Edelweiss : Anagram gets assimilated in Q2FY11…:: ICICI Sec

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Edelweiss : Anagram gets assimilated in Q2FY11…
Edelweiss saw a healthy 44% YoY jump in total revenues to Rs 376
crore (though not directly comparable due to incorporation of Anagram
in Q2FY11), higher than our estimate of Rs 355 crore. Just like peers,
Edelweiss also managed to arrest the fall in market share and showed a
marginal QoQ improvement to 3.9% excluding Anagram and 4.4%
inclusive of that (ADT of Rs 5390 crore). Yields stayed under pressure as
expected because of rising options segment and falling cash volumes.
The growth in topline was equally supported by 103% YoY, 42% QoQ
rise in interest income. PAT of Rs 66 crore was in line with our estimate.
Pressure on yields stays, to improve marginally
Edelweiss reported blended yields of 4.25 bps (including Anagram) and
4.21 bps excluding Anagram, which like-to-like is down 35 bps QoQ and
135 bps YoY. Since Edelweiss is a strong player on the institutional end
and more focused towards the derivative segment, the fall in yields is not
entirely surprising. We expect a marginal improvement in yields to 4.4
bps in the coming period due to the full quarter impact of Anagram.
Financing book growing rapidly
The loan book grew by a staggering 350% YoY, up 21% QoQ to Rs 3110
crore. The NIM seems to be contracting gradually and is now~4%
because of rising interest cost. Of the total, Rs 1000 crore accounted for
promoter funding and Rs 2200 crore was towards LAS/margin funding
and IPO funding. We see financing income growing at 64% CAGR over
FY10-12E to Rs 912 crore accounting for 52% of the total income because
of shoring up of the financing book to Rs 4410 crore.
Valuation
We are now valuing the company on an SOTP basis, considering that
~52% of the topline will be contributed by financing income for FY12E.
We have valued the agency business (brokerage and investment banking)
at 16x FY12E EPS and capital business (net worth based-generating
treasury and financing income) at 1.3x FY12E BV and arrived at a fair
value of Rs 71. We recommend an ADD rating on the stock.

Union Bank of India — Season of Migration- Sept 2010 RESULT UPDATE:: Ambit

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RESULT UPDATE
Union Bank of India — Season of Migration

Towards a new ‘Normal’

• NII growth stays strong at above 70%
• Sharp NPA spike pushes provisioning, drags bottomline
• System-driven recognition likely to set new normal for retail NPAs
• One-off delinquencies could normalize from current levels
• Business growth targets appear unrealistic; our forecasts more modest
• Expect near-term under-performance vis-à-vis peers
• Maintain ‘BUY’ with reduced 12-month TP of Rs450 (from Rs465)

ONGC- Strong F2Q11 Driven by Lower Subsidy Burden:: Morgan Stanley

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Oil & Natural Gas Corp.
Strong F2Q11 Driven by
Lower Subsidy Burden


Quick Comment – Strong F2Q11; F2He to remain
strong: ONGC reported strong F2Q11 results with
EBITDA of ~Rs113bn, up 38% QoQ and 28% YoY,
while net profit of Rs53.8bn, which was up 47% QoQ
and 6% YoY, and 5% ahead of our estimate. The strong
results were driven by lower subsidy burden, which was
down 45% QoQ, in line with our estimates, and the full
impact of APM gas price hike. We expect to ONGC to
report strong numbers for second half of the year on our
earlier thesis of a reduced subsidy burden and higher
realization from the natural gas business.
Highest net crude oil realization last 10 quarters:
Net of subsidy of US$16.5bbl, net oil realization was
US$62.8/bbl. We expect ONGC to continue earn
~US$62/bbl of net realization for the rest of the year.
Gross crude oil price realization for the company was
US$79.2/bbl, US$3.1/bbl higher than WTI.
Higher contribution from Natural Gas business:
F2Q11 was the first quarter with will full impact of APM
gas price hike effective June 1. F2Q11 gas realisation
was at US$3.9/mmbtu; up 45%QoQ and 85% YoY.
Crude sales volumes better than expected: Crude
sales at 5.9MMT were up 11.3% QoQ and 6.5% YoY,
driven mainly by optimization of internal consumption
and normalization of inventories that built up in F1Q11.
Oil production at 6.9MT was up ~3.6% QoQ. However,
gas production at 6.3Bcm was down 2.5% QoQ and 3%
YoY due to shut-down at PMT fields.
Higher recouped costs: Drywell write-offs were
Rs24bn, up 178% QoQ and 272% YoY, leading to
recouped costs rising 41% QoQ and 87% YoY.
What does this mean to our estimates? We maintain
our estimates at this time. However, we may have to
adjust our F2011e numbers based on F2Q11 results.
We will revisit our model after the analyst conference
call on October 29, 2010.

