>TATA MOTORS : Land Rover registers 7.8% decline, Jaguar declines by 11.2% YoY (MOTILAL OSWAL)

Land Rover registers 7.8% decline, Jaguar declines by 11.2% YoY

 JLR Sep-14 sales declined by 8.4% YoY (+3.8% MoM) to 32,858 units (est. 38,256 units), driven by decline in both Land Rover and Jaguar.

 Our interaction with management indicates healthy demand environment. Decline in sales have been primarily due to production constraints on account of transition to upcoming launches of Jaguar XE, Discovery Sport and start of China JV in 4QFY15.

 Land Rover declined by 7.8% YoY to 27,143 units (est. 31,497 units), while Jaguar declined by 11.2% YoY to 5,715 units (est. 6,760 units).

 As per the regional retail sales performance data released, China grew at the highest rate of 25.3% YoY. The UK and Europe grew by 9.3% and 21.1% YoY respectively, while the AsiaPacific grew by 24.5%. All major markets registered growth, except US and RoW which declined by 12.3% and 2.5% respectively.

 Commenting on the September performance Andy Goss, Jaguar Land Rover Group Sales Operations Director said: "Jaguar Land Rover has delivered continued solid growth in September. Our investment in new products continues with the debut of the Land Rover Discovery Sport and the Jaguar XE this month, giving us a very strong, desirable range of products appealing to more customers than ever before - and many more new models in the pipeline."

Valuation and view

 We believe JLR is on the strategic path and is investing in the right areas, resulting in its evolution as a much stronger and balanced player in the luxury vehicle market.

 Domestic business is expected to bounce back strongly along with an economic recovery and favorable product lifecycle in the PV division.

 The stock trades at 7.7x/5.7x FY15E/FY16E consolidated EPS.

 Maintain Buy with a target price of INR620 (FY16E SOTP-based) for ordinary shares and INR372 for DVR (~40% discount to the target price for ordinary shares).

RISH TRADER

>CEMENT SECTOR: Higher profitability to sustain, given increasing capex cost

Highlights:
 Volumes are likely to grow 8-9% in FY13, driven by individual housing and expected infrastructure push. Seasonal price correction has been sub-normal till August due to delayed monsoon.

 Capacity addition should slow down to ~60mt over FY13-15. Increase in capex cost necessitates sustenance of higher profitability; downside risks are limited.

 The costs of power, fuel and freight, which have been rising, are likely to stabilize at elevated levels. The focus would remain on enhancing operating efficiencies and maintaining margins.

 We (MOTILAL OSWAL) prefer Ambuja and Grasim/Ultratech among large-caps and Shree Cement among mid-caps.

To read report in detail: CEMENT SECTOR
RISH TRADER

>CEMENT SECTOR: 3 favorable trends, 3 positive expectations; Upgrading EPS 4-6%; potential for further 10-20% upgrade

Trend #1 Strong realizations across companies, beating estimates by wide margins
Trend #2 In-line costs, with no major surprises; cost push showing signs of moderation
Trend #3 Meaningful upgrades across companies; street yet to catch up

Expectation #1 Stabilizing cost factors should assuage cost inflation
Expectation #2 Strong realizations even in monsoon season to drive further upgrades
Expectation #3 Meaningful upgrades in consensus estimates to drive stock prices

Prefer Ambuja and UltraTech/Grasim among large-caps, and Shree Cement among mid-caps.


1QFY13 numbers decipher more positives, no negatives
The cement majors have reported strong numbers for 1QFY13 (EBITDA 9-18% ahead of estimates), amidst a mixed bag of expectations – improvement in operations coupled with regulatory concerns post the adverse verdict by the Competition Commission of India (CCI). The robust performance is attributable to (1) strong QoQ improvement in realizations (6-8%), and (2) in-line volumes and cost push (which has been showing signs of stabilization). Given our positive outlook, we have upgraded our earnings estimates (4-11% for ACC, Ambuja and UltraTech), backed by 10-12% upward revision in realization assumptions.

To read report in detail: CEMENT SECTOR

>BHARTI AIRTEL: FY12 Annual Report

Key Highlights:
 While Africa business proforma revenue growth at aggregate level remained strong at ~25% in INR terms (~19% in USD terms) in FY12, there was significant divergence in the performance at the individual country-level. As per our proforma estimates, Bharti Africa witnessed ~35%+ USD revenue growth in Sierra Leone, Ghana, Uganda, and DRC (together contribute 18% of Africa revenue). However, proforma revenue growth is estimated to be single-digit/negative for Chad, Niger, Seychelles, Madagascar, Kenya, Malawi and Congo B (together constitute 21% of Africa revenue).

 Gross debt remains largely USD denominated (70%) followed by INR (19%) and other currencies (11%). Debt schedule indicates relatively high re-payment in FY13 with 28% of overall gross debt (INR193b) having maturity period of less than one year. However leverage remains relatively comfortable with FY12 net debt/EBITDA at 2.75x.

