>Steel Authority of India Ltd: Commissioning of projects key to re-rating

SAIL announced August crude steel production growth of 7% y/y with YTD FY13 production growth of 3% y/y. We view the higher production and pick up in communication by the company positively as it gets closer to the commissioning of its projects (ISP and RSP over the next 6 months). The Aug production release also highlights the improvement in productivity parameters that had adversely impacted costs for the company during last year (Operating cost/MT in FY12 increased 17% y/y).

 August production data shows improvement in parameters: Aug crude steel production at 1.16MT highlights a significant improvement. Based on JPC data for July of SAIL, Aug crude steel production is up 3% m/m and is the highest monthly production since Mar-12. The company indicated that continued focus on techno-economic parameters to improve SAIL’s cost competitiveness has helped production. Blast furnace productivity in Aug was up ~9% y/y and concast production as a % of crude steel also improved by 4%. In our view, the commissioning of coke oven batteries, sinter plant, and other units in ISP and RSP should help drive continued improvement in productivity and lead to significant cost reduction for SAIL in 2HFY13.

 Lower coking coal costs to further help 2HFY13 margins: While there are concerns on steel demand, we believe that seasonal improvement in the 2HFY13 should help drive volume growth for the steel. Further, coking coal prices continued to remain depressed and steel companies have indicated that quarterly contract price for Oct-Dec quarter is ~$169-170/MT. Assuming INR remains at current levels, we believe that the decline in coking coal costs should benefit SAIL’s margins from Nov onwards (assuming 1-1.5months of inventory).

 Commissioning of projects key to re-rating: The commissioning process of the multi-billion dollar capex has commenced, with the start of coke oven battery at IISCO. Over the next few quarters, we believe investor focus should shift to how quickly the facilities stabilize. SAIL's
volume increase from capacity expansion is still a few quarters away and hence the real stress would emerge if the domestic demand does not improve by FY14E.

 P/BV valuation at GFC lows: SAIL is trading at 0.68x FY14 P/BV, which is lower than the GFC lows with absolute stock price close to GFC levels as stock have declined sharply over the last month. As highlighted in our recent note (link), similar valuation in Nov-Dec-11 was followed by a rebound. Iron ore price stabilization should also help SAIL’s stock price to rebound.

To read report in detail: SAIL
RISH TRADER

>INDIA MINING: SC allows mining in Category A Mines

 Iron ore mining allowed in Category A mines: As per media reports (Bloomberg, CNBC), Supreme Court allowed conditional resumption of mining in 18 iron ore leases in Karnataka. These mines are part of the Category A mines as per the CEC report (included 21 leases in CategoryA). While the court order is not available as yet, media reports (Bloomberg) indicate that the companies have to implement the R&R (rehabilitation and reclamation) plan as approved by CEC and all lease holders must get the necessary forest and environmental clearances. The companies are also required to get pollution clearance certificate and submit an undertaking that no mining laws would be flouted.

 While restart of production provides some relief, ramp up of production may take time: The restart of production in Category A mines was much needed given the declining stockpile and poor quality of ore in e-auction. As per media reports (Bloomberg), these 18 mining leases can produce ~7MT. JSW Steel had indicated that ramp up of production could take 3-6months, which in our view depends on the time taken to get necessary approvals. The production from Category A mines and the NMDC production (currently at 7-8MTPA production runrate) should help ease the iron ore availability in Karnataka but ramp up to full production remains key. The focus now shifts to the Category B mines, which are bulk of the mines in the state.

 Positive for JSW Steel but unlikely to lead to lower costs: We believe iron ore production and hence availability is likely to increase in over the next few months for the state’s steel makers (including JSW) and also the sponge iron producers. But as the ore will continue to be sold through the auction route, we do not expect a material reduction in iron ore costs. The restart of production in Category A mines will help improve utilization at JSTL's Vijayanagar plant, which is currently operating at 74% level (as per July data). The company had indicated that while eauction prices continue to remain high, the quality of ore being auctioned has deteriorated, therefore increasing the iron ore requirement. Sesa’s Karnataka mines are part of the Category B mines and therefore, not impacted by the order.

 A small step but is it enough? The current production level at NMDC and Category A mines will provide 15-16MTPA. The total iron ore production (last 3 year’s average) in Category B mines was 19.4MT, but approved production could be lower. JSW's own steel capacity in Karnataka stands at ~10MT (implying 16MT requirement at full utilization). Even assuming full 25MT iron ore production in Karnataka, we do not see exports starting anytime soon, unless the steel mills do not pick up the iron ore.

To read report in detail: INDIA MINING

>CHINA TECHNOLOGY EDGE

Homegrown smartphone industry on track, Rmb500 smartphone emerging


 Made-in-China smartphone shipment on track to reach 170MM in 2012, or 25% of global shipment. Smartphone production volume of Chinese vendors in 1H12 reached 70mn, according to HQ Research. Top 3 vendors (Huawei, ZTE and Lenovo) accounted for 42% of total units in 1H12, vs 60+% in 2011. This is driven by 1) MTK/QRD lowering barriers to entry in R&D; 2) Chinese telcos warming up to low-tier brands and 3) Huawei/ZTE focusing on profitability rather than volume. Vendors gaining market share include China Wireless, Gionee and OPPO. We maintain our smartphone shipment units by Chinese vendors at 170MM in 2012, but we cut shipment units of Huawei/ZTE by 11%/13% to 40MM/28MM (Table 3).