PNB 2QFY11 – Raising estimates, target; Buy:: Anand Rathi

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PNB
2QFY11 – Raising estimates, target; re-iterate Buy


 Raising estimates and target. We raise PNB’s FY11e/FY12e
EPS by 7.7%/12.9%, due to its healthy 2QFY11 performance. We
value the stock at 1.9x FY12e ABV (earlier 1.6x) owing to a better
RoE, and raise our target price to `1,602 from `1,230. We retain a
Buy, as we expect its high NIM and adequate NPA coverage to
keep its RoE one of the best in the sector.
 Healthy business growth, high NIM. Yoy growths in credit
(27.6%) and deposits (18.4%) were higher than the sector’s. NIM
improved 56bp yoy, 12bp qoq, to 4.1%, led by a 200-bp improved
CASA share to 40.6%. PNB’s enviable liability franchise holds it
in good stead in protecting its NIM. Due to higher NIM assumed,
we raise NII by 10.8% in FY12e and 13.8% in FY13e.
 Productivity, fees improve. Core cost-to-income improved 67bp
yoy to 43.6%, despite `2.5bn of provisions for employee pensions
and gratuity. Fee growth at 24.4% yoy was largely in line with
credit growth (27.6% yoy).
 NPA coverage falls; sufficiently capitalized. Gross NPAs rose
11.4% qoq. NPA coverage dropped from 81.2% in Mar ’10 to
77.1% now. Restructured assets were 6.5% of loans, and are likely
to be the overhang for PNB’s stock performance, near term.
Capital adequacy was sufficient at ~14%, with Tier-1 capital at
~9%.
 Valuation. At our target, PNB would trade at 2x FY12e and 1.6x
FY13e ABV. Risk: Higher credit costs, due to lower-thanexpected
NPA recoveries.

Emerging Markets -Capital Flows and Current Account Balances:: Citi

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Emerging Markets Macro and Strategy Outlook
Capital Flows and Current Account Balances
 Notwithstanding the failure of the G20 finance ministers and central bank governors
to agree a set of targets for where current accounts ought to go, we think there are
good reasons to expect current account balances in EM to deteriorate over time:
surpluses should fall, and deficits should rise, in many countries.
 To some extent this process is already at work, and a number of big EM current
account balances have deteriorated in recent quarters: China, India, Brazil and
Turkey have all seen their current accounts worsen.
 With the possible exception of Turkey, whose current account deficit now exceeds
6% GDP, the current account deterioration that we have seen has been pretty
modest. One way of explaining this is that policymakers still have a “fear of deficits”,
largely thanks to the role that big current account deficits have played in emerging
markets crises over the past 30 years.
 We think there is plenty of room for this “fear of deficits” to diminish, for three main
reasons. In the first place, real exchange rate appreciation has accelerated recently,
and currency strength will in the end bias spending decisions towards imports.
Second, a change in the composition of GDP growth in emerging economies — with
domestic spending growth now leading GDP growth in many countries — means
that there should be more spillover to imports. And finally, we think EM
policymakers might find themselves more easily convinced that current account
deficits are still well short of levels that give any rise to concerns about external
vulnerability.
 Deteriorating current account balances in EM might give rise to a debate about
whether we’re headed for another round of EM crises. This would be a valid debate,
but we think the risks are pretty low in the short run.

