>EICHER MOTORS

Revenue up 22% YoY, led by 62% YoY volume growth in motorcycles Eicher Motors reported top-line revenue at `15.9bn, up 22% YoY led by ~8% YoY volume growth in M&HCV. The company sold 11,979 medium and heavy commercial vehicles (M&HCV). It sold 27,244 motorcycles in 2QCY12, up 62% YoY.

Operating margins decline 180bps QoQ to 8.8%
The company’s operating margins declined 180bps QoQ to 8.8%. This was mainly led due to higher staff costs and other expenses. Staff costs was in line with expansion plans. The higher incentives to push sales led to higher other expenses. EBIDTA for the quarter was ` 1.4bn, up 11% YoY.

PAT reported at ` 760mn, flattish YoY
The company reported its PAT at ` 760mn. This was because of lower other income. The EPS for the quarter stood at ` 28.2.

View and valuation
Macro headwinds may affect the demand in the commercial vehicle segment. Accordingly, we estimate volume growth of 12% in CY13 in the CV segment. Its demand in the motorcycle segment continues to be strong with a waiting of almost 2-3 months. With supply issues being sorted, we expect this segment to grow 30% YoY. We also believe margins may remain stable at these levels. The stock is currently trading at a P/E of 13.9x CY14E. We recommend Accumulate.

To read report in detail: EICHER MOTORS
RISH TRADER

>PERSISTENT SYSTEMS: Earnings Review Q4FY2012

Persistent Systems’ operating results for Q4FY12 were inline with expectations with a topline growth of 1.1% at ` 2.7bn as against our estimate of ` 2.7bn. Revenue growth was largely driven by IP led efforts - contributing 12% to revenues (up 38% QoQ) also includes Openwave numbers. Non IP revenues were up by just 1.5% QoQ all on better pricing of 1.7% as volumes remained flat for the quarter.


The company has indicated better than industry growth (NASSCOM projects 11-14%) for FY13 along with margin maintenance at FY12 levels of 19.6% at PBT levels. The company has not given quantitative guidance and has earmarked a soft fresh hiring plan of 350 employees in FY13. It will review salary hikes post Q2FY13 and have indicated better reward than peers.


We believe that the company going forward would rely less on fresh hiring as it used to be till FY10. We expect 15% volume growth for the company in view of challenging demand in the discretionary (new development) budgets. It would also focus on non linear opportunities and improved efficiency; incrementally. It continues to remain focused on its next generation technologies and expect its sales strategy along with opportunities in ‘Bigdata’ to drive the revenue growth in the coming period.


We remain positive on the stock for its attractive valuations of 6.6 (x) for FY14E
EPS of ` 49.4 with a BUY rating on the stock with a target of ` 444 valued at 9x
of its FY14E earnings.

Financial Highlights:
Persistent Systems’ operating results for Q4FY12 were inline with expectations with a topline growth of 1.1% at ` 2.7bn as against our estimate of ` 2.7bn (Revenues up 4.9% in USD terms). Revenue growth was largely driven by IP led efforts - contributing 12% to revenues (up 38% QoQ). Non IP revenues were up by just 1.5% QoQ all on better pricing of 1.7% as volumes remained flat for the quarter. EBITDA grew 11% QoQ at ` 773mn on lower travel cost and flat non IP expenses (employee count down by 78 QoQ) thus resulting in better operating margins of 28.5% (up 260bps) for the quarter – DE at ` 677mn.


PAT grew by 1.6% qoq to ` 412mn ahead of our estimate of ` 398mn as gains on operating margin got negated to certain extent on higher depreciation and weak other income (loss of ` 34mn as against gain of ` 27mn).


The company managed to achieve its PBT margin maintenance but fell short of its USD revenue guidance of 29% (actual achieved 22%) for FY12.


The company has named Mr. Rohit Kamat as the Chief Financial Officer with effect from April 23, 2012, in place of Mr. Rajesh Ghonasgi who has resigned citing personal reasons. Brief profile of Mr Kamat is annexed below for your reference.


Valuation & Outlook:
We believe the series of efforts such as acquisition of S&M team of Agilent & Openwave location services, sales with strategy (pre-emptive effort to deploy codeveloped products), and investment in next generation technologies would lead into higher than industry growth rate. We remain positive on the stock for its attractive valuations of 6.6 (x) for FY14E EPS of ` 49.4 with a BUY rating on the stock with a target of ` 444 valued at 9x of its FY14E earnings.


RISH TRADER

>PHARMACEUTICAL SECTOR: Increased sales from US generics to propel growth

■  Domestic formulations in a recovery phase
We expect the domestic pharma industry (DPI) growth to rebound to mid teens (14%-15%) during FY13, from low double digit growth during FY12. Over the medium term, we believe 14% growth to be sustainable. Our assumption is based on market share gains in life-style related products; increased pace of new product launches and higher penetration in tier III cities and rural markets.


We have observed sales force attrition levels to have come off their peaks while our channel checks indicate gradual absorption of underlying inventory (anti-infectives in particular). We expect Lupin and Sun Pharma to sustain market outperformance (>16-17% growth) while others, Torrent and IPCA in particular, to witness a stronger FY13E (albeit on low base) on the back of higher MR (marketing representative) productivity and increased focus on faster growing segments. The National Pharmaceutical Pricing Authority (NPPA) / Drug Price Control Order (DPCO) stance to expand the drug coverage list for pricing control and recovery of arrears remains an overhang.


■  Increased sales from US generics to propel growth
The key regulated markets - US and EU - are due to witness continuing mass generic penetration. The upcoming patent cliff coupled with pro-generic healthcare reforms places the US generic market in a sweet spot. On the contrary, stringent price control interventions and intense competition makes Europe less a profitable market. Our research highlights that CY12 will see the largest wave of US patent expirations (for drugs worth USD 33.6bn) and Indian players - Dr. Reddy’s, Sun Pharma and Lupin - are well-prepared to capitalize on a majority of these opportunities. Despite intense competition and other growth constraints, we expect these companies to be major beneficiaries (Refer Annexure - Generic Opportunities).


■  Favourable currency movement adding to conviction
The Rupee depreciation against the Dollar (14% in FY12) works in the favour of most of these drug makers on account of higher realization on their export receivables (eg. Sun Pharma, Dr. Reddy’s, Divi’s Labs, etc.). At the same time, select companies will see this benefit being offset by high MTM losses on their forex liabilities (eg. Ranbaxy, Cadila, Glenmark, etc.).


■  MNC Tie ups for EMs to aid topline growth FY13E onwards
Looming patent expiries (blockbuster products) and low R&D productivity (poor visibility on product pipeline) has led to MNC companies increasing their thrust on branded generics. The frequency of long-term supply deals with local generic manufacturers as a result has increased. We anticipate revenue contribution from some of the past deals entered into (Cadila – Abbott; Torrent- Astrazeneca) to aid topline growth in FY13E and scale up thereafter.