 Asian chipset vendors continued to gain market share in June. Total smartphone chipset shipment to Chinese handset makers reached 75-80MM in 1H12. MediaTek’s smartphone chipset shipment in June amounted to 8mn (nearly half are EDGE/TD/EVDO), exceeded Qualcomm’s shipment in China for the first time. Spreadtrum’s smartphone chipset shipment reached 1mn (including TD and EDGE) for the first time in June and is poised to ramp up quickly to 3mn per month by August. Meanwhile, price competition intensified further – ASP of low-to-mid end smartphone chipset is now touching US$6 – putting pressure on margins of chipset makers.

 Chinese telcos and open channels ready to push Rmb500 smartphone in 2H12. In the open channel, we found 18 smartphone models with 3+’’ touch screen priced at Rmb500 or below at pcpop.com, a popular website on handsets. Chinese telcos will start to push Rmb500 smartphone in 3Q12. For example, multiple smartphone models including Lenovo A288t, Huawei 8808D and K-touch 800A will be launched for China Mobile in July-August period. China Unicom continues to focus on the Rmb800-1,500 segment but will launch Rmb500 models as well. We summarized China Unicom’s planned smartphone specifications (screen, CPU, RAM, ROM, camera, sensor and others) in 5 price categories in Table 4.

 Whitebox tablet – a passing fad or here to stay? Whitebox tablet shipment in 2012 could exceed 40MM, according to EE Times and several industry sources. In 2Q12 whitebox tablet shipment was 9-10MM vs 11-12MM in 1Q12. The 20% drop qoq is mainly due to high inventory level at the end of 1Q12. Major chipset makers for whitebox tablets include Rockchip, Allwinner, VIA, Infotmics and Amlogic. These are mostly 7'' ones with FOB price of US$50. They are mainly replacing multiple devices such as MP4s, PDAs and DVDs in emerging markets. Vendors are aiming to launch 5'', 6'', 8'' and 9'' products entering 2013. We’ll follow the space closely to see whether whitebox tablet will start to impact PC and smartphone market then.

 Stock implication: We maintain our positive view on MediaTek and Spreadtrum as they will continue to ride the wave of low-price smartphones.

To read report in detail: CHINA TECHNOLOGY

>STRATEGY- Stratoscope: Show Me the Money

In the midst of the dividend payout season for Indian equities, we analyzed the payout policies of Corporate India and its relationship with stock price performances. We highlight key observations and stock ideas in the report.

 The median dividend payout ratio for the BSE 100 has remained stable over the last decade at about 20%. The flat trend is not satisfying from a minority shareholder perspective. But could be attributed to: a) the corporate sector in India being in a capital-intensive growth phase (both organic and inorganic), b) funding constraints post the global financial crises, c) increased competitive intensity has also resulted in a more cautious stance on sustainability of payouts.

 The cautious stance is reflected even in the payout policies of defensive sectors – Consumer Staples, Consumer Discretionary and Healthcare, wherein payout policies have remained stable or reduced. The payout of the IT services sector has almost doubled over the last decade. But it still remains around the broad market average. Payout of the Financials sector has also been limited to around the market average. The State-owned Banks have, however, seen a reduction in recent times due to capital constraints.

 It is also worth highlighting that only a few managements have a clearly articulated dividend payout policy. The state-owned companies typically try to adhere to Government guidelines which stipulate a payout of about 20-30% depending on the sector. Given the Government’s
fiscal constraints, we expect cash-rich, state-owned companies to continue to have a high payout policy.

 That said, managements wanting to enhance shareholder value would do well to have a consistent payout policy – with stable to rising dividends. Our analysis shows that companies with such a policy have consistently outperformed the benchmark over the last decade.

To read report in detail: STRATEGY

>TOUCH PANEL SECTOR

From over-supply to tight supply: Risk and Opportunity in touch panel sector



After prolonged oversupply and margin decline, we now expect oversupply in the touch panel industry to reverse on the back of the launch of Windows 8 along with low-cost tablet PCs. Our analysis suggests the demand from touch-on-PC and ever-growing tablet would outstrip realistic mid/large-size touch panel supply. This would likely create tight supply in 4Q12 onwards especially for One-Glass-Solution (“OGS”) capacity. We believe TPK stands out in this trend. Other touch panel makers could also see spill-over effect in 2H12.


 Touch panel likely penetrates into an untapped market: Major PC brands plan around 10% of NBs to be equipped with touch panels in 2013. Given the high price points of Win 8 NBs, however, we make conservative estimate of 2%/6% touch penetration into NBs for 2012/2013. Regardless, we forecast touch-on-NBs will account for 7%/18% of the mid/large touch panel demand in 2012/2013. The penetration rate will continue to increase along with price elasticity.