Sun TV, Shines again --ADD says IIFL,

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Shines again
Sun TV’s 2QFY11 result fell marginally short of our estimate, on higher costs. Growth momentum in
both advertising and subscription revenues continues unabated. Advertising revenue growth will pick
up in 3Q as we get into the festive season. Sun’s focus on subscription revenues has started yielding
results, with total subscription revenues growing 60% YoY in 2Q. In 3QFY11, the company released its
much-awaited movie Endhiran starring superstar Rajnikanth, which is doing very well at the box
office. We raise our earnings estimates for FY11 by 5% and for FY12 by 9% to factor in stronger than
expected growth in revenues and also earnings from Endhiran. We Retain ADD and upgrade our target
price to Rs553.
Revenues growth momentum stronger than headline number suggest: Sun’s 2QFY11 revenues,
down 3.6% QoQ at Rs4.3bn, should be seen in context of the fact that the festive season this year falls in
3Q instead of 2Q, and the dearth of new releases in 2Q caused a QoQ drop of Rs340m in movie revenues.
Costs were marginally higher than our estimates, contributing to the small disappointment in earnings.
We raise earnings estimates: Management hiked its FY11 guidance for analogue cable revenues from
Rs1.8bn to Rs2bn, and is now targeting 25% growth in this revenue stream in FY12. Additionally, it expects
DTH revenues to grow at over 20% annually over the next three years. A focus on international distribution
could throw up a positive surprise. Accordingly, we raise our EPS estimate for FY11 by 5% and for FY12 by 9%.
Premium justified; we reiterate ADD: The stock is trading at a P/E of 23.6x on FY12ii—not inexpensive,
but still at the median of its historical trading band. We believe the strong earnings visibility and possibility
of positive surprises in both advertising and subscription revenue is not fully captured in valuations. Our
price target of Rs553 (26x FY12ii EPS) represents an upside of 11%. We reiterate ADD.

Piramal Glass Shift Continues, Maintain BUY :: Emkay

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Piramal Glass

Shift Continues, Maintain BUY

BUY

CMP: Rs 137                                       Target Price: Rs 160

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n     Piramal Glass (PGL) Q2FY11 performance exceeds expectation – revenue growth at 2.6% yoy to Rs3.1 bn and APAT up 3700% yoy to Rs206 mn

n     C&P contribution improves from 43% of revenues to 48% of revenues – C&P register revenue growth of 14.6% yoy to Rs1.4 bn

n     Fine-tune assumptions on interest expenditure and material costs – upgrade FY11E earnings by 9.9% (Rs9.3/Share) and FY12E earnings by 3.0% (Rs18.7/Share)

n     Maintain BUY with revised target price of Rs160/Share

IDBI: F2Q11: Margins Expand Sharply :: Morgan Stanley

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IDBI: F2Q11: Margins Expand Sharply

IDBI Bank reported profits of Rs4.3 bn (+71% QoQ
and +69% YoY): Our estimate was Rs3.3 bn. The key
reason for the beat was significantly better than
expected NII progression (driven by margin expansion)
The key highlights from the results include:
1) Margins expanded sharply, 63 bps QoQ / 122 YoY
to 2.27%.
2) Volume growth was weak. The loan book
contracted by 4% QoQ and the deposit book by 2%
QoQ. On a YoY basis, loans grew by 24% YoY
while deposits grew by 18% YoY.
3) Loan loss provisions were stable QoQ at Rs3.2 bn
(96 bps of loans, annualized). Coverage ratio
improved to 74.5% from 73.6% in the previous
quarter. GNPLs were down 6% QoQ.
4) Operating costs moved up by 26% QoQ and 90%
YoY, driven by employee expenses. However,
given strong revenue progression, cost:core income
ratio moved to 39% from 38% in the previous
quarter.
5) Capital gains and recoveries contribution to
earnings remained very low.
6) Core fee income growth was at 14% YoY (+24%
QoQ). It was 50% YoY in the previous quarter.
Given the sharp nature of the rise in margins, we
will look for further clarity on margin sustainability
at IDBI Bank’s analyst meeting (scheduled on
October 29). We will follow up with a more detailed
note.

BHEL - Strong Performance, Clear Path Ahead; BUY : Emkay

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BHEL

Strong Performance, Clear Path Ahead; Retain BUY

BUY

CMP: Rs 2,446                                       Target Price: Rs 3,030

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n     BHEL report strong performance – Revenues up 26% yoy to Rs87.2 bn, EBITDA margins improve 60 bps yoy to 17.7%, Net profits increase 33% yoy to Rs11.4 bn

n     Bagged orders worth Rs200 bn during Jul-Oct’10 – achieved 50% of FY11E target orders. Order book at Rs1537 bn

n     H1FY11 performance on all counts, gives comfort to  achieve FY11E estimates – enhances probability of earnings upgrade

n     Maintain earnings estimates of FY11E (Rs110.6/Share) and FY12E (Rs129.0/Share)- with target price of Rs3,030/Share