 Only ~9% of the overall borrowings for Bharti are at a fixed rate implying that interest rates remain key earnings variable. Every 1% increase in USD (INR) interest rate would have impacted Bharti's FY12 PBT by INR4.8b (INR1b).

 Earnings sensitivity to exchange rate remains high as well with adverse impact of INR4.6b on FY12 PBT (7%) for a 5% appreciation in USD assuming all other variables remained constant.

 Contingent liabilities have increased significantly during FY12 largely due to increased tax-related disputes. Contingencies increased 81% YoY to INR55.5b in FY12.

 We expect 14% EBITDA CAGR for Bharti over FY12-14E. The stock trades at EV/EBITDA of 6.5x FY13E and 5.3x FY14E.

 Maintain Buy with a target price of INR370 based on 7.5x FY14 EV/EBITDA for India & SA business, 5x EV/EBITDA for Africa business and INR142b impact for potential regulatory outlay.

To read report in detail: BHARTI AIRTEL

>JAMMU & KASHMIR BANK: 1QFY13

Strong business growth on the back of lower base
While on a sequential basis business growth remained muted, on a YoY basis loans and deposits grew 26% and 23% respectively. CD ratio improved marginally by 60bp QoQ to 62.6%, and there still remains ample of scope to improve CD ratio from hereon which would cushion margins. CASA deposits grew 18% YoY but declined 5% QoQ to INR205.6b led by moderation in CA deposits (+7% YoY but down 22% QoQ). As a consequence CASA ratio declined 200bp QoQ to 38.7%. SA deposits growth was healthy at 22% YoY (largely flat QoQ).

Margin decline just 6bp QoQ; strong fee income growth
Reported margins declined 6bp QoQ to 3.8%. While cost of deposits increased 52bp QoQ to 6.9%, higher yield on loans (+22bp QoQ) and investments (+27bp QoQ) partially negated the impact and led to healthy margin performance. Non-interest income growth was strong at 39% YoY led by fee income growth of +28% YoY and higher treasury income (INR202m v/s INR100m in 1QFY12 and INR227m in 4QFY12). Income from insurance commission was flat YoY at INR75m. As a result overall core income grew 3% QoQ and 23% YoY to ~INR5.9b.

Healthy asset quality performance; PCR at 90%+ one of the best in the industry
During the quarter bank shifted its portfolio in between INR1m and INR5m to system based NPA recognition. However, despite that there was no surprise on the asset quality front as bank contained its slippages to INR857m (annualized slippage ratio of 1.3% as compared to 1.2% in FY12). Remaining portfolio of INR82.9b (25% of overall loans; ~0.5m accounts) is expected to be transited to system based recognition by end of Sept-12. However management clarified that of the remaining portfolio that is to be transited INR47.5b (14.3% of overall loans) is to state government employees (personal finance) where the loan is guaranteed by their salary. Thereby asset quality is expected to remain healthy.

Bank continued to maintain high PCR of 94% (one of the highest in the industry), thereby NNPA was contained. While GNPA in percentage terms stood at 1.6%, NNPA% was at just 14bp (flat QoQ). During the quarter, the bank restructured loans of INR400m, taking the outstanding restructured loan portfolio to INR13.7b, 4.1% of overall loans.

Other highlights
 Given the current environment bank has made a contingent provision of INR239m taking the cumulative number to INR800m, which bank expects to utilize in case asset quality comes under pressure.

 Bank has entered into an agreement to sell 52m shares of Metlife India at a price of INR36.5 per share (totalling to INR1.9b), however the process is pending approval of IRDA. Further 66m shares are expected to be sold to PNB, however the price is yet not determined. Bank currently hold 220m shares of MetLife India and post completion of both the transaction, it would be still have 102m shares left.

 Break-up of loans with J&K (40% of overall loans): Agriculture segment - 15%; Trade - 16%; Personal Segment - 35%; SME - 16%; Corporate - 18%


 Break-up of loans outside J&K (60% of overall loans): Agriculture segment - 7%; Trade - 12%; Personal Segment - 4%; SME - 3%; Corporate - 81%

 Major portion of corporate loans is towards term loans, however bank would target to increase the share of working capital financing from here-on as it would also provide impetus to fee income.

Valuation and view
JKBK continues to deliver healthy performance on business growth, margins and asset quality. While shifting to system based recognition of NPA and strong growth in corporate segment outside J&K remains a risk to asset quality, strong margins of 3.7- 3.8% and PCR of 94% would provide cushion. J&K Bank is expected to maintain RoA of 1.3%+ and RoE of ~20%.The stock trades at of 0.9x FY13 BV of INR986 and 0.8x FY14 BV of INR1,144. Maintain Buy with a target price of INR1,145 (1x FY14E BV).

>TATA STEEL: Overseas business had an erosive impact on net worth

Despite free cash flows of INR22b, net debt increased 5% to INR524b Operating cash flows were up significantly due to working capital release in FY12 against large increase in FY11. Also, half of the INR120b capex was funded by asset sales. Despite free cash flows of INR22b, net debt increased 5% to INR524b.