 Demand outgrows supply: Since most of the touch panel makers barely breakeven with mid/large size touch panel, we estimate the industry capacity sees only mild growth by 39%/16% in 2012/2013 vis-à-vis demand growth of 59%/41% for 2012/2013. In the worst case scenario where demand for touchscreen PCs turns out to be disappointing during holiday seasons, second-tier touch panel makers could likely see more de-stocking risks in 1Q13, but the trend of touch-on-PCs is inevitable, in our view.


 Shortage likely in 4Q12 onwards – Currently, the market remains skeptical about touch panel penetration into NB and PC markets. Our base case suggests a supply glut of mere 2% if touch penetration in NBs reaches 6% in 2013 and tight supply will return if the penetration exceeds 7%. Hence, we believe touch panel adoption rate in NB will be the major swing factor for supply/demand dynamic in 2013.


 Risk of in-cell in iPad – We currently do not expect Apple to use in-cell for iPad in 2013. If Apple adopts in-cell for iPad in 2013, however, this could change the supply/demand dynamics of the touch panel industry. iPad represents 40~50% of the total mid/large touch panel demand, or equivalent to around 40 million units of NBs. Nevertheless, non-Apple devices would likely prefer OGS over in-cell to avoid high front-end costs for photo masks and tooling


To read report in detail: TOUCH PANEL SECTOR

>DLF LIMITED: Rentco build-out is still subdued

Making the right moves; debt reduction and asset sales remain key rating triggers


We think DLF is taking the right strategic steps in terms of: 1) getting debt under control via asset sales; 2) consolidating land bank back into performing geographies; 3) resolving execution by completely outsourcing to reputed Indian contractors; 4) focusing on improving infrastructure in Gurgaon; and 5)continued investment into select high-value rental assets. Results of this will likely show themselves over a 12-month horizon. In the interim, we see two main catalysts: 1) asset sales of three big-ticket deals; and 2) launch of a highend golf course project in Gurgaon in 2H. Given the macro we would like to wait for gearing to come down before turning more positive. Maintain Neutral.


 Asset sales program expanded to Rs100B from Rs60B: DLF has increased the scope of its asset divestiture target to Rs100B. To date it has achieved Rs48B in asset sales and has thus clawed back roughly half of the equity raised in 2007. Currently there are three large deals i.e. NTC, Aman and Wind power, which if crystallize over the course of FY13 could raise additional Rs30-40B thus clearing gearing overhang.


 Devco’s FY13 pre-sales target at Rs65B with 10-12msf of bookings: Overall the company is looking to continue with its focus on plotted and high-end launches to mitigate the impact of steep input price increases. This should then help maintain EBITDA margins in the range of 45%-50%. Presales in FY13 will be driven by launch of golf course project (Rs15B), residential launches in Gurgaon/Chennai and plotted developments in rest of the country. Prices in the core markets of Gurgaon/ New Gurgaon region have surpassed our bull-case assumptions despite the macro, in part driven by corporate movement out of Delhi.


 Rentco build-out is still subdued given uncertain leasing environment; Cybercity in our view holds potential to show long-term rent growth: Target leasing for FY13 stands at a meager 2 msf (vs. peak levels of 8-10 msf). An uncertain macro and the company’s gearing have constrained growth here. However even at a subdued level we think a 15-20% growth in rentco is still achievable over 2-3 years.


To read report in detail: DLF LIMITED
RISH TRADER

>TIGER AIRWAYS HOLDINGS LIMITED: Potential merger with Scoot or takeover by majority shareholders SIA and Temasek is possible in the longer term

Ready to take-off after the turbulence; initiate at OW


■  Initiate at OW with Jun-13 PT of S$0.90: Tiger Airways’ (TGR) share price has rebounded by 19% and outperformed the market by 6% ytd, following its 62% decline and 45% underperformance in the past 12 months largely due to the negative impact of Tiger Australia’s suspension and capacity indigestion in FY12E. Although the near-term outlook is challenging and current valuations look unattractive given TGR’s low earnings base, we believe the expected earnings turnaround in FY13 and our c.108% pa net profit growth in FY14-15 has not been priced in. Our PT implies a 22% upside from the current share price.


■  Strong earnings turnaround expected: With the normalization of Tiger Australia’s operations and continued passenger/ancillary income growth, EBITDAR margins are likely to return to c.21% in FY13, similar to the FY10-11 level, after falling to c.5% in FY12, and rise to c.29% by FY15 with greater economies of scale. FY13-15E average c.4% ROA, c.18% ROE and c.7% ROCE are above the Asian airline sector. TGR benefits from the strong financial backing of majority shareholders Temasek and SIA.


■  Other positive drivers: 1) New JVs SEAir (Philippines) and Mandala (Indonesia) could help drive Tiger’s earnings growth and regional franchise in these fast-growing markets. There is upside risk to our forecasts if these JVs turn profitable earlier than expected. 2) Move to Changi Airport T2 could help boost traffic feed given its closer operating proximity to a significantly larger critical mass of airlines. 3) Potential collaboration with Scoot could drive synergies. A potential merger with Scoot or takeover by majority shareholder SIA is possible in the longer term, in our view.


