Asia Oil and Petrochemicals Refining margin remains firm :: Macquarie Research,

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Asia Oil and Petrochemicals
Refining margin remains firm
Refining and petrochemicals update
 GRMs robust; Petchem margins mixed: Singapore complex GRM was
maintained at US$8.2/bbl, up 6% WoW, driven by overall price strength in
light and middle distillates. This leaves QTD GRM at US$8.8/bbl (+115% YoY,
+18% QoQ). Petrochemical margins were mixed last week, with polyethylene
spreads down 3~8% WoW, while MEG spreads showed another week of
rebound (+39% WoW) to US$234/ton. PVC margins also remained firm, at
US$550/tonne (+3% WoW), which implies 36% YoY and QoQ growth.
Country-specific developments and views
 Korea: We believe 2Q11 earnings to be largely the bottom for Korean oil
refiners and petrochems. Nevertheless, our views on the sector remain bright
as we expect strength in both oil refining and petrochemical margins to
continue. In the near term, we believe Hanwha Chemical has the best
earnings catalyst, driven by sequential margin increase in PVC, which
generates 80% of its EBITDA.
 Taiwan: Formosa Group posted a ~10% MoM decline in aggregated May
sales, largely reflecting softer chemical prices. Going into June, we may
continue to see MoM decline due to the May fire and the subsequent
government order to shut down MEG, BPA, and VCM plants. From local
news, the actual timing of the shutdown of MEG plants (total capacity: 1.75m
tonnes/yr, 100% of NPC’s MEG capacity) is still uncertain (final deadline of
the government is 20 June), while 3 BPA plants (total capacity: 330K
tonnes/yr, 78% of NPC’s BPA capacity) should be shut down by 15 June. The
main beneficiaries of the MEG plant shutdown would likely be OUCC (1710
TT, Not-rated) and China Man-Made Fiber (1718 TT, Not-rated), and the
beneficiary of the BPA plant shutdown would be TPCC (4725 TT, Non-rated).
 India: Cairn India indicated to the government that its Rajasthan production
can increase to 300kbpd (240kbpd claimed earlier) and recoverable reserves
to 1.65bboe (vs 0.7bboe approved), provided policy actions and
increased capex/technology are applied. This could yield more than US$22-
25bn vs the US$2.1bn the government would gain from imposing the disputed
royalty in Rajasthan as cost-recoverable, which we believe the government is
supporting as a precondition to the Vedanta group’s potentially destabilising
takeover. Cairn India is being squeezed due to the Vedanta group having
taken a definitive step towards acquiring a controlling stake through the Sesa
Goa open offer (8.4%) and taking over Petronas's stake (10.1%).
 Japan: We continue to like JX Holdings (5020, ¥527, OP, TP ¥700) as we
believe the market is too negative on the refining margin outlook and is
missing the positive impact of industry restructuring and capacity reductions in
Japan’s refining industry. We attended a meeting with JX president Takahagi,
and left reassured that the industry has changed for the better, there is more
discipline on the supply side, and the capacity reductions will continue despite
fears that the government policy aimed at reducing overcapacity will change
following the earthquake.
Outlook and Strategy
 Among Asian stocks, we particularly like S-Oil, Hanwha Chemical and PTTCH.

IDFC (IDFC.BO; Summary Takeaways from Citi India Investor Conference – Day 3

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


IDFC (IDFC.BO; Rs135.20; 1M)
 Takeaways from Mumbai — IDFC management presented at our India Investor
Conference in Mumbai today. Key highlights are as below:
 Outlook on overall infrastructure environment — There has been a lot of
issues surrounding the infrastructure space recently, especially in the power
segment. Management is of the opinion that most current concerns are related to
execution, and will likely see some improvement in 2H12. However, fuel/coal
linkage is the more serious concern - partly executional (can be fixed), but partly