To read report in detail: PHARMACEUTICAL SECTOR
RISH TRADER

>Indian agriculture and tractors

Highlights of the Indian agricultural sector

• Has always been a key sector of India’s economy
• Currently contributes ~18% of Indian GDP
• Accounts for ~10% of India’s exports
• Second largest producer of rice and wheat in the world
• Largest producer of pulses
• Fourth largest producer of coarse grains
• Second largest producer of vegetables, groundnuts and fruits
• Current average growth rate: 2.8%

Highlights of the Indian tractor industry

• The Indian tractor industry has developed over the years to become the largest tractor market in the world.
• From just about 50,000 units in the early eighties, the size of the tractor market in the country has grown to over 600,000 units.
• Increased use of tractors for haulage and non-agricultural applications.
• The opportunities are still huge considering the low farm mechanisation levels in the country, when compared to other developed economies across the world.
• After a splendid performance during the last two to three years, the Indian tractor industry is believed to head for a slowdown, which we believe is a myth.

To read full report: AGRICULTURE AND TRACTORS

RISH TRADER

>PUNJAB NATIONAL BANK: In power sector, the bank’s management indicated that some of the newly commissioned power generation companies

■ On CASA deposit front, the bank’s management faces difficulty in maintaining high level of 35% CASA due to interest rate gaps in deposits and stiff competition.
■ On credit book expansion plan, PNB’s management indicated credit growth of 100-200bps higher growth than the industry; the bank awaits clarity on monetary policy and Union Budget before finalizing internal target for credit growth in FY13.
■ The bank’s management expects NIM of 3.75%-3.8% in FY12; in 9MFY12, the bank recorded NIM of 3.85%. In FY13, margin is expected to moderate slightly. We also factor in 11bps decline in margin in FY13 due to faster drift in yield on assets in declining interest rate scenario. Though, cut in CRR would aid margin slightly.
■ On NPA front, PNB’s management expects GNPA ratio to inch up in next 2 quarters mainly due to high slippages and lesser credit growth. As on end-December’11, the bank had GNPA ratio of 2.42%.

■ On Air-India loan restructuring front, banking sector total working capital loans of ` 225 bn is going for restructuring before end-March’12. Part of loans (of ` 85bn) would be converted into bonds with non-SLR status but with central government backing; the bond paper would carry coupon rate of 9.25% and with zero risk-weight. Of the total exposure, banks would take NPV losses of 10-12% (of almost ` 23bn). PNB exposure to Air-India is Rs 21bn and the bank management expects to take NPV hit of ` 500-1000mn
in Q4FY12 itself. Banks would be better off with replacement of loans with such bond paper. The NPV hit of 10-12% would not have any significant impact on the banks’ profitability.

■ In power sector, the bank’s management indicated that some of the newly commissioned power generation companies might not be in a position to fully pass-on their incremental higher cost of production in accordance with agreements they have entered into with power purchasers. This would reflect into adverse impact on their profitability.

On core operation front, the bank’s performance would remain robust and the bank would accrue benefits of declining interest rate in form of capital gains and MTM write-backs. We maintain our positive stance on the stock.

RISH TRADER

>STRIDES ACROLAB: Sold its Ascent Pharma business to Watson

Q4CY11 results beat estimates, healthy performance despite lower contribution from sterile business
■ Strides Arcolabs’ (STAR) topline grew 50% YoY to ` 6.98bn, led by higher than- expected revenue contribution from the pharma division at ` 4.08bn (up 63.8% YoY).


■ Revenue from specialty business saw a slight moderation in growth during the quarter at ` 2.73bn (up 23.6% YoY) restrained by subdued performance in Brazil, where the company shifted its marketing strategy from distributor channels to its own front-ended model. Licensing income for the quarter stood at ` 1.7bn (Q4CY10: ` 973mn).


■ Growth in pharma business was driven by higher-than-expected contribution from HIV segment and high growth in Indian brands. African business also witnessed stable growth amidst civil and political unrest.


■ EBITDA margins stood lower by 310bps YoY at 15.6% due to higher other expenses (up 440bps YoY at 25.2% of sales) which included one-off loss of ` 310mn on Brazilian front-ended operations. Adjusted for that, EBITDA margins stood 20%.


■ STAR recorded net MTM gain of ` 602mn (includes ` 800mn gain on restatement of assets in Ascent Pharma). PAT after minority interest and excluding extraordinary items grew 85.9% YoY to ` 102mn.


■ The management has deferred its guidance for CY12E for the time being due to uncertainity over timely regulatory approvals and outcome of patent litigations. However, they indicated of high growth potential in sterile business, mainly aided by launch of 36 products this year and higher contribution from recently FDA approved Penem facility in Brazil.



Q4CY11 Result
■ Revenue grew 50% YoY to ` 6.98bn, mainly driven by higher-than-expected revenue contribution from pharma business at ` 4.08bn (up 63.8% YoY). EBITDA margin for pharma business stood at 11%.


■ Specialty business saw a slight moderation in growth at ` 2.73bn (up 23.6 YoY). EBITDA margins stood at 28%. Licensing income for the quarter grew 74.6% YoY to ` 1.7bn.


■ Consolidated EBITDA margins shrunk 310bps to 15.6%, deterred by higher other expenses at 25.2% of sales (up 440bps) which included one-time loss of `310mn on Brazilian operations. Raw material costs too increased to 47.6% of sales (up 90bps YoY) while employee costs declined to 11.6% of sales (down
220bps YoY).


■ During the quarter, interest cost grew 12.4% YoY to ` 507mn while depreciation increased by 70.2% YoY to ` 298mn. PBT excluding extraordinary items stood at ` 285mn (down 1.5% YoY).


■ Extraordinary items (EOI) for the quarter include MTM gain of ` 602mn on net foreign assets, of which ` 800mn was on restatement of assets in Ascent Pharma. The company also recorded loss on sale of investments of ` 20mn.


■ PAT, after minority interest and excluding EOI, grew 85.9% YoY to ` 102mn.



Pharma division
■ The company sold its Ascent Pharma business to Watson for AUD 375mn. Ascent Pharma had recorded total sales of ` 8.3bn for CY11 along with an EBITDA of ` 1.05bn. The transaction has been completed as of 24th January 2012. The company will receive USD 265mn from the sale (post tax and after AUD 50mn of debt repayment relating to Ascent). The rest of the proceeds will be utilized towards debt reduction - includes FCCB redemption of USD 116mn (including premium).
■ The company’s flagship brand Renerve generates sales of ` 340mn and grew 45% YoY.


