/5’: CRISIL Research has reaffirmed CRISIL IPO Grade ‘3/5’ for the proposed initial public offering of Vascon Engineers Ltd. (VEL) (CRISIL Research has undertaken a fresh grading exercise for VEL as the grading assigned to the company on Dec 31, 2007 had expired.) The grade indicates that the fundamentals of the issue are average relative to other listed equity securities in India. However, this grade is not an opinion on whether the issue price is appropriate in relation to the issue fundamentals.

Company Background
VEL is a Pune-based player, engaged in real estate construction and development. The company was incorporated in January 1986, and commenced operations with the construction of Cipla’s Patalganga factory in November 1986. Up to 1998, the company was a real estate contractor - executing contracts for third parties.

VEL’s real estate business comprises construction of residential and office complexes along with IT parks, industrial units, shopping malls, multiplexes, educational institutions and hotels. As of August 31, 2009, the company completed construction contracts worth Rs 8.8 billion, out of which Rs 6.4 billion was for third parties. In terms of saleable area, VEL has constructed over 4.58 million square feet during the last 5 years. In 2008-09, the construction business and development business contributed to around 93 per cent and 6 per cent respectively to the company’s total revenues.

Grading Highlights

Business Prospects
• Strong EPC order book provides comfort on revenues and margin front.
• Third EPC Order book concentration (around 33 per cent of the total order book) towards industrial, hospital, educational and airport clients gives better revenue visibility.
• Being in the construction business for over two decades, the company has built strong technical and design expertise. A large part of the company’s reputation in the Pune market is on account of its track record in providing timely delivery to clients.
• The joint development model reduces the working capital requirement as the contribution towards land cost is only in the form of deposits with the land owners. The risk of a fall in property prices is shared with the land owner. In this business model VEL acts as a real estate contactor as well as developer thereby earning a larger share of the revenues.
• The company’s real estate development business is primarily concentrated in Maharashtra, especially in-andaround Pune, exposing it to a high level of geographic and price risk. Also, Pune city, in terms of demand for residential and commercial space, is to a large extent dependent on the fortunes of the IT/ITES industry.

Financial Performance
• Healthy revenue growth at a CAGR of 54 per cent driven by high growth in EPC business over the past 3 years.
• EPC business in which the company undertakes civil construction of buildings etc formed close to 93 per cent of the company’s sales in 2008-09. The EBITDA margin in EPC business improved from 13.5 per cent in 2005-06 to 15 per cent in 2008-09. Real estate development business accounted for ~ 6 per cent of sales in 2008-09. Real Estate development business has also witnessed EBITDA margin expansion from 31.0 per cent in 2007-08 to 76.0 per cent in 2008-09.
• In spite of the Indian real estate sector going through a downturn, the company’s EPC business witnessed a healthy CAGR of 20.0 per cent from Rs 3,624 Mn in 2006-07 to Rs 5,114 Mn in 2008-09.
• The company postponed around 90 per cent of its projects on the development front. This though impacted revenues and lead to postponement of cash flows, it helped the company to maintain low gearing and also weather the demand uncertainty.

Management Capabilities
• Mr.Vasudevan provides the company leadership and direction. He is a qualified engineer - BE (civil) - from the University of Pune and has worked with organization such as Maharashtra Industrial Development Corporation, Hindustan Construction Company Ltd, Atul Constructions Company Ltd and Beck Engineer Company Pvt Ltd.
• The company has a strong and capable second line of management who has been with the company since its inception.

Corporate Governance
• VEL’s corporate governance meets the required corporate governance standards.

To read the full report: VASCON ENGINEERS

>The Asia-Pacific Economies: How far from the pre-crisis potential?

KEY MESSAGES: ■ Asian economies are spearheading the global recovery with their stronger than-expected rebound in growth. Fiscal and monetary stimulus has played a crucial role in this rebound.

■ Some economies such as Australia have benefited from the strong trade-linkages with China, whose own recovery has been underpinned by massive fiscal stimulus.

■ Significant output loss in 2008 and 2009 imply that none of the countries in the next couple of years would attain the output level, had they continued to grow at the rate witnessed in the pre-crisis period.

■ In the Asia-Pacific region, Indonesia and Australia have been least affected by the crisis, and their economies are likely to rebound close to the pre-crisis output potential by 2011.

