>NEYVELI LIGNITE (ICICI DIRECT)

Changing fortunes...

Neyveli Lignite (NLC), a Mini Ratna government enterprise, is an integrated thermal power generator with a fuel base of lignite. It operates a 2,490 MW generation capacity split into three plants (viz TPS-I, TPS-II and TPS-I Exp) and has a captive mining capacity of 24 MTPA. Capacity addition (expected at 4,440 MW), new CERC norms and a possible tariff renegotiation with Tamil Nadu Electricity Board for its TPS-I (600 MW) will be key drivers for earnings. Consequently, with a slew of positives in the offing, we are initiating coverage with an OUTPERFORMER rating.

■ Expanded generation capacity to provide revenue upside in Q1FY10
We expect the overall generation to deliver ~25% growth YoY in Q1FY10E. Operations have normalised after roadblocks observed in Q1FY09 due to the strikes witnessed at the plants. We expect the company to achieve a production of 4,938 million units (MU) as compared to 3,937 MU in the corresponding quarter last year.

■ New CERC tariff policy should offer significant upsides
New CERC regulations (2009-14) should boost the PAT by Rs 229 crore and the EPS by Rs 1.4 per share. We expect a major improvement in earnings from incremental RoE of 1.5%, retention
of tax benefits, relaxed station heat rate and ease in operational and maintenance expenses (relaxed by~60%) under normative clauses.

■ Renegotiations of tariff for TPS-I (600 MW) to boost bottomline
NLC is renegotiating the PPA with Tamil Nadu Electricity Board (TNEB) for its 600 MW TPS-I plant that is nearing the end of its operating life. We expect the new realisation per unit to be around Rs 3 per unit against the current Rs 1.8 per unit. Tariff renegotiation should contribute to an incremental PAT of Rs 270 crore annually. This will raise the EPS by Rs 1.6 per annum for the next three years.

■ Valuations
At the CMP of Rs 118, the stock is trading at an EV/EBITDA of 9.1x FY10E and 7.2x FY11E EBITDA, respectively. We expect the new CERC policy and renegotiation of PPA with TNEB to enhance the financial performance. Thus, we are initiating coverage on NLC with an OUTPERFORMER rating and a price target of Rs 155.

To see full report: NEYVELI LIGNITE

>MEDIA SECTOR (ICICI SECURITIES)

Capital raising activity picks up

Network18, Dish TV & IBN18 raise capital; Jagran Prakashan promoters buy in
Buoyancy in capital markets led to a flurry of fundraising activity, with Network18, IBN18 and Dish TV raising capital. Network18 raised Rs3.25bn via preferential allotment and QIP;IBN18 raised capital through sale of treasury stocks; and Dish TV promoters encashed some equity to fund the second tranche of the rights issue. All three witnessed significant erosion in stock price, of up to 20-30%, post the fundraising exercise. Jagran Prakashan (Jagran), however, witnessed promoters buying additional ~4.5% stake and has been outperforming the broader markets since June ’09.

Hindi GECs – Lively competition in tier I; NDTV Imagine & Sony consolidating in tier II
Competition in tier I of Hindi GECs heightened, with all three channels – Colors, STAR Plus & Zee TV – at the #1 spot in different weeks over weeks 23-27 of CY09. Colors retained an edge, while Zee TV continued to consolidate and STAR Plus continued to slip. During prime time, Zee TV was #1 during weeks 26-27 and that too with no blockbuster movies, events of grand finale shows . In tier II of Hindi GECs, NDTV Imagine and Sony Entertainment TV (Sony) have consolidated positions and garnered 20% of prime-time market share between themselves, up from 13-15% three months ago post introduction of a fresh slate of programming. NDTV Imagine has maintained >100 GRPs for six consecutive weeks.

Valuations – Prefer print companies and Sun TV Network (Sun)
We recently upgraded HT Media (HTML) to BUY from Hold and Jagran remains our top pick in the sector. We expect the crumbling newsprint prices (down 50% from recent peak) to contribute to high profitability of print companies. We also prefer TV18 and Network18 as their stocks offer attractive entry points at current market prices owing to heightened concerns about competition and poor Q4FY09 results. We prefer Sun over Zee Entertainment Enterprises (ZEEL) and recommend investing in ZEEL only on dips.

Key factors to watch
i) Impact of cost-control exercise (initiated in FY09) on Q1FY10 results ii) Fundraising by IBN18 iii) Newsprint price movement post the steep US$100 decline in past five weeks iv) Performance of NDTV Imagine and Sony, which have introduced a new set of programming.

