24 October 2010

Infosys Technologies Strong 2Q priced in:: Indiabulls research

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Infosys Technologies Strong 2Q priced in



Infosys has reported a strong 2QFY11 posting a 10.2% QoQ growth in revenues (USD terms) vs our expectation of 7%. However, PAT is in line at `17.37bn (on the back of a 117bps sequential increase in effective tax rates). With current valuations at 21x FY12, and headwinds from a strengthening INR, we believe the strong 2Q performance is priced in. Reiterate Neutral with a price target of `3,250 (`3,212 earlier).
Outperformance driven by 3% increase in average realised rates
The surprise during the quarter was driven by a 3% increase in average realised rates on the back of a higher contribution from enterprise application services (EAS) and system integration (together accounting for 55% of incremental revenues).
BFSI and retail: Biggest contributors to growth in 2QFY11
BFSI and retail together contributed 55% to incremental revenues of $138mn (highest-ever incremental revenue additions for Infosys). BFSI grew by 8% while retail grew by 20% QoQ. Other verticals like energy & utilities (15.7% QoQ), manufacturing (6.8% QoQ), and telecom (3.9% QoQ) also showed good growth.
2QFY11 guidance lower than expectations
Infosys EPS guidance of `115-117 is lower than our expectations of `118-120 on the back of a 130bps impact on PAT margins due to higher effective tax rates and a stronger INR. FY11 revenue growth guidance of 25% and 3Q revenue growth guidance of 4.4% implies a 1.3% QoQ growth in 4Q, which is conservative in our view.
Revise estimates marginally to factor higher exit run-rate into FY12
We revise our estimates marginally to factor in the tail wind from a strong 2Q and room for upgrade on conservative implied 4Q guidance (1.3% QoQ implied for 4Q). We increase our FY11E EPS by 2.6% to `124.3 (`121.2 earlier) and FY12E EPS marginally (1.1%) to `147.7 on the back of a higher exit run-rate for FY11.
However, current valuations limit upsides
We see limited upside to Infosys at 21x FY12E EPS of `147.7 with headwinds from currency and lack of clarity around CY11 budgets. We also see no room for any meaningful upgrades for FY12. Reiterate Neutral with a price target of `3,250 (`3,212 earlier).

Associated Cements Worst over but recovery long drawn:: Macquarie Research,

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Associated Cements
Worst over but recovery long drawn
Event
 3Q results – a new bottom: ACC reported 60% lower than expected results
during the quarter, due to weaker than estimated realisations and sales
volume as well as higher than expected costs. We are reducing estimates
21% for CY10 and CY11 and believe that oversupply issue will take some
time to weed out, though this quarter has seen the worst. We maintain
Underperform rating on ACC and target price at Rs771.
Impact
 Weak results continue: ACC reported net sales at Rs17.5bn, down 18%
YoY as sales volume at 4.83mt was down 4.5% YoY, and realization at
Rs3,390/t was down 12.9% YoY. The company reported EBITDA Rs1.65bn or
Rs342 per ton. Net profit was at Rs863mn, down 75% QoQ and 79% YoY.
 Recovery expected but a muted one: We expect oversupply issue to keep
the cement prices subdued for at least another 12 months. We do take notice
of the recent attempts by the industry to artificially increase the cement prices,
but don’t expect these measures to have a lasting impact without fundamental
support.
 Still reducing earnings estimates: We have reduced our CY10 and CY11
earnings by 21% as we cut sales volume due to delays in capacity
expansions and also built in higher staff costs. Our assumptions factor in
EBITDA margin of Rs760/t for 4Q and Rs713/t for CY11, a sharp recovery
from Rs342/t achieved this quarter.
 Downside to consensus earnings: Consensus is estimating EPS of Rs69.4
and Rs71.4 per share for CY10 and CY11. Our new estimates are 13% and
19% below current consensus forecasts.
Earnings and target price revision
 We are revising our estimates by -21%, -21% and +18% for CY10, CY11 and
CY12 to Rs60.4, Rs58.1 and Rs72.5 per share, respectively.
Price catalyst
 12-month price target: Rs771.00 based on a DCF methodology.
 Catalyst: Continued weak demand and volume
Action and recommendation
 Maintain Underperform: Muted volume growth, low margins don’t make an
exciting picture. ACC has rallied on news on increase in cement prices but
given the risks of earnings downgrade, we see further downsides. The stock
is also expensive, currently trading at 16.9x CY11 earnings, as compared to
historical average of 12.0x and current peer group average of 15.0x. Maintain
Underperform.