■  Valuation, key risks: Our Jun-13 PT of S$0.90 is based on 11x 12M fwd Adj. EV/EBITDAR, in line with TGR’s historical average valuation since Tiger Australia’s suspension and supported by the recovery of TGR’s EBITDAR margin to 21% in FY13E and 29% by FY15E vs. 20% for sector peers. Key risks: 1) rising fuel prices; 2) Tiger Australia’s recovery stalls; 3)weaker S$; 4) execution risks in SEAir and Mandala JVs; and 5) potential equity-raising to fund aircraft capex if sale & leaseback options become unattractive.


To read report in detail: TIGER AIRWAYS
RISH TRADER

>BHARAT ELECTRONICS LIMITED: A Solid Play on Indian Defense Modernization

Initiate coverage with Overweight rating, Sept-12 PT of Rs2000 based on 16x Sep13E P/E. BHE, a leading Indian manufacturer of defense electronics, is a play on rising government expenditure on modernization of Indian defense forces. This is supported by a favorable policy framework that seeks a higher share of domestically-produced equipment. With its strong R&D capability, solid execution track record, and long-standing relationship with the Indian defense establishment, we think BHE is well positioned to benefit. It currently has an order book of Rs270B providing revenue visibility for 4-5 years. Valuations have de-rated over the past few quarters on account of margin pressure owing to oneoff lower-margin non-defense orders. We expect a rebound in margins to drive 18% EPS CAGR over FY12-FY14E, which should drive valuations higher. We estimate BHE has Rs55B of cash (Rs685 per share, 45% of market cap) as at 3Q FY12; with the govt. looking at sources of cash to fund its fiscal deficit, we see a case for higher/special dividend payout (the govt. has a 75.9% stake in Bharat).


■ Well positioned to benefit from rising defense expenditure. Indian govt. spending on defense equipment is expected to rise at a 10% CAGR to USD19B by 2015 (source CII-Deloitte). While most defense equipment procurement is from foreign vendors, govt. wants to increase domestic share. Defense Procurement Policy mandates minimum 30% offset against any foreign capital acquisition over Rs3B. BEL is well positioned to benefit, given its strong R&D capabilities and longstanding relationships with Indian defense establishment. Its current order book of Rs270B is largely skewed towards defense related orders (80%+) providing steady revenue visibility over next 4-5 years.


■ Margins set to recover, solid cash profile. We forecast EPS CAGR of 18% over FY12-FY14E, driven by 8% revenue CAGR and margin recovery. We estimate BHE has cash balance of Rs55B (Rs685 per share) on its books, which will increase to Rs63.6B (Rs795 per share) by FY14E.


■ Price target, valuations and key risks. Our Sep-12 PT of Rs2000 is based on 16x Sep13E P/E, towards the middle of BHE's historical trading range. BHE is trading at 13xFY13E P/E, which we believe is attractive given its order-book, earnings growth and cash profile. We expect margin recovery to drive stock rerating. Key risks to our thesis are increasing competition, delay in execution, changes to payment terms and slowdown in defense expenditure.


To read full report: BHARAT ELECTRONICS
RISH TRADER

>SINTEX INDUSTRIES LIMITED: Will significantly cut capex and slow down execution of its working-capital-intensive monolithic business.

Looking to improve the balance sheet profile, but at a cost of lower growth; cut PT to Rs115

■ Looking to improve its balance sheet profile as the operating environment becomes more challenging: We expect SINT to significantly cut its capex over the next two years, while slowing down the execution of its monolithic projects to preserve working capital, as payments from the government have slowed considerably over past 1-2 quarters.


■ Monolithic business likely to slow down sharply: Execution for the monolithic business is slowing down, as payments from the government are being delayed, and delays in government clearances and site handovers are adding to the slowdown. We reduce our monolithic business growth estimates for FY12/13 from 30% to 5%.


■ Receivables cycle getting stretched, but cash flows to improve: We believe that while working capital in FY12 is likely to deteriorate at the margin on account of the delay in government payments, free cash generation should improve aided by slower growth of the working-capitalintensive monolithic business and lower capital expenditure.


■ Comfortable on FCCB repayment: Management is comfortable on the FCCB maturing in Mar 2013. The repayment of US$278MM will be partly met through US$170MM of US$-denominated cash deposits. The remaining US$110MM will likely be refinanced through a US$-denominated ECB.


■ We reduce our PT to Rs115: We cut our FY12-FY14 EPS estimates by 14%-20% to incorporate lower growth for the monolithic business. We also reduce our Sep-12 PT to Rs115 based on 7x FY13E P/E (from Rs208 based on 10x FY13E P/E). We cut our target multiple from 10x to 7x to factor in the lower growth outlook; our target multiple is in line with the domestic peer group average. Key risks include deteriorating working capital, nonrelated ventures, and a further slowdown in the European business.


RISH TRADER

>EQUITY STRATEGY: India Investor Tours: Glass half full...or half empty?

