>SUGAR INDUSTRY: Is Sugar cycle near bottom for next Structural up move!

Sugar cane crop in the country appears to have reached near peak level: Major
upside potential for sugar cane crop from current level of 343mnt appears limited. Negligible
addition to cultivated land, rising profitability of farmers from other competing crops, increased
cane arrears during SY12 in UP will limit further addition to cane cultivation and stable drawal
rate. Below average monsoon expectation in Maharashtra and high cane arrears in UP likely to
affect sugar cane production mainly in SY13e.

Steadily rising demand vs. near stable crop: SY12 sugar production of 26mnt appears to
be near peak level considering stagnant acreage towards cane and stable drawal rate. Going
forward we expect sugar production go down to 23.5mnt in SY13e level. Sugar demand is
steadily rising at 3% reaching 22.5mnt in SY12. Reducing demand supply gap within domestic
market will reduce inventory level within system. However with somewhat lower crop in SY13
season and expected reduction in drawal rate, we expect sugar inventory to reduce from
current level of 5.9mnt to 5.7mnt by FY13e and 5.0mnt by SY14e. This is likely to push prices
upward going forward over next 1-2 years.

Levy quota likely be withdrawn or lowered: Much hyped positive expectation for the
industry is de-control of the industry wherein, near term possibility is withdrawal of levy quota
or lower % of levy sugar as per production and stocks available with government. Currently
sugar companies are selling 10% of their production at `1970/qtl which is 35% below market
price. There is expectation that Govt. will likely lower levy quota by atleast 5% or may
withdraw completely. This will benefit around `1200-2500cr to the industry.

By-products profitability: Power and distillery play very important role in improving
profitability of the mills. Rising import bill makes ethanol blending attractive thus, improving
demand prospects for distillery. Prolonged coal deficit in the country is shifting focus towards
alternate fuels improving prospects for co-generation. Most of sugar refineries have signed PPA with State Electricity Boards (SEBs).

Exports: India is likely to export around 3mnt of sugar in SY12e. Out of this, industry has
already expected around 2.5mnt by June 2012. Exports of around 5mnt over last two years
helped reducing countrywide sugar inventory which has prevented sugar prices sliding down.

Conclusion: It appears that worst for domestic sugar industry is over and sugar prices have upside potential from current level over long term. Domestic sugar cane crop appears to have reached peak level with marginal upside due to limiting factors such as limited addition to cultivated land, rising profitability of alternate crops and stable drawal rate. It also faces near term challenges in terms of below average expected monsoon for 2012 and rising cane arrears in UP.


Domestic consumption of sugar is rising at a steady pace of 3% reaching 22.5mnt in SY12. Surplus in the domestic market during last two years is absorbed globally with exports reaching around 3mnt in SY12. Thus, country is likely to end SY12 with inventory level of 5.9mnt. Reducing production and rising consumption to reduce inventory level to 5.7mnt and 5.0mnt in SY13e and SY14e respectively.  Reducing inventory level is likely to push sugar prices upward in the long term. Sugar companies stock prices are at trough level discounting major concerns thus, any positive would lead to re-rating of the stocks. We have a long term POSITIVE view on the sector. Companies which we prefer in the sector are: 1. Balrampur Chini Mills Ltd. 2. Dhampur Sugar Mills Ltd. 3. Triveni Engineering & Industries Ltd.


To read report in detail: SUGAR INDUSTRY

RISH TRADER

>INFORMATION TECHNOLOGY INDUSTRY OUTLOOK: Key growth drivers and threats

In the face of the volatility in the economic environment and currency, 2011 recorded steady growth for technology and related services sector, with worldwide spending surpassing USD 1.7 trillion, a growth of 5.4% over 2010. Software products, IT and BPO services continued to lead, accounting for over USD 1 trillion - 63% of the total spend. IT-hardware spend of USD 645 billion, accounted for the balance 38% of the worldwide technology spend in 2011. The year saw renewed demand for overall global sourcing, which grew by 12% over 2010, nearly twice the global technology spend growth.


India’s share in global sourcing stood at 58% in 2011, up from 55% in 2010. Indian IT-BPO exports continued on the growth path in FY12, as it is estimated to have grown by 16.3%. IT services has been exhibiting the robust growth at 19%, BPO growing by 13% & ER& D by 15%. Transformation, new business models are driving organization wide efficiencies


While the growth in IT-BPO spend is expected to be gradual over the next three years, global sourcing spend is seen to outpace this growth. IT outsourcing market is set to grow at a CAGR of about 8% over 2011 to 2013, while BPO off shoring is expected to grow at a little over 7% during the same period. Costs still remain essential for global sourcing, industry expertise and innovation is expected to drive future sourcing requirement. In addition, rate of introduction of new technology is much faster now and is expected to continue to be even faster in future. There is a strong correlation between technology adoption rate and investment rate. The year 2011 was the year of mobile adoption, where tablets and smartphones sales growth, by volume and by percentage, outpaced the shipment of desktop and laptop market. This mobile revolution witnessed spending by organizations in developing both consumer apps and enterprise apps.