BPCL, Gas provides buffer. -BUY:: Kotak Sec,

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Gas provides buffer. An Anadarko-led consortium with BPCL as a 10% partner has
made another discovery in Area 1 in the Rovuma basin in Mozambique. This is the
consortium’s fourth successful discovery in the same block. Reserves and PSC data are
not yet available but a consortium partner (Cove Energy) has put the resource potential
of the block as exceeding 10 tcf. We do not ascribe any value currently to BPCL’s E&P
assets in our 12-month fair valuation of `855.


E&P portfolio could be meaningful
Exhibit 1 gives details of discoveries in BPCL’s E&P assets. The available data is quite sketchy
currently for us to ascribe value to BPCL’s E&P assets. However, the value of the E&P portfolio
could be meaningful in the context of BPCL’s current market capitalization of US$5.8 bn.
Preliminary estimates put gross resource potential of over 300 mn bbls oil in BM-C-30 block in the
Campos basin in Brazil (BPCL’s stake: 12.5%) and over 10 tcf of gas in Area 1 in the Rovuma basin
in Mozambique (BPCL’s stake: 10%).
Downside risks to earnings exist for FY2011E but too early to take a call
We do not rule out earnings risks to our FY2011E earnings given (1) continued delay in
deregulation of diesel prices; we currently model deregulation from January 1, 2011 and
(2) higher-than-expected FYTD crude oil prices. We would note that FY2011E earnings would
depend on the amount of compensation from the government and net under-recoveries to be
borne by the downstream oil companies. We assume that the government-owned downstream oil
companies will bear net under-recoveries of `54 bn in FY2011E.
We base our BUY rating on FY2012E earnings anyway
We assume full deregulation of auto fuel prices in FY2012E and assume that the downstream oil
companies would bear `53 bn of net under-recoveries in FY2012E; the latter compares with `56
bn in FY2010. We currently assume US$75/bbl crude price and `46/US$ exchange rate for
FY2012E. The recent spike in crude oil prices poses risks to earnings of the downstream oil
companies; however, the recent increase in crude oil price seems to be largely driven by increased
speculation in crude oil futures (see Exhibit 2).
Value exists but realization will likely test patience
Exhibit 3 gives our computation for the fair valuation of BPCL and other downstream oil stocks
while Exhibit 4 shows our fair valuation under a blue-sky scenario of full deregulation. We use 10X
FY2012E EPS (less dividends from associates and subsidiaries valued separately) plus fair value of
investments to arrive at our 12-month fair valuation of `855 for BPCL.

Company declaring results on October 25th

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Company Company Company Company Company
Aarey Drugs Bijlee Textiles Jarigold Tex Petronet LNG Sumeet Inds
ABC Bearings Centum Elect JIK Inds Polycon Intl Super Sales
ADANI POWER Chemplast Sanmar Jindal South Powersoft Glob Swarna Sec
Aditya Birla Money Clariant Chem K Sera Sera Procter & Gamble Tata Coffee
Amara Raja Crompton Greav Kalyani Steel Rajkumar Forge Tata Teleservices
Amrit Corp Dutron Poly Katwa Udyog Ramco Inds Titan Inds
Apar Inds Ecoplast Khatau Makan Ramco Systems Triveni Glass
Apcotex Inds EID Parry Ladderup Fin REC TVS Electronics
Ashiana Agro Everest Inds Lakshmi Mach Relic Tech United Bank
Asian Hotels (East) GIC Housing Lynx Machinery Rolta India Vakrangee Soft
Astral Poly Glodyne Tech Madhur Inds Rose Merc Varun Inds
Available Fin Goodyear India Madras Cements Rosekamal Tex Vedant Hotels
Aventis Pharma Gujarat Hotels MAH HOLIDAY Saint Gobain Vybra Automet
Banco Products Hester Bio Mahaan Foods Schablona India Wabco TVS India
Banswara Syn Hindustan Oil Maral Overseas SER Inds Walchand People
Bayer Crop Hindustan Unilever Morarjee Tex Shree Rama Multi Wheel & Axle
BENGLA& ASM HSIL Moschip Semi Skyline Millars Wim Plast
Bharat Immun Idea Cellular Mundra Port Sri Vajra Gran
BHILWRA TEC Int Trvl House NAKODA Stanrose Mafat