The last quarter has been challenging for Indian equities, given the macro uncertainties – both local and global. In this backdrop, we hosted Investors in a series of Tours covering Senior Policy makers, Opinion leaders and Managements of more than 30 companies from the Financials, Investment and Consumption sectors over the last week. In this note, we have summarized the takeaways from these meetings. We believe these notes should serve as a useful guide to the current mood in business circles.

Key highlights:

■ Policy environment – Slowdown, but no Paralysis. The pace of economic reforms has not matched expectations. But that said, senior bureaucrats opined that allegations of a ‘policy paralysis’ are over done and largely a media creation. A sense of urgency appears to be coming

through. But execution will require consensus building and coordination. We discerned a heightened commitment towards containing inflation and fiscal consolidation. Progress on rural and social initiatives appear to be solid and may not be well appreciated.

■ Financials – A mixed bag. Interest rates have probably peaked, but the easing cycle could be some time away. Recent regulatory changes – abolition of prepayment charges, savings bank rate deregulation and tougher priority sector norms – are not seen as disruptive to sector dynamics. Loan growth remains healthy. But asset quality concerns remain at the fore given a slowing economy and the collapse in the INR. But balance sheet risk is expected to be episodic rather than systemic.

■ Investment cycle – Advantage SoEs. A muddled macro is taking a toll on investment cycle, particularly as it pertains to the private sector in the infrastructure segment. Management focus appears to be on internal measures to turn around viz. de-leveraging, working capital rationalization, etc. State owned companies however appear to be bucking the weak trend. A regulatory regime with assured returns and conservative leverage have allowed them to push ahead with their investment plans.

■ Consumption cycle – Moderating. The slowdown in discretionary spending appears to be gathering momentum. Demand for staples has been holding out until recently. But early signs of a moderation are beginning to manifest themselves. The bigger concern for managements remains margin pressure. A weak currency is adding to their woes, even as volumes moderate and competitive pressures remain intense.

To read the full report: EQUITY STRATEGY

RISH TRADER

>UNITECH: What's the land value? At least Rs 62/share, in our view.

• In calculating the land value, we have re-valued just two large

parcels in the company’ portfolio, viz. 1) 900 acres of high value land

parcels along the company’s traditional stronghold of Sohna Road,

Gurgaon region. (Land transactions at Rs 35-100MM/Acre vs. Book

value Rs 15MM/Acre) and 2) Noida land holdings especially on its 350

acre parcel in Noida (Grande). This is a prime piece of land, 20 minutes

away from South Delhi, but where monetization has remained slow.

Transaction rates around this parcel have ranged from Rs130-

200MM/Acre (Book value Rs 49MM/Acre).

• Liquidity is not really a issue with the company having pre-sold

approx. Rs 95B of property over the last two years (FY10/11). We

estimate UT has yet to receive Rs 30B cash flows from these (net of

construction/taxes). This coupled with its annuities of Rs2B should cover

large part of its repayments, implying no stress in the business.

• Earnings ramp up will be the key trigger- UT’s bookings run rate over

the last two years has been at Rs10-12B per Q. However, revenue

recognition from RE continues to lag at Rs5.5B per Q. As FY11/12

projects contribute to revenues progressively over FY12E, we forecast

earnings ramp up can be meaningfully high (JPM FY12E +90% Y/Y).

• Upgrade to OW, Mar-12 TP Rs 60/share, based on 10x FCFE and in

line with current land value estimate. The upgrade is primarily due to the

removal of discount on FV given issues on telco (25% previously).

While there is still no clarity on it, newsflow on the same has started to

subside.

To read the full report: UNITECH LIMITED

>BHARTI AIRTEL LIMITED: Some positives, more unknowns

We assume coverage of Bharti Airtel with a Neutral rating and a Mar-11 price target of Rs357 (13% upside). We prefer Bharti over RCOM and Idea as we believe it is better placed to benefit from Phase 1 (minute growth, moderated price competition). However Phase 2 in the Indian telco sector (competition resurgence) could throw up some challenges and we also expect Bharti to face operational issues in Africa in the near term. We see regulation as a continued overhang and don’t expect consolidation in the market anytime soon. Improving performance in Africa, benign regulations, and evidence of high-end churn not increasing at Bharti would make us more positive.

• Phase 1 opportunity: Bharti, helped by its leadership position and strong operational performance, will fully benefit from the moderating price competition coupled with minute growth at the GSM majors, in our view.

• Phase 2 challenges: We expect to see increased competition in the postpaid wireless segment as a result of 3G rollouts and implementation of MNP. With 3G we expect to see higher capacity in the market, a need to defend 2G revenue base (70% coverage), and also an opportunity for
revenue consolidation. We estimate that a 0.5% increase in Bharti’s postpaid churn negatively impacts its margins by 1.5%.

• Africa a near-term concern: Africa offers Bharti longer-term growth potential, in our view, especially if management is able to deliver on cost management. However, we expect Bharti to face operational and execution challenges. On our estimates, Africa is 8%/4% dilutive on EPS in
FY11/FY12 but 4% accretive in FY13.