Financials
■ Gross debt position as of Feb-12 stands at ` 22.5bn (Dec-11: ` 25.6bn; Dec-10: ` 20.1bn). Net-debt/equity ratio pulled down to 0.7x as of Feb-12.
■ Cash in books stands at ` 10.5bn as of Feb-12 (Dec-11: ` 2.6bn; Dec-10: `3.4bn).
■ The company clarified that gross block (incl. WIP) of ` 13bn, as of Dec-11, includes only ` 200mn pertaining to Ascent Pharma. This figure will increase by ` 1bn – 1.5bn as additional capex is incurred.
■ Goodwill on books stands at ` 19bn as of Dec-11 and will be reduced by ` 3bn – 4bn after the Ascent Pharma sale.
■ Capex guidance for CY12E stands at USD 15mn.
■ The management has deferred its guidance for CY12E for the time being due to uncertainity over timely regulatory approvals and outcome of patent litigations.



Valuations
STAR stands to benefit from the current drug shortages in the US as global players like Hospira experience manufacturing compliance issues. FDA approval to its Bangalore sterile and oncology facilities allows it to move the approved products (25 of them in CY12E) towards commercialisation.


We expect 17% earnings growth over CY11-13E. Increased contribution from sterile segment, turnaround in front-ended Brazilian operations will lead to margin expansion. The divestment of Ascent Pharma business has strengthened its Balance Sheet (Net Debt/Equity - 0.7x) while also its capex cycle is nearing an end. This shall result in higher return ratios going forward. At CMP of ` 533, the stock trades at 11.8xCY12E and 10.1xCY13E earnings. We recommend Accumulate on the stock with a revised target price of ` 583 (11x CY13E earnings).
RISH TRADER

>MAHARASHTRA SEAMLESS: Will commence production at its 2,00,000 tonne mill in Q4FY12

Results inline with estimates, higher volumes compensate for lower margins
■ Maharashtra Seamless (MSL) Q3 FY12 profits ` 810mn (DCe: ` 805mn) primarily due to higher than expected volumes however EBITDA per tonne at `12272 per tonne for seamless pipes was lowest in 16 quarters
■ Net sales increased 6.9% QoQ/52.2% YoY) to ` 6.17bn (DCe ` 5.7bn) primarily due to higher volumes and better realisations. Sales volumes in seamless pipes at 70936 tonne (+0.3%QoQ/46%YoY) and ERW pipes at 33755 tonnes (+6.7%QoQ,40.7%YoY) witnessed strong traction. However EBITDA per tonne continue to decline for seamless pipes and were at lowest in 16 quarters at ` 12,272 (DCe ` 14000 per tonne) due to issues regarding the billet availability leading to higher cost. EBITDA per tonne in the ERW segment increased by 54%QoQ/3.4%YoY to 4467 per tonne (Dolat Est `N 3000 per tonne). EBITDA fell by 4.7% QoQ to ` 1.02bn on back of lower margins at 16.6%.
■ MSL will commence its new pipe mill capacity of 200000 tonnes in Q4FY12 which will drive volume growth over FY12-14E.
■ MSL’s order book remained flat sequentially at ` 5.51bn despite strong demand environment. Export order book remains strong and currently constitute 50% of its order book.
■ MSL is facing margin pressure in domestic markets due to increase in competition from the Chinese players and Indian players.
■ We expect MSL earnings to grow at 13%CAGR over FY12-14E primarily led by volumes. Demands for seamless pipes continue to remain strong given the high oil prices. We believe MSL, with a strong balance sheet is well-placed to capitalize on the strong demand for seamless pipes. MSL is currently trading at 4.6xFY12EV/EBITDA and 4xFY13EV/EBITDA. We maintain our Buy rating on the stock with a price target of ` 421 (5x FY13 EV/EBITDA).




Highlights
■ MSL’s net sales increased by 6.9% QOQ to ` 6.17bn. Sales volumes increased 0.3% QoQ and 6.7% QoQ to 70936 tonnes and 33755 tonnes in seamless and ERW pipes respectively. Seamless pipes realizations were increased by 5.8% QoQ at ` 62857 per tonne whereas for ERW pipes it rose by 4.2% to ` 45099 per tonne.
■ EBITDA per tonne on seamless pipes decreased 14.6% QoQ/36.2%YoY to ` 12,232 due to higher cost raw material and increase in Chinese competition post the withdrawal of the anti dumping duty application on China.
■ EBITDA per tonne in ERW pipes increased sequentially by 56.2% to ` 4467 as it had an inventory loss due to a decline in steel prices. We now expect MSL margins to be in the range of ` 2500-3000 per tonne as against the earlier `3000-3500 due to increase in competitive intensity.
■ EBITDA declined 4.7% QoQ despite 25% volume growth as the margins dipped in seamless pipes segment.
■ Other income declined 5.8% QoQ to ` 138mn (Dolat est: ` 150mn) as MSL has invested in FMPs whose gains will be booked in March 2012.
■ PAT was flat sequentially at ` 810mn as margin fall was compensated by higher volumes.


Demand strong but margins under pressure.
MSL expects demand to remain strong for seamless pipes with the prevailing high crude oil prices (USD 115 a barrel) and increase in rig counts. MSL also expects strong demand from the boiler segment due to large capacities being added in the power sector. MSL’s order book remained flat sequentially to ` 5.51bn despite strong demand environment. Seamless pipes contribute 76% of the order book whereas rest is contributed by ERW pipes. Export order book remains strong and currently constitute 50% of its order book.


Valuation
We expect MSL earnings to grow at 13%CAGR over FY12-14E primarily led by volumes. Demands for seamless pipes continue to remain strong given the high oil prices. We believe MSL, with a strong balance sheet is well-placed to capitalize on the strong demand for seamless pipes. MSL is currently trading at 4.6xFY12EV/ EBITDA and 4xFY13EV/EBITDA. We maintain our Buy rating on the stock with a
price target of ` 421 (5x FY13 EV/EBITDA).


RISH TRADER

>DHANUKA AGRITECH: Aims to launch 7 products over next 4 years

Q3FY12 results miss estimates; disappointing operational performance dents earnings growth
■ Topline for Q3FY12 de-grew by 3.7% YoY to ` 1.1bn, mainly on account of 6% decline in volume off-take due to poor northeast monsoons.
■ Rainfall in key regions of Andhra Pradesh, Karnataka and Maharashtra recorded 40% decline, impacting the revenue contribution from these markets.
■ For 9MFY12, herbicides and fungicides portfolio has shown a muted growth of 5% YoY while the insecticides and PGR portfolio grew by 14% YoY.
■ Top five products for 9MFY12 contributed 31% to the topline. The company's flagship brand Targa Super contributed 14.6% (YTD) to the topline and witnessed a decline of 61% during the quarter.
■ EBITDA margins have declined by 530bps YoY to 11.5% led by higher raw material cost at 52.6% of sales (up 750bps YoY). Lower employee cost (down 40bps YoY) and other expenses (down 190bps YoY) restricted margin contraction to some extent.
■ Lower acreages, increasing fertilizer prices and falling produce prices have reduced average farmer’s propensity to spend on specialty products. The resulting shift in focus towards generic products has dented EBITDA margin.
■ Interest expense fell by 3.4% YoY to ` 19mn. Gross debt as of December 2011 stood at ` 400mn. Depreciation too declined by 36.5% YoY to ` 12mn.
■ Tax rate stood lower at 19.5% (Q3FY11: 20.7%). PAT declined by 37% YoY to ` 78mn.