bajaj auto,Higher revenues and in-line margins deliver marginal upside.:: Kotak Sec,

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Higher revenues and in-line margins deliver marginal upside. Bajaj Auto’s 2QFY11
PAT came in 6% above estimates, driven by sequential improvement in realizations,
higher financial income and lower depreciation. However, a seasonal increase in
working capital saw in a smaller proportion of earnings reach the bank. We tweak our
EPS estimates upwards but maintain our REDUCE rating as the stock is discounting the
continuation of the strong demand, pricing environment and a strong product cycle.


Bajaj Auto reported slightly better than expected PAT on higher realizations; margins were in line
Bajaj Auto reported PAT for 2QFY11 of Rs6.8 bn, up 69% yoy and 16% qoq. The reported PAT
came in 6% better than our expectations of Rs6.4 bn with the upside being driven by higher-thanexpected
revenues. Revenues for the quarter came in at Rs43.4 bn compared to our estimate of
Rs41.5 bn. Realizations for the quarter were up 4% qoq and came in better than expectations.
The sequential increase in realizations was driven by price increases taken during the quarter and a
richer mix consisting of a higher proportion of 3-wheelers and Pulsars.
Margins were in line with estimates; up 70bps qoq but down 130 bps yoy
EBITDA margins for the quarter came in at 20.7% compared to 20% reported in 1QFY11 and
22% in 2QFY10. The 70 bps of sequential margin improvement was driven by lower raw material
costs and higher realizations. Raw material costs as a percentage of sales declined to 73.5% from
74.1% as the company’s raw material contracts reflected the pullback we saw in commodity
prices during the May-June period. The sequential decline was offset by increases in tire prices and
certain components.
Tweaking up FY2011E and FY2012E EPS estimates by 3%, largely reflecting 2QFY11 beat
We are raising our FY2011E and FY2012E EPS estimate to Rs91 and Rs104 from Rs88 and Rs101
prior. The increase primarily reflects higher financial income and lower depreciation expense. We
expect depreciation expense to be flat or even trend down from 2QFY11 levels as the company’s
Chakan plant assets gets fully depreciated. Our FY2011E and FY2012E earnings estimates reflect
volume growth of 38% and 15%, respectively, and margins in the20% range.
Tweaking target upward to Rs1,450, maintain REDUCE
We raised our target by Rs30 to Rs1,450 to reflect the higher earnings estimates. We maintain our
REDUCE rating as the stock largely reflects the strong demand fundamentals, product cycle and
pricing power being enjoyed currently. Our earnings estimates assume a continuation of these
favorable factors into FY2012E and could prove aggressive in the event of a mean reversion in
growth to the 10-12% range, given increasing competitive intensity in the motorcycle segment.

