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

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

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

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

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

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

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

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

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

  RISH TRADER

>INR: An exciting range (MERRILL LYNCH)

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

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

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

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

RISH TRADER

>SIEMENS LIMITED: Projects in mobility KAHRAAMA, Essar Construction, solar thermal & Torrent Power (Earnings Review Q4FY12)

New orders fall, Adj PAT 46% below BofAMLe; Maintain UPF


2Q12 only optically in line, Revenue disconnect
Siemens (SIEM) 2Q12 Adj PAT of Rs1.63bn is 46% lower than BofAMLe. Revenues of Rs38bn beat BofAMLe by 11%, up 22% YoY. However, results include a net write back of Rs2.1bn (PBT), which we believe led to higher revenues and in-line Rep PAT Rs3bn. 1H12 order inflows declined 36% YoY (adj -27%) due to high base, lower project orders, but short cycle & SMART products drove base orders. We maintain our Underperform rating on: 1) reduced revenue visibility as orders decline from power gen, T&D and process sectors; 2) lower FY12-14E margins due to new product launches; and 3) modest 8% earnings CAGR in FY12-14E, and declining RoEs.


Mobility and new products drive revenues
We believe a) projects in mobility (Gurgaon Rs7-8bn, Chennai Rs6bn, & Kolkata Rs1.6bn), b) power (KAHRAAMA Rs25bn, Essar Const, 200MW solar thermal &  Torrent Power Rs15bn), and c) launch of new low cost products in 1Q12, were major revenue drivers in our view in absence of mgmt commentary on the impact of the write back on revenue and EBITDA.


Margins lower on comp, cost push, entry pricing & losses
Despite the write back EBITDA margins contracted 130bp YoY (13%) on price competition in T&D, cost push in industry projects and entry pricing on SMART products. Segmentally, Industry (-600bp), Healthcare (loss) and Infra &cities (-100bp) were margin drags. Energy was positively impacted due to the write back.


We are 6% & 14% lower than consensus, expect downgrades
We maintain our FY12/13/14 earnings ests despite lower than anticipated results in 1H, as SIEM aggressively provides for contingencies (3-3.5% of rev) while executing large orders. We estimate KAHRAAMA & Gurgaon metro to be mostly complete in FY12, so expect further write backs. We do not change order inflow & revenue ests as we build in for contribution from VAI and also Rs10bn order from Qatar. However, our FY12/13 ests are 6% and 14% lower than Street. Consensus has lowered ests by 13/10% in past qtr; we expect further earnings downgrades.

RISH TRADER

JAIPRAKASH ASSOCIATES LIMITED: Scale-up hydro E&C with 2nd win of FY12

■ Won Rs9bn external E&C order in Bhutan improve visibility; Buy
JPA won Rs9bn (3-5% of E&C sales) construction contracts for 720MW Mangdechhu HEP in Bhutan. This is the 2nd external hydro E&C contract win for JPA in 9 months. Bhutan orders improve visibility of construction revenue by 10-16% and could compensate for the delay in start of construction at its own, Lower Siang HEP. Catalysts for JPA: 1) start of - Karcham HEP 1H12 and Yamuna Exp in 1QFY13 and 2) peaking of capex at parent and JP Infra in FY11/12 leading to deleveraging from FY13E. Buy JPA on assets trading at 31% discount to NAV, which could be un-locked by improving visibility of cash flows or divestment (Cement). Weak cement markets and leveraged balance sheet are the risks.


■ Won 2nd external hydro E&C order of FY12; More to follow
JPA won two E&C contracts for 720MW Mangdechhu HEP from Mangdechhu Hydroelectric Project Authority, Bhutan. The first contract is of Rs6bn includes construction of diversion and intake structure & tunnels package. The second contract is of Rs3bn for surge shaft, pressure shafts, Main access tunnel to power house bottom etc… In July’11, JPA won Rs21bn construction contracts for 990MW Punatsangchhu II Hydro-electric project in Bhutan beating L&T and HCC. These project wins should boost JPA’s RoCE given that both these projects would absorb the stock of equipments JPA owns and were getting free after completion on Karcham HEP in 2QFY12. Govt. of India is aiding to develop 10GW of hydropower by 2020 in Bhutan, of which JPA has already won 1.7GW and the rest are likely
order by 2015. This creates significant growth opportunity for JPA.


■ Buy value assets 31% discount & 10% EPS CAGR in FY11-13E
We view JPA as one of the best asset plays (31% disc to NAV). Triggers: a) start of projects (esp. Karcham), BTG order for 2GW Bara Ph 2, b) monetization of realty, c) bottom-out of cement prices in FY13 and d) approval for Gr. NOIDA airport.