Financial highlights
■ Revenue for the quarter declined by 3.7% YoY led by a 6% decline in volume offtake. This was primarily on account of poor northeastern monsoons. The management indicated of a slowdown in herbicide and fungicide product segment during the quarter.


■ For 9MFY12, insecticides, herbicides, fungicides and PGRs/others contributed 48%, 30%, 12% and 10% to the topline respectively. This implies that herbicides and fungicides portfolio has shown a muted growth of 5% YoY while the insecticides and PGR portfolio grew by 14% YoY.


■ EBITDA margins have declined by 530bps YoY to 11.5% led by higher raw material cost at 52.6% of sales (up 750bps YoY). Employee cost and other expenses declined by 40bps YoY and 190bps YoY and stood at 9.3% and 26.6% of sales respectively. Lower revenue contribution from specialty products
impacted profitability.


■ Interest expense fell by 3.4% YoY to ` 19mn. Gross debt as December 2011 stood at  400mn.


■ Depreciation too declined by 36.5% YoY to ` 12mn. The company incurred ` 400mn of capex during 9MFY12.


■ Tax rate stood at 19.5% (Q3FY11 – 20.7%). PAT de-grew 37% YoY to ` 78mn.


Key takeaways from the conference call
■ All India rainfall data showed 48% drop during the quarter. Rainfall in key regions of Andhra Pradesh, Karnataka and Maharashtra recorded 40% decline.
■ Unfavourable weather conditions have led to lower crop acreage and pest incidence, impacting demand for pesticides. Further, increase in fertilizer cost and decline in produce prices has reduced the farmers’ propensity to invest in specialty products. The resulting shift towards to generic products has dented Dhanuka’s operating margins.
■ Sales in Andhra Pradesh contribute 22% to the topline. With increasing revenue contribution from eastern zone, this figure is expected to decline in future.
■ Top five products for 9MFY12 contributed 31% to the topline. The company's flagship brand Targa Super contributed 14.6% (YTD) to the topline and witnessed a decline of 61% during this quarter.
■ Slowdown in operations has led to inventory pile-up which the management expects to ease out by Q1FY13E. The management does not foresee any decline in industry prices for pesticide due to excess inventory in the system.
■ No new products were introduced for the quarter. However, the management has indicated of seven new product launches over CY12E-15E (one insecticide in CY12 and two each in CY13E-15E).
■ Gross debt on books as of December 2011 stands at ` 400mn, of which `298mn is secured and the balance is unsecured in nature.
■ The management has guided for a topline growth of 6-7% for FY12E.
■ Capex guidance for FY13E is ` 50-60mn.
■ Tax rate is guided to be 22%-23% for FY12E and FY13E. The Udhampur facility enjoys 100% tax benefit which will reduce to 30% FY14E onwards.
■ The management has guided for an improvement in operations after the Kharif season.




Valuation
Long term growth drivers include strengthening its seeds portfolio (scouting for acquisition) and manufacturing selective technicals, leading to backward integration. DAL enjoys high return ratios owing to its asset-light model.


However, given the eminent slowdown in the agrochem industry and slower off-take of high-margin specialty products, we have revised our FY12E/FY13E earnings estimate downwards by 20.5%/19.1%. At CMP, the stock trades at 9x FY12E and 6.9x FY13E earnings. We recommend Accumulate with a revised target price of `100 (8x FY13E earnings).


RISH TRADER

>CITY UNION BANK

■ In Q3 FY12, City Union Bank’s (CUB) NII grew 17.3% YoY to ` 1.2bn — in line with our estimates. However, NIM fell to 3.24% from 3.48% in Q3 FY11 and 3.41% in Q2 FY12.


■ Operating expenses rose 34% to ` 686mn, whereas other income grew 40% to ` 508mn from ` 363mn in Q3FY11, resulting in a 17% YoY jump in operating profit to ` 1.05bn (Dolat est: ` 1.01bn).


■ CUB reported a bottom-line of ` 722mn compared to our estimates of ` 628mn and consensus estimate of ` 677mn. Sharp decline of 67% YoY in tax expenses to ` 71mn from ` 215mn aided bottom-line growth.


■ During the quarter, gross NPA ratios largely remained stable at 1.17% on sequential basis. Provision coverage ratio decreased to 76% from 79% in Q2 FY12. Overall, asset quality remains firm, though the bank made lesser NPA provisions.


■ We see business growing 28% CAGR in FY11-13. We factor in margin compression of 25bps in FY12 as well as FY13 to 3.07% and 2.82% respectively (yearly average). We estimate that CUB will report RoAA of
1.3-1.6% and RoAE of 19-24%.


■ We increase our FY12 earnings estimates by 6% due to better asset quality; however, we maintain our FY13 earnings estimates and target price at ` 53 at 1.5x adjusted book value FY13. We reiterate our Buy rating on the stock with a potential 23% upside. At current market price, it trades 1.2x FY13 (ABV) respectively.



Strong business growth: In Q3 FY12, City Union Bank’s (CUB) total business grew 29% YoY to ` 264bn. Deposits and gross advances grew 28.7% and 29.5% to ` 154bn and ` 110bn respectively. Credit-deposit ratio slightly increased to 71.5% from 71.1% in Q3 FY11. On the deposits side, the CASA share declined to 16.8% from 18.64% in Q3 FY11 and 17.9% in Q2 FY12 account of a sharp rise in term deposits (up 32% YoY) as compared to only 16% growth in CASA deposits.




On the credit book side, trading & MSME loans, which earn higher yields, constitute over 50% of the credit book. CUB’s major industry exposure is to textile and iron & steel industries.


The management expects 25-28% growth in FY12; we expect business to expand 28% CAGR in FY11-13. We also expect CUB’s credit book and deposits to grow 28.7% and 27.6% CAGR respectively in FY11-13. On the credit book front, growth will mainly come from the MSME and agriculture sectors. Rapid branch expansion and entry into new geographies will aid low-cost deposit mobilization.


Slight strain on margin: A sharp rise in term deposit mobilisation resulted into 11-bps sequential increase in cost of deposits; further 11-bps decline in yield on advances impacted margins. Difficulty in passing on the higher liabilities cost led to 17-bps QoQ decline in NIM to 3.24% from 3.41% in Q2 FY12.