Looking Forward and Week gone by Indiabulls research,

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The Week Gone By
Indian markets wrapped the week on a flat note. The indices
belled the week on positive note onthe back of better than
expected Q2 results of L&T and housing finance major HDFC's .
However, thereafter markets tumbled due to shifting of funds by
investors towards the primary market to subscribe IPO of Coal
India. Later in the week, higher volatility was seen ahead of the
expiry of the October 2010 contracts.
Looking Forward
Industrial output in August grew at the slowest pace in 15
months at 5.6%, nearly half of last year is a cause for concern.
We expect In Q2FY11 the overall margins of corporates are
expected to be under pressure due to higher input & interest
cost as in the June quarter. Among the sectors, Banking, Metals
& Consumer Durables could positively surprise, while FMCG, IT,
Cement & Autos are expected to deliver results in line with the
expectations. Overall corporate earnings growth is unlikely to
match the pace of rise in the stock prices in the near term. So it
undergo a correction before the next upmove begins. Further,
Inflows into secondary equity markets could be hit in the
immediate short term due to diversion of funds to the mega Rs
15000-crore Coal India IPO. The issue was subscribed more
than 15 times. Pressure on fund outflows will ease in late
October 2010 or early November 2010 as Coal India begins to
refund excess subscriptions received towards its initial public
offering. Any correction, if it takes place, is expected to be short
lived in near term & a dip of 5-7% from current levels should be
considered as a buying opportunity. Investor's will eye on Q2
earnings of Heavy weights like BHEL, Maruti Suzuki, Union
Bank, SAIL, ONGC and PNB which are due next week.
However, Global cues and fund flows will remain key for the
market.

BAJAJ AUTO Growth trajectory maintained:: Edelweiss

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􀂃 PAT marginally ahead of estimates
Bajaj Auto’s (BAL) Q2FY11 PAT of INR 6.8 bn was 4% ahead of our estimate of
INR 6.6 bn. The variance was on account of higher–than-expected revenue,
which benefited from a 4% sequential increase in realizations per vehicle.
􀂃 Net revenue jumps 50% Y-o-Y
The company’s net revenue, at INR 43.4 bn (up 50% Y-o-Y) was driven by the
volume growth with total units sold crossing the 1-mn mark (motorcycle sales
increasing 47% Y-o-Y; three wheeler sales registering 37% Y-o-Y growth) during
the quarter. Further, the healthy revenue growth was aided by improvement in
average realisation per vehicle (up ~3% Y-o-Y and Q-o-Q) largely on account of
better product mix (higher proportion of three wheelers and lower proportion of
the low end Platina in volumes) along with a marginal price hike.
􀂃 EBITDA margins, at 20.7%, up 70bps Q-o-Q
BAL’s EBITDA margins, at 20.7%, jumped 70bps sequentially on the back of
marginal decline in commodity prices, better operating leverage, and a better
product mix. This was broadly in line with our estimate of 20.5%. Other non
operating income rose 3% Q-o-Q and 285% Y-o-Y led by increasing liquid
investments (up INR 5.7 bn over FY10). Overall net profit at INR 6.8 bn
(Edelweiss estimate at INR 6.5 bn) increased 70% Y-o-Y and 16% Q-o-Q.
􀂃 FY11 volume guidance maintained at 4 mn units
Management has reiterated its guidance for FY11 at 4 mn units (3.6 mn two
wheelers, 0.4 mn three wheelers). Capacity constraints could ease post the
festival season. For FY12, capacity will be increased to 5.0 mn units (from 4.3
mn). The company expects pressure on EBITDA margins in H2FY11 on account
of higher commodity prices, stronger conversion costs from auto ancillaries, and
increased promotion expenses in Q4FY11. For FY11, BAL has maintained EBITDA
margin of 20% (versus 20.3% in H1FY11).
􀂃 Outlook and valuations: Positive; maintain ‘HOLD’
At CMP of INR 1,514, the stock is trading at 18.0x FY11E and 15.5x FY12E
revised earnings of INR 85 and INR 98, respectively. Hence, while the outlook
remains positive, we maintain ‘HOLD’ recommendation on the stock with a
target price of INR 1,570 i.e., 16x FY12E. On a relative return basis we rate the
stock ‘Sector Performer’.

Larsen & Toubro:: Execution starting to pick up:: Indiabulls Research

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Larsen & Toubro
Execution starting to pick up



Signs of pick-up in execution in 2QFY11, reassures us that 2HFY11 is likely to see strong re-bound in revenue, helped by a decade-peak order backlog (3.0x TTM revenues). We maintain our revenue and APAT growth estimates of over 25% and 22% CAGR respectively over FY10-12E and remain positive on L&T’s long-term prospects. However, we believe that the stock is currently fairly valued, discounting FY12E earnings by 20.9x. We maintain our Neutral rating but increase target price to `2,100 (earlier `2,007), primarily due to increase in value assigned to financial subsidiaries.


