>RANBAXY LABORATORIES: Q2 – ahead of expectation driven by gDiovan (NOMURA)

Ranbaxy’s Q2 performance was better than our and consensus expectations on account of better-than-expected sales in its US business. In July 2014, the company launched generic Diovan in the US with six-month exclusivity, which was the key reason for the positive surprises on sales (~5%) and

EBITDA (~33%), in our view. We estimate Diovan sales at ~USD 110-120mn for Q2 vs our expectation of USD 76mn. Sandoz has also indicated generic Diovan sales at more than USD 100mn for the quarter, which holds similar market share as Ranbaxy. Also, we think that the EBITDA margin of Diovan came in significantly higher vs our estimates.

Sales in most of the other geographies ex India were below expectation, mostly on account of (a) API supply constraints from the Devas and Toansa facilities, and (b) lower tender (ARV) business.

With the announced merger with Sun Pharma (every shareholder of RBXY will receive 0.8 shares of SUNP), its share price is more linked to SUNP’s share price. Our target price of INR 694 is on based on 0.8x SUNP’s TP (based on the merger ratio) of INR 868.

Key highlights from Q2 results

 Consolidated revenue was ~5%/9% ahead of our/consensus expectations. This was on account of better-than-expected sales in the US driven by gDiovan.

 Material cost as a % of sales came in at 31.3%, lower than our expectation of 33.9% on account of higher sales of gDiovan having high gross margin. Other expense was ~4% below our expectation on account of cost control measures taken by company.

 EBITDA came in at INR 8.79bn, which was significantly above our estimate of INR 6.6bn and consensus expectation of INR 4.8bn on account of higher sales and lower other expense. Reported EBITDA implies margin of 27.3% vs our expectation of 21.5% and consensus of 16.1%.

 Reported PAT at INR 4.8bn was ~31% ahead of our expectation of INR 3.66bn and significantly ahead of consensus of INR 2.7bn.

 Regional performance –

o US business – US reported strong sales-driven launch of generic Diovan with six-month exclusivity in July 2014. US sales were ~24% ahead of our expectation. Q-Q, US sales were up USD 109mn, which we believe was largely driven by gDiovan. This corresponds to our estimate of USD 76mn.

We believe a significant part of the exclusivity sales is booked in the quarter.

o India business (including consumer healthcare) reported sales growth of 12% y-y, better than IPM growth. Company India sales were in line with our expectation. Though sales of consumer healthcare has declined y-y over last three quarters, management expects sales to pick up as excess inventory in the channel gets consumed.

o Eastern Europe and CIS - Sales in Q2 declined ~15% y-y and were ~15% below our expectation. This was on account of lower ARV sales in Russia and Romania. Geopolitical instability affected sales in Ukraine.

o Western Europe – Sales in this region grew ~15% y-y and was marginally below expectation. The company reported strong growth in UK, Germany, Spain and North Europe.

o APAC and Latin America reported sales declined ~18% y-y and were ~22% below our expectation. This was on account of (a) change in business model in Thailand, and (b) API supply constraints from the Toansa and Devas facilities, which affected sales in Malaysia and Brazil.

o Africa and ME reported sales declined ~4% y-y and sales were ~8% below expectation. As per management, this was on account of lower tender (ARV) business.

Key takeaways from the conference call

 Nexium exclusivity – Company has reiterated it has six-month exclusivity in Nexium and will launch in the US market after approval.

 Derivative position – Total outstanding derivative contracts stand at USD 373mn at end of Q2FY15 vs USD 470mn at end of Q1FY15. As per the company, currently contracts worth ~ USD 32mn mature every month, but this run rate will decline going forward.

 Mohali facility – As per management, the Mohali facility will be the first facility to be remediated. The Mohali facility is currently under import alert from the US FDA.

 Toansa and Devas facilities – As per management, API production at these two facilities have started after company voluntarily suspended supply to all markets in February 2014. These two facilities are under import alert from the US FDA.

 Net debt stood at USD 739mn at end of Q2FY15.

RISH TRADER

>SESA GOA: Iron ore mining suspended in Goa

Goa government suspends iron ore mining in the state …
The state government of Goa has suspended iron ore mining in Goa, as recommended by the Justice Shah committee constituted earlier to probe the allegations of mining irregularities. Please note that the government has allowed movements of iron ore already produced and stored at ports or in transit.

Little impact on steel production in India – majority of iron ore was exported
Goa produced close to 50mn tonnes of iron ore in FY11, of which 40-45mn tonnes were exported, as per industry sources. Not more than 2-2.5mn tonnes of iron ore produced in Goa are for domestic use (largely
for sponge iron).

Therefore we believe the impact of mining ban in Goa will be different from that in Karnataka, as domestic steel production would be largely unaffected by this. Indeed, seeing the global iron ore scenario we believe the event could help to provide temporary support to global iron ore prices which in turn may help steel prices.

Closure of mines in Goa may be short lived unlike Karnataka
Our interactions with industry sources suggest that iron ore mining suspension in Goa is likely to be short lived and mining should start in the next 1-2 months. The key reasons for the above belief are: 1) mining irregularities reported are not as severe as in Karnataka; and 2) iron ore mining is much more important for Goa compared to Karnataka.

Goa has total GDP of close to USD6.5bn and iron ore exports tend to contribute near 50% of it. At the same time the ban has been imposed by the current government which will be affected more by popular sentiment (which supports mining).

Negative SESA GOA, but no major value impact
In our opinion, the news is certainly negative for SESA GOA, given that the company will not have any operational iron ore mine now under the new directive and its Karnataka mines are yet to restart production. 

The iron ore business, which is close to 15% of total EBITDA and 19% of total profit of the merged SESA Sterlite, will now cease to contribute to earnings.

Since we don’t expect the ban to continue for long and thing are improving in Karnataka, we believe value impact from the above would not be significant. Our interactions with traders in Goa suggest that SESA GOA’s mines would not be involved in any major irregularity and hence we don’t expect any loss of reserves for the company.