Phoenix Mills- Bottomline beats estimate -BUY target Rs 300: Religare

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Phoenix Mills Ltd
Bottomline beats estimates; several growth drivers ahead
Phoenix Mills (PHNX) reported a 10% QoQ increase in its Q2FY11 sales to
Rs 443mn. This growth was largely driven by its luxury mall Palladium that
contributed 41% of the quarter’s revenue. The company’s EBITDA margin
remained flat QoQ at 72%. Blended rentals (including Palladium) for High
Street Phoenix (HSP) were slightly higher than in Q1FY11. We see the following
near-term triggers for the stock: 1) Commencement of three Market City
Projects in FY11. 2) Starting up of the Shangri-La Hotel in Q1FY12. 3) An
increase in rental income, with Palladium now fully operational and rentals on
0.15msf in HSP coming up for renewal during Q3 and Q4FY11. We maintain
our BUY rating on the stock with target price of Rs 300 after ascribing a 20%
discount to NAV.

Palladium drives Q2FY11 revenues: Income from operations increased by 68%
YoY and 10% QoQ to Rs 443mn. Palladium contributed ~41% of the quarter’s
revenue. Incremental revenues were driven by the full contribution of ZARA,
Landmark, Gucci, Boss, and Burberry outlets (as against a limited period
contribution last quarter) and opening of new stores like Fifa and Etro. Palladium
is now fully operational except for some space on the ground floor.
Improvement in blended rentals buoys PAT: PHNX’s average rentals for HSP
increased to Rs 166psf-170psf in Q2FY11, marginally higher than the last
quarter. PAT increased by 21.5% QoQ to Rs 221mn on account of a 16% drop
in interest costs as the company paid-off part of its outstanding loans.
Three Market City projects to be operational in FY11: Market City projects at
Bangaluru and Pune are in final stages and would generate rentals for their
respective SPVs from Q4FY11 onwards; the Market City project at Kurla
(Mumbai) would also start contributing from March ’11 onwards. Leasing status
has improved for Bangaluru and Chennai Market City projects and would
continue to improve before these projects become operational (Fig 3). PHNX has
increased its stake in the Bangaluru project (to 32.7% from 28.1% earlier) and is
likely to raise its stake in the Pune project as well (to 58.5% from 50% earlier) —
both value-accretive moves from a long-term perspective.

Maintain BUY with target price of Rs 300: We maintain a BUY on the stock with
a target price to Rs 300 after ascribing a 20% discount to NAV. Increasing the
stakes in Bangaluru and Pune Market city projects will further enhance its value
in the long term.

Bank of Baroda - A jewel among PSU banks:: Macquarie

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Bank of Baroda
A jewel among PSU banks
Event
 Earnings 25% above our estimates: BOB reported 2Q net profits of
Rs10.2bn, 25% above our estimate, mainly due to better-than-expected NII
and fees.
 Maintain Neutral; raise TP to Rs1,030: Neutral rating maintained due to
what we regard as rich valuations. We raise our TP by 20% to Rs1,030 due to
increased earnings. Thus, we include higher FY12E RoE and higher initialperiod
earnings growth in our two-stage Gordon growth model.
Impact
 Asset quality – the biggest comforting factor: We think BOB’s ability to
consistently maintain slippages well below industry standards is very
encouraging. At a time when industry averages are hovering at around a 1.5–
2.0% slippage ratio, we see BOB’s slippage ratio, which was 60bp this
quarter, as quite commendable and reflective of the superior credit
assessment standards of the bank. The bank has one of the lowest
restructured asset portfolios at 2.8% of its loan book. Even in terms of an NPL
coverage ratio, BOB’s is 85%, which should act as an excellent cushion.
 Deposit growth and loan growth perfectly matched: Unlike at other banks,
where balance sheets may be stretched and deposit growth is running well
below loan growth, BOB has managed to match its 30% loan growth with a
30% deposit growth, which is quite commendable, in our view.
 We think margins may have peaked: With domestic business NIMs already
at 3.62% (up 20bp QoQ), we think NIMs may have peaked, and with deposit
re-pricing yet to occur, we think NIMs are likely to decline.
 Several other positives to be noted: Fee income growth looked impressive
at 29% and was mainly driven by strong loan growth and good momentum in
the international business. Return ratios have improved from 1Q levels for the
international business.
 Key negative – yet to provide for second option of pension: While other
banks are providing prudently for the second option of pension, BOB has yet
to provide for pensions, and its opex is likely to increase further. We have
factored that into our numbers.
Earnings and target price revision
 We raise our EPS estimates for FY11–13E by 10–20%, mainly due to higher
NII and fees. We raise our TP by 20% to Rs1,030, mainly due to higher
projected earnings growth and a higher FY12E RoE.
Price catalyst
 12-month price target: Rs1,030.00 based on a Gordon Growth methodology.
 Catalyst: Continued stability in asset quality, strong fee income traction.
Action and recommendation
 One of the best-run PSU banks: We believe BOB, which has consistently
delivered on several operational parameters, remains one of the best-run
PSU banks in India. Even so, we maintain our Neutral rating on a valuation
basis.