Net worth driven by asset sales and translation gains, not by business profit
The net worth of the Tata Steel group increased by INR77b to INR433b largely due to equity infusion, asset sales, goodwill and asset translation gains. Core profit from India business after paying dividend contributed INR47b, but this was offset by INR42b of after tax loss in overseas operations. Actuarial loss of INR24b in overseas business had an erosive impact on net worth.


Adjusted EPS 11% lower than reported EPS
EPS adjusted for the distribution expense of INR2.25b towards hybrid perpetual securities (HPS) was INR18.6, 11% lower than reported EPS. From the common shareholder’s perspective, HPS is debt and the interest in the form of distribution expense should be adjusted against EPS.


Other highlights
 The management highlighted that Tata Steel Europe (TSE) is under enormous stress due to prolonged recession in Europe. Stricter environmental norms ahead will increase costs. The covenants on acquisition debt are also concerning.


 Full commissioning of the Jamshedpur Brownfield expansion is delayed by further three months. Poor 1QFY13 volumes and project delays have put the guidance of 1m tonnes of incremental volumes in FY13 at risk, in our view.


 Coking coal shipments have started from Mozambique in June 2012. Iron ore shipments from Canada are likely to start in 4QFY13. Outlook not very encouraging


 Significant cost increases on account of power, freight, iron ore, etc for India operations are sticky in nature. For TSI (Tata Steel India), the increase in revenue in FY12, driven by volumes and prices, was offset by increase in costs.


 TSE not only faces the challenge to deal with the steel price and raw material cost squeeze, but also rising specific fixed costs due to production loss.


To read report in detail: TATA STEEL

>JSW ENERGY

 1QFY13 adjusted PAT higher than estimates: During 1QFY13 adjusted PAT stood at INR1.9b v/s our estimate of INR1.6, consolidated PAT boosted by higher generation. JSWEL reported forex loss of INR2.3b pertaining MTM on Buyer's credit availed from bank (USD442m as at Jun-12) towards coal imports and is marked at INR56/USD as at June 2012. Subsidiaries performance was impacted by one-off charges as accelerated depreciation of INR100m led to losses of INR200m at SACMH and at Jaigad transmission, company booked reversal of arrears of INR240m. Raj West recorded improvement in performance with PAT loss INR100m for 1QFY13, vs ~INR450m YoY.


 Robust operating performance, gross margin on up move: JSWEL net generation during the quarter stood at ~4.7BUs units (up 95% YoY), led by better PLFs at all the projects. In 1QFY13 gross margin improved to INR2.1/ unit, vs lows of INR0.2/unit in 2QFY12. Fuel cost was flat QoQ as entire coal inventory of the last quarter was consumed and benefit of lower prices would be realized from 2QFY13.


 Key takeaways from Analyst meet: a) Target to commission all units of Raj West project by Sept-12, hopeful of getting clearance for ~7mtpa production from Kapurdi mines, all units to operate from 3QFY13E, b) Booked entire Vijaynagar capacity for next 12 months at ST realization of INR4.25/unit+, c) Limit Buyer's credit (USD442m as at Jun-12) exposure to USD400m mark to avoid huge forex exposure, and d) fuel cost to see moderation in 2QFY13 as high cost inventory at Ratnagiri is fully consumed in 1QFY13.


 Valuations and view: We JSWEL to report consolidated net profit of INR6.2b (up 88% YoY) in FY13E and INR10.5b (up 69% YoY) in FY14E. Stock trades at PER of 8.3x and P/BV of 1.3x (RoE of 16%) on FY14E basis. Maintain Buy.

>VARDHMAN TEXTILES

Vardhman Textiles’ (Vardhman) Q1FY13 numbers were a mixed bag – revenues came in marginally lower than our expectation but EBITDA and PAT surprised positively. The company reported a robust expansion in operating margins (both sequentially and YoY) led by healthy improvement in realisations (sequentially) and substantial reduction in input costs YoY. The company is on track with expansion plans and is also going ahead with the expansion of 55,000 spindles that it had put on hold. Even in a bleak economic situation, the company is going ahead with the expansion plans as it is unable to cater to the customer demands completely and has, hence, laid out a capital expenditure of | 1,800 crore during FY12-14E. Considering the uncertainty over the profitability scenario in H2FY13E we have not revised our estimates. During FY12- 14E, we expect sales, EBITDA and PAT to grow at a CAGR of 16.0%, 18.4% and 30.0%, respectively. However, the current valuations do not provide comfort. Therefore, we maintain our HOLD rating on the stock.


Operating margins – a positive surprise…
Vardhman’s Q1FY13 revenues remained flat both YoY and QoQ, at | 939.6 crore as against our estimate of | 1,008.2 crore. The yarn segment de-grew 4.6% to | 804.5 crore while the fabric segment grew marginally (up 2.0% YoY) to | 314.8 crore. Operating margins were up 1424 bps YoY to 18.1% as the company had taken a one-time inventory write-off in the corresponding quarter last year.