Revenue beats ‘low’ expectations; growth guidance maintained at 20%
2QFY11 results came ahead of expectations, primarily led by revenues, which came ~5% higher than our and street’s estimates. The management indicated that execution is expected to pick up further in 2H and maintained its revenue growth guidance of 20% for FY11. The adjusted PAT for the quarter came ahead of estimates led by higher revenues and higher other income.


International business ordering yet to pick up
Order inflow in the company’s international operations (mainly in the Middle East) has continued to remain sluggish and has contributed only 6% to 1HFY11 order inflows. In terms of revenue it has contributed only 12% to 1HFY11 revenues, compared to 17.4% in FY10 (19% in FY09).


Development projects constitute high proportion of order inflows
28% of the order inflows in FY11 so far have been from the company’s own development projects. With orders from the Hyderabad metro project expected to be received by the E&C arm in the next few months, we expect a major chunk of current year’s order inflow (~35%) to be from own development projects. This will help meet the full-year inflow growth guidance of 25% and help boost margin for the E&C business (as orders from own SPVs generally command higher margins). However, these projects will also require significant equity funding from the balance sheet.


Strong growth ahead but fairly valued; maintain Neutral
L&T remains our long-term preferred play in the infrastructure sector thanks to its sustainable competitive edge, superior quality of earnings leading to high returns, and strong growth prospects. However, we believe the stock is currently fairly valued, discounting the FY12E earnings by 20.9x (which is near its 5-year average trading multiple). We maintain our Neutral rating with revised target price of `2,100 (from `2,007)



24/10/2010: Gray Market Premium for Indian IPOs; Coal India, Gyscoal, Prestige and BS Transcomm

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Company Name
Offer Price
Premium
(Rs.)
(Rs.)



B S Trans
248
(Lower
band)
DISCOUNT
Prestige Estates
183
(Upper Band)
DISCOUNT
Gyscoal Alloys
 71
(Upper Band)
12 to 14
Coal India
225 to 245
24 to 26
+  5% discount for retail

Polaris Software: Margin improvement impressive but sustainability a concern:: Kotak Sec,

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Margin improvement impressive but sustainability a concern. Polaris reported
revenues of US$83.6 mn (+6% qoq), in line with our estimates, but surprised positively
on margins. EBITDA margins improved 220 bps sequentially versus our expectation of
flat margins. We retain our negative stance on the stock given our concerns on
weak positioning and margin sustenance due to (1) rupee appreciation headwinds,
(2) increasing supply side cost pressures. Maintain SELL and target price of Rs180/share.


Modest revenue growth – given the demand unconstrained environment
Polaris reported revenues of US$83.6 mn (+6% qoq, +19.5% yoy), in line with our expectations.
A 6% US$ revenue growth when the industry is operating in a demand unconstrained
environment is just about par for the course, in our view. We expect the Tier-II pack including
Polaris to lag the Tier-I companies on revenue growth in the current growth phase for the Indian IT
industry. Cut back in investments and running on a very thin bench during the downturn may
have robbed companies like Polaris to participate in the strong growth phase. Under-investments
during the downturn and not being ready for the growth phase is evident from the management
commentary that they were unable to fulfill demand for the past two quarters.
Strong margin performance – but sustainability is the question
A sharp 220 bps improvement in margins versus our expectation of flat margins drove
outperformance at EBITDA and net income level. Company reported an EBITDA of Rs606 mn
(+26% qoq) and net income of Rs484 mn (+3.5% qoq). Although a 220 bps improvement in
margins is commendable, sustainability of the same is a question. The industry is operating in a
supply constrained environment and cost pressures on the employee front are bound to have an
impact on margins. The company recruited more than 900 people in 2QFY11, mostly during the
end of the quarter which would keep the margins under pressure in the next quarter. Appreciating
Re is another major concern – rupee has appreciated 4.6% in 3QFY11 till date vs 2QFY11.
Mid-sized companies including Polaris have a greater sensitivity to the movement of Re/US$.
Weak positioning and margin sustainability concerns drive our negative view
We increase our EPS estimates for FY2011E/FY2012E to Rs19.4 and Rs19.8 from Rs19.1 and
Rs18.8 earlier. Increase in estimates is driven by increase in OPM assumptions for FY2011E/
FY2012E by 60 and 20 bps given the better-than-expected performance. Despite building in 20%
revenue growth in FY2012E, the EPS broadly remains same due to
(1) increase in tax rates,
(2) pressure on margins due to rupee and
(3) supply side constraints.