From IT industry perspective - the market for enterprise mobility solutions alone is expected to grow to USD 17 bn by 2015, presenting a huge opportunity to increase revenue from this segment at a pace of triple-digit growth. Clearly, the future of technology services industry is beyond services - it will be a combination of services, solutions and platforms. Indian IT
organizations are investing in building platforms to drive future growth opportunities. These domain solutions and technology platforms will offer improved revenue leverage versus talent employed in the industry and will also significantly increase the intellectual property base of the Indian IT industry. The industry can take a clue from the fact that public cloud services
spending is expected to outpace growth of the overall IT spend by about four times between 2012 and 2015.


To read report in detail: IT INDUSTRY
RISH TRADER

>STERLITE INDUSTRIES: Expansion update

Sterlite Industries India’s (SIIL) 1QFY13 EBITDA was 5%/7% below our/street estimates, while PAT was 1%/5% above our/street estimates, respectively, due to higher other income and lower tax despite being hit by forex loss. Power segment posted a strong performance, while other segments like aluminium, zinc and copper witnessed minor pressure. SIIL will witness multiple expansion projects getting commissioned in the next one year, which would ensure healthy growth. We retain our Buy rating, earning estimates as well as the TP on SIIL of Rs138. Our TP is based on the combined entity, Sesa-Sterlite’s valuation. 


Power segment gives a positive surprise, aluminium and copper drags: Driven by lower costs due to higher power generation and better coal availability, the power segment was able to post EBITDA margin of 37.6% versus 32.4% in 4QFY12 and 27.0% in 1QFY12. Power realisation per unit increased 1% QoQ, while costs/unit dropped 6% QoQ. Aluminium segment, particularly BALCO, continued to witness high costs to the tune of 17% YoY and 7% QoQ in rupee terms due to tapering of coal linkage and higher costs of alumina due to low grade of bauxite. Copper segment also disappointed due to lower Tc/Rc margin and higher production costs. 


Expansion update: BALCO is likely to start metal tapping operations at its 325,000tn smelter from 3QFY13 onwards, while the first 300MW unit of its 1,200MW power plant is set for synchronisation in 2QFY13 (deferred by a quarter). SEL’s fourth unit is under trial run and the same is likely to start commercial power generation in 2QFY13. After getting environmental clearance, SIIL is looking at obtaining stage-II forest clearance for 211mt BALCO coal block, but we expect a major delay. Talwandi Sabo plant is progressing well and its first unit of 660MW is set to be synchronised at the end of 4QFY13, although we expect a delay of 3-6 months. SIIL has indicated that the new expansion plan for HZL is being prepared and would be presented in due course. 


Other highlights: SIIL started an additional 700MW power transmission capacity in 1QFY13, while, it expects to commission another 1,000MW transmission capacity by 4QFY13, taking the total capacity to 2,850MW. SIIL has responded to Coal India’s offer of supplying pit-stock inventory (logistics arrangements have to be made by the buyer) at the administered price. It expects 2-3mt of additional coal from this route.


To read report in detail: SIIL

>YES BANK

Continues to impress with yet another quarter of strong results
Yes Bank’s reported PAT of Rs.290.1 cr in Q1FY13 resulting in a growth of 34.3% on a YoY basis and 6.7% on QoQ basis.


 Loan book growth moderates
Yes Bank loan book grew at 16.4% YoY and 1.4% on a QoQ basis in Q1FY13. Total Customer Assets (Loans + Credit Substitutes) grew by 32.4% to Rs 49,340 cr in Q1FY13. The bank expects to grow ~30-35% in its total customer assets. We have factored in growth of 34.5% for customer assets in FY13E and 25.7% in FY14E.


 CASA momentum continues
CASA deposits increased by 71.5% YoY and 10.5% QoQ to Rs 8,170 cr taking the CASA ratio to 16.3% in Q1FY13 up from 10.9% in Q1FY12. The Bank continues to witness increased traction in CASA on the back of enhanced Savings Rate offering and improvements in productivity. We expect CASA ratio to be at 17.5% and 18.4% in FY13E and FY14E.


 Cost to income ratio remains elevated
The bank added 25 new branches and added approximately 540 employees in Q1FY12 which resulted in higher operating expenses. The cost to income ratio stood fairly stable at 39.5% in Q1FY13 as compared to 39.8% in Q4FY12 and broadly within the Management’s targeted levels. We expect cost to income ratio to be at 39.3% and 39.2% for FY13E and FY14E.


 Non- interest income continues to impress
Non Interest Income grew a whopping 74.3% YoY and 8.2% QoQ to Rs 288.1 cr in Q1FY13. Financial Markets increased almost 2.5x to Rs 95 crs which has been the highest level since Q1FY10 primarily due to Rs 30 cr of treasury gain. Management does not expect these levels of growth to be sustainable going forward. We expect non-interest income to grow 29.7% and 27.3% for FY13E and FY14E.


 Asset quality remains stable
Gross NPA increased 30.6% QoQ to Rs.109.5 Cr in the quarter ended June 2012. Gross NPAs and Net NPAs stood at 0.28% & 0.06%, respectively as on June 2012. The bank’s restructured assets stood at 0.51% of gross advances at Rs 196.5 cr in Q1FY13. Provisioning coverage ratio of the bank (including technical write off) stood at 78.3% in Q1FY13. We expect Gross NPAs to be at 0.39% and 0.42% for FY13E and FY14E and Net NPAs to be at 0.07% and 0.08% for FY13E and FY14E.


To read report in detail: YES BANK


RISH TRADER