also structural and could lead to overall slower growth in power capacity
additions medium term. The good parts - renewable energy will get relatively
more focus & improved execution for road projects - will likely be key growth
areas.
 IDFC's loan growth should remain healthy — IDFC management remained
confident of loan growth, and although slower in 1H12 (high single digits
sequentially), it should pick-up in 2H12 with overall FY12 growth of around 25%.
Key drivers could be power (undisbursed sanctions largely, fresh sanctions may
pick-up later) and roads. Longer term, management remains more confident of
the growth outlook and is not changing its guidance of doubling loan book
between FY11-FY14.
 NIM pressure likely to ease off in next few months — Management says NIM
pressure is seeing signs of easing as banks have been raising their lending rates
and interest spreads have limited downside from current levels (2.2% currently).
While there is some immediate pressure, these should moderate as the interest
rate environment stabilizes.
 Asset quality: Still too early to talk of impairments — IDFC management
believes it is still too early to talk about meaningful impairments to its loans as
most of the power exposure is in operational assets (55% of total power
exposure) and only 45% is under construction. Also it does not have much
exposure to the merchant power segments (has had caps on exposure to
merchant power) and believes key in asset quality will be selection of the
sponsors - IDFC relatively well placed.
 Capital market businesses — With regards to the outlook on market segments
for IDFC, broking, investment banking, and asset management remain
challenging as increasing competitive intensity has impacted profitability. Also,
loan related fees could slow as incremental disbursements are lower in FY12.
Principal investments remain volatile and difficult to predict (would be challenging
to see meaningful upsides in the current environment).


Infrastructure Development Finance
(IDFC.BO; Rs133.45; 1M)
Valuation
We value IDFC at Rs174 based on our sum-of-the-parts methodology. We value
IDFC's core lending business at Rs142 per share; we prefer a P/BV multiple of 2.0x
1yr-Fwd BV benchmarked towards the lower band of private banks' target P/BV
multiples, given its sub-15% core ROE. This reflects IDFC's premium positioning in
the infrastructure segment, strong management, long track record of low asset risks
and relatively high growth profile. However, its target multiple is constrained by its
lack of retail asset, liability and distribution franchises relative to premier private
bank franchises. We value the asset management business as a percentage of
assets and value this business at Rs9 per share sub-divided into Rs5 for the private
equity segment (7% of AUMs) and Rs4 for the Stanchart AMC business (4% of
AUMs). We value IDFC's broking and investment banking business at Rs5 per
share based on 15x 1yr Fwd profits. Finally, we also add Rs18 for IDFC's
investment portfolio including the NSE (valued in-line with the last reported
transaction).
Risks
We rate IDFC shares Medium Risk, even as our quantitative risk system, which
tracks 260-day historical share price volatility, suggests Low Risk. While IDFC’s

increasing scale and strong asset quality track record, reduce risks, we believe its
mono-segment lending and inherent exposure to capital markets increase its risk
profile. Key downside risks that could restrict the stock from achieving our target
price include: a) Sharp increases in interest rates; b) Significant slowdown in
infrastructure growth and asset quality; c) Continued softness in capital markets for
a relatively longer period; d) Regulatory changes and a higher tax rate.

Macquarie Research:: Global Property Insight - Strong defensive qualities

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Global real estate outperforms again in May
Global real estate securities had a month of outperformance, albeit with only a
modest rise in absolute terms, compared to the decline in global equity markets.
In local currency terms (see p.14) Europe was the star performer. Of the leading
markets only Singapore failed to outperform its local equity market, buoyed by
FY results demonstrating the strength of the Central London office market (see p
3).
Capital market issuance
Activity improved this month (a total of £7.3bn vs. £5.2bn last month) of which
only £2.9bn was for secondary issues (£0.6bn) with North America yet again
dominating, £0.3bn was for IPOs (£2.4bn), and the bond market saw £4.1bn
(£2.2bn) of new issuance.
Recommended weightings (Summary p3-9, Details p23 )
Key Overweight markets – China, Hong Kong, US and Canada
Key Underweight markets – Japan, Australia and New Zealand
Current global valuations suggest 13.9% upside to TP

India Inc's appetite for making deals is robust:: Business Line

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��

India Inc's interest in M&A seems to have sustained, despite the gnawing fundamental challenges facing the economy, according to data released by advisory firm, Grant Thornton India. The total value of deals (M&A, PE and QIP) struck in May 2011 was about $5.4 billion across 99 deals as compared with $1.8 billion sealed across 72 transactions in May 2010.

Surge in inbound and private equity deals, several high value M&A deals and action in new sectors were among the other notable trends. Here are the key highlights:

INBOUNDS DOMINATE

Foreign companies seem to be in no mood to shy away from the domestic arena, what with their hunger for Indian companies only growing. Inbound deals, though only one-third in value compared with what was recorded in May-2010, showed a healthy surge in volumes. Inbound deals value for the month was about $1.3 billion ($3.8 billion) across eight deals (five last year). It, however, is an altogether different story if the year-to-date deal data are seen, what with the value of inbound deals struck so far this year far surpassing the total inbound deal value transacted in Jan-May 2010.