…but an uncertain H2FY13 prevents change in estimates
Even though the company has positively surprised us on the operating profit front we have not increased our earnings estimates as we are apprehensive about the profitability situation in H2FY13E. With a lower cotton crop expected in cotton season 2012-13, prices of cotton are likely to remain firm or trend upwards, thereby pressuring the profitability.


Uncertain times and a weak past lead to discomfort with valuations 
Vardhman is recovering well from a painful FY11 with demand picking up and also an improvement in margins (due to favourable realisations and input prices). However, we feel the current stock prices factor in the positives and see limited upside from current levels. We maintain our HOLD rating with a target price of | 229 (based on an average arrived at by assigning a multiple of 0.7x FY14E book value and 4.5x FY14E EPS).


To read report in detail: VARDHMAN TEXTILES

>SANOFI INDIA

Sanofi India's (SANL) 2QCY12 operational performance was in line with our expectations. Key highlights:


 Net sales grew 23.5% YoY to INR3.74b v/s our estimate of INR3.7b. We believe topline growth has been led by strong growth in domestic revenue on consolidation of Universal Medicare acquisition. Exports are also likely to have grown during the quarter.


 EBITDA grew 22% YoY to INR522m v/s our estimate of INR537m. EBITDA margin contracted 10bp to 14% v/s our estimate of 14.5%.


 Adjusted PAT declined 18.5% YoY to INR405m and was lower than our estimate of INR442m due to higher amortization cost relating to the brands and technical knowhow acquired from Universal Medicare in 2011.


 SANL has, in the past, indicated that for the domestic business, the rural and OTC segments will be the key growth drivers, and that it is likely to incur extra expenditure to establish its presence in these segments. This is likely to pressurize short-term profitability.


We believe SANL will be one of the key beneficiaries of the patent regime in the long-term. The parent has a strong R&D pipeline with a total of 61 products undergoing clinical trials, of which 18 are in Phase-III or pending approvals. Some of these are likely to be launched in India. However, SANL's profitability has declined significantly in the last five years, with EBITDA margin declining from 25% in CY06 to 14.3% in CY11, mainly impacted by discontinuation of Rabipur sales in the domestic market, lower export growth and higher staff & promotional expenses. RoE has declined from 28.6% to 17.3% during the period. The stock trades at 29.9x CY12E and 23.8x CY13E EPS. We believe that the stock performance will remain muted in the short term until clarity emerges on future growth drivers. Maintain Neutral.


To read report in detail: SANL

>AXIS BANK: 1QFY13 Results Update

Axis Bank’s 1QFY13 PAT grew 23% YoY to INR11.5b, in line with our estimate of INR11.2b. Lower than estimated opex growth compensated for the muted fee income growth. Key highlights:


 Daily average CASA ratio declined to 36% from 38% in FY12 and 37% in 1QFY12, led by continued moderation in average current account (CA) deposit growth. Daily average savings account (SA) growth (+22% YoY) remained healthy, with strong customer acquisitions (+26% YoY).
 Fee income growth continued to moderate (less than 10% YoY growth in the last two quarters). Fee income as a percentage of average assets declined 30bp QoQ, leading to RoA contraction of 24bp QoQ.
 Reported loan growth was strong at 30% YoY. However, loan growth was 25% YoY, adjusted for INR depreciation, and 21% YoY, adjusted for lower base (on account of repayment of short-term loans).
 Margin decline of ~18bp QoQ to 3.37%, slippages of INR4.6b, and addition of INR6.3b to restructured loans were largely on anticipated lines. However, muted recoveries and upgradations were disappointing.


Valuation and view: Axis Bank’s key strength has been its ability to grow CASA deposits (~35% CAGR over FY06-12). Given its strong and rapidly growing liability franchise, we expect SA growth to remain healthy (with strong customer acquisitions). While pressure on asset quality has increased, it still remains under check. Healthy NII and fee income growth coupled with stable cost to income ratio should lead to 19% and 15% CAGR in core operating profit and PAT over FY12-14. Maintain Buy.


To read report in detail: AXIS BANK

>ONGC: Aspiration to double overall production by 2030

Ad-hoc subsidy a near-term risk; sector reforms in the offing


 ONGC has chalked out a perspective plan, under which it targets to double overall production and increase production of its overseas subsidiary, OVL, six-fold by 2030.


 The company expects to increase its gas production to 100mmscmd by 2016-17, led by the development of its deepwater fields in KG basin and Daman offshore.


 Ad hoc subsidy sharing is near-term risk. Given the precarious government finances and easing of inflationary pressure, it believes sector reforms are in the offing.


 The stock trades at >40% discount to global peers at 10.3x FY13E EPS of INR27.3. Buy


To read report in detail: ONGC


RISH TRADER

>MPHASIS: Mulling share buyback as cash reserves pile up

 The company expects volumes in Direct channel to rebound in 3QFY12, with 3-4% QoQ growth. HP shall continue to be a drag with sequential volume decline of 4-5%. Despite average wage hikes of 8% at offshore and 3% at onsite, and a mere ~5-10bp OPM sensitivity to per percentage change in currency, the company expects EBITDA margins to expand by 30-40bp QoQ in 3QFY12, led by: [1] Facilities consolidation, as the company gave up as many as 3,000 seats after continued headcount decrease, and [2] ~50bp tailwind from currency.