RISH TRADER

>DLF: Gurgaon remains strong; Golf course launch key trigger

■ Strong sales booking expected in 4Q; Reiterate Buy
We expect strong rebound in sales booking for DLF in 4Q led by pick up in new launches especially in its core market of Gurgaon. DLF has launched over 5mn sq ft of new projects with sale value upwards of Rs25bn in 4Q. We see 5-10% upside risk to our FY12 booking estimate of Rs41bn (Rs16bn in 4Q). We reiterate our Buy rating with PO of Rs245 (25% upside) and believe the recent weakness (YTD, DLF up only 6% against 30% for Realty Index) offers good entry price.


■ Gurgaon remains strong; Golf course launch key trigger
DLF will be the key beneficiary of strong trends in Gurgaon given 43% of its NAV is derived from Gurgaon. DLF’s recent launches in New Gurgaon have been at significant premium to our estimate and competition. If this trend sustains for future launches, we expect 6-8% upside risk to our gross NAV estimate of Rs288/sh. The Golf course launch in 1HFY13 will be the key trigger as it will help DLF achieve 50% higher sales booking in FY13 (Rs62bn) against FY12 (Rs41bn).


■ Operational cash break even expected in FY13
We expect DLF to achieve operational cash break even in FY13 against a deficit of Rs15bn seen in FY12 as 1) its sales booking improves substantially in FY13 leading to additional cash flow of Rs2-2.5bn/qtr and 2) execution picks up pace due to measures undertaken by DLF in FY12 (outsourcing to third party, substantial jump in completions). The fall in interest rates should also help cap interest cost expense in FY13.


■ Debt reduction hinges on non core sale
Management expects to conclude three large non-core asset sales (Wind Mills, Aman Resorts and NTC Mumbai land, valued upwards of Rs50bn) in 1HFY13 which would help reduce debt significantly. This would further augment positive cash flows expected from improved sales booking in 1HFY13.


To read full report: DLF
RISH TRADER

>DIVI's LAB: Vizag SEZ, Carotenoids uptick to boost revenues

Sustained revenue ramp-up in sight; Buy

■ Recent underperformance offers a particularly good entry point; Buy
We believe Divis 14% YTD underperformance (vs market) is overdone noting high revenue visibility (22%+), healthy Balance Sheet and strong earnings trajectory (24% EPS CAGR). Our recent interaction with management reinforces our optimistic view on Divis’ ability to capitalize on CRAMS recovery backed by strong customer relationships (~70% sales from repeat business) & capex plan. Rate Divis as our top mid-cap pharma pick and reiterate Buy with PO of Rs940.


■ Vizag SEZ, Carotenoids uptick to boost revenues
We expect Divis to sustain 22% sales CAGR over FY12-14E driven by (a) increased volumes in key API products (~35% of sales, 60%+ mkt share) & new launches from upcoming US patent expirations (like generic Seroquel-Mar’12, Diovan-Sep’12) to help 20%+ growth; (b) New orderflow in high margin custom synthesis business to sustain 25%+ growth & (c) Carotenoids business set to double sales to Rs1.6bn by FY14E. New Vizag SEZ would support company’s growth plan with 25% incremental capacity being added (peak sales of Rs5bn).


■ Carotenoids – opportunity to unfold strongly
We expect Divis carotenoid business to grow at fast pace over FY12-14E to clock revenues of Rs1.6bn (from Rs840mn in FY12E). New customer additions through distributor (like Omya Intl) would help capture mkt share of ~5% in US$1bn global mkt over 3-5 years. With only two large players DSM & BASF in the market, customized solutions would help Divis differentiate and gain market share.


■ Attractive valuations; PO implies 27% upside potential
Divis is currently trading at 15.8x FY13E & 13.4x our FY14E, at 15% discount to its historic average and in line with the sector despite stronger return ratios (~25%) & superior margin profile (37% EBITDA margin vs 20% avg). We expect 4Q PAT to improve 17% QoQ led by 22% sales growth, implying sustained improvement in revenue run-rate and key to re-rating potential. Reiterate Buy.


To read full report: DIVI's LAB
RISH TRADER

>GAIL INDIA LIMITED: Twin worries of gas shortage and rising subsidy -

Gas supply a worry but FY12 subsidy may be as expected

■ Twin worries of gas shortage and rising subsidy
GAIL’s 9M FY12 EPS factoring the actual subsidy (under-provision in 3Q) is up just 6% YoY. In 9M, GAIL was hit by flat gas transmission volume and 75% YoY rise in subsidy. GAIL’s volume growth was capped by gas output from the KG D6 block declining sharply. There was a concern that share in subsidy of GAIL and its upstream peers, which was 37.9% in 9M FY12, may go up further in FY12. However, now no further negative surprise on subsidy appears likely in FY12. Gas supply and subsidy would remain worries for FY13. Retain Underperform.