• Our Rs357 price target is based on our SOTP valuation. At current levels we don’t believe Bharti is inexpensive – it is trading at over 14x one-year forward P/E (up from 10-11x in May) back to the levels last seen in early 2008. Key risks to our rating and price target are rational competition post MNP and a better performance in Africa on the upside, while downside risks include higher-post paid churn at Bharti on account of competition, a less benign regulatory environment than is being priced-in currently.

To read the full report: BHARTI AIRTEL

>EDUCOMP SOLUTIONS LIMITED: 1QFY11 results weaker than expected; SmartClass, K-12 schools traction continues to be strong - ALERT

■ 1QFY11 results came in lower than expected: Revenues of Rs.2,279m came in 6% below our estimates, driven by lower ICT and preschools business revenues missing our estimates. EBIT margins of 20.4% were below our estimate of 24% mainly driven by lower margins in the SLS (SmartClass and ICT) businesses. However, sharp reduction in tax rates led to net profit (Rs. 366m) coming in just 5% below our estimates.

■ SmartClass segment: Educomp implemented SmartClass solutions in 6,750 classrooms in 1QFY11 - on track to achieve the high end of its FY11 guidance of 25,000-30,000 implementations. However, margins were hit by 1) induction of 160 additional sales & marketing personnel taking the sales team size to 380 people; 2) Increase in COGS due to hardware costs for partial SmartClass deployments where revenue has not been recognized – we believe this should reverse in 2QFY11.

■ ICT segment: Surprisingly, Educomp did not implement any new schools in ICT segment – leading to 27% Q/Q decline in ICT revenues. EBIT margins also declined to 17.7% vs. our expectation of 30% and 4QFY10 levels of 37.7%.

■ K-12 segment: Schools revenues came in at Rs. 205m (up 37% Q/Q, 71% Y/Y). Revenue decline in pre-schools segment (Eurokids and R2W) led to flat revenues Q/Q for the overall K-12 segment at Rs. 305m. EBIT margins were strong at 38% driven by better margins in the schools
business.

■ Other segments: Investments in Raffles JV, Pearson JV (IndiaCan) and online ventures (Savvica, Authorgen, LearningHour etc.) amounting to Rs. 104.3m in the quarter.

• Tax rate change: 1QFY11 tax rate was lower than expected (MAT rate) - the company attributed this to tax benefits arising from higher tax paid in FY10 on the school contracts transferred from BOOT to EduSmart model. As a result, management expects effective tax rate to come down to 18% in FY11 and return to corporate tax rate (30%) in FY12. We would seek further clarity on this from the management.

To read the full report: EDUCOMP SOLUTIONS

>INDIA FINANCIALS: Stick to Quality: u/g HDFC and BOI to OW, d/g IDFC and SBI to UW

• We remain positive on India financials against a macro backdrop of
rising rates and accelerating growth. All-round quality is likely to do
better than lopsided deposit or loan franchises, with credit growth and
falling NPL provisions being key earnings drivers. We reshuffle our
ratings and our top picks are HDFC Bank/HDFC, Kotak and IndusInd.

• Rising rates are not a worry, yet, because they are unlikely to affect
growth. Rates are definitely rising, though, across all segments.
Continuing tightness in short term liquidity should put upward pressure
on deposit costs. Bond yields should also harden, given the fiscal
weakness. Lending yields have gone up only in segments, but we expect
a more general hardening with a lag.

• Loan growth and provisions are key earnings drivers, against a
backdrop of the improving economy. NIM expansion is largely done and
the outlook is flat. Fee income is a challenge, as flow businesses are
under pressure all round. This is different from the previous cycle where
non-interest income played a strong role.

• We reshuffle our ratings: a) upgrade HDFC to OW given the strong
loan growth tailwinds, b) BOI to OW because of the asset quality
turnaround, c) cut IDFC to UW on concerns around the flow business
and c) SBI to UW because of high valuations and relative absence of
positive triggers.

• All-rounders in focus. At this phase of the cycle, balance between loan
origination and deposits is important, given liquidity is neither excessive
nor short. We recommend exiting the "origination" shops like IDFC. Our
top picks are a) quality names like HDFC and HDFC Bank and b) Kotak
and IndusInd which are addressing legacy weaknesses in funding
franchises.Our least preferred is SBI, which we think is too richly valued.

To read the full report: INDIA FINANCIALS

>Tata Steel Ltd: Q1FY11 Consolidated earnings preview

• Earnings expectations for both standalone and consolidated: TATA reports
consolidated earnings on 12th August. For standalone business, we expect
EBITDA of Rs25bn (+48% y/y, -14% q/q) v/s Bloomberg Consensus (BBRG)
estimates of Rs24.7bn. Our standalone PAT estimates are Rs13bn (+66% y/y, -
35% q/q) v/s BBRG of Rs13.3bn. For the consolidated results, we expect
EBITDA of Rs46.6bn (-2% q/q) and PAT at Rs20.6bn (-25% q/q) v/s BBRG
EBITDA of Rs43.5bn and PAT at Rs18.04bn.