Hero Honda Motors- Margins disappoints, lower to REDUCE :Emkay

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Hero Honda Motors Ltd.

Margins disappoints, lower rating to REDUCE

REDUCE

CMP: Rs 1,866                                       Target Price: Rs 1,720

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n     EBIDTA margin disappoints at 13.4% (est. of 15.2%). APAT at Rs 5.1bn was 10% below our est. of Rs 5.7bn. Margins suffer due to higher RM cost and other expenses

n     H2FY11 margin est. of 14.4% at risk in absence of price hikes. Excise (cess) demand notice for Haridwar plant, would further impact margins by 1 %, currently unaccounted in P&L

n     Maintain FY11E/FY12E volumes est. of 5.3mn/5.9mn units.  Downgrade FY11E/FY12E EPS by 11 each to Rs 107.2/122.8

n     Downgrade rating to REDUCE from HOLD, revise TP to Rs1,720 (down 11%) - 14x FY12 EPS. Continue to prefer Bajaj Auto over Hero Honda

NMDC -Strong but not enough:: Macquarie

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NMDC
Strong but not enough
Event
 Below expectation: NMDC reported its 2QFY11 earnings which were lower
than our estimate, due to lower sales volume impacted by a ban on
transportation in Karnataka as well as the monsoon season. Given an
overhang of 26% tax on mining earnings and difficulty in increasing volume,
the risks are to the downside. We have marginally cut our earnings and target
price to Rs241 from Rs255. Maintain Underperform.
Impact
 Strong 2QFY11 results helped by pricing: NMDC reported net sales at
Rs24.46bn, 14% below our estimate of Rs28.5bn, down 2.3% QoQ, though
up 77% YoY due to strength in iron ore prices. EBITDA at Rs18.4bn was up
81% YoY and down 10% QoQ. PAT at Rs13.8bn is 20% below estimate,
down 8% QoQ and up 79% YoY.
 Reducing earnings estimates: We have reduced earnings for NMDC
between 5-13% respectively for FY11-13, as we believe that NMDC is lagging
behind in volume due to transportation issues. Also, NMDC has been a bit
slow in raising prices and hence lags during rising price scenarios.
 Costs have shifted up a notch: NMDC saw an increase of $10/t in its costs
from $15/t last quarter to $25/t in 2QFY11. Though these costs were impacted
by monsoons, a shift of royalty to ad valorem basis and an increase in freight
by railways have also impacted the cost base. We expect NMDC cost to be in
the range of $20/t on a normalized basis, an increase from $18/t reported last
year.
 26% tax an overhang: The new mining bill talks about a 26% tax on mining
profits to be distributed to traditional land owners. This directly affects NMDC
and could erase 20% of its NAV; thus, it is a key overhang on the stock.
Earnings and target price revision
 We are reducing our earnings estimates by -13%,-5% and -4% in FY11, FY12
and FY13, respectively and have reduced TP to Rs241.
Price catalyst
 12-month price target: Rs241.00 based on a Sum of Parts methodology.
 Catalyst: Near term weakness in iron ore prices
Action and recommendation
 Maintain Underperform: The company is currently trading at 17x on FY11E
on cyclically peak iron ore prices. The recent issue of transport permits in
Karnataka and Naxal has slowed down new mine ramp up, diversification into
steel making and reduced chances of acquiring new resources as competition
from other steel mills increase remain the biggest risks. We continue to
recommend exposure to JSPL (JSP IN, Outperform, TP: Rs962, CMP:
Rs692) as a better way to play resources.

