>Power Sector Q2FY12 Preview: Operational weakness; sector reforms

Adani Power

We expect sales of 3494 MU at an overall average PLF of 74% .EBIDTA margins are expected to improve by 300bps sequentially on account of better operational efficiency. However, the next and the following quarter is expected to be tough as the rupee has depreciated over 8% We expect APL to clock a PATJSW Energy

PLFs and short-term realizations could drive Q2 FY12 results, as global spot coal prices (RB Index) are sequentially flat. Operational softness is expected to continue – SBU I-II (76% PLF), Raj West I (shutdown), Ratnagiri I (70% PLF). We forecast a 153bp Q-o-Q margin contraction as declining merchant realizations outweigh nonrecurrence of one-time expenses from Q1 FY12.

KSK Energy

We expect (1) Wardha Warora offtake and fuel dynamics and (2) taxes to be the key earnings drivers. Following the recent WCL linkage activation, we factor in lower Wardha Warora fuel costs at ` 2.75/unit but also model low project PLFs (60%) and high auxiliary consumption (12%). Q1 FY12 had benefited from a negative tax rate that we do not expect to recur.

Orient Green Power

Q2 is expected to be the best quarter seasonally for OGPL, and thus expect average Wind PLFs of 21%. We expect OGPL to sell 168MU (vs 127MU in Q1FY12) at an average realization of ` 4.6/unit. EBIDTA margins are expected to remain flat yoy and improve by 795 bps sequentially to 51%.We expect Q2FY12 PAT to come in at ` 79mln which translates to an EPS of ` 0.17

PTC India

Q2 is the best quarter for PTC in terms of volumes as cross border volumes peaks during this period. We forecast PTC to trade 9.9 BU inclusive of 3 BU of Cross border Trades at average margins of 4.5bps. We expect overall EBIDTA to come in at ` 589mln implying EBIDTA margins of 1.6% and overall PAT and EPS to come in at 552mln and ` 1.87.

Outlook

PLFs have continued to decline this quarter: -842 bp among private players, -777 bp all-India. Key drivers, in our view, include SEB backing down, ongoing capacity addition, seasonally-weak demand (monsoons), and preferential use of hydropower in the merit order dispatch. This quarter also saw plenty of action in coal regulatory developments and distribution sector reforms: (1) no-go/CEPI, (2) draft MMDR Cabinet approval, (3) MRRT/Australian carbon tax, (4) proposed distribution reforms and discom tariff increases, and (5) progress toward revised Case 1/2 standard bidding documents with increased fuel passthrough.

To read the full report: POWER SECTOR

>SWARAJ ENGINES: Capacity expansion to drive growth

We are impressed with Swaraj Engines' conservative management style, negative working capital high margin (17%) and RoE (32%) and high asset turnover (10x). While Swaraj Engines was unable to fulfill demand of Swaraj Tractors in FY11 due to capacity constratints, given 33,000 units expansion of capacity (up 79%) over FY12-13, we expect 22%, revenue and 14% profit CAGR over FY11-13E

Keypoints

• Major capacity expansion to meet rising demand
• Strong possibility of Swaraj Engines being used for Mahindra tractors
• Construction equipment business
• Good FY12 monsoons positive for tractor industry

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>Equity Strategy: On longer, higher, cleaner growth (JEFFERIES)

Key Takeaway

To us, the Indian economy is off the celebrated 8%+ growth path. And now this should be the number one economic concern. The causes are not all in the global environment. We present a basket of signs to point that something is amiss. More importantly, we discuss what we deem as the true drivers of longterm growth and what policy action is needed as a solution. Until efforts are

being made to address growth, or we see signs of global stability, we maintain our defensive bias on equities.

Needed first and foremost – an admission that growth is off: We study the past relationships of 12 high frequency domestic economic indicators with GDP. All of them suggest that current domestic growth is likely lower than the headline published GDP growth with more slowdown ahead.

All other economic indicators imply that it doesn't feel like 7.7% GDP growth

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>India Property Initiating Coverage: Cheap. Really? (Jefferies)

Key Takeaway

Property sector investment at inflection point is all about getting the timing right and fraught with risks. We are not trying to make a call on the cycle turning from here but presenting a case for remaining selective while investing in the sector given the far-reaching structural changes. We initiate coverage on eight companies with Oberoi Realty as our top Buy and DLF as our top

Underperform.

A free meal, no more

2011 has provided enough empirical evidence of a structural shift over the past five years. The shift to construction linked payment and buyers becoming selective has made development more capital intensive. Cheap land acquisition, a major value creator earlier, is no longer as lucrative with land owners demanding share in conversion gains. Increasing construction costs and manpower shortages are hindering growth prospects. Regulatory interference is rising and both equity and debt has become scarce and expensive. As a consequence the business is no longer as profitable as it used to be.

There will be new industry leaders that will emerge in this new era and the critical success factors will now shift to a) clean and converted land banks, b) strong balance sheets, c)

execution strengths, d) transparency, and e) lower litigation risks.

Challenging times ahead

After two years of strong volume growth across most cities, we are at the cusp of a cyclical volume slowdown. Recent trends indicate that residential volumes are beginning to slow down with a 14% YoY drop in All-India June-11 volumes on rising mortgage rates and alltime high property prices. With developers’ reluctance to cut prices, we believe that volume recovery will get pushed into 2H FY13. We expect a significant slowdown in Mumbai and Gurgaon volumes while Bangalore, Chennai and Pune expected to perform relatively better in FY12.

No gain in being bold

Realty sector has underperformed without any de-rating with consensus continuing to remain bullish on growth prospects and FII ownership at all-time highs. MSCI real estate index is up only 6% since Mar'09 and has underperformed both the autos and staples which are up 234% and 62% respectively. Despite that real estate sector has not seen any valuation de-rating vis-à-vis these sectors. Additionally, timing was critical for stock returns in the real estate sector. If one was a few months too early or late in catching the bottom for real estate stocks, most of the 2009 out-performance would have been lost.

Initiate coverage on the sector

Being selective remains the key to investing in the sector and we like management with positive cashflows, stronger balance sheets and low risks. We initiate on Oberoi, Sobha and Prestige with Buy ratings, Godrej properties and Unitech with Hold ratings and DLF, IBREL and HDIL with Underperform ratings.

To read the full report: India Property