Operating expenses led by branch expansion: In Q3 FY12, the bank added 2 branches and 27 ATMs, taking the total branch network to 286 branches and 378 ATMs. This resulted in slight higher operating overheads.


The cost-income ratio increase to 39.5% from 36.2% in Q3 FY11 and fell from 40.1% in Q2 FY12. On the back of better operating efficiencies in place, we expect CUB’s C-I ratio to remain in the range of 41-44%.


Better asset quality on sequential basis: During the quarter, CUB’s gross NPAs rose 18% YoY and 4% QoQ to ` 1.3bn. Gross NPA ratios sequentially remained stable at 1.17%. Net NPA ratio increased to 0.51% from 0.42% in Q2 FY12. The net and gross NPA ratios declined YoY by 2bps and 11bps respectively. Provision coverage ratio decreased to 76% from 79% in Q2 FY12. Overall, asset quality remains firm, though the bank made lesser NPA provisions.


On the restructured loan book front, at the end of Q3 FY12, total outstanding stood at ` 2.8bn. Almost 88% of the restructured loan book completed one year of principal repayment after the moratorium. Most of CUB’s credit books were secured by collaterals, adding buffer to asset quality.


Valuation
We increase our FY12 earnings estimates by 6% due to better asset quality; however, we maintain our FY13 earnings estimates and target price at ` 53 at 1.5x adjusted book value FY13. We reiterate our Buy rating on the stock with a potential 23% upside. At current market price, it trades 1.2x FY13 (ABV) respectively.
RISH TRADER

>ANDHRA BANK: Higher provisions on investment depreciation and NPV losses on restructured loan book dent bottom-line

Core & operating income in-line with our estimates; higher provisioning impacts bottomline


We reiterate our positive stance on the stock; improvement in GNPA and provision coverage levels provides comfort. Lesser than estimated bottom-line was mainly due to NPV losses on a telecom restructured loan book


■ In Q3 FY12, Andhra Bank’s net interest income (NII) grew 17% YoY to ` 9.8bn — in line with our estimates. Margin remained stable at 3.81% in Q3 FY12 on sequential basis. Net profit de-grew 8.4% YoY to ` 3bn as against our estimates of ` 3.7bn and consensus estimate of ` 3.1bn.


■ The deviation at net profit level was primarily on account of higher provisioning on restructured loan book NPV losses and Investment depreciation (` 190mn as against ` 1mn in Q3 FY11).


■ There was 5.2% decline in gross NPAs on sequential basis; a key positive surprise in the result. Further, lower NPL provisioning (` 395mn as against ` 1.5bn in Q3 FY11) resulted in decline in credit cost to 22bps in Q3 FY12 as against 130bps in Q2 FY12 and 104bps in Q3 FY11). PCR increased to 66.4% as against 61.7% in Q2 FY12.


■ The quarterly result was broadly in line on core income level, with a positive surprise on GNPL front — sequential decline in GNPL and stable margins improved overall performance. The asset quality (particularly on restructuring front) will be a key parameter to watch out for going ahead. We reduce our earnings estimates by 3% and 2% for FY12 and FY13 respectively. We cut the target prices by 9% to ` 135 at 1x adjusted book value (ABV) FY13 and maintain our Buy rating.




► Better business growth: In Q3 FY12, Andhra Bank’s total business grew 20.4% YoY to ` 1.8tn. Deposits and advances grew 20.2% and 20.7% to ` 987bn and `792bn respectively. Credit-deposit ratio increased to 80.2% from 78.9% in Q2 FY12 and 79.9% in Q3 FY11. On the deposits side, CASA share declined to 26.6% from 28.7% in Q3 FY11; however, rose from 26.1% in Q2 FY12. The loan book grew primarily due to 20.6% YoY growth in SME and 23.8% YoY in corporate sectors.


We expect business to grow 17.4% CAGR in FY11-13 on the back of credit book and deposit growth of 17.1% and 17.7% CAGR respectively in FY11-13. Stable margins: In Q3 FY12, Andhra Bank remained stable at 3.81% on sequential basis. Rise in yield on advances (31 bps) and yield on investment (7 bps) on QoQ basis as against only 13 bps QoQ rise in cost of deposits curtailed decline in margins. Going forward, we believe margins will decline on the back of re-pricing of deposits at higher rates. We expect Andhra Bank’s margins to rose by 5bps and fell by 20bps to 3.4% and 3.2% (on yearly average basis) in FY12 and FY13 respectively.


► Higher other income & contained operating expenses aided operating income: The banks reported traction in other income with 18.4% YoY and 32% QoQ jump to ` 2.4bn. The growth was led primarily by 97% YoY jump in forex income to ` 308mn and 65% YoY growth in treasury income to ` 163mn. However, fee income was flat at ` 695mn.


On operating expenses front, the bank was able to manage it efficiently, leading to a marginal 9.6% YoY growth to Rs 4.5bn. Its cost-income ratio came down to 37% from 39.7% in Q3 FY11 and 39.2% in Q2 FY12. Hence, it reported 22.5% jump in operating jump to ` 7.7bn.


► Higher provisioning affects bottom-line: In Q3 FY12, the bank’s NPL provisioning declined by 74% to ` 395mn compared to ` 1.5bn in Q3 FY11 and ` 2.2bn in Q2 FY12. In Q3 FY12, bank’s credit cost declined to 22 bps as against 104bps in Q3 FY11 and 130bps in Q2 FY12. Higher than expected provisioning of ` 2.5bn for standard assets as against Rs 315mn in Q3 FY11 and ` 190mn as against ` 1mn in Q3 FY11 on account of investment depreciation losses led to deviation on bottomline level.


► Asset quality improved on sequential basis; uncertainty remains in future: During the quarter, the bank’s gross NPA declined 5.2% QoQ to ` 18.8bn. Gross NPA ratio sequentially decline by 29bps YoY to 2.38% while net NPA ratio fell by 27 basis points to 1.21%. Provision coverage ratio rose to 66.7% from 61.7% in Q2 FY12 resulting in decline in net NPA ratio.


As on end-Q3 FY12, the bank’s outstanding balance in restructured loans was at ` 36.8bn; of which, majority came from major industries (telecom, textile and iron & steel) and MSME sector. On sequential basis, gross slippage ratio came down to 2.11% from 6.46% in Q2 FY12. Overall, the bank’s asset quality improved on sequential basis. In FY12, we expect bank’s gross slippage ratio to increase to 2.6%. We expect credit cost to slightly decrease to 0.68% in FY12 from 0.73% in FY11.


► View & valuation
The quarterly result was broadly in line on core income level, with a positive surprise on GNPL front. Sequential decline in GNPL and stable margins improved overall performance. The asset quality (particularly on restructuring front) will be a key parameter to watch out for going ahead. We reduce our earnings estimates by 3% and 2% for FY12 and FY13 respectively. We cut the target prices by 9% to ` 135 at 1x adjusted book value (ABV) FY13 and maintain our Buy rating.