 EBIT margins in HP's services business have fallen sharply, and the parent company is focused on profitability. This is driving HP's decision to shift some work to their wholly owned subsidiary HP India at Mphasis' expense. Volumes from HP channel will be flat to marginally lower in FY13 too, while volumes in direct channel are expected to grow by 10%. The company expects FY13 EPS to be ~INR41-42, on the back of favorable hedges (@~INR52/USD v/s ~INR50 for FY12).


 Mphasis continues to generate operating cash flow of ~USD15m per month, and with no big-ticket acquisitions on the anvil, the management is mulling over the possibility of a share buyback.


 We have revised our FY12/13 revenue estimates downwards by 1.4/2.1% and increased FY13 EPS estimate by 4.4%. While buyback expectations may support the stock, structural growth problems on high HP dependency need to ease off before we turn incrementally positive on Mphasis. The stock trades at 10x FY13E earnings. Maintain Sell.


To read report in detail: MPHASIS
RISH TRADER

>STRIDES ACROLAB: Acquired a USFDA-approved sterile formulation facility from Star Drugs and Research

Acquires USFDA approved sterile formulation facility for INR1.25b
During the quarter, STR acquired a USFDA-approved sterile formulation facility from Star Drugs and Research. The facility is located at Hosur, near Banglore, and has a capacity to manufacture 97m units of liquid vials. The company paid INR1.25b for the facility, largely from internal cash accruals. The net block of the acquired facility stands at INR680m. Acquisition of this facility provides STR immediate incremental sterile manufacturing capacity; all the existing capacities are fully booked due to drug shortages of sterile injectables, worldwide. This acquisition will help STR accelerate the launch of its approved products in the US market and give additional leverage to secure GPO contracts. The facility is expected to contribute to revenue from 3QCY12, as product site transfers will take about three months.


Specialty business in US to see significant ramp-up led by new capacities, product approvals and low competition
Specialty business in the US is likely to see significant ramp-up on the back of USFDA approval for STR’s new sterile injectable and oncology facilities at Bangalore and Penems facility in Brazil. STR is in the process of shifting manufacturing of all approved injectable products to its new facility, thereby eliminating capacity constraints. It has already shifted few key products to the new facility. STR has 73 product approvals in the sterile segment in the US, of which it has launched 42 products as against just 33 products till the end of 4QCY11 due to capacity constraints. STR plans to launch all approved products in CY12, which will boost revenue from the specialty business, significantly.


The company expects strong product approvals in this market even in CY12. Further, the management also mentioned that 6 of the 8 major players in injectable segment have been facing production issues, which in turn is helping STR to increase its revenue rapidly in the US market. STR is entering into long-term contracts ranging from 2-5 years with GPOs to establish its strong credentials as reliable supplier of injectable products in the US market. It expects to garner 15-25% market share in the products it has launched in the US, backed by Pfizer’s strong marketing and distribution set-up and lower competition. The management also mentioned that for the first time it has started developing products for Para-IV filings in the US market and plans to file 14 Para-IV products in the US in CY12. Further, it plans to file 14 products in the ophthalmic segment in CY12.


Upgrading earnings estimates by 21% for CY12 and by 15% for CY13

• Based on 1QCY12 performance, we are upgrading our revenue estimates by 2% for each of CY12 and CY13.
• However, given the much higher EBITDA margin in 1QCY12 and strong management guidance for CY12, we are upgrading our earnings estimates by 21% for CY12 and by 15% for CY13.

Valuation and view
STR is set to emerge as a specialty products company with revenue contribution from this segment rising from 28% in CY09 to an estimated 75% in CY13. It has an impressive specialty product pipeline. Large manufacturing capacities are in place to support revenue scale-up, coupled with best-in-class marketing partners like Pfizer and GSK. We believe that the sale of Ascent Pharma at attractive valuations will lead to significant improvement in the company’s financials. STR may unlock further value from the sale of the remaining pharma business, as its focus remains on the specialty business. We expect STR to post 24% earnings CAGR over CY11-13, led by revenue ramp-up from the SI (sterile injectables) segment and substantial reduction in interest cost owning to debt repayment. Core EBITDA margin will expand in line with changing product mix and higher capacity utilization. Return ratios are set to improve over CY11-13 and debt-equity will decline from 1.9x in CY10 to 0.7x in CY13. The stock trades at 11.7x CY12E and 11x CY13E EPS. Buy with a revised target price of INR823 (14x CY13E EPS), an upside of 28%.


To read report in detail: STRIDES ACROLAB
RISH TRADER

>INDIA STRATEGY- ECONOMY: Growth should be the focus of RBI/government

CRADLE OF PESSIMISM



FY12 turned out to be a year of reckoning for most countries. India witnessed rapid slowdown in growth, coupled with near double-digit inflation. Accordingly, we also had to tone down many of our optimistic assumptions. With the uncertainties persisting, we now focus more closely on the coming quarter (1QFY13), while annual projections would remain a critical input for our forward-looking assessment.