Year-to-date, there have been 51 inbound deals for a total value of $17.3 billion as compared to $5 billion inbound deals over 38 deals reported in same period in 2010. In fact, the surge in inbound deals has helped India Inc. match its last year's score of total cross-border deals for the first five months. The total value of cross border deals struck in the first five months in 2010 was about $22.7 billion (127 deals), while the value of such deals is pegged at about $23.1 billion (125 deals) this year.

Outbound deals on the contrary have remained relatively sedate, with May-2011 seeing 19 deals for a total value of about $2.1 billion as against 19 deals worth over $4 billion in May-2010. India Inc's deal-making appetite, however, remained robust, with companies striking domestic deals in plenty; domestic deals totalled $735 million across 28 deals during the month, roughly 2.5 times the deal values transacted in the corresponding month last year.

HIGH-VALUE DEALS AND NEW SECTORS

There have also been several high value deals this month, with four M&A transactions valued at over a quarter billion dollars (see table). The top five M&A deals made up about 79 per cent of the total M&A deal values for the month. Interestingly, the month also saw deal activity spread to a handful of new sectors such as shipping and ports and electricals.

PE ON A STRONG WICKET

Private equity action remained robust, what with the month seeing 43 deals for an aggregate value of about $1.14 billion as against $0.26 billion (15 deals) in May 2010. PE activity on a year-to-date basis too has surpassed that seen in same period in 2010. So far this year, PE deals total to about $4 billion (156 deals), a healthy growth from what was reported in Jan-May 2010 ($2.6 billion across 109 deals)

Buy HDFC Bank: De-risking growth ::CLSA

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


De-risking growth
HDFC Bank’s FY11 annual report underlines its ability to leverage on the
liability franchise to defend margins in a high rate environment and at the
same time de-risk the balance sheet. Bank is focussing on expanding in
rural belts that will also help to meet priority sector targets. Asset quality
is at its cyclical best and bank has improved coverage ratio. We expect
earnings to grow at 28% Cagr over FY11-14, led by loan growth. BUY.
Strong liability franchise supports margin defence…
During FY11, bank’s branch network expanded by 15% and over 80% of new
branches were in new areas. Branch expansion and improving productivity
have been key to its healthy CASA growth and faster growth in retail loans
(27% vs. 17% for sector). With a CASA ratio of 53%, balanced ALM and
lower share of wholesale deposits (33% of total) bank is better positioned to
defend market share and margins even as it picks quality assets. Rs6.7bn of
floating provision in FY11 is ~2x impact of 50bps rise in savings deposit costs.
… and de-risking the balance sheet
During FY11, bank’s loans grew by 27%, but more importantly it reduced the
risk profile of exposures. Not only was RWA/ asset ratio stable at 70% (much
lower than other banks), share of exposures to real estate, capital market
and unsecured loans declined & growth in off-balance sheet exposures lagged
loan growth. Exposures to infrastructure and metal sectors grew at a fast
pace (+100%) and overseas loans (mostly to Indians) grew by 135%.
Focus on rural lending will help to meet priority sector targets
Alike other private sector banks, HDFC Bank also had shortfall in meeting its
priority sector targets forcing it to increase investment in low-yielding assets
by ~70%. It has been expanding in rural belts that reflects in 56% growth in
agri-loans in FY11. Further expansion will enable it to meet priority sector
norms and mobilise deposits. It invested ~Rs4bn in HDB Financial Services,
its NBFC subsidiary that focuses on lower-end of the customer segment.
Asset quality at cyclical best; we expect rise from current levels
Asset quality trends were impressive with delinquency ratio falling to 1.1% of
last year’s loans- lowest in 6 years. Lower slippages and provisioning in retail
segment reflect in rise in segment’s pre-tax ROA to 3.8% (from 2.5% in
FY10), but NPL ratio of corporate loans rose. Slippages may rise from current
levels, but high coverage ratio will help to keep provision stable.
Maintain BUY
We expect earnings to grow at 28% Cagr over FY11-14, led by loan growth.
Quality of growth will support premium valuations. Our target price is based
on 3.7x FY13 adjusted PB. Maintain BUY.

