>ADANI POWER: Plug in; More upside left

Still more upside despite run-up Adani Power (APL) shares have outperformed the MSCI India by 10.6% in the past three months and have surpassed our previous target price of INR135. We retain our BUY rating, as our new TP suggests another 16% upside from current levels despite factoring in the risk of higher tax incidence and a slight delay in capacity addition. We now
estimate the company will achieve 4.6x net profit growth over FY11-13, on the back of a 10-fold growth in power generation capacity to 6.6 GW by FY13. APL currently has 990 MW of capacity under operation and it will be India’s first power generator to complete a super-critical power plant, when it starts its Mundra III power plant early next year.

Modelling in risk of possible rise in tax incidence
Despite a delay in capacity addition, our FY11E EBITDA goes up by about 9% on higher merchant tariffs and more power available for spot sales. However, our FY11E EPS goes up only by 1.5% as we assume a 20% income tax rate versus 0% earlier to factor in the risk from the
government’s proposals to levy an export duty or to withdraw tax exemptions to units situated in Special Economic Zones (SEZs). Our FY12E EBITDA goes down by 2.7% as we assume lower capacity utilization as new plants ramp-up. We cut our FY12E EPS by 15.9% as we assume a 20% income tax rate versus nil earlier. Ceteris Paribus, our valuation is not impacted by a higher tax incidence as we were valuing APL on a fully taxed basis.

Raising TP to INR160 – BUY
We raise our DCF-based TP by 18.5% from INR135.00 to INR160.00 , primarily on a roll-over to FY12. We continue to like APL as we believe it will be the fastest growing IPP on the back of solid execution. We value APL’s 6.6GW of projects by estimating project free cash flows for the
next 15 years and then discounting it using project-specific WACCs. We consolidate the project discounted cash flows and assume a 3% terminal growth rate. For our WACC calculation, we continue to assume a cost of equity of 15% and a cost of debt of 11.5%. APL trades at our FY13E
EV/EBITDA of 6.0x vs the global peers at 7.4x. At our TP, the stock would trade at an FY13E EV/EBITDA of 6.5x. Key risks stem from execution delays, higher-than-expected coal costs, lower utilization and lower-than-expected merchant tariffs.

To read the full report: ADANI POWER

>>INDIA STRATEGY: A Tale of Two Stocks

Stock Weight in MSCI India: RIL and INFY Converge

• Key Debate: Reliance Industries’ MSCI India index weight converged with Infosys’ weight earlier this week. In our view, this is significant because it was only at the end of 2007 when the stocks were separated by 11% points in terms of index weight with Reliance at about 17% and Infosys below 7%. They are both now at just below 11%. What is also significant is that Morgan Stanley’s analysts rate both these stocks Equal-weight, that is almost 22% of the index accounted for by two stocks expected to move in line with the index. We see these noteworthy developments especially given that both companies are in some way linked to global growth and in other ways are solid proxies on India’s long-term growth story. The key debate is what lies in store ahead, where are these stocks in terms of what the market is pricing in and what is the market view on these stocks?

• Infosys is pricing in slightly more growth than Reliance but Reliance finds greater favor with investors:

• Infosys has handsomely outperformed Reliance since the beginning of 2008 (by 110% points).

• Infosys (Rs2,778.60) has gone through a big earnings and stock rating upgrade cycle since May 2009. For the first time (since we have data going back ten years) the sell side is rating Reliance (Rs972.25) below the market average. The earnings estimates have been recently cut by the sell-side consensus for RIL along with its stock rating.

• That said, institutional investors have been buying Reliance over Infosys over the past five quarters. This is especially true for domestic institutions who have purchased Reliance and sold Infosys since March 2009.

• Both companies have gone through a weak patch, fundamentally speaking, with ROEs dipping below trend line. The prospective estimates suggest a recovery with RIL expected to beat INFY on earnings growth (3-year CAGR of 23% vs. 18%).

• Our single stage implied growth model suggests that the market is implying INFY’s long-term EPS growth to be 15.2% vs. 12.2% for RIL. Thus, RIL is a tad more attractively valued although this has to be seen in the context of its cyclical business mix.

• Conclusion: Both these stocks appear to be set for a period of consolidation relative to the market and maybe even some downside. On a five-year basis, both stocks represent high quality investments though from a top-down perspective we think the scales are tilted slightly in favor of RIL given valuations and earnings growth prospects. Investors with a 12-month horizon could be better off in more attractive large cap stocks such as SBI (Rs2784), DLF (Rs315.75), L&T (Rs1804.80), Adani Power (Rs141.30), Ranbaxy (Rs445.20) and Bharti (Rs317.55) – all rated OW.