To see full report: MEDIA SECTOR

>INDUSIND BANK LIMITED (BNP PARIBAS)

1QFY10 EARNINGS UPDATE

Results confirm our positive transformation thesis
IndusInd Bank posted strong 1QFY10 earnings, beating our PAT estimates by 81%. The improvement was broad based – net interest income, fee income and credit costs all coming in better than our estimates. Key highlights are:

1) Net interest income 5% higher than budgeted on marginally higher loan growth (4% q-q) and in-line NIM of 2.6%.

2) Non-interest income 64% higher than expected on higher treasury gains, forex income and robust fee income growth.

3) P&L provisioning costs 13% lower than expected on lower than anticipated NPLs. Net NPL ratio down to 1% from 1.1% in the previous quarter (our estimate was 1.2%).

4) Annualized return on asset (RoA) for the quarter much higher at 1.3% compared to our estimate of 0.7% and 0.8% for the previous quarter.

Detailed comparison in Exhibit 1 in report.

Valuation: Recommend BUY with TP of INR90
While we are yet to revise our estimates and TP after 1QFY10 results, we believe IndusInd Bank is firmly on the transformation path. We reiterate our BUY rating on the stock. As highlighted in our initiation report (The comeback kid – published June 10, 2009), given management’s intent and strategic focus, IndusInd is well poised to break into the big league within the private sector bank space in the next few years.

Our TP of INR90 is derived from a three-stage residual income model. At our TP, IIB is valued at 1.77x the FY11E ABV and 12.6x FY11E EPS. We expect IndusInd to achieve an adjusted ROE of 15.5% by FY11 and 16.8% by FY12 on an expanding capital base. IndusInd Bank is looking
to raise approximately USD100m in equity in 2QFY10.

Our current estimates are factoring in the dilution at an average price of INR55 per share. Lower than expected equity dilution due to the strong price record in the recent past will provide upside to our EPS estimates.

To see full report: INDUSIND BANK

>ABB LIMITED (JAYPEE CAPITAL)

We initiate coverage on ABB with a ‘SELL’ recommendation and a target price of INR 588 per share implying a downside of 15% from current levels. We expect ABB to generate strong revenues from power business due to robust spending planned in power generation resulting in robust demand for power equipments. However, the slowdown in industrial capex due to high cost of borrowings and limited access to capital will drag the project business putting greater strain on the financials of ABB.

Power business going from strength to strength
With demand for power expected to grow at 8 to 10% annually, power supply will face greater strain. In order to meet the shortfall, heavy investments are planned in increasing the installed capacity of power generation. Higher plan outlay for power T&D has also been made in 11th plan as the need for more efficient T&D network is severely felt. More emphasis will be given to reduce the T&D loss (India – 27%, world average – 15%) by strengthening the grid and replacing the old T&D equipments with the new ones. Majority of these investments will be undertaken by state utilities and central government entities, providing further cushion in the present economic
environment.

Corporate capex yet to take off, project business to drag
Although the power segment is poised to grow at a fast rate, the industrial segment will see the continuation of slowdown in the current year. The key differentiator is the availability of funding. We do not expect any revival in industrial capex as the access to capital is still constrained. The capital that is raised at the currently prevailing high cost will be utilised only to secure funding for the ongoing projects. We believe the impact of increasing cost of capital on IRR will keep away private sector from investing in new projects as they become unviable.

Slowdown in order inflow, worsening credit cycle
CY08 saw significant slowdown in order inflow on account of economic slowdown which resulted in deferment / cancelation of industry capex. This lead to a drastic fall in order intake in four consecutive quarters beginning from INR 27bn in Q1CY08 to INR 13bn in Q4 CY08. We expect a subdued order intake in CY09 as well. ABB is also experiencing a severe expansion in the working capital cycle which has resulted in a heavy fall in cash levels from INR 6.4 bn in CY07 to INR 3.5 bn in CY08 and increased borrowings for short term working capital loans at high interest rates affecting the business profitability.

Ground realities do not reflect market buoyancy, valuations expensive, SELL with a price target of INR 588
In the previous down cycle that lasted between 1997 and 2000, the capital goods industry recorded negative earnings growth on account of slowdown in both power and industry capex. However, this time around, due to government’s increased thrust on infrastructure development, there is a strong visibility in the power T&D segment. This will ensure positive business environment for ABB’s power segment verticals. However, we believe the recovery in the industrial capex is unlikely for next two quarters which will keep the industry segment sub‐dued. This change in business mix has put pressure on the financials of ABB as a result of falling earnings, slowing order book, and expanding working capital cycle. We project a moderate growth of 8% in revenues and 3% in profits for ABB in CY09. We assign a P/E multiple of 18 times CY10E EPS of INR 32.7 to arrive at a target price of INR 588 per share implying a downside of 15% from current levels.

To see full report: ABB LTD.