■ Gas supply shortage to continue; will margins be capped?
GAIL’s 9M FY12 gas transmission volume is up just 1% YoY. Its FY12 volumes are likely to be flat. Reliance Industries (RIL) has guided decline in KG D6 gas volume by 15.5mmscmd in FY13. LNG imports (capacity constraints) would not be able to make up for fall in output. Thus GAIL’s gas volume may remain flat even in FY13. GAIL’s gas transmission and trading EBITDA is up 10% YoY in 9M FY12 despite flat volume boosted by marketing margins on LNG imports. There is a risk (low in our view) that marketing margins on LNG imports could get capped.


■ FY12 subsidy may be as expected; 3Q shortfall in 4Q
The subsidy provision in the FY13 budget is at the higher end of our expectation at Rs400bn. If it was lower than expected there was risk that GAIL and its upstream peers may have to bear more subsidy than as per 9M formula (38%). Thus no further negative surprise on subsidy is likely, which means GAIL’s FY12E EPS may be up 11% YoY as expected. However, GAIL had under-provided subsidy by Rs3.35bn in 3Q, which it will have to account in 4Q. We expect GAIL’s FY12 subsidy to be 40% YoY up at Rs29.5bn.


To read full report: GAIL
RISH TRADER

>Singapore GRM at 15-week low; RIL up US$1/bbl WoW but weak- MERRILL LYNCH

■ Singapore GRM halved over last seven weeks to US$5.1/bbl
Reuters’ Singapore GRM has fallen by 51% since the week ended January 27 from US$10.3/bbl to US$5.1/bbl last week. Singapore GRM last week is at the lowest level in 15 weeks. Singapore GRM in 4QTD is now at US$8.0/bbl. It has been hit by a fall in diesel, jet fuel and fuel oil cracks. Fuel oil cracks have declined the most (US$10.7/bbl) in the last seven weeks. Jet fuel and diesel cracks are also down from peak levels in 4Q by US$3.7-5.0/bbl to US$13.7- 13.9/bbl. In the last 2-3 weeks diesel and jet fuel cracks are at the lowest level since Nov-Dec’10.


■ RIL’s theoretical GRM up US$1.0/bbl WoW at US$4.5-5.7/bbl
RIL’s theoretical GRM last week at US$4.5-5.7/bbl is up US$1.0/bbl WoW with higher end of the estimate being at US$0.6/bbl premium to Singapore GRM. RIL has gained from Arab heavy being at US$0.4/bbl discount to Dubai and not producing fuel oil (cracks down sharply). However, RIL’s GRM was boosted most by our assumption that its new refinery uses Souedie crude (API of 24), which was at US$6.3/bbl discount to Dubai. If use of Oriente crude (also API of 24) is assumed, RIL’s GRM last week would be lower at US$3.6-4.7/bbl.


■ RIL’s theoretical GRM in Mar’12 lowest since Dec’09
RIL’s theoretical GRM to date in March 2012 at US$3.9-5.0/bbl is at the lowest level since December 2009.


■ RIL’s 4QTD GRM below Singapore GRM and down YoY
RIL’s theoretical GRM in 4QTD at US$5.3-6.5/bbl is down US$2.7-3.9/bbl YoY (US$9.2/bbl in 4Q FY11). It is also US$1.5-2.7/bbl below Reuters’ Singapore GRM of US$8.0/bbl. RIL’s gain from QoQ product cracks rise is less than that of Reuters’ product slate. Discount to Dubai of crude RIL uses is also QoQ lower.


■ RIL’s 4Q profit down 20-30% YoY at 4QTD GRM
RIL’s 4Q profit works out to Rs37.4-43.1bn at 4QTD theoretical GRM of US$5.3- 6.5/bbl and blended petrochemical margin of US$427/t (down 22% YoY in rupee terms). It would mean 20-30% YoY fall in 4Q profit (4Q FY11: Rs53.8bn). 


■ Downside to RIL’s FY13 EPS 10-20% if GRM at 4QTD level
Our FY13 EPS estimate for RIL assumes its GRM at US$8/bbl. If RIL’s FY13 GRM is at 4QTD FY12 level (ignoring shutdown) of US$5.7-6.8/bbl, its FY13 EPS would be 10-20% below our estimate of Rs66.9.


■ R&M companies GRM up WoW and QoQ
BPCL and HPCL’s theoretical GRM last week was up WoW at US$3.1-3. 2/bbl. Their 4QTD theoretical GRM (including inventory gain) is also up QoQ at US$5.8-5.9/bbl.