UNION BANK 2QFY11: Below est; Asset quality, fees and opex disappoint:: Motilal Oswal

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UNION BANK 2QFY11: Below est; Asset quality, fees and opex disappoint; Margins improve QoQ; Downgrading estimates

Union Bank of India (UNBK IN, Mkt Cap US$4.5b, CMP Rs393, Buy) 2QFY11 earnings disappointed with PAT decline of 40% to Rs3b (44% below estimates) despite NII growth of 73% YoY (10% higher than est). Higher provisions on NPAs and higher opex (due to higher than guided 2^nd Pension provisions and gratuity) led significantly lower than estimated profitability. However, margins improvement of 18bp QoQ despite higher slippages in the quarter is a positive surprise.

Key highlights

-          Sharp deterioration in asset quality a negative surprise: Slippages in 2QFY11 were Rs11.3b led by recognition of NPA under agri-debt relief (Rs4.2b) and slippages in three large corporate accounts (~Rs3b) besides normal slippages. Mgmt is guiding for lower slippages in 2HFY11 and expects strong up-gradations and recoveries. Management targets to bring down GNPA ratio to 2.3% by end FY11 v/s 2.8% in 2QFY11.

-          Pension provisions a bigger negative surprise: Employee expenses during the quarter increased sharply as bank provided ~Rs2.5b towards pension and gratuity related liability. UNBK has estimated pension related liability of Rs24b to be amortized over 5 years (Rs2.4b provided till 1HFY11) and Rs2.5b towards gratuity to be provided in FY11 (Rs1.27b provided till 1HFY11). Earlier bank had guided for Rs12b of liability. Sharp increase in the pension liability is a cause of concern for the bank and sector in particular. Union bank has total employee base of 27,000 and assuming 50% will opt for 2^nd pension option, per employee liability comes to Rs1.8-2m which is a big negative surprise in our view. We would seek details from other banks also on this liability, which is not factored in our estimates.

-          Loan growth higher than industry: Loans grew 27% YoY but remain muted on a sequential basis (1.3% QoQ, in line with industry trend) to Rs1.26t. On the back of strong pipeline of sanctioned loans management target loan growth of 25% in FY11.

-          Margins a positive surprise: NII grew 73% YoY and 14% QoQ lead by 93bp YoY and 32bp QoQ improvement in NIMs to 3.35%. Adjusted for one-offs NIMs improved 18bp QoQ to 3.21% - A positive surprise considering higher slippages during the quarter.

-          Fee income disappoints again: Fee income grew 8% YoY in 2QFY11, flat YoY in 1HFY11. Mgmt has toned down its guidance on fees from 20%+ to 15% now.

Valuation and view

-          Increase in operating expenses and higher credit cost is leading to sharp downgrades in our earning estimates. We had earlier built-in pension liability of Rs2.4b p.a. for 5 years from FY11 but current management guidance of Rs4.8b liability p.a., would result in higher operating expenses. Further, we are also increasing the provisioning expenses by 12% and 15% respectively for FY11 and FY12 to account for higher credit costs. Higher than expected reduction on account of strong recoveries and up gradations can provide positive surprise on asset quality.

-          Strong business growth and improvement in margins will drive NII growth for UNBK. We model NII growth of 47% YoY for FY11 and 19% for FY12 respectively.Overall, we have downgraded our earnings estimates for FY11 by 15% and for FY12 by 12% to Rs21.4b and Rs26.9b respectively.  Return ratios are likely to contract with RoAs of ~1% and RoE of 22-23% over FY11-12. Stock trades at 1.6x FY12 BV and 7.4x FY12E EPS. Maintain Buy with a target price of Rs425 (1.7x FY12E BV)

Asset Quality deteriorates sharply QoQ; Upgradation and recoveries lower QoQ

-          GNPAs in absolute terms increased by 29% QoQ to Rs35b, whereas in % terms GNPA increased to 2.8% v/s 2.2% in 1QFY11 and 1.93% in 2QFY10. NNPA in % terms increased to 1.18% v/s 0.94% in 1QFY11. PCR incl technical write-off decline marginally to 70% v/s 71% in 1QFY11.

-          Slippages in 2QFY11 were Rs11.3b led by recognition of NPA under agri. debt relief (Rs4.2b) and three large accounts (~Rs3b) falling into NPA besides slippages in normal course of business.