The iron ore business contributed INR40/share to our target price of INR220/share (of the merged entity SESA Sterlite).


To read report in detail: SESA GOA

RISH TRADER

>BHEL: Coalgate, fake orders and then some more

Action: Execution outlook worsens, while stock seems fairly valued 

Recent news flow regarding several private sector power producers being implicated in the ‘coalgate’ scandal, some of which are BHEL’s existing customers, has negative implications for BHEL’s execution outlook. We estimate that ~28% of BHEL’s existing order book is at risk now (compared to ~19% earlier) and this drives our earnings cuts over the next few years. Simultaneously, several other private power developers have allegedly placed fake orders with power equipment companies in order to boost their chances of securing coal mines in India. Such issues question the credibility of the 115GW equipment orders placed in the system and raise the possibility that post clean-up of some of these orders (through cancellation/forfeiture), new order activity could revive sooner than earlier expected, albeit likely to be in 2-3 years, in our view. In the medium term, we believe the outlook remains highly uncertain as the clean-up of existing orders will bring accompanying pain for the incumbents.

Catalysts: Orders, results and sector concerns Execution and order inflow/cancellation clarity are key stock catalysts.

Valuation: Cut FY13F-14F earnings estimates 1-8% and TP to INR199 We continue to value BHEL based on a DCF methodology (Ke 13.5% and terminal growth of 4%). Our TP of INR199/share factors in deteriorating margins (down to 12-14% levels post FY14 and 8% post FY17) and 6GW p.a. coal-based order inflow over the medium term. Given ~0.5% potential upside from current levels, we maintain our NEUTRAL rating.

To read report in detail: BHEL

>TATA MOTORS: JLR’s US retail volume up 32% y-y in Aug-12

JLR’s retail sales volume in the US increased by 32% y-y in Aug-12.
After four months of weak growth (~7% y-y avg growth), volumes in Aug- 12 were much improved, in our view. We note that Aug-12 had 1 more selling day as compared to Aug-11, and we estimate that this benefitted growth by around 4%. [Note that August retail sales data include 700 units (621 units in July-12) of Evoque. Sales of older models (ex- Evoque) were up by around 12%.]

We are building in flat volumes for models ex-Evoque in the US for JLR in FY13F, compared to around a 6% y-y decline in volumes thus far (FYTD: Apr-Aug).

In Aug-12, based on data from AutoData Corp, Audi sales were up 13% y-y, BMW sales declined 19% y-y and Mercedes sales rose 12% y-y. Total industry US market sales including all vehicle types increased by
20% y-y.

The weighted-average marketing and promotional spend for JLR increased by 4% m-m in August; incentives declined by 2% m-m at Jaguar and increased by 20% m-m at Land Rover.

To read report in detail: TATA MOTORS
RISH TRADER

>HCL TECHNOLOGIES: NDR Feedback

We hosted HCL Tech on an NDR in Asia last week. The management team was represented by Mr Anant Gupta (President & COO), Mr Anil Chanana (CFO) and Mr Sanjay Mendiratta (Head of IR). The key takeaways from the NDR were: 1) significant market-share shift opportunity over the next 2.5 years, when ~USD140bn worth of deals come up for renegotiation, 2) overall spending remains soft, however, market-share gains are possible from vendor churn (which has increased from ~15% to ~35% over the past 3-5 years towards newer players), 3) expects significant deals to be decided in 2Q/3QFY13F and 4) confidence in maintaining EBIT margins at FY12 levels of ~16%. HCLT remains our top pick in IT, we maintain BUY. Continued outperformance on revenue growth and margin stability, in our view, can lead to a further re-rating.

Big window of opportunity over next 2.5 years from vendor churn
The company sees ~USD140bn worth of deals coming up for renegotiation in the total outsourcing space (source TPI) over the next 2.5 years. This is coupled with vendor churn increasing from 15% to 35% over the last 3-5 years. This, in our view, lends a USD40bn+ opportunity for HCLT to target. The company has seen successes in the past in winning large deals (USD2.5bn+ over last 3 quarters) with Astra Zeneca, Statoil, UPM, Blue Cross and Blue Shield Association etc. The company, in conjunction with participating in churn, is also focussing on cross selling and tracks the service adoption at its clients very closely.

Vendor churn in BFSI an opportunity
While overall spending in BFSI remains constrained, the company sees vendor churn opportunities over the next 6 quarters (HCLT signed USD1b+ of deals in BFSI over last 3 quarters). This is an opportunity for the company to get into blue chip clients, which it was shut out from due to limited participation in the Y2K boom and strong deal ramp-ups in the 2003-05 period.

Reasons for churn and key success factors
The company sees vendor churn because of: 1) dissatisfaction with existing vendors on rigidity in cost structures and limited flexibility, 2) availability of more innovative cost structures, 3) the need to delink technology and services, and 4) greater stability of technology over time reducing input costs and change in importance of systems as business requirements change. The key success factors according to the company are: 1) an ability to showcase a business case with savings of at least 10-15% being imperative for a client to look for churn, 2) zero defect transitions (as extensions are costly and there is a set timeline to
shift from one vendor to another), 3) reference-ability and 4) the availability of alternatives like HCLT to take up large total outsourcing deals, which wasn’t available previously when these deals were signed.


Discretionary demand soft; growth through shift from RTB to CTB
The company sees discretionary demand to be soft and growth largely being driven by need to cut costs (e.g ERP consolidation), shorter-term ROI projects and mandatory spending (e.g risk & compliance). Investments to discretionary projects are largely through reallocation of cost saves in RTB to CTB (e.g in Europe a trend seen of EAS projects being bundled with ITO deals).