To read full report: OIL REFINING & MARKETING

>ONGC: Adverse subsidy sharing would make us bearish

■ FY13-14 EPS cut by 11% and PO by 17% to Rs298
The cess on crude oil has been raised from Rs2,575/ton (US$6.9/bbl) to Rs4,635/ton (US$12.4/bbl) in the FY13 budget. It has meant a cut in ONGC’s FY13-14 EPS by 11%. We have also cut ONGC’s PO by 17% to Rs298/share from Rs358/share earlier. ONGC’s revised PO implies 9% potential upside. We downgrade ONGC to Neutral given the hit from rise in cess and also as hope of reforms are fading after the recent state election results.


■ EPS cut due to rise in cess by 80% (US$5.5/bbl)
Cess would increase on production from ONGC’s nomination blocks and the pre-NELP Rajasthan block. The increase in cess on crude oil by 80% (US$5.5/bbl) to Rs4,635/ton (US$12.4/bbl) has meant a cut in ONGC’s FY13-14 EPS by 11%. If there is no diesel price hike or only a modest hike ONGC’s FY13 EPS is likely to be YoY lower. Share in subsidy of ONGC and its upstream peers is another crucial factor, which will influence its earnings outlook.


■ Cut PO on rise in cess; PO at 10% discount to fair value
ONGC’s fair value is down by 7% to Rs332/share due to the rise in cess on crude. ONGC trades at discount to its fair value when there is no progress on reforms, there is uncertainty on subsidy sharing and earning outlook is poor. We are skeptical on reforms in the remaining 2-year term of this government. When there is no progress on reforms risk of adverse subsidy sharing also rises. We have therefore fixed ONGC’s PO at 10% discount to its fair value at Rs298/share.


■ What would make us bullish or bearish on ONGC?
Hefty hike in subsidized products or steep fall in oil price and favorable subsidy sharing, which improves earnings outlook would make us bullish. Sharply higher oil price and adverse subsidy sharing would make us bearish on ONGC.


To read full report: ONGC
RISH TRADER

>INDIA MARKET STRATEGY MARCH 2012: March: An “Eventful” Month but oil as important

Focus on the 3 events ….
Over the next couple of weeks, 3 events will be important for markets. Given the sharp rally in markets, expectations are high and the market could be vulnerable to a correction on any disappointment. However, price of oil may be as important as these events in determining the market direction (and of course will affect two of these events).


1. March 6 - Assembly election results: A Congress strong performance with a kingmaker role in Uttar Pradesh positive for markets. 
2. March 15th - Credit Policy: Consensus and our expectations are for a rate cut but high oil prices persist, RBI may do a CRR cut only.
3. March 16th – Budget: The key to watch is the fiscal deficit estimate.


… but oil prices as important
While an increase in crude oil is clearly negative for India’s macro-economy, the co-relation of Indian stock market and oil is strongly positive ie a rising crude oil prices lead to a rise in equity markets (co-relation is strong at 89%). However, this relationship turns negative at a tipping point (and we may be close to it) ie Indian markets fall even as crude continues to rally.


Sharp crude rallies break this co-relation: On 10 occasions over past 10 years we have seen a rally in crude prices by over 30% in 3 months. On 6 of these 10 occasions, markets gave a negative return over the next quarter. Similarly, India under-performed EMs on 8 of these occasions


Rising crude oil hurts the economy in 3 ways…
1. Inflation: A 5% increase in domestic oil prices increases inflation directly by app 75 bps (see Table 3)
2. Current account deficit: Oil accounts for 30% of total imports. A $10/bbl increase in oil prices will increase current account deficit by $8bn (0.4% of GDP).
3. Fiscal Deficit: Every $15/bbl increase in oil price can lead to an increase in fiscal deficit by roughly 0.3% of GDP assuming a 10% increase in domestic oil prices (see table 5).


.. but the positive is that the tipping point has gone up
In a macro sense, oil, at US$110/bbl today, is like oil at US$70/bbl in 2007. For example, net oil imports remain around 4% of GDP and the oil subsidy around 0.8% of GDP similar to 2007 although oil prices are over 50% higher.


To read full report: MARKET STRATEGY

>HAVELLS: Upbeat Outlook

■ Raising PO on higher EPS and re-rating
Our management meeting left us increasingly confident about margin expansion and 20%+ revenue growth. We have raised PO by 15% to Rs625 driven by (1) increase in our EPS for FY13 and FY14 by 5% and 8% respectively, and (2) increase in valuation basis of India entity by 10% to PE of 16.5x FY13E earnings owing to higher profitability. Our FY13 and FY14 EPS estimates are higher than consensus by 10% and 13% respectively. Stock at PE of 12.7x FY13E is attractive. Buy.


■ Margin improvement to continue
Havells has completed it’s investment in land and buildings for the next three years and is focusing on the expansion of margins and cash flow. The company is aiming to achieve 14%+ EBITDA margin in India and 10%+ EBITDA margin globally in two-three years. We have raised FY13/14e EBITDA margin to around 13.3% in India from 12.9% and maintain assumption of 8% globally.