Weak positioning in multivendor
situations and questions on margin sustainability drives our negative view on Polaris. Retain
SELL rating with a target price of Rs180/share.

ALLAHABAD BANK Momentum continues:: Edelweiss

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Allahabad Bank (ALBK) reported strong earnings of INR 4 bn in Q2FY11 (58.4%
growth in core operating profit), well ahead of our estimate of (INR 3.6 bn). This
growth was driven by robust traction in core income growth; NIMs improved 24bps
Q-o-Q, aided by ~200bps rise in CD ratio. The bank used strong core earnings to
provide for retirement benefits and NPL provisions. PAT growth of 21% yoy was also
supported by lower tax provisions of 21% during the quarter. Slippage, excluding
agri waiver, came in at 1.5%- annualized, ably curtailed by better recoveries/
upgrades.
􀂄 Business momentum continues; margin upside a key positive
ALBK reported robust pick up in advances for the quarter at 8.4% Q-o-Q and
35% Y-o-Y, to INR 820.9 bn. Strong growth was witnessed in the SME segment
and trade loans, while retail growth was led by housing. Infrastructure credit
remains the mainstay of credit consumption in the corporate segment, and
currently forms nearly 20% of the overall book. Management is confident of
achieving an above-industry growth rate of 25% in loan book in FY11E.
Key highlight during the quarter was the 24bps Q-o-Q improvement in margins
(to 3.34%), driven by better investment yields and improved CD ratio, which
compensated for the 11bps rise in cost of funds. Migration of investment in liquid
mutual funds into high yielding assets also contributed to the margin uptick.
􀂄 Slippage a tad higher; higher recoveries the compensating factor
During the quarter, slippages came in at INR 4.5 bn (3% annualised), higher
than the Q1 run rate of 70 bps. However, ~INR 2.2 bn came in from slippages in
the agri book. Key positives were higher recoveries (both from NPLs and written
off accounts) and an upgrade of INR 2 bn, which curtailed the impact of
slippages. Overall GNPA and NNPA increased to 1.8% and 0.6% from 1.5% and
0.4% in Q4FY10, respectively. The restructured book currently stands at 3.7%,
below industry average. Provisioning coverage including technical write-offs
stands strong at 81%.
􀂄 Outlook and valuations: Core earnings to the fore; maintain ‘BUY’
Driven by strong advance growth and better-than-expected margin performance,
we are revising our earnings estimate by ~4% for FY11. Led by strong advance
growth of 27% CAGR over FY10-12E and stable margins, we expect the bank to
report 28% CAGR in earnings with average RoEs of ~24%. The stock is currently
attractive at 1.3x FY12E book and 5.5x earnings. We maintain ‘BUY’ on the
stock and rate it ‘Sector Outperformer’ on relative returns.