Lupin Limited (LUPN.BO; Summary Takeaways from Citi India Investor Conference – Day 3

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Lupin Limited (LUPN.BO; Rs438.00; 1L)
 Takeaways from Mumbai — Lupin Ltd presented at the Citi India Investor
Conference in Mumbai. Below are the key takeaways.
 What's new - Lupin does not expect the restrictions on Simva 80mg in the US to
impact materially, as most of the revenues come from the 20mg dosage form. There
could be some hit once Lipitor goes generic, but it is likely be priced higher than
Simva generic. Aerochamber Plus is unlikely to be launched in the near term but
other branded products continue to do well.
 US biz to be key growth driver - Most of Lupin's pending generic ANDAs (c60-70
out of c100) are likely to mature over the next 3-4 years, implying a significant
product rollout phase on a base of 30 odd products. Fortamet, Lotrel higher strength
& Geodon are key near-term catalysts. OCs would remain a good opportunity
despite more competition than envisaged earlier. Besides, it intends to maintain US
branded revenues in the c30% (of US biz) range through a combination of its own
launches and acquisitions.
 Japan & India to add to momentum - Lupin expects growth in India to sustain in
the c18-20% range, on the back of new launches and greater penetration. Japan is
the other market with potential, as the government's efforts to increase generic


penetration gain traction. Lupin has several launches planned and is also working
on backending API sourcing to India - leading to growth with improving margins
(currently below corporate average, despite better pricing).
 Acquisitions, an integral part of growth strategy - as Lupin aims to get to
US$3bn revenues by 2013. Potential targets include interesting branded
opportunities in the US, market access vehicles in emerging markets such as Brazil,
Turkey etc., or even something to strengthen its presence in one of its key markets.
While the ticket size of acquisitions could go up, the focus on RoI and strategic fit
would remain paramount.



Lupin
(LUPN.BO; Rs438.00; 1L)
Valuation
Given that pharma is a growth sector, we use P/E as our primary method to value
the base business of pharma companies. Lupin has historically (last six to seven
years) traded in a band of 10-34x one-year forward earnings. We value Lupin at 20x
12m forward earnings, in line with the sector leaders such as Cipla, Dr Reddy’s &
Sun Pharma due to its leadership in key markets/products & robust financial
metrics. At 20x Mar12E recurring FDEPS, we arrive at a target price of Rs 500.
Risks
We rate Lupin Low Risk, inline with the recommendation of our quantitative riskrating
system, which tracks 260-day historical share price volatility. Key downside
risks to achieving our target price include: 1) Earlier than expected Generic
competition in Suprax (c8% of FY10 sales); 2) INR appreciation would hurt, given its
exposure to global markets; 3) Reasonable exposure to the domestic formulations
market (29% of sales) leaves Lupin vulnerable to any significant widening of the
price control net. 4) Inability to effectively scale up the Kyowa operations or Antara
sales.

Maruti Suzuki India - Channel checks: slowdown in sales :: Macquarie Research

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Maruti Suzuki India
Channel checks: slowdown in sales
Event
 We have done extensive checks with car dealerships in the ten largest cities
of the country. Our channel checks suggest there has been a sharp slowdown
in car demand, especially for the petrol variants, given a steep increase in
petrol prices. We are cutting our FY12 volume growth assumption for MSIL to
9% from 16% earlier. We have cut our FY12 EPS estimate by 9% to Rs85,
which is 9% below consensus estimates. We reiterate our contrarian
Underperform rating with a revised target price of Rs1,020 (Rs1,080 earlier).
Impact
 Car sales hit by increase in petrol prices. Car sales growth has been weak
over the last two months, with YoY growth in April–May falling to 10%, from a
growth of 26% last year. Retail demand has been impacted by the rise in
interest rates and petrol price hikes. Our channel checks suggest that diesel
car demand is still good, but petrol variants have been badly hit. We estimate
that the ownership cost of a petrol car has gone up 20% YoY.
 Maruti growing even slower than the industry. Maruti’s domestic sales
growth has lagged industry growth over the last two months, with sales growth
of only 4% YoY. As 80% of cars sold by Maruti are petrol powered, we are not
surprised by Maruti’s slower growth. The ongoing workers’ strike at the Manesar
plant that produces most diesel variants should further impact Maruti’s nearterm
sales growth prospects. With the impending launch of three new small cars
– Toyota Liva, Honda Brio and Hyundai’s 800cc car – we expect Maruti’s
market share to come under further pressure in the coming months.
 Rising inventories, growing discounts. Our channel checks suggest that
the inventory level for petrol cars at the dealerships has been rising over the
last 3–4 months, as retail sales have been much weaker than the plant
dispatch volumes. Due to the slowdown in growth, companies have increased
the cash discount and freebies offered to attract customers for petrol cars.
 No respite in margins for Maruti. Contrary to street expectations, we believe
MSIL’s EBITDA margins will decline further this year. The average customer
discount has been rising across brands as a result of competition and slowing
demand. Further, higher commodity prices, rise in R&D costs and a stronger
Yen should drive margin decline of 40bp YoY in FY12E, by our estimates.
Earnings and target price revision
 We have cut our FY12E EPS by 9% and target price by 6% to Rs1,020/sh.
Price catalyst
 12-month price target: Rs1,020.00 based on a DCF methodology.
 Catalyst: Monthly sales numbers and end of strike at the Manesar plant.
Action and recommendation
 Underperform maintained. Maruti currently trades at 14.4x FY12E earnings,
a premium to its Indian auto peers. With the challenging operating
environment, we believe the current valuations are not justified.