■ The Indian economy would not be able to reach the potential size it may have achieved had it not been hit by the meltdown; the estimated output loss due to the crisis would be around 8 per cent of the pre-crisis potential GDP by 2011.

■ Out of the Newly Industrialsed Economies (NIEs), three economies - Singapore, Hong Kong and Taiwan - would witness the maximum output loss to GDP in 2011; consequently, their recovery to pre-crisis levels will be delayed.


After having suffered the worst recession since World-War II, which was intensified by the Lehman burst in October 2008, economies across the world are slowly and steadily marching their way towards recovery. There has been discernable improvement in the global economy in the second half of 2009, underpinned by output expansion in emerging market economies, particularly in Asia. World manufacturing activity has picked up, trade is recovering, financial market conditions are improving, and risk appetite is returning. As a result The International Monetary Fund (IMF) has been upgrading the growth outlook for the global economy. It now expects the global economy to shrink by 1.06 per cent in 2009 (IMF, October 2009), as compared to its earlier estimate of a contraction of 1.4 per cent (IMF, July 2009), before expanding by 3.5 per cent in 2010 (Figure 1).

The critical question is - with a recovery underway, which countries would bounce back to their pre-crisis potential? In other words, we assess, over the next couple of years which countries would (or would not) be able to compensate for loss in economic output as a result of the crisis. This is our focal issue in this paper.

The paper is divided into two broad sections. The first section analyses the role played by expansionary fiscal and monetary policies in the rebound of Asian economies by examining the drivers of recovery in domestic as well as external demand. The second section addresses the crucial question of the likelihood of economies in the region reverting to their potential size of the economy by comparing the pre-crisis trend and expected economic growth rates over the next couple of years. The analysis has been presented for the 13 Asia- Pacific economies (APAC economies, henceforth), namely, Australia, New Zealand, Japan (bucketed under industrial Asia), Singapore, Hong Kong, Korea, Taiwan (the Newly Industrialsed Economies, NIEs), Malaysia, Indonesia, Thailand, Philippines, Vietnam (the ASEAN-5 economies), and finally, India. China has been excluded from the analysis because of non-availability of relevant GDP data.

To read the full report: ASIA-PACIFIC ECONOMIES

>JM FINANCIAL LIMITED (CRISIL)

The JM Financial Group is one of the leading players in the financial services field with business interests in investment banking, equity broking, wealth management, securities-based funding, asset management and alternative asset management. JM Financial Ltd (JM Financial) is the holding company for the operating entities in the group

FUNDAMENTAL GRADE
CRISIL's Fundamental Grade represents an overall assessment of the fundamentals of the company graded in relation to other listed equity securities in India. The grade facilitates easy comparison of fundamentals between companies, irrespective of the size or the industry they operate in. The grading factors in the following:

• Business Prospects: Business prospects factors in Industry prospects and company's future financial performance
• Management Evaluation: Factors such as track record of the management, strategy are taken into consideration
• Corporate Governance: Assessment of adequacy of corporate governance structure and disclosure norms

■ Leading player in investment banking space
JM Financial has established a strong market position in the investment banking segment, which includes capital raising and mergers and acquisition advisory. The company has been a lead manager in around 30% of the total equity capital raised in the last 3 years. The strong relationships built with clients over the years and a robust track record has enabled the company to maintain its market position. Its revenues in the investment banking segment declined sharply by 60% in FY09, reflecting the subdued environment in the capital markets. Going forward, with reviving economic growth, we expect revenues from this segment to increase at a healthy pace.

■ Expanding footprint in the broking business
In the retail broking and wealth management businesses, the company has been keen on expanding its reach and client base through the franchisee route. On the institutional equities front, the company is still building up scale post its split from Morgan Stanley. JM Financial is currently focused on expanding its research capabilities across sectors and companies and strengthening its derivatives desk. While the broking revenues witnessed a slump in 2008-09 on account of adverse market conditions, they are likely to regain momentum with an expected recovery in the market.

■ Securities funding business linked to capital market activities
In the securities funding business, the company provides loan against securities, IPO financing, and sponsor funding. In FY09, the company entered the asset reconstruction business in association with public sector banks. As of March 2009, this business had a book size of around Rs 9 bn. We believe that the company’s comfortable gearing and strong net worth provides it the leeway to expand and sustain during bouts of volatility in the capital market.