To read the full report: ANDHRA BANK
RISH TRADER

>Karur Vysya Bank

Core interest income, operating profit and net profit in-line with our estimates supported by stable margin and asset quality


 ► In Q3 FY12, Karur Vysya Bank’s (KVB) net interest income (NII) grew11.4% YoY to ` 2.3bn, slightly lesser than our estimates of ` 2.4bn. KVB’s margin remains stable at 3.06% against 3.03% in Q2FY12. KVB’s operating profit was at ` 1.89bn compared to our estimates of ` 1.93bn. Net profit grew 10.3% YoY to ` 1.25bn (Dolat est: ` 1.21bn, Consensus est: ` 1.22bn).


► The bank’s core operation remains marginally better, contained liability cost aided margin and it maintained its consistency in fee income growth.


► Asset quality remained healthy with flat gross NPAs at 1.45% and reasonably high PCR at 80%. The bank’s asset quality remains under control and management is confident of maintaining gross NPA at current
level of ` 3bn by the end-march’12. Overall result is in-line with stable margin and asset quality.


► We expect KVB’s total business to grow by 31% CAGR on the back of 30.4% growth in deposits mobilization and 31.9% expansion in credit book. We estimate margin to drift down by 30bps to 2.86% in FY12 and subsequently by 12bps to 2.74% in FY13. In FY12-13, the bank would report RoAA and RoAE in a range of 1.3%-1.5% and around 18-20% respectively.


► We revise upward our FY12 and FY13 earnings estimates by 11% and 9% respectively considering higher business growth and improvement in margin and asset quality. We increase our target price by 5% to ` 434 at 1.8x adjusted book value (ABV) FY13 and reiterate the stock rating as Accumulate.


■ Robust business growth: KVB’s total business grew 35% YoY to ` 524bn. Deposits and gross advances grew 35.2% and 34.9% to ` 301bn and ` 223bn respectively. Credit-deposit ratio remains stagnant at 73.2%. On the deposit side, CASA share declined to 20.4% as against 21.6% in Q2 FY12 and 25% in Q3 FY11. 


The bank’s tremendous efforts and focused approach on volume growth have led to business growth of 30-35% (higher than the industry average) in the past couple of quarters. For FY11-13, we expect KVB’s total business to grow 31.1% CAGR. We assume deposit and credit books to expand 30.4% and 31.9% respectively over the corresponding period.



■ Slight improvement in margin: KVB reported 3bps QoQ rise in margins to 3.06% as against 3.03% in Q2 FY11. Lesser increase in cost of deposits (18 bps QoQ) as against 30 bps QoQ rise in yield on advances contained higher erosion in margin. Going forward, it is expected that moderate growth in deposits and increase in credit-deposit ratio will protect higher erosion in margin. We estimate margins to drift down by 30 bps to 2.86% in FY12 and subsequently by 12bps to 2.74% in FY13.


■ Operating expenses in-line with our expectation: KVB’s total operating expenses rose 32.5% YoY to ` 1.3bn, mainly due to employee expenses and overheads. The cost-income ratio rose to 41.5% from 36.1% in Q3 FY11, however, came down from 46% in Q2 FY12. Going forward, considering rapid branch expansion and long break-even periods, the cost-income ratio could remain high. Though, on the back of better cost efficiency, the management expects to maintain C-I ratio around 40-41% in FY12.


■ Robust non-fund income on account of consistent increase in fee income: Other income grew by 27% YoY to ` 894mn from ` 704mn in Q3 FY11 primarily, on account of 32% YoY increase in fee income. However, there was decline in treasury income to ` 67mn from ` 140mn in Q3 FY11.


■ Stability in asset quality; a big positive: On asset quality front, net addition to gross NPAs stood at ` 239mn compared to ` 232mn in Q2 FY12. The bank’s asset quality remains stable with GNPA at ` 3.2bn and GNPA ratio at 1.45% compared to ` 3.0bn and 1.48% as on end-Sep’11. Net NPA ratio remains stable sequentially at 0.29%. Provision coverage ratio remains flat 80% on QoQ basis. Overall, asset quality remains stable.


Valuation
In FY12-13, the bank would report RoAA and RoAE in a range of 1.3%-1.5% and around 18-20% respectively. Considering sequential improvement in asset quality and margins, we revise our FY12 and FY13 earnings estimates by 11% and 9% respectively. We increase our price target by 5% to ` 434 and reiterate the rating as Accumulate at 1.8x adjusted book value (ABV) FY13.


RISH TRADER

>ORIENTAL BANK OF COMMERCE

Healthy business expansion: In Q3 FY12, the bank’s management expects credit and deposit growth in a range of 20% and 18% respectively compared to 21% and 19% in Q2 FY12. In deposits, CASA share is expected to be maintained at 23% level.


OBC’s business growth in Q2 FY12 grew around 19.6%. In Q2 FY12, SME and overall priority sectors were key loan growth drivers. Going forward, higher retail term deposit rates will lead to higher deposit mobilisation. Further, OBC is expected to witness strong growth across all credit segments. Over FY11-13, we estimate OBC’s business CAGR at 17%, nearly in line with the industry. On business volume growth front, we expect credit and deposit growth of 18% and 17% respectively in FY12 and 17% in FY13.


Stable margin: In Q3 FY12, NIM is expected to improve by 10 bps (QoQ) to 2.75% on the back of higher credit-deposit ratio and lesser write-back of interest income. In Q2 FY12, the bank reported margins of 2.64% compared to 3.3% in Q2 FY11 and 2.94% in Q1 FY12. We expect margin to fall by 60 bps to 2.24% (on yearly average basis) compared to the bank’s management expectations of 20 bps fall to below 3% level compared to 3.2% in FY11.


Strain on asset quality: Overall, the bank’s management expects gross NPA to remain stable in percentage terms on QoQ basis, but loan-restructuring to increase sharply in Q3FY12 and Q4FY12. Though, the bank’s management is not sure of quantum of loan-restructuring to be done in Q3FY12, but they sounded quite negative on this front. Majority of large-ticket loan-restructuring would come from power (Rajasthan & Haryana SEBs), aviation (mainly Air India) sectors. Asset quality deteriorated over past couple of quarters as CBS implementation led to ` 8bn of slippages in Q2 FY12. During Q2 FY12, the bank completed 100% migration of its loan book under the systemdriven NPA recognition platform as expected.


The bank’s exposure to power sector is close to ` 135bn (13% of total advances), of which 71% is with central &; state government projects and rest with private companies’ projects. Total exposure to state electricity boards is ` 81bn of which ` 38bn is secured by state government guarantee.