The monsoon session of Parliament likely to disappoint on the reform agenda: Credit Suisse

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


● The Monsoon session of Parliament is expected to run mid-July to
end-Aug. At a time when reforms need a kick-start, in the absence
of which the economy is slowing, we think this session should be
an opportunity for the government to pass some important bills.
● The spate of scandals hitting headlines since Nov-10 has affected
the legislative atmosphere, and law-making has slowed visibly.
We note, however, that even before these scandals broke out, the
pace of law-making was among the slowest ever seen (Figure 1):
UPA-I had the lowest number of bills ever; UPA-II could go lower.
● The last two sessions were the worst two “normal” sessions ever,
in our opinion. Quality matters more than quantity, but most of the
important bills seem stuck too. Some investors expected lawmaking
to pick-up after the 13-May state election results but it did
not happen.
● Recent events reduce the probability of the monsoon session
achieving much. In addition to the noise on corruption, the LokPal
bill, etc, we now have leaders of the two main parties arguing over
the police action last weekend at protests in Delhi. Those
expecting progress on major bills (Figure 3) may be disappointed.
A lot expected from the Monsoon session
The Monsoon session of Parliament is expected to start mid-July and
end by August. In a typical year, the Indian Parliament meets three
times: the budget session, the monsoon session, and then the winter
session. In addition there are special sessions of the Parliament called
for specific purposes. Monsoon sessions have accounted for ~30% of
the days that Parliament has worked, and for 30% of bills ever passed.


The spate of scandals that have hit headlines since November 2010have affected the legislative atmosphere, and law-making has slowed
visibly. We note, however, that even before these scandals broke out
the pace of law-making was among the slowest ever seen (Figure 1).
UPA, in its first stint 2004-09, had set the record for the lowest number
of bills passed. At the current pace, the UPA in this stint could set a
new low. The last two sessions have seen a total of seven bills
passed – among the worst two “normal” sessions ever. The number of
days the Parliament meets has been falling over the decades (Figure
2), though the number of days matter less than number of bills passed.

A worrying run-up to the monsoon session
At a time when the government needs to kick-start reforms in the
absence of which the Indian economy is slowing, the monsoon
session was being perceived as an opportunity for the government to
seize the initiative and push through some important bills. Indeed,
some investors even expected this to happen after the 13 May state
election results.
Worryingly, events over the past week, in our view, significantly
reduce the probability of meaningful legislative activity happening in
the monsoon session. In addition to the regular noise over drafting of
the LokPal bill (corruption watchdog) with civil society representatives,
repercussions over several important DMK leaders being in jail and
the media routinely exposing new scams by the week, we now have
leaders of the two principal political parties (the ruling Congress and
the Opposition BJP) indulging in name-calling over police action last
weekend at Baba Ramdev’s protest in New Delhi. Add to these
continuing investigations by the CBI and proceedings of the Joint
Parliamentary Committee (JPC) on the Telecom scam, and we think
chances of important bills passing this year seem remote.