KOTAK MAHINDRA BANK Financing business going strong; : Edelweiss

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Kotak Mahindra Bank (KMB) reported consolidated PAT (excluding life insurance) of
INR 3.5 bn in Q2FY11 - growth of 19% Y-o-Y and 5% Q-o-Q. Profits were lower than
our expectation, primarily due to MTM hit on liquid funds (accounting change
proposed by regulator in AMC), higher provisioning (on commercial real estate) in
Kotak Mahindra Prime and muted profits in investment banking. Key positives during
the quarter have been robust advance growth and NPLs coming off significantly;
these were, however, partially offset by marginal decline in NIMs. Consolidated
advances grew 40% Y-o-Y (14% Q-o-Q) to INR 375 bn, with growth broad-based
across segments. NIMs (consolidated) came off 10bps Q-o-Q to 5.6% (over and
above 50bps decline in Q1FY11). Consolidated gross NPLs (excluding stressed assets)
declined to 1.69% (from 2.02% in Q1FY11). While provisioning coverage was inched
up 5% points to meet RBI’s 70% diktat, credit cost was lower.
• Banking business profits grew 55% Y-o-Y (4% Q-o-Q) to INR 1.95 bn, driven
by strong advance growth of 35% and decline in LLP of 41% Y-o-Y.
• Kotak Mahindra Prime reported 19% Q-o-Q decline in PAT, to INR 613 mn,
due to higher provisions of INR 80 mn (on commercial real estate). Advances
continued to be strong and were up 10% Q-o-Q (46% Y-o-Y) at INR 100 bn.
• Kotak Securities reported 9% Q-o-Q growth in profits, at INR 517 mn. Average
daily trading volume inched up 15% Q-o-Q and market share was sustained at
3.7%. Profitability of investment banking remained subdued at INR 73 mn.
• Domestic AMC business reported loss of INR 39 mn as it has taken a one-time
MTM hit on liquid funds due to accounting change proposed by the regulator. The
company has witnessed some strong flows in offshore funds (AUMs rose to
USD 2 bn); however, upfront cost in raising these funds hit profitability.
􀂃 Outlook and valuations: Positive; maintain ‘BUY’
The bank has surprised positively in terms of advance growth and asset quality
in H1FY11. We are revising our advance growth estimate upwards to 35-40% for
FY11-12. NIMs in the immediate term will be supported by equity infusion from
Sumitomo. We, however, believe structural shift in portfolio mix and increased
funding cost could pressurize NIMs. The macro environment for KMB is becoming
more conducive with buoyant capital market activities and favourable credit
cycle. The stock is currently trading at 2.7x FY12E book and 18.4x FY12E
earnings (excluding life insurance). Our SOTP fair value stands at INR 540 per
share for FY12E. We believe upsides to our fair value could flow from securities
and investment banking related earnings. Stressed asset portfolio also carries a
huge embedded value. We maintain ‘BUY/Sector Performer’ on the stock.

Mindtree, Reiterate REDUCE, this time on core business concerns:: Kotak Sec,

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Reiterate REDUCE, this time on core business concerns. Even as course correction
on the (costly) mis-step to invest in handset products business is welcome, we note
reasons for concern on the core business and would be wary of any re-rating in a hurry.
In its acquisitive and bold pursuits (into unrelated areas), MT appears to have taken its
eye off the ball on core business – underperformance on revenue growth as well as
margins, the unpleasant outcomes. We cut our TP 18% to Rs450; reiterate REDUCE.


Products (3G Android handset) investments – a costly mis-step…
What started as an unnecessary diversification into an unrelated area (in our view) is ending as a
costly (~US$20 mn) mis-step. MindTree has decided not to pursue its ‘white-labeled handsets’
(products) ambitions any further. The company has already invested close to US$5 mn on this
foray and indicates that closing this business would entail a further US$12-14 mn charge over the
next 2-3 quarters. This charge would be on account of (1) some fixed-asset write-off, (2) noncancellable
purchase orders for handset/prototype components, (3) severance pay for a few
employees who will be let off, and (4) penalty on cancelling sub-contracting commitments.
…adds to the previous disappointments
The product investments mis-step adds to the list of disappointments from MindTree as a public
listed company, which includes among others – (1) entering into exotic forex derivative contracts –
this continues to lend volatility to the company’s reported quarterly financials, (2) weakly timed
acquisitions, and (3) poor guidance management – the company had to do away with giving
annual revenue/EBITDA/PAT in beginning-FY2011E.
Moving on – core business margin concerns drive EPS and target price cuts; REDUCE
MT’s revenue performance for the Sep 2010 quarter was marginally better than expectations,
however, and more importantly, core business margin performance disappointed. The 120 bps
qoq improvement in core (ex-product investments) margins was aided to the tune of 330 bps on
account of provision reversals, indicating a 210 bps underlying decline in margins. In a quarter
with strong tailwinds in the form of strong volume growth and currency benefits, such margin
performance is disappointing and reflects the pricing/wage pressure facing the company.
Even as we remain positive on revenue growth for MT (in line with our sector view), our margin
outlook for the company has weakened further. We take our FY2012E margin estimates down
220 bps (in effect a 450 bps downgrade, as we remove the earlier assumed product investments).
We cut our (pre-exceptional) FY2011E and FY2012E EPS estimate to Rs27.4 and Rs39.3,
respectively. Reiterate REDUCE with a revised target price of Rs450/share (Rs550 earlier).