Segmental outlook: Positive on Europe, Telecom remains sluggish
The company remains confident on the growth outlook in Europe (increased cost push at clients) and expects broad-based growth across verticals with strength in manufacturing, retail, energy & utilities and healthcare (except telecom – 8% of revenue). Telecom continues to be sluggish and the company has not seen any material trends to suggest a reversal. Within Europe, the company sees Nordics to be an area of
strength.

Confident on EBIT margin stability at FY12 levels of ~16%
The company was not defensive on their lower margin profile versus tier 1 IT peers and believes that this is conscious choice, which has been made given the profile of business (total outsourcing deals) that the company chases. It remains confident on holding EBIT margins at FY12 levels of ~16% if USD-INR rates are sustained closer to 55 levels. The company ended 4QFY12 at 19% EBIT, it would face pressures on wage hikes (8% offshore and 2% onsite) and possible increases in sales expenses as big deal flow comes up for decision making by 2Q/3Q. The company sees pricing to be stable. Within BPO, the company sees it
operating closer to breakeven for a year.

Cash usage, dividends and visas
The company indicated that it has converted ~100% or higher of its net income to operating cash flow over the last 3 years and has distributed ~60% of the FCF generated to dividends. The company does not have any acquisitions or abnormal capex in the pipeline over the near term. The company does not see visas to be a material issue and remains committed to creating 10,000 incremental local jobs in US/Europe by FY15.

RISH TRADER

>MARUTI SUZUKI LIMITED: Manesar plant to resume production from August 21 under heavy security cover

Manesar plant to resume production from August 21 under heavy security cover
In a press conference today, Maruti announced that it will resume production at its Manesar plant from August 21 under heavy security cover. With this resumption, the shutdown will have lasted for around 1 month – broadly in-line with what we were building into our numbers. As per an investigation conducted by the company, they will fire 500 regular workers who were involved in the misconduct on 18 July. Further, the company will no longer employ contract workers on the production line; however, MSIL will keep 20% of the total workforce on short-term agreements. According to today’s announcement, current contract workers (1,869 employees) will be given an opportunity to join the company as regular (ie, permanent/non-contract) workers provided they meet the company requirements.

Production will get ramped up gradually
As per the company, about 300 workers will resume production from August 21; the company will aim to manufacture 150 cars daily initially as compared to full capacity of around 1,600 cars daily. Production will increase gradually as the company hires more workers, in our view. If everything goes smoothly, we believe the company may take another month to achieve full production. In our view, the company may be able to largely make up for lower production later on during the year. Hence, our estimates are unchanged at this stage.

Do not expect significant stock reaction; maintain Neutral
We believe expectations around the resumption of production have been built in to the share price from last week. Therefore, we do not expect any significant stock reaction on this announcement. Maintain Neutral.

To read report in detail: MARUTI SUZUKI

>RELIANCE POWER: Projects: Sasan start-up by Dec, Chhatrasal awaits formal FC

1QFY13 normalized EBITDA, PAT a tad below our forecast
At Rs2.27bn, Reliance Power’s (RPWR’s) 1QFY13 normalized net profit was ~3% below our forecast (marginally above consensus); reported PAT was higher at Rs2.4bn on the back of prior period adjustments. RPWR’s top line surprised on the back of third-party power purchases and sale (to meet PPA supply commitment from its Butibori facility), but normalized EBITDA (at Rs3.5bn) was 3% below our/consensus forecast despite sharply lower ‘other opex’. Treasury gains surprised yet again (Rs1.16bn vs our forecast of Rs0.7bn), but were offset by higher-than expected depreciation and interest outgo.

Rosa: RoE remains healthy at 30.7%, albeit down 150bp QoQ
In the first quarter where the entire 1200MW capacity was in commercial operation, the drop in Plant Availability (PAF) from ~92% to 81% led to a 150bp drop in RoE (normalized for prior period revenue) to 30.7%. As per the management, [1] coal mix during the quarter was 51% linkage, 39% imports and 10% domestic market-procured); [2] the receivables cycle remains in check; a combined escrow facility of Rs3.5bn for the entire 1200MW capacity (Phase-I,II) is in the works.

Projects: Sasan start-up by Dec, Chhatrasal awaits formal FC
[1] Coal production from Sasan-linked coal mines is expected to begin shortly; commissioning of Unit-1 (800MW) at Sasan is scheduled in Dec-2012. [2] Formal grant of Forest Clearance (Stage-I) for the Chhatrasal coal block, which would enable RPWR to commence construction of its Chitrangi facility, is awaited. [3] Tato-II (700MW) hydropower project has secured key clearances (TEC, FC) enabling start-up of construction activities. [4] On coal production in Indonesia. RPWR is in the process of awarding contracts for each component of the evacuation chain.

Big-ticket projects still subject to policy diktats; maintain REDUCE
Valuation remains expensive (22.4x FY14F P/E and 1.3x FY14F P/B) and one-half of the FCFE-based fair value remains concentrated in projects (Chitrangi, Sasan-II, Samalkot) wherein operational timelines and profitability remain subject to regulatory diktats and fuel supply risk

To read report in detail: RELIANCE POWER

>UNITECH: New launches geographical breakdown

Unitech’s struggles in improving its execution continue, as liquidity for the company remains tight. In this scenario, its revenue recognition is faltering, and 1QFY13 results disappointed yet again on the top line, which missed our and consensus estimates by 30% and 38%, respectively. EBITDA margins at 20% were in line with our estimate of 21%, while a lower interest cost recognized on the P&L helped the company report a PAT of INR459 mn, slightly below our estimate. Our target price and rating are under review.

The sales run rate has started dipping, as Unitech now focuses more on execution than new launches. Also, with execution significantly delayed on many projects, the scope to launch new projects remains limited. The company sold 1.5mn sqft of projects in 1QFY13 worth INR7 bn, down from 1.8mn sqft in 4QFY12 and 1.9mn sqft in 1QFY12, a fall in line with the dip in the overall property market. The company managed to deliver only ~0.8mn sqft in 1QFY13. Deliveries of older projects launched before 2009 at 0.3mn sqft in 1Q were still extremely slow, despite 80% of the older projects being in finishing or handover stage. The company has provided the balance sheet for FY12, where consolidated net debt is down INR3.25 bn YoY at INR54 bn, which is a minor positive.