■ Strong product pipeline for 20%+ sales growth
New product pipe line is very robust and is key to management target of over 20% revenue growth. The company has just launched air coolers. It will soon get into UPS, inverters and kitchen appliances. We have raised our 15% sales growth expectation to 18% in FY13 and 15.5% in FY14. Upside could come from faster
ramp up of new products.


■ Rising cash-flow to boost valuation
We expect the decline in capex, expansion of margin, and tight control over working capital to boost the cashflow of Havells like never before. Stronger cash flow will be key to a re-rating. We have valued Havells on a sum of part basis with (1) India entity at PE of 16.5x FY13E EPS of Rs31.9/sh, which is a 5% premium to Indian peers, and (2) Sylvania, the global entity at PE of 12.5x, and at a 15% discount to global peers.


To read full report: HAVELLS
RISH TRADER

>CUMMINS INDIA: New emission norm and Bio-fuel boosts FY14/15 outlook

■ Bullish outlook, but disappointing new export policy
Cummins India reassured investors in the recent analyst meeting with guidance of over 15% revenue growth in CY12. The company also mentioned that Cummins Inc Group in India aims to grow at 25% CAGR and achieve US$7bn sales by 2016. In our opinion, however, it disappointed with the disclosure that Cummins Inc will manufacture new 60litre engine independently and Cummins India will not get to export these.


■ Demand has bounced back but has no near term upside
We are positively surprised by the pace of recovery in the sales of heavy engines and genset. The company reported 10% m-o-m growth in genset sales for the last three months from the low of Nov 2011. While the recovery has been quite swift, the company may not raise production of 30/50ltr engine from 18/day now in the next six months, as it expects demand to remain at current level.


■ New emission norm and Bio-fuel boosts FY14/15 outlook
Cummins India could benefit from (1) tightening of emission norm for genset in 2013 that could lead to 20-30% price hike, and (2) stronger demand for its new bio-fuel genset having business potential of over US$200mn. However, it is too early to factor in the benefit as the emission norm change may get delayed. Also its peers don't see prices rising by more than 5-8%.


■ Margin peaks off & capex surge to hurt
Currently Cummins India is trading at the higher end of its valuation with FY13E PE being 19x. Recent bounce back in the stock reflects the recovery in business. Likely decline in margin owing to absence of FX gain that had boosted Q3FY12 by 100bp could hurt stock. Also 4 fold jump in capex to Rs1.6bn in 2012-15 will hurt ROE and likely de-rate the stock.


To read full report: CUMMINS INDIA
RISH TRADER

>INDIA STRATEGY: Identifying Over-Owned/ Under-Owned Stocks

FII portfolio: U/W on IT & Consumer and O/W on Industrial fall; U/W on energy & O/W on telecom rise


■ During the quarter while FIIs were net sellers, domestic MFs & LIC were net
buyers. FII holding in Sensex has come down marginally.


■ FIIs were positive on defensives like Consumers & Telecom whereas they sold across most of the other sectors like Financials, Metals and Industrials. FII ownership in SBI is at all time low whereas Industrials has become an U/W sector for the first time due to this selling.


■ Financials, the favorite sector for FII, saw significant selling during the quarter bringing down the O/W marginally. Industrials was another sector sold by the FIIs resulting in reduction in its O/W. The Software sector was the biggest sector bought by the FIIs, followed by Consumers, resulting in change in their respective O/W and U/W.


■ In terms of long term trends, while the underweight of energy continues to come down, Industrials has become an underweight sector. On the other hand, consumers are no longer an underweight sector due to consistent buying done every quarter. Also Financials has seen its weight come down. Within Banks while FIIs have sold names like SBI, ICICI, Axis, they have increased exposure in Kotak. Any surprise in these names can reverse the trend.


■ Key buys in this quarter were: Infy, ITC, TCS, HDFC, HUL and Wipro . Key sells were: ICICI Bk, L&T, Coal India, Axis Bank and RIL.. 


Domestic MF Portfolio: U/W on metals fall; O/W on Industrials rise
■ Domestic MF portfolio is in stark contrast with that of FIIs, with Industrials being major O/W sector, sector where FIIs are marginally positive. Consumer is another sector where domestic MFs are heavily O/W in contrast to FIIs who are not. They are also U/W Financials where FIIs are O/W. However, on the similar lines of FIIs, domestic MFs are also U/W commodities.


■ In contrast to FIIs, MFs bought Metals and sold consumer & telecom names. On the similar lines of FIIs, MFs also bought software and cement names.


■ During the quarter mutual funds bought Software, Industrials, Metals & Energy and sold consumers &Telecom.


LIC net buyer
On the similar lines of MFs who were buyers, LIC was also a net buyer. LIC bought Financials (SBI, HDFC Bank), Utilities (Tata Power) and Energy (RIL). LIC sold Cement (Ultratech, ACC), Software (Infy) and Telecom (Bharti).