■  We estimate inflation at 6.5% for March 2012 and at 6.2% for 1QFY13. These estimates have seen some upward revision in the last couple of months, led by global crude prices, budget proposals, electricity tariff hikes and pending fuel price hikes. These factors have also led us to revise our average inflation estimate to 6.8% for FY13 from 5.6% earlier. We believe inflation would remain within the 6.5% level for a major part of FY13 and will inch above 7% only after December 2012. This presents a reasonable 8-month window of opportunity for the RBI to first ease rates and then pause, as inflation begins rising once again in December 2012. We expect the RBI to cut rates by 100bp in CY12.



■ The liquidity deficit persisted through FY12, but became aggravated during 2HFY12. The government/RBI has also scheduled a larger part (65% of gross and 59% of net) of borrowing for 1HFY13. Some softening of the liquidity situation is likely in April-May 2012, but should firm up once again due to large net borrowings, slowing money supply growth and stress from the external situation. To tide over the liquidity problem, we expect the RBI to undertake open market operations (OMOs) totaling INR1.8t during FY13.


■ The latest BoP data indicates significant stress on the external situation. While merchandise trade volume has declined in 3QFY12, invisibles have been failing to grow for some time. Trade and current account gaps are reaching their record levels at 10% and 4%, respectively. The scenario is unlikely to improve much in FY13 due to multiple headwinds, including weakness in the western economies, high oil prices, etc. Additionally, the INR is vulnerable to inflation. Considering these factors, the exchange rate should hover at INR50-52/USD barring  unexpected developments in balance of payments (BoP) or inflation.


■ Policy flip-flops in many key areas of reform coupled with the coming together of various macroeconomic risks have heightened uncertainties prevailing in the market. While many factors such as coalition politics, political bickering, strained relationship between the government and the judiciary and general lack of governance has been held responsible for this, the combined impact of these events has taken a toll on the investment cycle and attractiveness of India as a destination for foreign capital. We believe meaningful progress in some of these areas is necessary to restore investors’ confidence.


To read report in detail: INDIA STRATEGY
RISH TRADER

>DISH TV: Indian pay TV subscription story strong, led by increasing digitization; DTH at the forefront of digitization wave

■ Re-initiating coverage with Neutral rating and TP of INR65: We re-initiate coverage on Dish TV (DITV), with a Neutral rating and target price of INR65. DITV is well positioned to benefit from the ongoing digitalization further boosted by government regulations to phase-out analogue broadcasting which should drive 22% revenue CAGR and 30% EBITDA CAGR over FY12-14E. However we are cautious due to 1) likely increase in competitive activity as six DTH operators and several MSOs might see digitalization as an opportunity to grab subscribers, 2) lower room to squeeze content cost percentage further down, and 3) already high consensus expectations. Our FY13/14 EBITDA estimates are 9/6% lower than consensus. Valuation at 9.3x FY14 EV/EBITDA (11.6x adjusting for lease rentals) and ~USD110/subscriber is not inexpensive.


■ Strong leadership position in DTH; high churn and potential increase in competitive intensity remain concerns: DTH technology is leading the digitization wave, with industry subscriber base of ~40m or one-third of the total cable and satellite base of ~120m. The DTH industry has been riding a tailwind of (1) weak competition from the fragmented cable industry, (2) preferred treatment from broadcasters (in the form of fixed-fee payment structures), who have been combating under-declaration by cable operators, (3) better execution capabilities, (4) strong balance sheet support, resulting in ability to withstand significant cash burn, and (5) the government's fresh deadline for sunset of analog broadcasting by December 2014. DITV enjoys a leadership position, with ~30% subscriber share in the fast-growing 6-player Indian DTH market. However, we expect subscriber churn to peak in FY12 and remain at elevated levels going forward (14-15% p.a. of net subs) as compared to FY09-11 levels (9-10%) due to increase in competition from DTH as well as cable operators.


■ Expect 19% subscriber CAGR, 6% ARPU CAGR over FY12-14: Subscriber additions
have weakened since 3QFY11 due to (1) one-off demand in the earlier period related to cricket World Cup and IPL, (2) general economic slowdown, and (3) increase in connection costs and tariffs by the DTH industry. We model gross subscriber addition of 2.7m in FY12 (v/s 3.5m in FY11), 3.5m in FY13 and 4m in FY14, which will drive ~19% CAGR in average net subscribers over FY12-14. We model 6% CAGR in DITV's ARPU over FY12-14, which will be driven by increase in renewal ARPU as well as lower proportion of subscribers on activation plans.


To read full report: DISH TV
RISH TRADER

>RELIANCE INDUSTRIES: Share buyback to provide only near-term support to valuations; Neutral

■  Business fundamentals to drive long-term stock performance: RIL's 2012 share buyback announcement of INR104b (120m shares; 3.7% of outstanding equity and 7% of free float) "to increase shareholder value" is meaningful, though we will have to wait to know the actual buyback (25% mandatory; 1.7% till date) quantum. We expect the buyback to act as a support to valuations in the near term. However, over the long term, stock performance would be driven by (1) business fundamentals, and (2) cash utilization.