Key results highlights
 1QFY13 revenues at INR4.1bn (-32% YoY and -43% QoQ) came in lower than our and Street expectations of INR5.9bn and INR6.6bn, respectively.

 EBITDA margins at 20% were in line with our estimate of 21%. However, from the segment results, EBIT margins in the real estate segment are extremely low at 13.5%, which is a concern.

 Below the EBITDA level, lower interest cost at INR1.2 bn vs. our estimate of INR3.4 bn saved the day for Unitech and helped it report PAT only slightly below our estimate of INR497 mn.

 The average residential realisation was up QoQ to INR4,215/sqft (vs INR 3,863/sq ft in 4QFY12). The Noida region was a larger contributor to sales in the last two quarters, with Gurgaon slowing down significantly with the dependence on National Capital Region (NCR) as a whole still continuing.

 Execution remains a key disappointment, as the company managed to deliver only an additional 0.8mn sqft even with ~80% of the older projects being in finishing or handover stage. Of this, 0.3mn sqft was
from older projects launched before 2009 and 0.4mn sqft from projects launched after 2009.

 On the balance sheet side, inventory moved up by a large INR10 bn YoY as of Mar’12, with a similar reduction in fixed assets, which could be a case of realignment of some land parcels.

 Short-term loans and advances are down ~INR5 bn. The auditors have remarked that, of the total INR43.2 bn of short-term loans and advances, INR16.1 bn has been outstanding for long period and they are unable to ascertain the recoverability of the same.

To read report in detail: UNITECH



RISH TRADER

>LARSEN & TOUBRO: Adj. PAT slightly ahead; orders disappoint

L&T’s1QFY13 reported results were marginally ahead of estimates after adjusting for several one-offs reported during the quarter — namely, higher other income, forex loss on unhedged foreign currency loan liability and compensation for voluntary retirement scheme. Revenue growth surprised positively at 26% y-y, even as order inflow disappointed marginally at INR195bn (vs. Nomura est of INR200bn). Adjusted for the one-offs, results were slightly ahead of our and consensus estimates.


Other highlights of the result are as follows:
 Reported EBITDA at INR10.9bn for 1QFY13 was below estimates. However, as per the CFO’s comments on CNBC earlier today, LT has accounted for mark-to-market provision on the unhedged portion of its foreign currency loans of ~INR1.6bn. CNBC further cited additional forex loss (possibly on trade positions) for ~INR1.07bn for the company in 1QFY13. Adjusted for these, EBITDA margin was in-line with expectations at 11.3%.


 However, we note that SG&A expense historically has been around 4.75% of sales compared to 4.8% this quarter (despite including FX loss). Net of FX loss of INR2.67bn, SG&A expense would have been 2.52% of sales, which is amongst the lowest in the past 5 years.


 Net income was boosted by strong other income at INR6bn vs INR3bn a year ago. Management cited higher dividends from subsidiaries and treasury gains as key reasons for growth.


 Order inflow at INR195bn was below our estimate and led by the transportation and buildings & factories segments. Net of chunky orders received from L&T IDPL and Reliance Infra, as well as spilled over orders from FY12, the sustainable run-rate of order inflow is much lower at INR100-120bn per quarter, based on our calculations.


 Management attributes the y-y revenue drop in machinery and industrial products to restructuring of the welding products division into a subsidiary.


 Management maintained its guidance for 15-20% growth in FY13 both in revenues and order inflow.


Management’s conference call is scheduled at 5pm IST today, and we look for commentary on revenue execution, slow-moving orders, SG&A expense and other income break-down, margin outlook and order breakdown.

RISH TRADER

>CARBON MARKET (EUROPEAN UTILITIES)

EC could delay 400m to 1.2bn of carbon auction in Phase 3 Reuters reported on 14th June that the European Commission’s draft proposals to stimulate the carbon market could involve delaying the sale of 400m, 900m or 1.2bn permits during 2013-15 and then releasing them over 2016-18. The EC declined to comment, citing market sensitivity. But market fundamentals do not change without a structural solution


The 1.2bn figure clearly cheered up a carbon market, which has been desperate for some good news, and carbon prices edged up over EUR8/t. However, we are of the view that simply delaying the auction of some permits in Phase 3 does not change the long-term fundamentals of the EU ETS. This appears to be more of a way to kick the can down the road and prevent the market from crashing.


Three basic options to deal with carbon, two unlikely, in our view
Out of the EU’s three basic options for dealing with the EU ETS – a temporary delay, a permanent set-aside or doing nothing – we think the last two are unlikely. Intervention in the European carbon market has become more a question of when and how, not if, but it is hard to imagine a permanent set-aside being implemented in the next 12-18 months due to the lack of political support from carbon-intensive countries, especially the Eastern Europeans and those countries that are struggling with recession. ST impact of the delay: from minimal to significant…


We estimate that ~1.8bn of surplus will be coming into Phase 3, and hence a mere 400m delay over three years will be unlikely to move the carbon market materially, if at all. Meanwhile, an action towards the upper range, e.g., 900m or 1.2bn, will likely create a temporary scarcity in the system, thereby boosting the carbon prices. Regarding a 1.2bn delay, we think the EUA price could be pushed upwards to EUR9-11/t by end-2013.