To read the full report: INDIA STRATEGY

>CAMPHOR ALLIED & PRODUCTS LIMITED: Chemical market back on huge expansion

Since 1961, Camphor & Allied Products Ltd. (CAPL) has been a pioneer in the field of Terpene Chemistry in India. It established the first Synthetic Camphor plant with technology from Dupont, USA. CAPL is India’s largest manufacturers of variety of terpene chemicals and other speciality aroma chemicals. CAPL’s vast product range includes Synthetic Camphor, Terpineols, Pine Oils, Resins, Astrolide, and several other chemicals finding applications in vast array of industries ranging from Flavours & Fragrances, Pharmaceuticals, Soaps & Cosmetics, Rubber & Tyre, Paints & Varnishes and many more.

A state of the-art manufacturing facility was set up at Nandesari, Baroda (45 minutes by air from Mumbai) in 1999, to manufacture high value fragrance chemicals and fragrance chemical intermediates based on inhouse technology. Products manufactured at this plant are of international standard and are well accepted in markets abroad and at home.

CAPL has two plants – first at Bareilly, UP & second at Baroda, Gujarat. CAPL also has a dedicated in-house Research Center CAPL has been witnessing major change in the performance and profitability since the change in the management in 2008. The company was taken over in 2008, via stake purchase and open offer @ Rs 167/share.

The new promoters are leaders in fragrance industry – Oriental Aromatics Ltd. Since then the turnover has increased from 105 Cr to 165 Cr and NP from 0.49 Cr to 10.18 Cr.

Camphor has manufacturing facilities in Bareilly (Uttar Pradesh) and Nandesari (Gujarat). Its product range includes fragrance chemicals such as amberone, pharmaceutical products such as camphor and terpineols, aromatic chemicals.

To read the full report: CAPL

>GMR INFRASTRUCTURE: Focus back on domestic assets

GMR's focus is fully back on its high-growth domestic assets following the commissioning of its largest asset, the Delhi airport (DIAL), the start of its gasbased power plant in Kakinanda and the progress on exiting Intergen. However, DIAL's ramp-up has been delayed. We lower our EPS forecasts but reiterate Buy.

■ 1QFY11 results impress on EBITDA, but disappoint on PAT
GMR Infra recorded consolidated normalised PAT post minority of Rs24m (-89% yoy, -95%
qoq) on net sales of Rs12.3bn (+5% yoy, +9% qoq). Even though EBITDA was 11% ahead of our estimate, growing 17% yoy and 20% qoq to Rs3.78bn, PAT disappointed due to FX translation impact, a sharp decline in other income and higher taxes. In terms of divisional performance, all except roads and others recorded qoq dips in EBIT, while, on a yoy basis, airports and roads recorded a sharp increase.

■ Delay in DIAL ramp-up impacts financials
We halve our FY11 EPS forecast, as we build in the more than three-month delay in DIAL becoming fully operational, the change in our revenue-recognition method from assured returns to actual sales, and higher interest and depreciation costs for GMR’s Turkey airport. Our FY12F EPS cut is limited to 25%, as the Vemagiri power-plant expansion is ahead of schedule and operations are likely to start six months early, in October 2011. These EPS cuts have little impact on our DCF value for individual projects, as airport returns are assured by the government for the time value of money. We value the 50% stake in Intergen at the restructured equity investment of Rs15.8bn (Rs8.5bn earlier), which raises our SOTP-based target to Rs79 (from Rs78.40). Upside could come from pending financial closure of projects that we haven’t valued, like Male International Airport and 2,800MW in power projects.

■ Intergen overhang is behind us, focus on domestic project execution. Buy
We expect sales traction to improve sharply in the coming months, with the commissioning of
GMR Infra’s largest asset, DIAL Terminal 3, and GMR Energy’s gas-based Kakinada power
plant. For the medium term, GMR’s plan to sell its 50% stake in Intergen and deploy it in the
domestic power business should help drive ROE higher. We expect a sharp ROE uptrend in
FY13, which puts GMR at only 1.18x FY13F PB with low equity-dilution risk following the
improvement in its net debt/equity to 1.43x in June 2010. We reiterate Buy on 27% upside.

To read the full report: GMR INFRASTRUCTURE