• Corus expectations: We expect Corus Q1FY11E EBITDA at $480mn with
EBITDA/MT of $117/MT. While we do not have BBRG estimates for the
same, we believe street estimates are slightly lower than ours. Over the past
few quarters Corus earnings have varied very significantly from ours and
street estimates with Dec-09 and March-10 quarter Corus earnings
significantly above everyone’s estimates while June-09 and Sept-09 were
significantly below estimates. We do admit that even for this quarter (while we
are back to steady state business), given the various moving parts and lack data,
Corus earnings may be significantly below/above our and street estimates.
Corus reported EBITDA/MT of $94/MT in the March-10 quarter with ASP of
$976/MT. Since then, while Corus should see higher iron ore costs (as the new
contracts come into place), coking coal should be on the older and lower priced
contracts. German spot HRC prices have increased by nearly $200/MT in
the Feb-May-10 period. We do not expect Corus ASP to increase $200/MT
q/q, but are building in $74/MT ASP increase q/q and $51/MT cost
increase, and hence our $23/MT EBITDA/MT increase q/q to $117/MT.

• 3 key variables we would like more clarity on are: a) Given Arcelor’s (MT)
comments that costs would continue to increase into the Dec quarter and 10%
increase in steel prices would be required to maintain EBITDA, we would like
more clarity on Corus’s cost trajectory over next 2 quarters; b) What kind of
capacity utilizations the company expects over FY11E, and c) details on the
potential re-financing of the Corus debt and would it possibly include any
further equity issue (TATA had issued stock to promoters, in May).

• Pension assets could likely decline further from March-10 closing levels:
Longer term we continue to believe the pension issue is among the most
important variables for TATA Corus as historically healthcare inflation has been
ahead of asset returns Given that equity markets had come off sharply in the
June quarter, we expect the pension surplus assets to decline further from the
reported number of $217mn. While the current rally in equity markets should
result in pension surplus assets moving up in the Sep quarter, the net surplus has
declined from a peak of $2.1bn as of Mar-08 to $0.2bn in Mar-10 end.

• While we continue to believe that the worst is behind for Corus and unit should
be profitable (operating level) into FY11E, visibility on profitability levels
remains low.

To read the full report: TISCO

>MAHINDRA & MAHINDRA (JP MORGAN)

Jun' 10 - Sales growth (+7% yoy) moderates on base effect and production constraints - ALERT

• M&M’s unit sales grew +7% yoy over the month, with unit sales being driven by the three-wheeler and light truck portfolio. The UV and FES segment sales were impacted by production constraints.

• Automotive segment sales growth driven by compact portfolio: While M&M’s automotive sales were up +19% yoy, growth was driven by the three wheeler and light truck portfolio (+125% yoy). UV sales though were flat yoy (off a high base) given production constraints. The management highlighted that shortage fuel injection equipment as well as a plant shutdown (for maintenance) led to the lower sales.

• Tractor sales decline -9% yoy on component shortage: The management highlighted that tractor sales were impacted by shortage of castings and tyres at the vendor’s end. The company though continues to guide for FY11E tractor segment growth of 10-14%, given healthy demand.

• The M&M Renault Logan recorded domestic unit sales of 563 units over June (a growth of +12% yoy).

• M&M commences production of its heavy truck portfolio: Mahindra Navistar Automotives Ltd. commenced production of its 25 ton truck – MN25, from its new manufacturing plant at Chakan. The vehicle is priced at c.Rs.1.5m (ex-showroom Pune). The company will roll out its HCV product portfolio over the course of the year from this facility.

• M&M has commenced due diligence for the bankrupt Korean SUV maker – Ssangyong. The company is amongst one of the six companies that have been short listed for the same. The date for submitting bids has been set as July 20 by the bankruptcy court in Korea.

• Over the month, the stock price (+9% yoy) outperformed the broader BSE Sensex (+6% yoy). We re-iterate our OW stance on M&M – given that the company will benefit from a) expansion into newer product segments b) sustained growth in its traditional segments. Besides, the companies’ subsidiaries (c.30% of stock price) should benefit from a healthy economy, given their presence in high growth segments of the market.

To read the full report: MAHINDRA & MAHINDRA

>SOBHA DEVELOPERS: FY11 sales of 3msf look achievable to us. Near term focus on debt reduction.

• FY11 sales guidance of 3msf (+50% Y/Y, FY10-2msf) seems achievable in our view given (a) company’s current bookings run rate of ~0.7-0.8msf per quarter, (b) 3.4msf of unsold inventory in its ongoing projects and (c) robust launch plans of 7msf in FY11. Our average realization assumption of Rs 3,700 psf for FY11 is in line with company guidance of Rs 3,750-3,800 psf. Overall this should drive a 40% CAGR earnings growth over FY10-12E on our estimates.

• Reducing leverage remains the key focus-Target Net D/E remains at 0.5x vs 0.8x currently. The company's overall plan is to reduce net debt by Rs4B aided by Rs2B of asset sales and the rest via operational cash flows. However, Sobha has debt maturity of Rs5B in FY11 thereby implying a cash flow gap of Rs1B. Management indicated that the company has debt facilities in place to re-finance this. Overall for FY11, we model net debt reduction of Rs3.3B which includes Rs1.5B from asset sales.