-          Mgmt is guiding for lower slippages in 2HFY11 and expects strong upgradations and recoveries. Management targets to bring down GNPA ratio to 2.3% by end FY11 v/s 2.8% in 2QFY11. We model in slippages of 2.25% for FY11 and credit cost of 0.9% vs 0.65% in FY10.

-          O/s restructured loan stood at Rs51.2b (4% of the loan book, facility-wise) out of which 11.3% have already slipped in to NPA and management expects cumulative slippages to be less than 15% of the overall restructured book.

High pension and gratuity related liability to increase operating expenses – a key negative for sector as well as bank

-          Operating expense grew by 50% YoY and 24% QoQ to Rs9.1b. Employee expenses during the quarter increased sharply as bank provided ~Rs2.5b towards pension (Rs1.2b) and gratuity related liability (~Rs1.3b in 1HFY11, bulk of which was provided in 2QFY11).

-          UNBK has estimated pension related liability of Rs24b to be amortized over 5 years (Rs2.4b provided till 1HFY11) and Rs2.5b towards gratuity to be provided in FY11 (Rs1.27b provided till 1HFY11).

-          Union bank has total employee base of 27,000 and assuming 50% will opt for 2^nd pension option. Per employee liability comes to Rs1.8-2m which is a negative surprise in our view for the sector and bank.

-          Cost to income ratio increased to 45% v/s 41% in 1QFY11 and 43% in 2QFY10.

-          Management expects employee expenses to decline from 2QFY11 levels; this in our view would be on the back of relatively lower gratuity related expenses.

Loans growth remains muted QoQ; in line with industry trend

-          Loans grew 27% YoY (on a lower base) and 1.3% QoQ to Rs1.26t, while deposits grew by 18% YoY and 4% QoQ to Rs1.8t.

-          Savings deposits grew 29%YoY and 6% QoQ (a positive factor), however due to lower growth in current deposits overall CASA grew by 19% YoY. CASA ratio remained stable at 32.7%.

-          CD ratio declined to 71.1% v/s 73% in 1QFY11 (however improved by 441bp YoY).

-          On the back of strong pipeline of sanctioned loans management target loan growth of 25% in FY11.

Strong margin QoQ; Adj. for one off NIM at 3.21%- positive surprise

-          NII grew 73% YoY and 14% QoQ to Rs15.4b. During the quarter, UNBK accounted Rs1.2b of interest income on income tax refunds and there was reversal of Rs620mn due to classification of agri-debt relief amount as NPAs. Even adjusting for this NII growth would have been higher at 66% YoY (6% higher than our est)  

-          Reported margins improved 93bp YoY and 32bp QoQ to 3.35%. Adjusting for the one-off income in interest, margins were at 3.21% (up 18bp QoQ). This improvement is a positive surprise considering the deterioration in asset quality.

-          Cost of deposits increased by 6bp QoQ to 5.4% whereas yield on loan were up by 24bp QoQ to 9.6% driving the NIM expansion. Strong expansion in margins despite higher slippages during the quarter instills confidence in us of bank maintaining strong margin in FY11. Management targets NIM of 3.1%+ for FY11.

Core fee income growth muted but management expects it to recover

-          Other income grew by 17% QoQ but declined by 4% YoY.

-          Fee income (including forex) growth remained muted. It grew 8% YoY to Rs2.8b Trading gains were Rs1.9b vs Rs1.4b in 1QFY11 and Rs2.3b in 2QFY10.

-          Recoveries during the quarter were Rs440m v/s Rs380m in 1QFY11 and Rs420m in 2QFY10

-          Although fee income growth for 1HFY11 is merely 4% YoY, mgmt expects it to grow ~15% for FY11 driven by pick up in loan growth.

Valuations and view

-          Overall, we have downgraded our earnings estimates for FY11 by 15% and for FY12 by 12% to Rs21.4b and Rs26.9b.  Return ratios are likely to contract with RoAs of ~1% and RoE of 22-23% over FY11-12. Stock trades at 1.6x FY12 BV and 7.4x FY12E EPS. Maintain Buy with a target price of Rs425 (1.7x FY12E BV)

Larsen & Toubro: Taking it up a Notch **BEST IDEA** Morgan Stanley

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Larsen & Toubro
Taking it up a Notch