■  Outlook for core businesses not very encouraging: Refining and petchem margin performance will be primarily governed by the global economic environment (particularly Europe). We remain cautiously optimistic on refining margins, primarily due to increased refinery closure rate in US and Europe. On the petchem front, we believe that the margins have bottomed out. Gas production at RIL's flagship KG-D6 block is declining. While BP's stake purchase is positive for the E&P business, RIL has not shared any concrete ramp-up plans yet.


■  RoE-accretive cash deployment a key challenge: Cash deployment has been a key challenge for RIL post the completion of the new refinery and KG-D6 development. Apart from annual cash generation of USD6b, RIL has ~USD22b for deployment. The company has made investments of over USD8b in new ventures, but we do not expect meaningful positive contribution from these businesses before end-FY14. Though the most tax efficient way to reward shareholders, we believe share buyback is only a short-term solution.


■  Cutting estimates; maintain Neutral: We are cutting our FY12/FY13 EPS estimates by 3%/4% to factor in lower GRM in FY12 and cut in KG-D6 production assumptions from 43/35mmscmd to 42/28mmscmd in FY12/FY13. The stock trades at 10.8x FY13E adjusted EPS of INR66.9 and at an EV of 7.3x FY13E EBITDA. Maintain Neutral with a target price of INR800.


To read full report: RIL
RISH TRADER

>ITC: Best pre-budget return in the stock since 2006

ITC's stock has appreciated by 4.2% over the past two months, and is the best pre-budget returns since 2006. This performance is being partly driven by the strong stock market rally since end December 2011. There are expectations of a double digit increase in excise duty on cigarettes given the fiscal constraints of the Central government. However, ITC has given negative returns (after budget) only on two occasions in the past eight years; as the company has managed to pass on the increased duties given the superior pricing power. We believe that any correction in the stock price will provide a good entry point. Maintain Buy. Expect double-digit hike in excise duty; VAT to increase in a few states: There is high probability of double-digit hike to combat the inflation impact. However, very sharp excise increase looks unlikely as revenues suffer due to decline in volumes. Out of the 6 six states that have announced budgets, only Bihar and J&K hiked the VAT. There seems little incentive to increase VAT beyond 20% as differential taxes promote cigarette smuggling from neighboring states. However we expect another 100-150bp increase in the VAT rate (currently 18.5%).


ITC's price increases are ahead of hikes in duty and taxes: Increases in excise duty has a cascading impact on taxes as VAT is imposed at post-excise cigarette rates. We estimate that ITC needs to increase cigarette prices by 2.3% for every 5% increase in excise duty to maintain realizations/stick. The price increase required to neutralize the impact of a 1% VAT rate increase is ~0.8%. ITC has been hiking prices at a rate higher than the increase in duties and taxes. We note that excise duty declined from 55% of sales in FY06 to 44.5% in FY12.


ITC's cigarette segment's EBIT grew 15% even during bad times: ITC's cigarette segment posted 16.8% EBIT growth in FY11 and is expected to register ~20% growth in FY12. The company has been calibrating its price hikes and volume growth to grow its cigarette EBIT by 15% CAGR since 2003 due to its strong pricing power. It increased prices by ~6% in FY12 so far. We estimate the cigarette business to register 15.2% EBIT CAGR post FY12. A lower-than-expected hike in excise duty and higher volume growth could result in higher growth.


Non-cigarette segments' EBIT up 26% in 9MFY12; outlook positive: We expect non-cigarette EBIT to grow at 20% over FY12-14 led by (1) gradual reduction in the FMCG losses, (2) 14% EBIT CAGR in paperboard led by capacity expansion, (3) recovery in hotels, and (4) 15% EBIT CAGR in Agri business led by gains from new leaf tobacco facility in Mysore. We estimate 17% PAT CAGR over FY12-14. The stock trades at 22.5x FY13E EPS of INR9.2 and 19.2x FY14E EPS of INR10.8. Buy.


To read full report: ITC
RISH TRADER

>PIPAVAV DEFENCE & OFFSHORE

■ India's growing defense expenditure presents a huge opportunity: Given the ~USD200b expected allocation to defense capital expenditure for the period 2012-2017, India is set to ramp up its naval capabilities meaningfully. With its 'Buy Indian, Make Indian' initiative, the Ministry of Defense (MOD) is increasing stress on indigenization. The Ministry also envisages a greater role for the private sector, which should benefit established players like PIPV.


■ PIPV is suitably positioned - has first mover advantage, strong international tieups: PIPV enjoys first mover advantage and best-in-class infrastructure in the shipbuilding segment. It operates the second largest shipbuilding capacity in the world. PIPV uses modular construction technology, with two 600MT Goliath cranes, which enables it to reduce the construction and delivery time of vessels. Further, it enjoys strong strategic partnerships with several international players, which should aid robust warship order booking in the near future. MOD's growing stress on indigenization and its Mazgaon JV should boost order intake.