BUY Sterlite Industries:: Strong profit growth ahead ::CLSA

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Strong profit growth ahead
We upgrade Sterlite’s FY12-13 EPS by 7-8% factoring in CLSA’s new base
metal price forecasts. We see Sterlite delivering strong 34% EPS CAGR over
FY11-13 even after accounting for further delays in Sterlite Energy’s (SEL)
and Balco’s expansions. We believe that most of the company-specific
negatives that have plagued the stock in 2010 are priced in and expect better
stock performance ahead driven by the superior earnings growth profile.
Maintain O-PF with a revised target price of Rs195.
Zinc business will drive strong earnings growth over FY12-13
Hindustan Zinc (HZL) will provide 8% CAGR in zinc volumes and 65% CAGR in
silver volumes over FY11-13, driving strong 25% profit CAGR over the period.
Silver will rise to 19% of HZL’s EBITDA by FY13 (10% in FY11) providing a case
for some expansion in multiples. Rising cash costs have been a concern in the last
year but we believe that our estimates adequately factor in the same. Anglo-zinc
will also be a big contributor to Sterlite’s earnings growth over FY12-13. On our
new zinc-lead price forecasts, we now see the Anglo-zinc acquisition as being
value-accretive for Sterlite (value-neutral previously). This is without assigning
any value to the Gamsberg project, which we treat as option value.
Sterlite Energy and Balco expansions to drive further growth
SEL is targeting to commission Units 3 & 4 of its 2400MW plant by 3QFY12. We
have built in 3-6m delays here but even after this, SEL provides strong accretion
to earnings over FY12 and FY13. We assume linkage coal, e-auction coal and
imported coal to provide a third each of SEL’s coal requirements. Balco will also
commission its 1200MW power plant by 2QFY13 (assuming delay of 3m). We have
not assumed any benefit from Balco’s captive coal block as it is still awaiting
clearances.
What we worry about on Sterlite?
Our key concerns on Sterlite are – 1) More delays in SEL (we have assumed 3-
6m); 2) Lower eventual PLF in SEL (we have assumed 85%); 3) Coal supply for
SEL (we have assumed just a third from coal linkage); 4) Larger than expected
losses in VAL and any increase in Sterlite’s equity stake in the company
(management maintains that Sterlite’s 29.5% stake will not change).
Upgrading FY12-13 estimates by 7-8%; maintain O-PF
Zinc and power will constitute 69% and 12% of Sterlite’s consol EPS in FY13.
Given that the latter is driven by projects under commissioning, satisfactory
execution by Sterlite here will be crucial. We maintain O-PF on Sterlite. Our target
price drops slightly to Rs195 (Rs202 previously) as we have cut our long-term PLF
for SEL to 85%, which impacts its DCF value and use a lower multiple for HZL.

India Market Outlook: Musings from the political capital 􀂃 BNP Paribas

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Musings from the political capital
􀂃 Politics – expect more uncertainty and turmoil
􀂃 Mid-term elections possible but not probable
􀂃 Politics could remain an overhang on the equity markets
􀂃 Several government initiatives – PMGSY, RTE, NRHM – progressing well
Our recent interaction with policy makers and political journalists gave us interesting insights
into their thought process in light of the increasing political turmoil and public discontent.
While our takeaways do not provide much room for immediate optimism, there are several
silver linings – in terms of rapid progress in some of the infrastructure initiatives and some
social sector schemes.
Politics: More uncertainty and turmoil
After revelation of a slew of scams and failure to execute any reform measures, the UPA
government has exhausted the political capital acquired after its unprecedented electoral
mandate in 2009. Recent surveys point to significant decline in public mood towards the
government.
Policy momentum could remain slow…
As the government is focused on political survival, pro-growth policy measures are unlikely
for the rest of the government’s tenure. The opposition may be expected to benefit in such a
political environment but it seems to lack the sagacity to capitalise on the government’s
weakness. While probable, mid-term elections are unlikely as no political party seems to be
prepared for it. As such, politics could remain an overhang on the equity markets in the
medium term.
… but its not all gloom and doom
Despite the increasing political dysfunctionality, several government initiatives are
progressing well, particularly the rural roads programme (PMGSY), National Rural Health
Mission (NRHM) and Right to Education (RTE). Furthermore, with the shift in public
priorities, improving governance and delivery of public services have become a political
imperative at the state level. Even the traditional laggard states like Chattisgarh and Bihar
have improved their governance.
DMIC: A new paradigm in urbanisation
Urbanisation and industrialisation had hitherto been neglected by the Indian policy makers.
The Delhi Mumbai Industrial Corridor (DMIC) plans to set up seven manufacturing cities
along the Dadri to the JNPT railway freight corridor. The public sector will acquire land, plan
and fund trunk infrastructure and obtain environmental and other clearances, while the
private sector will set up manufacturing units. A trust fund of USD$5b has been set up for
the purpose.
Equity markets could continue to underperform in the near term
The combination of macro-economic headwinds, earnings downgrades, continuing political
headwinds and India’s valuation premium relative to Asia ex-Japan (20-25% P/E premium
based on BNPP and FactSet consensus estimates) appears to portend further
underperformance by India. We believe the valuation of the Indian market could bottom at
12.5-13x FY12E P/E (from 14.5x now), implying a floor level of 16,500-17,000 for the
Sensex.