To read full report: INDIA STRATEGY
RISH TRADER

>REAL ESTATE(FEBRUARY 2012): 50 bps cut = 3-4% price cut; not enough to attract demand

■ 50 bps cut = 3-4% price cut only
Our economist expects a 50 bps rate cut in 2QCY12. Developers are holding prices primarily hinged on this rate cycle turn for demand to return. However, our analysis shows a 50 bps rate cut equates to mere 3-4% reduction in cost of acquisition; which we believe will not be enough to attract demand.


■ Waiting for 100bps cut in FY13 might be too late
We believe, with poor cash flows, developers will disappoint the market on volume and cash flows in FY13 also if they decide to wait out for demand to return once a total of 100 bps is cut in FY13.


■ Time correction versus price correction
There seems a consensus opinion built-up around possibility of real estate prices under-going time correction rather than price correction. We believe the same is possible for affordable cities of Bangalore and Noida as prices remain stable in FY13 and 100 bps rate cut reduces cost by 7-8%. Developers in both cities are offering 3-4% discount to close deals. However, we believe the city of Mumbai will have to witness a double digit correction beyond the 7-8% reduction due to rate cuts. Anecdotal data shows discounts of 6-8% available depending on the project.


■ History says only price correction can do the trick
We believe the market will be disappointed with operational performance of real estate firms, if prices stay sticky leading to poor volumes. Past cycles show stock prices lag price correction but lead volume recovery by a quarter to two.


■ Volumes with sound realization remains critical
3QFY12 witnessed volume recovery but at lowered realization as developers continued their focus on affordable housing to weather tough market conditions. We believe new launches (mid-end to high-end) in core markets (at discounted prices) will help improve cash flows.


■ Current rally does not corroborate with physical market
We believe the current rally in real estate stocks could be overdone and recommend caution as the current rally led by global liquidity does not corroborate with the physical market trends wherein 1) sales volume continue to wilt, 2) unsold inventory remains high 3) balance sheets remain stretched 4) asset sale progress
slow 5) capital availability still tight and 6) execution has slowed.


■ Can buy fundamentals at dips
We like firms with sound balance sheet, annuity income and launch visibility; thus recommend BUY on Oberoi (C-1-7, Rs287.45) and Underperform: HDIL (C-3-9 Rs120), IBREL (C-3-8, RsV-3-8).


To read full report: REAL ESTATE
RISH TRADER

>RIL & Singapore GRM down sharply WoW

■ RIL GRM down US$1.3-1.7/bbl WoW; Sing down US$1.3/bbl
RIL’s theoretical GRM for the week ended February 17 at US$6.1-7.2/bbl is down US$0.4/bbl WoW assuming its refinery operates as usual. However, shut down of one CDU at its more complex new refinery would mean an additional hit of US$1.0-1.3/bbl and GRM of US$4.83-6.19/bbl last week. Singapore GRM at US$8.52/bbl last week is also down US$1.3/bbl WoW. The decline in GRM last week is due to a fall in diesel, jet fuel and fuel oil cracks. RIL’s GRM to date in 4Q at US$6.09-7.19/bbl is US$2.0-3.1/bbl below Singapore GRM of US$9.23/bbl.


■ Shutdown at new refinery to hit RIL GRM by US$1-1.3/bbl
Half of RIL’s new refinery was shut for planned maintenance on February 10. It is to restart in the first week of March. The new refinery has a superior product slate (more petrol instead of naphtha) than the old refinery. This will therefore shave off US$1.0-1.3/bbl of RIL’s GRM last week and US$0.14-0.19/bbl of its 4QTD GRM.


■ Diesel and jet fuel down WoW but still healthy
RIL’s GRM last week was hit by US$1.5-2.2/bbl WoW fall in jet fuel and diesel cracks (46% of its product slate). Jet fuel and diesel cracks are still healthy at US$15.7-16.7/bbl. Singapore GRM was also hit by US$2.8/bbl WoW fall in fuel oil (RIL does not produce) cracks. LPG and naphtha cracks were up US$0.1-0.9/bbl.


■ RIL’s 4QTD GRM below Singapore GRM & down YoY
RIL’s theoretical GRM in 4QTD at US$6.09-7.19/bbl is US$2.0-3.1/bbl below Reuters’ Singapore GRM of US$9.23/bbl. In 4QTD RIL’s gain from QoQ product cracks rise is US$2.4/bbl vis-à-vis US$2.5/bbl for Reuters’ Singapore GRM. RIL is also hit by lower discount to Dubai of crude it uses (down US$0.1-0.7/bbl QoQ). Its 4QTD GRM is also down US$2.0-3.1/bbl YoY (US$9.2/bbl in 4Q FY11).