■ Uncertainties inherent in capital markets
Fortunes of JM Financial’s businesses are inextricably linked to the capital markets. While the company’s diversified product profile and healthy market position would provide some succour to revenues, its earnings remain vulnerable to volatility in capital market related businesses.

■ Revenues growth to be buoyant
CRISIL Equities expects JM Financial’s turnover to register at a CAGR of 37% between FY09 and FY12. Growth across all its major business segments is expected to remain
ealthy, provided economic conditions continue to improve. Adjusted EPS is projected to grow at a CAGR of 43%. JM Financial’s balance sheet strength – net worth of Rs 16 bn as of March 2009 – gives it the ability to withstand market volatility.

To read the full report: JM FINANCIAL LIMITED

>Everest Kanto Cylinder Limited (CRISIL)

‘Superior Fundamentals and Strong Upside’

■ Strong management and sustained leadership in cylinder market
Everest Kanto Cylinder Ltd (Everest Kanto) has a strong and experienced management with about three decades of experience in the high pressure cylinder industry. The management has successfully driven the company to a leadership position in the domestic as well as international markets. It is India’s largest player with 65% of market share and the second largest player in the world. The company supplies to around 20 countries and is one of the leading suppliers to Iran and Pakistan, the fastest growing

■ Compressed Natural Gas (CNG) markets, globally.
Domestic and international markets to provide impetus for growth In the domestic market, we expect CNG infrastructure to grow on account of increase in coverage of city gas distribution projects (from 35 to 100) and availability of gas from Reliance Industries, new discoveries by Oil and Natural Gas Corporation Limited (ONGC) and Gujarat State Petroleum Corporation Limited (GSPC) in the Krishna-Godavari (KG) basin. On the global front, rising concerns over environmental pollution by vehicle emissions and oil price fluctuations have caused governments of various countries to initiate CNG implementation programmes.

■ Expansion plans to meet future requirements
Everest Kanto augmented its production capacity by 400,000 cylinders in the last 3 years. It plans to increase it further by another 500,000 cylinders by the Q1FY11. This capacity expansion is expected to bridge the foreseen demand-supply gap.

■ Everest Kanto to demonstrate strong financial performance
Everest Kanto is well-positioned to encash the huge opportunity present in the cylinder space. Acquisition of CP Industries has enabled Everest Kanto’s entry into high margin jumbo cylinder business and access to the US market. We expect the company to witness strong growth in its gross sales at a Compound Annual Growth Rate (CAGR) of 16% over FY09-12 to Rs 13.9 Bn. PAT is expected to grow at a CAGR of 22% during the same period.

■ We assign Everest Kanto ‘4/5’ on Fundamental and ‘5/5’ on Valuation
Everest Kanto’s fundamental grade of ‘4/5’ indicates that the company’s fundamentals are
‘Superior’ relative to other listed securities in India. The grading factors in strong management capabilities and Everest Kanto’s leadership position in the industry. Prospects of the industry and of the company are positive as well. The valuation grade of ‘5/5’ indicates the value of the stock has ‘Strong Upside’ (Fundamental Price of Rs 270) from the current market price.

To see full report: EVEREST KANTO CYLINDER

>Phoenix Mills Limited (CRISIL)

■ Under penetrated organised retail provides bright industry prospects
Under-penetration of the organised retail market, rising disposable income and favorable demographics buoy India’s retail sector. However, these prospects are partly subdued by the fragmented industry and low entry barriers.

■ Phoenix pioneered an innovative concept of the Market City
Phoenix Mills Limited (Phoenix) pioneered the Market City concept in India. It refers to a multi-use premise for retail, commercial, entertainment as well as hospitality needs. The economic strength of the concept is derived from the inherit nature of business offerings, extensive range of services enabling larger footfalls and higher longevity at the premise.

■ HSP provides revenue stability; expansion will augment steadiness
High Street Phoenix (HSP) contributes nearly 99% of the lease revenues. Out of 0.5 million square feet (msft) leased area; anchor tenants occupy nearly 40% and contribute almost a quarter of revenues. HSP’s revenues are expected to be Rs 2.0 Bn by FY12, translating into a 32% 3-year CAGR, with 0.9 msft of leased area.