■ Capacity utilization increasing; expect revenue CAGR of 40% over FY12-14: PIPV's current capacity, which is currently USD1.7b (in terms of revenue potential), is likely to shoot up to USD2.5b once the second dry dock becomes operational by 2014. In FY11, capacity utilization stood at USD170m (10% of total capacity). We now expect capacity utilization of USD360m (22% of total capacity) in FY12. We expect revenue to grow at a CAGR of 40% over FY12-14. Our earnings estimates largely factor in execution of the existing order book of USD1.3b. We have not factored in possibilities of increased defense orders.


■ Initiating coverage with a Buy rating: We believe that PIPV is well placed to exploit the massive opportunity that India's defense sector offers in the next few years. It has global-sized assets and best-in-class tie-ups. Also, PIPV offers the only credible large-size exposure for investors to India's defense business. We estimate net profit at INR532m for FY12 and INR809m for FY13, translating into an EPS of INR0.8 for FY12 and INR1.2 for FY13. We value PIPV based on replacement cost method at INR67b (INR100/sh). Initiate coverage with a Buy.


To read full report: PIPAVAV DEFENCE
RISH TRADER

>SHREE RENUKA SUGARS: New crushing season commenced

■ Shree Renuka Sugars' (SHRS) reported 11% YoY growth in EBIDTA to INR3.3b for 5QFY12 (change in accounting year to April-March from October-September). Revenue declined 9% YoY to INR20.5b, while PAT surged 4x to INR3.4b due to forex gain of INR4.3b on USD/Real dominated liabilities. The forex gain was due to adoption of revised accounting standard to amortize change in long term foreign exchange liabilities over the tenor of the liability.


■ Standalone EBITDA slipped by just 3% YoY, despite the huge 37% YoY decline in revenue (on account of lower sugar sales and trading revenue). Expansion in EBITDA margin is attributed to the improvement in realizations across all segments. The company expects its refinery business to improve over next couple of quarters due to (1) favorable sugar spread; and (2) substantial availability of domestic raw sugar.


■ In Brazil, numbers remained steady on a YoY basis, although margins improved on account of higher sugar realization. However, higher realization was offset by lower volumes on account of adverse weather that impacted crushing volume of Renuka do Brasil (RDB). After the severe impact on cane yield in 4QSY11, the management expects yields to recover to ~65t/ha going forward.


■ During 5QFY12, SHRS has achieved its plantation target of ~25,000 ha (20,045ha at RDB and 5,136ha at VDI). We expect re-plantation to lower average age of crops and improve productivity/yield.


■ The company's net debt increased by ~INR7b to ~INR90b due to the increase in working capital debt in Indian operations. The management guided the divestment of co-gen business (138MW at Equipav) to be concluded by Feb-end. We believe this event would be a key trigger for the company's re-capitalization target.


■ Going forward, key triggers for the stock's would be: (1) turnaround in volumes and cane yield of its Brazilian operations, (2) upswing in international sugar prices, and (3) reduction in debt.


■ The stock trades at 5.8x FY13E EPS of INR7, and EV/EBITDA of 5.2x FY13E. We continue to value SHRS at 6x EV/ EBITDA, leading to a lower target price of INR50. Maintain Buy.


To read the full report: RENUKA SUGARS
RISH TRADER

>THIRD QUARTER FINANCIAL YEAR 2012 REVIEW: Healthy core operations overshadows higher restructuring

Slippages decline sequentially; Sharp rise in restructuring


■ Key highlights for private banks: (1) Largely stable NIM QoQ, (2) Asset quality continues to be strong, with GNPA% stable/declining QoQ, (3) Business growth robust, investment book growth remains healthy, as large corporate funded by credit substitutes, (4) Mid-cap private banks report strong growth in SA Deposit post deregulation of SB rates.


■ Key highlights for state-owned banks: (1) Largely stable margins QoQ, (2) strong fee income performance QoQ, (3) loan growth improves QoQ, however remains low on a YoY basis. (4) fall in CA deposits leading to muted CASA growth, (5) On a higher base (slippages were at an elevated level as in 2QFY12 most of the state owned banks migrated to system based recognition of NPA), slippages declines sharply QoQ (6) Addition of ~100bp of loans to restructured loans largely led by one large telecom account.


■ Positive surprises: (1) ICICIBC: Improvement in margins (+10bp QoQ) and strong performance on asset quality. (2) SBIN: Strong margin improvement (+26bp QoQ) (3) BoB: NIM stable QoQ, and robust fee income growth YoY. Among other banks FB, SIB and VYSB also delivered strong NIM and asset quality performance.


■ Negative surprises: (1) UNBK: Higher provisions due to restructuring of loans (it had taken an NPV hit of 25% on one large telecom account restructured visa–vis 10-15% by its peers). (2) CBK: Sharp contraction in NIM (cal) by 20bp QoQ (3) BoI: Addition to restructured loans of INR30b in 3QFY12.


To read full report: INDIAN FINANCIALS