TVS Motor Stronger margin and volumes ahead:: Bank of America Merrill Lynch

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TVS Motor
Stronger margin and volumes
ahead
􀂄 Strong earnings outlook
Q2 profit at Rs 548mn was lower than our est of Rs 661mn, mainly due to lower
than expected margins. Sales grew 43% to Rs16.2bn, slightly ahead of
expectations but EBITDA at Rs1.18bn was lower (est Rs1.28bn). We are
tweaking our forecasts (see table of Key Changes) as we expect lower margins to
be largely offset by stronger volumes. We have raised our PO slightly to Rs 90.00
from Rs87.50 in line with FY12E forecasts.
Sales expectations are higher
More than anticipated success of scooter Wego, positive outlook on mopeds and
new entry level bike Max-R (notwithstanding failure of Jive) drives our upgrade to
segmental volume assumptions. Post revision, we expect sales of 2.1mn in
FY11E (up 37% yoy) and 2.4mn in F12E (up 15%).
Margins expected to improve hereon
Q2 EBITDA margin was restricted to 6.7% (up 20bps qoq) due to higher emission
related costs and increased marketing/ad-spend on new launches. Salaries also
rose faster than expected with VRS charge. We expect margins to improve
hereon on the back of: (1) pricing action of 1-1.5% in Sept, and (2) higher
volumes. In FY12, we expect lower product amortisation costs to further boost
margins.
PO at Rs 90
We maintain a similar multiple of 7.5 EV/EBITDA for FY12E, which is equivalent
to 13.7x P/E. This represents a 25% discount to peers, given the relative scale of
business and some uncertainty over operations of its Indonesian subsidiary.

Yes Bank – 2QFY11 – Raise estimates, target price; re-iterate Buy:: Anand Rathi

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Yes Bank – 2QFY11 – Raise estimates, target price; re-iterate Buy
n       Raise estimates, target price. Yes Bank’s earnings rose 57.8% yoy, led by better net interest income (up 77.9% yoy) and lower provisions (down 25.4% yoy). We raise FY11e/FY12e EPS estimate 17.1%/15.6% on higher business growth assumptions. Due to better RoEs, we value Yes Bank at 3.1x PBV (2.8x PBV earlier) and raise our target price to `430 from `380.
n       Strong business growth, CASA improves. Advances & deposits grew 86.3% yoy & 106.6% yoy respectively. NIMs saw a marginal decline of 10bps yoy to 3.1%, with CASA improving 54bps yoy to 10.1%. We expect CAGR of 51.6% in advances and 56% in deposits over FY10-13e, due to its robust branch expansion plans.
n       Better productivity, fees aid profitability. While treasury income fell 57.9% yoy, growth in income from third-party distribution (up 43.3% yoy), financial advisory (13.1% yoy) and transaction banking (8.5% yoy) arrested the decline in non-interest income to only 3.3% yoy. Cost-to-assets fell 38bps yoy to 1.6% in 1HFY11, and is one of the lowest in the industry.
n       Asset quality slips, but coverage adequate. Gross NPAs increased 13.5% qoq, but comprise a low 0.22% of loans. Yes Bank’s re-structured advances declined `114m to `690m (0.2% of loans). NPA coverage is 74.7%, with capital adequacy of 19.4% (tier-1 of 11%) sufficient to support likely high business growth.
n       Valuation. At our target price, Yes Bank would trade at 3.2x FY12e and 2.5x FY12e ABV. Maintain Buy.