To read report in detail: CARBON MARKET

>RELIANCE COMMUNICATIONS: Update on RCOM’s submarine cable assets’ IPO

Preliminary submarine cable prospectus released on 5th July


RCOM released the preliminary prospectus for the listing of its cable assets as a business trust in Singapore last week. At this stage the pricing hasn’t been determined, but press articles indicate a pricing range of USD1.09-1.32 per unit, with an implied market cap of USD1.27- 1.54bn. The prospectus states a payout of at least 90% of distributable free cash in dividends and projects USc12.5 for FY13F. This implies a 9.5%-11.5% yield at the offer price indicated as per press, which is attractive vs the average telco yield of 6-7% across the region. However, this pricing range also implies a listing EV/EBITDA of ~10-12x FY13F
(on pro-forma EBITDA forecast of USD131mn with no debt at end of FY12F). Hence, we recommend some caution, and also given the lack of clarity/ inconsistency around group strategy, a ~10% yield alone may not be enough to entice many investors. We are, in general, positive on submarine cable businesses given their inherent cash/margin potential, but we don’t have enough comparables/ details to assess the merits of this transaction yet. (Source: Reliance’s GTI Said to Offer Up to 11% Yield in Singapore, Bloomberg, July 9 2012).


Positive catalyst, but only the first step to deleveraging
A listing of its submarine cables assets could be a positive catalyst for RCOM given its many attempts to monetize its various assets. However, if we assume a 65% divestment in cables (or roughly US$1bn proceeds based on price indicated by press), and these proceeds are used to reduce debt at RCOM level, gearing still remains high at close to 5x on our estimates.


Key highlights from the preliminary prospectus
 RCOM has created the Global Telecommunications Infrastructure Trust (GTI Trust), which now owns the submarine cable assets. This trust released the preliminary prospectus for an IPO listing in
Singapore.


 Total number of units after the IPO is expected to be 1,163mn and RCOM could potentially look to divest 55-65%, we understand, based on press reports, which highlight a price range of USD1.09-1.32 per unit. This implies a market cap in the range of USD1.27-1.54bn.


 As per the prospectus, the trust expects to at least distribute 90% of cash flows to unit holders. For FY13F, USc12.5 per unit is estimated to be distributed. This implies a yield in the range of 9.5-11.5%, based on above mentioned unit price range. However, these are preliminary estimates at this stage and are also subject to actual performance of the company (share price).


 As per pro forma statements, GTI Trust has no debt as on March 2012. This would imply a FY13F EV/EBITDA multiple of 10-12x (based on FY13F pro forma projections provided in the prospectus). This compares to the current regional average of 6-7x.


To read report in detail: RELIANCE COMMUNICATIONS
RISH TRADER

>INDUSIND BANK: PAT beat on higher other income (Erratum)

Key highlights

IndusInd Bank reported a PAT of INR2.36bn, marginally higher than our estimate of INR2.29bn (Street est. of INR2.31bn) on the back of higher than- expected other income. Key highlights from the quarter include:

 Loan book growth remained strong (up 31% y/y), primarily driven by 48% increase in consumer finance loans, while the corporate book increased at 20% y/y. While NII was below our estimates, strong fee

income of 42% y/y and trading gains of INR0.5bn (vs our estimate of INR 0.27bn) supported the earnings beat.

 Margins declined 7bps sequentially to 3.22% due to 35bps q/q increase in cost of funds vs 28bps q/q increase in yield on assets.

 Deposits grew at 28% y/y with savings deposits continuing to be strong, growing 9.5% q/q leading to 56bps improvement in the CASA ratio at 27.9%.

 Asset quality was largely stable with sequentially flat GNPL and NNPL ratios at 0.97% and 0.27%, respectively. The bank did not add any restructured loan during the quarter (the restructured book stands at

0.24% of the loan book). However, higher slippage of INR1.09bn vs our forecast of INR0.83bn led to LLPs of 50bps vs our estimate of 37bps.

 Total CAR was at 13.4% (including full-year profits) with Tier-I CAR at 11.2% (including full-year profits).

Outlook and key takeaways from management call

 Slippage was higher than expected as one mid-sized gems & jewellery account slipped to NPL leading to higher LLPs. Management expects to recover 50-60% of the amount within 3-6 months.

 IIB expects to cross 500 branches by FY13 end and 650 by FY14 end (currently at 421 branches). New branches opened last year average around INR70-80mn SA per branch vs INR220-230mn for matured

branches. Management expects to end FY13 with INR170-180mn of SA per branch. We are budgeting in INR125mn SA per branch by FY13 end.

 Third-party fee income growth was tepid as the bank has stopped recognising commission on non life insurance as a part of their income for the last six months. Management guides for fee income growth to

be higher than balance sheet growth for FY13.

 Management guides towards LLPs of around 50bps for FY13. We are building in LLPs of 56bps for FY13F.

 The bank expects to grow its loan book in the range of 25-30% vs our current estimate of 25%.

To read report in detail: INDUSIND BANK

>MAHINDRA & MAHINDRA: Launched Gio and Maxximo vans

In FY12, top-line performance of M&M was encouraging, in our view, with 25% volume growth and 36% revenue growth. The company also gained market share of around 300bps in the domestic automotive segment driven by new launches. M&M’s new launch pipeline looks solid, and we expect the company to maintain strong volume performance. Investments in new businesses dragged down consolidated EPS by around INR15/sh (~30%) in FY12. Turnaround in some of these businesses could lead to strong earnings growth over the next two to three years, in our view. Core business (ex investments) is trading at 9x FY14 M&M + MVML earnings of INR 58/sh, which is lower than 1-yr forward historical average P/E of ~12x. Reiterate BUY.

Auto segment – Market share improvements led by UVs and MPVs

M&M’s sales volumes in the automotive segment increased by 27% yoy in FY12 led by strong growth in UVs, LCVs and entry into the new MPV segment. Market share in the UVs segment increased to 55.1% in FY12, driven largely by the success of XUV500 launched in Sep-11. M&M launched Gio and Maxximo vans in FY12 and was able to garner 10% of the overall MPV segment. Market share also improved in the Verito segment and 3-wheelers. M&M remains the market leader in 2-3.5 ton LCV segment with a market share of around 67%, as per the company.