■Aggressive plans to launch Market Cities will double revenues
Phoenix plans to launch Market Cities in four major cities in India. With around 7.7 msft of retail and commercial area currently under development and expected to be operational through FY12 and beyond, we expect Phoenix’s revenues to be Rs 3.5 Bn in FY12, translating into a 3-year CAGR of 33%.

■ Phoenix’s financial performance is highly sensitive to occupancy rates
Phoenix’s financial performance is highly sensitive to its occupancy rates at its upcoming Market City projects. We have assumed occupancies in range of 60-75% during the initial few years of the Market Cities becoming operational. However, any change in this underlying assumption will materially impact the overall financial performance as well as valuation of the company.

■ Expansion looks highly aggressive especially looking at the past record
Although the management of the company has done well so far at a single location, viz, HSP, we feel that the ongoing expansion of more than 9 msft (as against the existing 0.9 msft until June 2009) at various market cities pose challenges of scale, complexity and demand risks which are significantly greater than what has been hitherto managed.

■ We assign Phoenix ‘2/5’ on fundamental and ‘3/5’ on valuation
We assign a fundamental grade of ‘2/5’, indicating that its fundamentals are ‘Moderate’ relative to other listed securities. While good industry prospects and expected revenue from upcoming market cities positively influence our grading, limited execution track record of management and aggressive expansion plans weigh down our overall grading. A valuation grade of ‘3/5’ indicates that the current market price is ‘Aligned’ to our fundamental value per share (Fundamental Value of Rs 160 per share).

To see full report: PHOENIX MILLS LIMITED

>EID PARRY INDIA LIMITED (CRISIL)

■ Healthy topline growth and rising margins, due to higher sugar prices
We believe that EID Parry (India) Ltd (EID) will ride the upturn in the sugar cycle, which coincides with the capacity enhancements of its integrated operations. Its topline and adjusted PAT are projected to grow at a two year CAGR of 61% to reach Rs 19.6 Bn and 68% to Rs 3.6 Bn by FY11, respectively. We expect margins to improve further to 16.2% and 17.6% in FY10 and FY11, respectively from around 9.3% in FY09.

■ Presence in south India bless EID with a longer cane-crushing season
EID’s sugar mills located in Tamil Nadu and Puducherry enjoys geographical advantages in the form of long crushing season (240 days in a year, as against 175 days in North India). This enables higher utilisation of EID’s combined 19,000 TCD sugar capacities.

■ Well placed to deal with sugarcane shortage
EID is well-placed than most of its peers in Tamil Nadu and other UP-based sugar producers, due to its better relationship with farmers enabling better availability of cane and proximity to ports enabling raw sugar refining. Besides, the company’s sugar mills are integrated for making power and spirits from its by-products, which helps in de-risking the business.

■ Port-based refining capacity to aid growth in long term
EID is setting up a one million tonnes per annum sugar refinery in a SEZ at Kakinada, through a 51:49 JV with global food giant Cargill. It is expected to be operational within the next 6 months. We expect the JV to contribute nearly Rs 430 Mn to EID’s profitability in FY11.

■ Regulatory risk in sugar industry can temper our fundamental grading
Despite expected robust financials over the medium term, government policies on sugar and sugarcane prices will continue to influence and render volatility to the overall profitability of sugar manufacturers, including EID. The non-linkage of sugarcane cost to sugar realisation is the key negative for the industry and would continue to result in huge volatility in EID’s earnings.

■ Coromandel fertilisers to contribute 39% to EID’s valuation
With a 62.9% stake in Coromandel, EID receives significant dividends from CFL. With an expected decline in CFL’s profitability; we expect dividend payment to reduce to Rs 654 Mn in FY11. Nevertheless, the subsidiary will remain a key contributor in the EID’s consolidated operations and valuation (we value EID’s stake in CFL at Rs 154 per share).

■ We assign EID a ‘4/5’ grade on Fundamental and ‘4/5’ on Valuation
EID’s fundamental grade of ‘4/5’ indicates that the company’s fundamentals are ‘Superior’ relative to other listed securities in India. The grading factors in the current buoyancy in the sugar industry, good management and EID’s position in the industry. However, the grading could be lowered if there are significant regulatory changes, which influence sugar realisations. The valuation grade of ‘4/5’ indicates potential ‘Upside’ (Fundamental value of Rs 394) from the current market price of the stock.

To see the full report: EID PARRY LIMITED