• 7 msf of new launches over the next 12-18 months: In FY10, Sobha achieved sales of 2msf largely from its ongoing projects with only one project being launched during the year. The pace of new launches is expected to pick up as unsold inventory is declining. Sobha targets around 7msf over the next 12-18 months. Preliminary work has already begun for its launches in South Bangalore (Marigold) and Pune (Carnation II).

• Delivery track record is good: In FY10 Sobha delivered 5.6msf of space in FY10 and is gearing for 6.5msf of deliveries in FY11. The company currently has 7.8msf of real estate projects under-construction, of which 4.4msf has already been sold. Historically Sobha has consistently delivered 6-7msf of projects (including contracting business) and this gives comfort to us on our sales assumptions.

• Maintain OW, Mar-11 PT of Rs420/share. A slowdown in hiring trends in the IT sector is the key risk to our OW hypothesis.

To read the full report: SOBHA DEVELOPERS

>RELIANCE INDUSTRIES LIMITED: Sticking to knittings

• Playing to strengths: RIL chairman Mukesh Ambani reiterated group focus on domestic growth areas at the AGM. Other than core petrochem areas, he announced investments in power, telecom and retail. We believe this plays to group strengths of managing large, complex
projects in a fluid Indian regulatory environment.

• Entry into power: RIL plans to enter the power sector in India (generation, transmission and distribution). With an amended agreement between the brothers barring RIL from gas-based non-captive generation until 2022, the company would explore clean coal, hydro and nuclear
power.

• Petchem capacity additions: RIL stated its intention to build global scale in its petrochemical businesses, confirming plans to build a ~1.5mmtpa off-gas ethylene cracker at the Jamnagar refinery (43% of monomer capacity). RIL is also adding a cumulative 4.6mmtpa of polyester/polyester intermediate capacity (73% of total) to maintain its leadership position.

• E&P thrust to continue: RIL reiterated its thrust into the E&P segment, stating an intention to accelerate reserve accretion, both domestically (off-shore east coast) and internationally. The company would continue to build its shale gas portfolio in N. America. RIL also stated that they
would supply gas to RNRL once the govt. allocates gas supplies.

• Refining: The new refinery has been tested to run at 700kbopd (as against nameplate of 580kbopd). RIL also plans to build one of the world's largest petcoke gassification plants at the refinery, which would aid margins.

• Broadband/Retail: RIL outlined the vast potential of an increase in penetration of broadband technology, with partnership plans to ensure an asset light operating model. The company expects retail sales to increase 10-fold (from Rs45bn) in the next 5 years, with continued investments in various retail formats.

To read the full report: RIL

>TATA MOTORS: May'10 JLR unit sales growth (+73% yoy) momentum sustains - ALERT

• Jaguar Land Rover sales growth momentum sustains: Land Rover sales at 13,933 units (+93% yoy) have sustained the YTD growth trend (+91% YTD). Jaguar sales grew for the first time in several months at 5,120 units (+34% yoy).

• Land Rover sales continue to benefit from strong demand in its key UK market, besides healthy industry growth in USA and China.

• Jaguar sales growth aided by the dispatch of the new ‘XJ’: Jaguar has commenced dispatches of its recently launched luxury sedan. Management has highlighted that there is a healthy order book for the new model.

• Global luxury car sales growth is healthy: The growth trend in luxury car sales continued with Mercedes (+18% y/y) & BMW (+12% y/y) reporting healthy sales growth, driven by strong sales in the US and China. Strong US luxury car sales (+35% y/y) offset the weak sales in Western Europe.

• We expect the sales growth at JLR to likely remain encouraging over the near term given a low base: While there are concerns of a potential slowdown in Europe, data indicates that sentiment is currently holding with private demand remaining steady.

To read the full report: TATA MOTORS

>Higher stipulated threshold for public shareholding to cap performance (JP MORGAN)

■ Government raises threshold for public shareholding in listed companies: The Indian government today amended the Securities Contracts (Regulation) Rules, making it mandatory for listed companies to have a minimum public holding of 25%.

■ At current market prices, the policy would entail selling down of equities aggregating US$32bn: Of this, at least US$13B will have to be raised over the next 12 months, given the stipulation of at least a 5% increase in public shareholding every year to get to the target.

■ State-owned companies to dominate equity offerings. In terms of promoter groups: a) the government of India will have to raise the lion's share, US$27bn, b) followed by the Indian private sector at US$4 bn. c) Multinational companies will have to raise a nominal US$600 m to

comply. We would not be surprised to see some of the MNCs to take the companies private and de-list.

■ Supply overhang to check performance: We estimate the current equity issuance pipeline for the next 12 months at about US$35 bn. Of which govt. divestments are expected to account for about US$10 bn. During the past, equity issuances in India have averaged about 2% of outstanding market cap every year. The change in regulation, coupled with the capital intensive phase that the Indian economy is in, implies that over the medium term equity issuances as a percentage of outstanding market cap could average 3-5%.

■ Global risk appetite becomes even more important: The amount to be raised this year is not daunting in comparison to peer group markets over the last decade. Global risk appetite will, however, have to be supportive, given India's over-dependence on external capital.

To read the full report: EQUITY STRATEGY