Tractor segment – Steady market share

M&M’s volumes in the domestic tractor market increased by 10% yoy in FY12, nearly in-line with industry growth of 11%. M&M’s overall market share remained steady at around 42%, but the company lost some market share in the 31-50 HP segment. The major gainer in this category has been TAFE (Tractors and Farm Equipments Ltd). M&M gained share in the 51HP+ and <30HP segments. The company is planning to launch a new tractor platform in FY13, which we believe should help it gain some market share.

M&M invested around INR10bn in subsidiaries in FY12 – a large part of the investment was towards unlisted subsidiaries. Three key points to note here are:

 M&M invested around INR3.5bn in its two-wheeler venture – the company increased its stake to 88.5% in the business from 80% earlier.

 M&M invested around INR1.6bn in Mahindra Navistar, its commercial business. This is possibly largely towards funding M&M’s share of net loss in the subsidiary in FY12, we believe.

 The company has invested INR2.3bn in Mahindra Engineering & Chemical Products Ltd (MECPL), a wholly owned subsidiary. MECPL is engaged in the business of manufacturing of material handling equipment. Further, Mahindra Retail is an indirect subsidiary of MECPL which has cumulative loss of around INR2.4bn till FY12.

To read report in detail: MAHINDRA & MAHINDRA

>GRASIM INDUSTRIES: Acquires 40% stake in sick pulp manufacturer

Grasim Industries has announced an acquisition of 40% stake in a distressed pulp manufacturer Terrace Bay Pulp, Canada. Another 60% has been acquired by an Aditya Birla Group entity Thai Rayon. While further details have not been revealed, Grasim will infuse USD44 mn over a three year period into Terrace Bay out of a total equity requirement of USD110 mn. At this moment the mill is shutdown after an explosion in its plant in Oct’11 further weakened an already weak financial position and will be restarted by Oct’12. Terrace Bay at this moment has been placed under credit protection by Canadian authorities.


Till now the mill was producing paper grade pulp with a capacity of 550,000 tonnes per annum and over the next 3-4 years, the mill would be converted into a 280,000 tonnes per annum dissolving pulp grade manufacturer to supply VSF manufacturers like Grasim. This would require an investment of USD250 mn in total. Terrace Bay currently has total assets of USD46.3 mn and has debt of USD54 mn from Ontario province and unsecured creditors.


This acquisition is in-line with Grasim’s intention to vertically integrate and have an in-house supply of pulp for its VSF business. Grasim is expanding its VSF capacity by 156,500 tonnes per annum or by almost 50% of its current capacity in India by end of FY13 apart from creating a Greenfield capacity in Turkey. We believe more acquisitions of pulp manufacturers are likely to come through in the future as the current inhouse pulp capacity is sufficient only for ~75% of Grasim’s current capacity. Grasim’s has USD430 mn of cash on its standalone books and almost USD1 bn of cash on its consolidated books which would be more than sufficient for this acquisition and further acquisitions. Grasim in May’11 had acquired 33% stake in Domsjo Fabriker, a Swedish pulp manufacturer for USD62 mn apart from further investments. Grasim does not necessarily ship pulp from these countries to its plants in India but hedges its purchases from nearby pulp manufacturers through sales from its acquired entities to other VSF manufacturers.


We do not expect any significant reaction by the stock to these acquisitions and at current levels after rallying 20% in the last one month we expect the stock to look for an upward movement in VSF prices or cement prices/volumes to further outperform.


To read report in detail: GRASIM INDUSTRIES


RISH TRADER

>LARSEN TOUBRO: Strong Q1 orders; sustainability a key concern

L&T has announced orders worth INR157bn in 1QFY13 so far (excluding an order from Sadara Chemical Company, Saudi Arabia, for which the order value has not been disclosed). Historically, disclosed order proportion has been 60-80% of a total quarter’s inflows, and thus the company could potentially end 1QFY13 with INR200-250bn worth of overall inflows. The risk, though, remains that the share of disclosed orders in 1QFY13 is higher than in prior quarters. Nevertheless, even with L&T ending up in excess of INR160bn for 1QFY13 inflows, it would be seen positively by the markets in our view. In the recent past, 1QFY13 orders have been ~23-24% of reported full-year inflows for the company; however, this year, we believe, 1QFY13 has witnessed higher order activity due to a carry-over of orders delayed from the previous year. As such, the adjusted full-year run-rate seems to be between INR670-800bn, which is higher than our current FY13 estimate of INR694bn.


Over the past few quarters and especially in 1QFY13, we note that order inflow has been primarily driven by sectors such as building and factories, roads and power T&D.



We also highlight a chartbook on IIP data, cement dispatch numbers and their correlation with L&T in the past. While we note a very strong correlation between cement dispatch volumes and L&T order inflow (both y-y growth trends), L&T’s inflows relate only modestly to the IIP data. We also map L&T’s valuation, with IIP data and 10-year G-sec bond yield, and find a strong correlation with bond yield rather than IIP data, suggesting that any upcoming rate cut might potentially lead to compression in valuation multiples; this follows from our strategist’s arguments that cut in interest rates may not be a panacea for falling IIP and, consequently, order inflow. Below we highlight two phases where interest rates were falling but it was accompanied by a fall in growth rates (please refer to Fig. 1). Also, historical evidence suggests that falling rates, by themselves, are neither necessary nor sufficient for market/L&T rerating.


To read report in detail: LARSEN & TOUBRO

RISH TRADER

>COAL INDIA

What’s new – PMO directs MoEF to grant clearance to 12 projects 
As per a news report from Press Trust of India (PTI), post a meeting convened by the Prime Minister’s Office (PMO) with the Environment Ministry (MoEF), Coal India (CIL) and Ministry of Coal (MoC) to review the status of 12 projects of CIL, where production is proposed to be raised by 25%: 

• The PMO has directed the MoEF to grant clearances to these projects within 3-4 months; progress would be monitored on a monthly basis.
• The permission to raise production from these projects by 25% would augment output by 10mtpa.
• However, the MoEF has not relaxed the prerequisite of a public hearing (meeting of all stakeholders, including villagers of the area to be affected) prior to the grant of the environment/forest approval. 
• 
  

Implication – Signal of intent to expedite clearances is a positive


 Feedback from our interaction with policymakers and CIL over the past three months has consistently indicated a 3QFY12 timeline for MoEF awarding clearances for critical projects of CIL. In this context, PMO’s push to MoEF to expedite the ‘green nod’ for CIL’s expansion projects was imminent, in our view.