■ RIL’s 4Q profit down 13-23% YoY at 4QTD GRM
RIL’s 4Q profit works out to Rs41.5-46.6bn at 4QTD theoretical GRM of US$6.1- 7.2/bbl and blended petrochemical margin of US$429/t (down 21% YoY in rupee terms). It would mean 13-23% YoY fall in 4Q profit (4Q FY11: Rs53.8bn).


■ Downside to RIL’s FY13 EPS 6-15% if GRM at 4QTD level
If RIL’s FY13 GRM is at 4QTD level of US$6.3-7.3/bbl, its FY13 earnings would be 6-15% below our EPS estimate of Rs66.4 (assumes GRM of US$8/bbl).


■ R&M companies GRM down WoW but up QoQ
HPCL and BPCL’s theoretical GRM last week was down WoW at US$3.6/bbl. However, their GRM in 4QTD at US$5.2-5.5/bbl is up QoQ.


To read full report: RIL
RISH TRADER

>EMPIRICAL & THEMATIC PERSPECTIVES: The Outlook for Global Imbalances

■ In this essay, we document a marked narrowing in the magnitude of global current account imbalances in the years since the financial crisis erupted. In particular, the U.S. deficit has halved from roughly 6 percent of GDP to 3 percent of GDP, and China’s surplus has declined significantly as well. We then consider whether the observed reduction in these imbalances—and in the magnitudes of global imbalances more generally—is only a temporary shift linked to the disruptions associated with the financial crisis or whether these adjustments are likely to be more durable.


■ In examining this issue, we first study data for a broad set of G-20 countries. We find evidence that over the past decade, countries with current account deficits have generally seen their currencies depreciate in real terms and this, in turn, has been associated with some closing of their deficits. Conversely, countries with external surpluses have tended to experience real appreciations, and their surpluses have narrowed. These results leave us hopeful that the recent adjustment in imbalances will not be immediately reversed once a stronger global recovery takes hold.


■ In the second half of the essay, we build forecasting models to assess the likely path of the U.S. and Chinese balances going forward. For the United States, our conclusion is that under plausible assumptions (flat dollar, moderate growth rates in the U.S. and abroad, and stable oil prices), the current account balance is likely to remain roughly in the neighborhood of 3 percent of GDP. Neither a further deterioration nor a substantial improvement seems to be in the cards over the next several years.


■ The outlook for China, however, is more worrisome. Given the significant estimated sensitivity of Chinese exports to foreign GDP growth, our model suggests that an eventual global recovery may bring with it a renewed widening in China’s trade surplus. Our work suggests that a further 15 percent real appreciation of the renminbi will be necessary to keep the Chinese trade balance in a range of 3 to 4 percent of GDP through 2015. This analysis should be interpreted as a cautionary tale for the Chinese authorities.


■ On balance, this analysis supports three broad conclusions. First, we see evidence that over the medium to long term (i.e., five to ten years), real exchange rates have tended to adjust in a manner consistent with greater global balance. In this important sense, the international monetary system seems to be functioning reasonably efficiently. Second, in light of this observation and the tenor of the evidence more generally, we expect much of the observed adjustment in global current accounts to prove durable, especially given the sharp depreciation of the dollar over the past decade and the stepdown in U.S. growth. Third, as our empirical work for China highlights, however, the adjustment process is still incomplete. Further exchange rate realignment in some key countries will be necessary to achieve a pattern of global spending and production that is likely to prove sustainable over the long run.


To read full report: OUTLOOK FOR GLOBAL IMBALANCES
RISH TRADER

>BRIGADE ENTERPRISES: 3Q earnings disappoint, office demand strong; Reiterate Buy

■ 3Q earnings below expectation; Reiterate Buy
Brigade reported disappointing 3Q earnings at Rs104mn (against our expectation of Rs170mn) primarily due to higher interest costs and lower revenue recognition. Positively EBIDTA margin saw sharp rebound. We reiterate our Buy rating with a lower PO of Rs100 (-9%) with potential upside of 40% from current levels. We have cut our PO to factor in a delay in residential launches and six month delay in completion of its retail mall project. We continue to like the stock given strong rental growth visibility and good pipeline of residential launches in FY13.


■ Aggressive residential launches ahead
Brigade continues to aggressively look at new residential launches with another 5mn sq ft lined up over the next 6 months. It has seen strong response to its launches in last 18months with 60% of the inventory pre sold. But the benefit of these launches will start reflecting in revenues only from 2HFY13. We have cut our earnings estimate for FY12-14 by 4-25% to factor in higher interest cost and have also pushed the revenue recognition from new residential projects by 6 months to reflect the delay in launches.