Upgrading numbers as expected: We highlighted in
our May 2010 report, The Beginning of the Upgrade
Cycle, that despite our estimates being 12-13% ahead
of consensus, we were being conservative on both
margins and revenues, and we expected to upgrade
earnings over the next 24 months. We believe that the
risk remains to the upside, with L&T moving from a
build-up phase (order book growth) in F2010-11e to an
execution phase (revenue growth) in F2012-13e.
Moving 15-16% ahead of consensus for F2012-13e:
With revenue momentum in F2Q11 being stronger than
our expectations, and our view on a strong pick-up in
execution from F3Q11e onwards, we are upgrading our
revenue numbers for F2012-13e by 3-7%. That shift,
coupled with the spillover effect of the upside surprise in
margins in F1H11, leads to a 7-8% upgrade in our
F2012-13e earnings.
Strong F3Q11e will be the next trigger: Historically,
the weak base for the September quarter (due to the
monsoon) has resulted in L&T’s sales growth QoQ in the
December quarter ranging between 10-12%. We believe
that the above-normal monsoon this year, coupled with
the drought in F2010, will help L&T register 32% YoY
growth in revenues in F3Q11.
Investment conclusion: While L&T, in revenue terms,
is larger than the next six largest construction
companies put together, owing to the fragmented
market (L&T’s market share is still only 2.5% in Indian
capex) and its high-quality execution, it has consistently
gained market share over the last two decades. It is also
the vendor of choice for the private sector, making it the
best way to play the structural growth story in Indian
infrastructure. Our revised price target of Rs2,433 (up
21%) implies a 21% return from current levels.

Grasim Industries- In-line results; JPMorgan

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Grasim Industries Ltd
Overweight
GRAS.BO, GRASIM IN
In-line results; Strong VSF performance to support
earnings



• Earnings in line with estimates: GRASIM reported 2Q FY11 EBITDA
of Rs7.8B, in line with our estimate. Consolidated PAT stood at Rs3.2B,
also in line.
• While VSF volumes were lower in 2Q, given late rains, the VSF
outlook remains strong: GRASIM reported weak standalone and
consolidated earnings driven by lower VSF volumes. VSF had a higherthan-
expected impact from the late arrival of rains (Nagda plant was shut
down for 25 days compared to eight days last year). However, the VSF
outlook remains strong given a) stronger cotton prices due to crop
damage in key cotton growing countries, and b) stronger demand from
VSF. GRASIM highlighted that it did increase VSF prices by Rs3/kg
(~2%) on Oct. 1 and the outlook for VSF was also strong. Costs on a
sequential basis are unlikely to see any significant move. We expect
VSF earnings and margins to remain elevated over the next few quarters.
• VSF growth plans: GRASIM announced a greenfield VSF plant of
0.12MT capacity at a total cost of Rs16.9B, brownfield expansion for a
capacity of 0.036MT for total cost of Rs4.49B, and also has plans for
higher caustic capacity for captive use in the VSF segment.
• Update on Star Cement acquisition: UltraTech completed the
acquisition of the Middle East-based Star Cement (3MT capacity with
implied acquisition price of $140/MT). The acquisition will be
consolidated into Grasim’s results starting in 3Q FY11. According to
management, the company is operating at a utilization rate of 80+% and
will generate EBITDA of ~Rs400/MT (current selling price in the region
is ~$65/MT).
• Remain OW with revised PT of Rs2,550: We remain OW on GRASIM
with a raised PT of Rs2,550. We expect the continued strong VSF
business (on the back of higher cotton prices) to provide earnings
support. While cement earnings in the cement subsidiary are likely to
remain volatile, we expect overall margins to be higher than the industry
average for the cement subsidiary (UltraTech Cement, N) given its pan-
India presence. Key risks remain usage of cash, further re-organization.

Forthcoming Results : October 31, 2010

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31-Oct-10
Company	Company	Company	Company
Auro Lab	Jaiprakash Asso	Omega Interact	Tulsi Extr
Fact Enterprise	Kutch Salt	Panchsheel Org	UBE Inds
Himatsingka Seide	Naina Semi	Simco Trading	UCIL Leasing

Coal India, Gravita and Power Grid --Gray Market Premium Prices for India IPO: 30th Oct, 2010

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Company Name	Offer Price	Premium
	(Rs.)	(Rs.)
Coal India	245  (Upper Band)	30 to 34 +  5% discount for retail
Gravita India	120 to 125	12 to 14
Power Grid FPO	80 to 90 (rumor)	4 to 6