 Notwithstanding, the non-exemption from ‘public hearing’ prior to the ‘green nod’ (which arguably leaves the door open for delay in granting clearances) for the 12 projects, we view this signal of intent to expedite clearances is a positive for CIL and, in turn, the power utilities space.


Production / offtake on target; up 6.4% / 6.3% YoY in 1QFY13… In 1QFY13, CIL posted a 6.4% YoY rise in production to 102.5mt (up 6.2mt YoY) and 6.3% YoY rise in offtake to 112.9mt (up 6.7mt YoY), in line with the company’s target. We build in offtake at 460mt (vs. 433mt in FY12 and CIL’s target of 470mt for FY13) and blended realization at Rs1,463/ton (implying a 3.2% rise over the normalized FY12 blended realization of Rs1,418/ton.


…our FY13 forecasts appear fairly achievable; maintain Buy rating On our FY13F normalized earnings (which includes the incidence of the potential 26% profit share via the mining tax), the stock trades at 14.2x P/E, 7.5x EV/EBITDA.

RISH TRADER

>TATA MOTORS

Action: Downgrade to Neutral; TP reduced to INR251
JLR’s 4QFY12 EBITDA declined by 240bps q-q to 14.6%, well below our estimate and consensus of 18-19%. JLR’s current margins are in line with those of global peers and management’s guidance. We estimate the EBITDA margin will stabilise around current levels of 14-15% over the next two years, as upside from an improved China mix is likely to be balanced by a weaker product mix and higher marketing expenses. We
thus reduce our FY13F/FY14F margins from 17.7%/18% to 14.1%/14.5%.


We now expect a 5% decline for domestic MHCVs in FY13F, compared with 0% growth previously. The key argument for our Buy rating so far was our above-consensus earnings estimates, which is no longer the case. Even though our estimates are below consensus, we believe that the recent stock price correction factors this in. Thus, the risk-reward appears balanced, in our view.


Catalysts: Success of new models (positive); global slowdown, growth moderation in China and domestic truck slowdown (negative)


 The success of new launches such as the Jaguar XF-Sportbrake and C-X16 could present upside risks to our estimates.


 Slowdown in developed markets such as the United States and in China could be downside risks. Weaker domestic truck could also be a downside risk.


Valuation: SOTP-based target price cut to INR251
We have reduced our valuation for JLR to INR172 (from INR248) on lowering our margin estimate to 14.1% for FY13 (from 17.7%). We value the standalone business at INR56.5 (7x FY14F EV/EBITDA).


To read report in detail: TATA MOTORS

>Dr Reddy's- Merck Serono biologic partnership

The deal contours present right balance between risks and rewards

Action: Dr Reddy's partnership with Merck Serono is strategically positive

We believe the deal catapults Dr Reddy's as a global player in biosimilars. We believe the partnership provides Dr Reddy's with: a) Merck Serono's development, manufacturing and commercial expertise across markets; b)financial support that can expedite some of Dr Reddy’s development programmes; c) the option of an efficient integrated worldwide product development; d) lower risks as investments in R&D, manufacturing and sales force are lowered and e) reasonable upsides as it gets to keep a share of profits in the most lucrative US market and certain branded markets like India and Russia. We think the deal may not have resulted in any immediate value discovery as there are no upfront and milestone payments disclosed. But the partnership, we believe, is the right strategic move and the deal has struck a right balance between risks and rewards.


Catalyst: Biosimilar remains an interesting opportunity
The deal appears well timed, as some clarity on regulatory pathways has begun to emerge in its developed markets of the US and Europe. With biologic drugs of USD100bn+ in sales going off-patent by 2020, we estimate the biosimilar opportunity in developed markets to record ~50% CAGR to reach USD20bn by 2020F. Also, we expect a 3-fold growth in patient volumes in emerging markets by 2020F as affordability increases on lower prices of biosimilars. Dr Reddy's biosimilar revenue of USD25mn (FY12) is <5% of the overall biosimilar market currently, on our reading.


Valuation: Maintain Buy
The deal does not impact our estimates but reduces risk. At 16x FY13F P/E, the valuations appear reasonable. Our TP implies 19% upside.


To read report in detail: DR. REDDY's LABORATORIES
RISH TRADER

>REPO RATE: Expect a 25bp repo rate cut on 18 June 2012

We now expect a 25bp repo rate cut on 18 June due to (a) weaker-than-expected real GDP growth of 5.3% y-o-y in Q1 2012, belying our and the Reserve Bank of India's (RBI) view that growth had bottomed in Q4; (b) despite rising headline WPI inflation, core WPI (non-food manufactured) inflation has continued to moderate, which suggests that pricing power has declined (India: Pricing power continues to fall, 15 May 2012); we expect a further moderation in core inflation in May (data due on 14 June); and (c) Brent oil prices have fallen to around USD100/bbl, more than offsetting the drag from INR depreciation. We assign a 20% probability to a 50bp rate cut at the June meeting. While sluggish growth, low core inflation and weak policy rate transmission argue for a more aggressive 50bp rate cut, our base case is a 25bp rate cut due to elevated headline inflation (primarily due to persistently high food inflation).


We do not expect a cash reserve ratio (CRR) cut on 18 June as liquidity is closer to the RBI's comfort zone and open market operations can be used to address the liquidity mismatch. Moreover, the CRR at 4.75% is close to the all-time low of 4.50% and needs to be kept ready as an emergency buffer to inject liquidity if conditions worsen.