Indian Midcaps: Strong but pressures visible ::CLSA

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Strong but pressures visible
Our analysis of the 4QFY11 results of 2900+ companies (
shows that while sales growth remains high, cost pressures are building up.
Net profits grew by a healthy 18% YoY, up from 12% in 3Q but lower than the
22% growth in sales as rising raw material and interest costs created
headwinds. Whilst the CNX Midcap has underperformed largecaps by 7% over
the past twelve months, it has outperformed by 5% over 3 months and the PE
discount is now broadly in line with the long term average. We prefer quality
names with strong growth drivers and margin visibility. We highlight Petronet
LNG, Torrent Pharma, Dish TV, Shree Renuka Sugars and Sintex as key picks.
Topline growing at 22%; raw materials jump 26%
q Net Sales for 4QFY11 for the mid-cap universe increased to Rs4.91tn from Rs4.36tn
in 3QFY11. In the ex-Oil & Gas and financials segment, sales increased 18% YoY
although the QoQ pickup was sharper than the broader universe (+12%).
q Raw materials costs were up by 26% YoY and 16% QoQ to 57.6% of revenue (up
190bps YoY, 160bps QoQ), while power costs rose 11% QoQ and staff costs 10%
QoQ. In ex-Oil and Gas and financials, material costs rose 22% YoY (16% QoQ).
EBTIDA margin at 12.1%; up 40bps YoY, down 130bps QoQ
q EBITDA margins for the entire midcap universe came in at 12.1%, up 30bps YoY
but down 130bps QoQ. In ex-Oil & Gas and financials, EBTIDA margins fell 100bps
QoQ to 12.0% in 4QFY11 but were up 40bps YoY. The YoY increase was led by
falling opex ratios, which offset the increase in material costs.
q A 9% YoY (10% QoQ) rise in staff costs was the lowest in three quarters suggesting
that the hiring and wage recovery visible through most of FY11 may be moderating.
Net profit growing 18% but interest costs rising; sector trends mixed
q Interest costs grew 32% YoY (10% QoQ). The increase in interest costs is higher
than the 12% increase in depreciation, suggesting hardening interest rates.
q Net profit grew 18% YoY, accelerating from the 12% in 3QFY11. QoQ increase was
4%. Net margin was 5.4% - down 20bps YoY/40bps QoQ.
q Net profit grew 18% YoY in the ex-oil and gas and financials universe (+4% QoQ)
as the net margin was flat YoY but fell 40bps QoQ
q At a sector level, consumer non-cyclical has been the strongest drivers of
aggregate bottom line growth while energy led on top line growth and was second
in bottom line growth. The moderating trend in consumer cyclicals continued while
financials saw a slowdown in profit growth after the strength seen in 2Q/3Q.
q Within the mid cap space, the financial performance of the larger companies seems
to have been better than the smaller ones with companies in the US$0.2-0.5bn
market cap range in particular seeing weak profit growth.
CNX Midcap has outperformed the Sensex over the past three months
q A 5% outperformance over 3 months has helped the CNX midcap to make up for
some of the underperperformance against the Sensex in Nov-March. On a 12
month basis though, the underperformance still stands at 7%.
q After the recent catchup, midcaps trade at a 19-23% discount to the Sensex on
FY12-13 PE, suggesting that a broad based narrowing of the discount is unlikely
and outperformance by midcaps will be driven by stock specific fundamentals.
q Given the uncertain earnings environment, we prefer quality midcaps where
earnings visibility is high and valuations reasonable. Our key picks below.
q Petronet LNG: benefits from shortfall in domestic gas production; 15x FY12 PE
with 11% FY11-13 EPS CAGR and upside risks from escalating tariffs.
q Torrent Pharma: India business driving growth with extra momentum from
exports to drive FY11-13 earnings CAGR of 21% and surging cashflow.
q Dish TV: classic J-curve play with a ciritical mass of 10m subscribers already
achieved and momentum continuing; upside to estimates from ARPU surprises.
q Shree Renuka Sugars : near stress case valuation; strong earnings pickup from
Brazil and improving balance sheet likely to drive a rerating.
q Sintex: strong earnings growth (22% FY11-13 CAGR) alongside improving return
ratios create rerating potential on the current sub 9x FY12 PE