The bank’s management expects Rajasthan & Haryana SEBs loans to come for restructuring in Q3FY12. The bank’s exposure to GTL group (`5bn) has been already restructured. In Aviation sector, the bank’s total exposure is ` 15bn (1.4% of total advances), of which exposure to Kingfisher is ` 460mn (backed by receivables). Rest is with AirIndia and Jet Airlines. Post FY12, the bank’s management expects things to revive in FY13 on restructuring front.


On gross NPA front, we factor increase in GNPA to 3.2% March-2012 from 1.98% in March-2011 and 2.95% in Q2FY12. On loan-restructuring front, we expect doubling of restructured loan book to ` 92bn on end- March-12 from ` 52bn as on end March-11.


Valuation
We expect business to grow 17% CAGR during FY11-13 and margins to hover around 2.2-2.3%. At current market price of ` 218, the stock quotes at 0.67x adjusted book value FY13. We value the bank at ` 223 at 0.7x ABV FY13; we rate the stock as a Reduce.


RISH TRADER

>PLASTICS INDUSTRY: REDEFINING PERCEPTION

Key Investment Rationale

Plastic consumption in India to grow at 15% CAGR

With India’s GDP growing at 8% annually and plastic products increasingly

finding application in all sectors of the economy, replacing other competing

products such as steel and aluminium, we expect demand to remain robust.

The application of plastic is increasingly evident across sectors including

packaging, agriculture, healthcare, aerospace, electronics and infrastructure.

According to the All India Plastics Manufacturers’ Association (AIPMA), the

domestic consumption has been growing at 10-12% CAGR over the last decade

and is all set to reach the 12.5mn tonnes in 2012 from 9mn tonnes in 2010

which will make India the third largest plastic consumer after US and China.

Innovation & introduction of value-added products: Key to growth & margins

The key USP in any industry that is largely unorganised is to regularly innovate

and come out with niche products at regular intervals. Sintex, Supreme, Astral

Time have consistently followed this thumb rule and thus have been able to

grow at a pace which is way above the industry average.

Plastic composites: Niche high growth engine

Plastic composites are new age products and are ideal replacement for

conventional materials such as steel, aluminium and wood on account of their

durability, corrosion and maintenance free character. The Indian composites

industry has grown at healthy 16-18% CAGR over the last five years, more than

twice the GDP growth rate. The burgeoning manufacturing sector and heavy

investments in infrastructure is expected to provide an impetus to the Rs 63-

bn Indian composite industry, which is expected to grow at 16-17% CAGR.

From our coverage universe, Sintex and Time Technoplast have a presence in

the composites segment while Supreme Industries is currently putting up a

facility to make composite cylinders. These companies will not only benefit

from high growth in these segments but will also enjoy better margins as

compared to their bouquet of conventional plastic products.

To read the full report: PLASTICS INDUSTRY

>FERTILIZER SECTOR: Sowing the seeds of Change (DOLAT CAPITAL)

We expect the sector to continue to gradually re-rate with pro active and favorable policy initiatives. With the step forward on complex fertilizer already in place, we hope that the government would follow through with similar steps on the urea segment.

We believe companies with strong raw-material tie-ups, plans for expansion and offering customized products would lead to higher volume growth. We therefore prefer stock specific approach .We are positive on Coromandel International (CIL) due to its strong business model and GSFC- beneficiary of NBS policy and high earnings visibility.

Relooking the Fertilizer Sector:
The latest Government Policy on Fertilizer Pricing and Subsidy is encouraging and a welcome step in the direction of deregulation of the industry.
We have identified the following drivers for industry that would act as a game changer and would make the sector attractive for the future growth potential which till now witnessed restricted growth due to its controlled regime.

■ Nutrient Based Subsidy (NBS)
■ Raw-Material Sourcing
■ New Investment Policy-4 (NPS-4)

Positive on Complex Fertilizer
The shift in policy regime from product based subsidy to nutrient based subsidy opens a plethora of opportunities for complex players. This change would encourage use of right nutrients as per requirement of soil, thus limiting the excess use of highly subsidized nutrient which has resulted in soil degradation and effected productivity (annexure). With this new policy, players with established raw-material linkages and offering customized products would enjoy an edge over the other players. This in turn shall benefit players like Coromandel International as they have build up strategic tie-ups and strong marketing and distribution networks.

The Nutrient Based Subsidy has also introduced a fixed subsidy regime and has left the market price floating in accordance with the demand and supply situation with a possibility of intervention by Government if the prices rise unreasonably. This has already led to an increase in prices of DAP (Di-Ammonium Phosphate) and MOP (Muriate of Potash) by Rs. 600 per
tonne i.e. 6.4% and 13.5% respectively. This would result in efficient players being rewarded over their counterparts.

The sourcing of raw material is the key to enjoy the fruit of efficiency as it is the most critical factor determining sustainability of business. We believe that this is the key area where Coromandel shall perform better than its peers. Its tie-up with Foskor and Tunisian Joint Venture with GSFC would lead to additional flow of phosphoric acid which would in turn lead
to production growth of 18% and 11% in FY11 and FY12. GSFC will also get access to the additional raw-material and would lead to production of customized complex fertilizers.

We remain positive on the complex fertilizer space and we recommend an accumulate on Coromandel International Fertilizer and a buy on GSFC.

Urea opportunities ahead
Similar to the policy pronouncements for the complex fertilizers, we expect the New Investment Policy IV to address the key issues for the urea segment as well. The key focus shall be to reduce the dependency on imports and encourage capacity expansion in India. The current urea capacity at 20 Mn MT has been stagnant for over a decade now.

We also observe that the expected policy is part of the ongoing series of steps that the government has been taking to move towards deregulation of the sector. The first leg of this has been witnessed with gas replacing all other high cost and unviable feedstocks. Further, the linking of additional production through Greenfield/Brownfield /Revamping to International Parity Pricing (IPP) has brought in the much needed impetus required to attract investments. NPS-III was in effect till 31st March, 2010.We believe ,the NPS-IV which is just around the corner shall continue with the pro active mode and attract capacity expansion. One of the provisions that would be looked into keenly would be revising the floor price which currently is fixed at US $ 250 per tonne.

With the above backdrop, we believe Chambal will stand to benefit as it has recently commenced its brownfield expansion which will make any additional production over and above the cut-off limit qualify for IPP. We assume the volumes to increase from 1.9 MT to 2.1 in FY10 and 2.4MT in FY11E.However,we recommend a reduce on the stock as it is fairly priced and trades at 10.8x FY11E EPS.