We see upside risks to headline inflation in the coming months. However, the continued moderation in core inflation along with another weak GDP print in Q2 2012 (due 31 August) will likely prompt the RBI to accord a higher priority to growth. As such, following the expected 25bp repo rate cut at the June meeting, we anticipate another 25bp cut in H2.


In our view, interest rate cuts are only a quick fix to growth. The current slowdown in growth is largely a payback from continued fiscal excesses and reflects slow government decision-making over the past year (See: India: Make or break, 2 May 2012). Real effective exchange rate depreciation has already started to ease monetary conditions. As such, the current Indian stagflationary environment needs tight fiscal policy to create a more stable macro backdrop. We see two issues with cutting interest rates. First, in the current tight liquidity environment, the transmission of policy rate cuts may be delayed and sub-optimal. Second, and more importantly, when inflationary expectations are in double-digits and potential growth is at risk of falling below 7%, it will not take much for inflationary pressure to rear its head. Without concomitant fiscal tightening, loose monetary policy will likely fan inflation and lead to greater macroeconomic instability down the road.


To read  report in detail: RATE CUTS
RISH TRADER

>How the fiscal deficit slows growth and sparks inflation: Four transmission channels (Reasons for India’s structural weakness)

Structurally higher inflation due to governmental policies
The larger fiscal deficit has fuelled inflationary pressures by widening the consumption-investment gap. Subsidized oil prices and an expansion in inclusive growth schemes (without augmenting investment) increased consumption demand to unsustainably high levels. Since the RBI responded to these demand-side inflationary pressures by tightening rates, the burden of adjustment has fallen disproportionately on investments, and more so on private investment, which is more efficient than public investment but is being crowded out by the large fiscal deficit.


In the face of rising demand and limited production, a higher minimum support price (MSP) of food crops has fuelled food inflation. Demand is increasing faster now than during 2003-07 because the middle class is approaching the income threshold, at which demand for consumer durables and higher-protein food takes off. Since nearly half of the consumer basket is comprised of food prices, this has led to an unmooring of inflation expectations. Also, the rural employment guarantee scheme, where wage hikes are linked to CPI inflation, has set a floor on rural wages and exacerbated labour shortages. In the end, this has reinforced the wage-price spiral.


Not surprisingly, average wholesale price index (WPI) inflation has increased from close to 5% during the decade prior to 2008 to 7.0-7.5% post-2008 (Figure 7), with the majority of the increase due to higher food prices (Figure 8).


In the medium term, absent an increase in investment, we doubt that WPI inflation will fall sustainably below 6%. India‟s capital stock-to-GDP ratio at 1.79 in 2010, is one of the lowest in Asia (Figure 9). Plotting capital stock-to-GDP ratios against average CPI inflation rates for 2006-10 reveals that these two variables are negatively correlated, suggesting that persistently high inflation in India appears to be well-explained by the low investment rate



Falling investment capacity
Manufacturing investment, which was the main driver of capex during 2003-07 (Figure 11), has been crowded out by the rising cost of borrowing. Infrastructure investment has been held up due to a policy logjam in acquiring land and obtaining environmental clearances. Lower investment has also hurt productivity, due to the slower adoption of new technologies. As a result, investment has fallen from a peak of 38.1% of GDP in FY08 to 35.1% in FY11 (Figure 12).


The government has flip-flopped on policies and been noncommittal on reforms. For instance, the decision in November 2011 to allow Foreign direct investment (FDI) in multi-brand retail was reversed days after being implemented. The government is also retroactively looking at taxing cross-border deals and bringing in new general anti-tax-avoidance measures, which have increased investors‟ uncertainty over the taxation regime. Despite deregulating petrol prices, oil-marketing companies have not been allowed to raise petrol prices. All of this has hurt investor sentiment and diminished the pipeline of investment projects.



The savings rate has fallen due to high inflation
A rising savings rate had been one of the foundations of India‟s expanding potential growth rate. It has made investment financing sustainable due to an ample availability of domestic funding and reduced dependence on foreign capital. This cushion has slowly eroded. The gross domestic savings rate has fallen from 36.8% of GDP in FY08 to 32.3% in FY11 (Figure 13). While the rise in the central government‟s fiscal deficit has reduced public savings, private corporate savings have also fallen due to a higher cost of production.


Overall, household saving has remained broadly unchanged, but its composition has physical savings trending up and financial savings falling, due to high inflation (Figure 14). Households have moved into physical assets as a hedge against inflation and trimmed their financial assets as the real rate of return has fallen. This shift in the composition of household saving (away from financial assets) does not bode well for sustaining growth, since it reduces the funds available to finance investment and blocks savings into non-productive assets such as gold.



A lower savings rate widens the current account deficit
India‟s current account deficit deteriorated because imports remained relatively robust while export growth slowed during the global slowdown. In our view, import demand was fuelled by four factors: 1) strong consumption demand was boosted by consumption-biased fiscal policies; 2) high inflation led to demand for gold imports4; 3) inelastic oil demand due to subsidized fuel prices (Figure 15); and 4) higher coal imports caused by delays in domestic production from slow environmental clearances (Figure 15). The national income identity suggests that a wider current account deficit reflects gross domestic saving falling much more than investment.


The need to finance a rising current account deficit has increased the economy‟s dependence on capital inflows (Figure 17). The basic balance of payments (BoP) deficit, defined as the current account plus net FDI inflows, has widened to levels last seen during the 1991 BoP crisis (Figure 18). While FX reserves provide a buffer against sudden capital outflows, their use is limited. First, domestic liquidity is already tight and USD sales by the RBI would lead to further INR liquidity shortages, which would need to be countered via open market operations and/or cash reserve ratio cuts. Second, as the RBI uses its FX reserves to defend INR, its medium-term FX vulnerability would increase as the reserve ratio worsens.



To read report in detail: FISCAL DEFICIT
RISH TRADER