■ Solid demand for its commercial assets
Brigade’s commercial projects in Bangalore have seen strong traction on leasing with its Summit project 95% leased and vacancy in WTC reducing to 35%. The benefit of the strong leasing should reflect in earnings from FY13. It has managed to sell 30% of its inventory in WTC with the latest transaction at Rs7000/sq ft against our estimate of Rs6000/sq ft. The retail mall (pre leased 85%) is expected to start operations from 4Q with rental accrual expected from 2QFY13.


■ Debt remains under control
The debt has remained flat in FY12 at Rs8bn given strong inflow from residential and commercial sale. Brigade expects to reduce debt by over 25% in FY13.
RISH TRADER

>DISH TV INDIA LIMITED: Key concerns abating

■ Churn likely to trend down
Post an increase in churn to 1.6% (monthly) in 3Q, it has fallen to 1.1% for the month of January. Management highlighted it has taken measures to control subscribers in pre churn (inactive for 0-120 days) and expects churn to reduce further in 1Q.


■ ARPU expansion likely
Reiterated guidance of achieving Rs155-156 ARPU for 4Q led by price hikes effected in November. Structurally it believes ARPUs likely to trend up due to implementation of cable TV digitalization across the country.


■ Operating leverage to continue
Expect 13-15% increase in content cost during FY13E. Margin expansion story likely sustainable. Forecast over 500 bps EBITDA margins expansion during FY12-14E


■ FCF turn around on track
Expects cash flow to turn positive FY13. Reiterated that current subscriber base should be able to fund gross sub addition of 2.6-2.7mn p.a. Stock trades at 11x EV/EBITDA FY13E at lower end of trading band of 11-18x ,we regard this as attractive. Retain Buy with PO of Rs90.




Price objective basis &  risk
Dish TV India Ltd (XCETF)
We value Dish TV on a DCF basis given the investment required in subsidizing set-top boxes for new subscribers and the gestation period involved. Our DCF value is Rs90 and implies EV/EBITDA of 16x FY13E. Our valuations are at a premium to global DTH peers such as DirecTV and Dish Network. We believe this is justified given the high growth in EBITDA for Dish vs peers.


While global peers trade at 6-9x EV/EBITDA currently, we note that historically during their growth phase these peers have traded at valuations of 12-15x EV/EBITDA.


We see upside risk from a potential reduction in license cost from 10% to 6% of revenue based on the court judgment. Downside risk is from higher-than expected churn impacting valuations adversely.


RISH TRADER

>KOTAK MAHINDRA BANK: Good Quality But Valuations Rich

■ Kotak bank continues focusing more on transaction banking and working capital loans as opposed to project loans or big concentrated bets. It expects loan growth to be around 25% in FY13


■ The bank is optimistic on its CASA acquisition strategies. It intends to increase CASA base but refrained from assigning any number as it has been only 2 months.


■ Fee income on a normalized basis can be expected to follow balance sheet growth.


■ Bank plans to increase branch network from 330 (Dec ‘11) to 500 branches by Calendar 2013.


■ Asset quality continues to hold up. Bank does not expect major slippages and restructuring coming forward.


RISH TRADER

>FIRSTSOURCE: Strong deal closures improve FY13 visibility

■ Retain Buy on attractive valuation, new PO Rs15
Firstsource saw impressive deal closures during Q3 that increase visibility into FY13 revenue growth. Additionally, we expect company’s EBIT margins to increase nearly 230bps in FY13 on benefits from improved efficiency in execution and operating leverage from revenue growth. We lower adj. FY13/14 EPS by 7% baking in higher transition costs related to deal wins and increased interest outgo. Retain Buy with new Rs15 PO (target 6.5xFY13 adj. EPS) on attractive valuation. Improved op margin, successful refinancing could be next stock triggers.


■ Q3 operating profit ahead of expectation
Revs grew ~1%qoq, 5% ahead of our est with seasonal softness in collections more than offset by ramps in recent deal wins. EBIT was 6% ahead of est led by rev beat but declined 15%qoq on increased transition costs. A1-x loss of Rs71m related to FCCB buy-back led to 68%qoq decline in reported PAT.


■ Impressive pipeline conversion, led by telecom
Company announced 3 deal closures in the telecom segment, worth US$160m & should help post 10% rev growth in FY13 (constant currency terms). We also factor ~150bps op margin improvement from its ongoing restructuring efforts. Collections (10% of rev) remain chief drag on op performance with decline seen in collectible volumes. Forecast FY13 EBIT to grow 94%yoy from low-base of FY12.


■ Cash shortfall of ~US$65-70m appears manageable
Towards ~US$237m of FCCB redemption in Dec 2012, company has a cash chest of ~US$130m and is likely to generate another US$35-40m from normalizing of receivables and free cash from operations. Financing the shortfall of ~US$65-70m appears manageable with Net Debt / EBITDA estimated at ~4x.


To read the full report: FIRSTSOURCE
RISH TRADER