To read the full report: FERTILIZER SECTOR

>GE SHIPPING (DOLAT CAPITAL)

Recovery in global GDP has resulted in higher oil demand (IEA estimates 1.8% in CY10 to 86.6mn barrels/day) leading to spurt in tonne-mile demand and freight rates. Anticipated increase in supply of new vessels is a concern but we believe the impact will be moderated by order slippages, cancellation and phasing out of single hull vessels. Based on the current scenario, we believe tanker freight rates and asset prices will improve from the current level. GE shipping stands as a beneficiary given its exposure to the tanker segment and scalability in its offshore business. We maintain a BUY recommendation with a target price of Rs.407(5x EV/EBITDA).

■ Tanker freight rates to rise on strong oil demand
Recovery in global GDP growth (estimated by IMF 3.9%) should lead to improved oil demand estimated at 1.8% in CY10 to 86.6mn barrels/day resulting in an increase in marine oil shipments by 2.9% in 2010. Generally, the shipping capacity is seen to grow at 1.6x of growth in oil demand. Therefore, we believe that an increase in tone mile demand and slower capacity addition will improve Tanker rates going forward.

■ Accelerated single hull phase out could releive supply side pressure
As the deadline of the mandatory phase out of Single Hull Oil Tankers is approaching, the shipping volume to exit the market will increase in 2010.According to IMO single hull oil tankers will not be allowed from 2010 onwards. At present, advanced countries in Europe and US have disallowed single-hull oil tankers to dock at their harbours from 1st Jan 2010.According to Clarkson estimate ~43.3mn dwt of oil tankers are due to be phased out but the actual phase out will be 70% of the planned or 30.3mn dwt.(9.9% of the total capacity)

■ Freight rates and assets prices will strengthen
In the last few quarters, freight rates across assets classes (tanker, bulker and product carrier) have recovered from the lows of Q3FY09.Recovery in bulk carrier was predominantly led by demand for iron ore in China and tanker rates improved with an increase in oil demand in the US and demand from Asian countries. Going forward we expect the demand will strength in 2010 in both the segments driven by recovery in global growth (IMF predicts 3.9% GDP growth).
This will lead to higher tonne- mile demand and an improvement in freight rates. Recovery in freight rates, resulting in better earning visibility and higher asset prices.

■ Dry bulk-Recovery in economy will bring up demand for Iron ore and coal
BDI touched a historical low of 663 points on Dec 2008 hurt by a decline in real demand as a result of the financial crisis and banks were not issuing letter of credit for the buyers. Bulk shipping is a leading indicator for economic cycles, as bulk shipping carries commodities like iron ore, coal and cement the consumption of which will significantly rise when the economy improves. Therefore, we, expect global bulk shipments to rise driven mainly by increased demand for iron ore and coal from China Europe and US.

Our preffered bet is GE Shipping on account of its largest exposure in tanker segment with 80% double hull vessels with an average age of 11 years and increased exposure in Offshore segment.We maintain a BUY recommendation with a target price of Rs.407.(5x EV/EBITDA).We also maintain a BUY on Mercator Lines with revised target price of Rs.75.

To read the full report: GE SHIPPING

>INDIAN ROOFING INDUSTRY (DOLAT CAPITAL)

Asbestos Cement Fibre Sheet (CFS) is an oligopoly market with the top four players collectively controlling ~60% of the market. The industry has witnessed a volume CAGR of 12% in the last 10 years. CFS being predominantly a rural product has its fortunes closely linked with the rural economy. Branding and distribution reach are key parameters in the business. However, ability to pass on raw material inflation by increasing realizations is limited on account of the affordability constraint of rural India for the product. The players are exposed to forex risk as imports account for ~50% of total raw material cost. To leverage on existing brand and distribution reach coupled with an increased focus to diversify and de-risk the revenue stream, players have started focusing on allied products used in “Green Buildings” as well as non allied industrial products. The key players generally generate positive cash flows.

The industry underwent a phase of turbulence due to a demand supply disequilibrium which has been addressed and is now expected to maintain the top line growth of ~20% coupled with stabilization in the margins for next couple of years. CFS industry is cyclical in nature with June quarter is the best quarter for the industry historically. We believe, the industry should be re-rated on PER on account of improved visibility, diversification of revenue
stream, expansion in margins and cash flows positive status of the players.

Our preferred bet is Hyderabad Industries (BUY- 135% Upside) followed by Visaka Industries (BUY –55% Upside) and Everest Industries (BUY - 43% Upside).

Hyderabad Industries
Hyderabad Industries Ltd (HIL) is the market leader (Capacity - 764500 Tons) with a share of ~18% in the Roofing industry (Asbestos Cement Fibre Sheet-CFS) with an experience of over six decades. Large capacity, Brand superiority of “Charminar” and Strong distribution network places HIL in the pole position by garnering largest market share with price leadership and provides volume strength. It helps to capitalize on the strong thrust of Government on Rural Housing. Increased focus on allied building products and Thermal Insulation business are expected to further boost sales growth and margins. We expect the company to clock revenue CAGR of ~16% between FY09 and FY11E with stable margins and return ratios. At CMP, the stock trades 4.7x its FY10E earning of Rs.97.7 and 4.2x its FY11E earnings of Rs.109. We recommend a BUY on the stock with the price target of Rs.1091 at which it discounts its FY11E earnings by 10x.

Everest Industries
Everest Industries has been the pioneer and the 2nd largest player (Capacity - 710000 Tons) in the Asbestos Cement Fibre Sheet (CFS) Industry with a presence of over seven decades with a market share of ~13%. The company is one of the leading brands and has transformed into a complete “Building Solutions” Company with its roofing to flooring range of solutions. The new unit at Roorkee has boosted EIL’s presence in the lucrative Northern region. Everest has also forayed into the Steel Building business to cater to the industrial segment. We expect the company to clock a revenue CAGR of 24% between FY09 and FY11E with stable margins and return ratios. At CMP, the stock trades 9x its FY10E earning of Rs.18 and 6.3x its FY11E earnings of Rs.25.7. We recommend a BUY on the stock with the price target of Rs.231 at which it discounts its FY11E earnings by 9x.

Visaka Industries
Visaka Industries (VIL) is the 3rd largest player (Capacity - 544000 Tons) in the Asbestos Cement Fibre (CFS) industry with a 15% market share. It has a prominent presence in the Southern markets and has a well established brand. Visaka plans to increase its CFS capacity over the next couple of years and has also forayed into the value added cement products segment thereby moving up the value chain. VIL is also one of the leading yarn producers with a presence in the overseas markets as well. This segment contributes ~20% to the top line and enjoys EBIT margin of ~9%. We expect VIL to clock a revenue growth of 11% between FY09 and FY11E with EBIDTA margin estimated to stabilize at 15% and PAT margin at 8%. At CMP, the stock trades 4.2x its FY10E earning of Rs.31.3 and 3.9x its FY11E earnings of Rs.34. We recommend a BUY with a target price of Rs.204 which discounts its FY11E EPS by 6x.

To read the full report: ROOFING INDUSTRY