Utilities Sector- Key beneficiaries from likely coal block clearances :: Credit Suisse

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


● Media reports suggest the EGoM responsible to resolve the ‘go,
no-go’ zone issue has decided to fast-track forest clearances for
eight captive coal blocks during their third meeting of 9 June 2011.
The EGoM indicated that since these captive coal blocks have
already incurred significant investments, they should be provided
forest clearances on a fast-track basis.
● All eight captive coal blocks are part of the 203 coal blocks that
were put under the ‘no-go zone’ by the Environment Ministry,
resulting in the denial of forest clearances to these mining
projects. In February 2011, the government had constituted an
EGoM to resolve the ‘go/ no-go zone’ issue on these projects.
● The final decision is likely to be taken during the fourth EGoM
meeting scheduled to be held on 2 July 2011. Since both the
EGoM and the PMO-appointed committee have expressed similar
favourable views, we believe visibility on clearance of these eight
coal blocks seems high.
● If approved, Adani Power, JPVL, KSK and Reliance Power would
be key beneficiaries among our utilities coverage. Essar Power
and Hindalco would be other beneficiaries.

EGoM likely to fast-track forest clearance for 8 coal blocks
As per a Business Standard news article dated 10 June 2011, the
Empowered Group of Ministers (EGoM), responsible to resolve the ‘go,
no-go’ zone issue has decided to fast-track forest clearances for eight
captive coal blocks during their third meeting of 9 June 2011. To recap,
even the committee appointed by the Prime Minister’s Office had
recommended that these blocks be put on the fast track for forest
clearances, considering these projects have already made significant
investments in the development of these coal blocks (and/ or
associated end-use power projects).
Background of the case
As shown in Figure 1 below, all these eight captive coal blocks were
allocated during CY06-07. At the time, there was no concept of a
‘go/no-go zone’; which was introduced subsequently by the
Environment Ministry. Overall, a total of 203 coal blocks are currently
categorised under the ‘no-go zone’ implying these mines are under
dense forest area; resulting in the Environment & Forest Ministry
declining forest clearances for mining projects – thereby impacting
their coal mining plans. In order to resolve the ‘go/ no-go zone’ issue,
in February 2011the Government constituted an EGoM (a group of 12
ministers from concerned ministries), headed by the Finance Minister
Mr Pranab Mukherjee.
Final decision likely in EGoM meet scheduled in July 2011
The first two meetings held in February and April 2011 were
inconclusive. The third EGoM meeting on this issue conducted
yesterday (June 9). While the EGoM has not made any conclusive
recommendations even in the third meeting, it indicated that projects
involving these 8 captive coal blocks where substantial investments
have already been incurred should be provided forest clearances on a
fast-track basis. The final decision on this issue is likely to be
announced in the fourth EGoM meeting scheduled for 2 July. In the
meanwhile, concerned agencies are requested to collect data relating
to the projects under review.
Visibility on clearance of eight coal blocks seems high
Considering that both the EGoM as well as the committee appointed
by the PMO have expressed similar views relating to the clearances
for eight captive coal blocks (refer Figure 1), we believe the visibility
on clearance of faster approvals for these blocks is high. If approved,
Adani Power (1.98GW Tiroda-I project), JPVL (1.32GW Nigrie project),
KSK Energy (1.8GW Mahanadi project) and Reliance Power (3.96GW
Sasan UMPP) would be the key beneficiaries among our utilities
coverage universe. Besides, the clearance of coal blocks should
benefit Adani Enterprises as an MDO for RRVUNL mines. Hindalco
and Essar Power would be the other beneficiaries.

Hindalco:: No triggers ahead ::CLSA

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


No triggers ahead
The delay in the Utkal refinery and un-availability of captive coal in Mahan (in
initial period) is likely to impact Hindalco severely. Mahan will have to import
alumina till Utkal comes online and without captive coal, we don’t see Mahan
making much money at PBT level. A further delay in Utkal / Mahan coal
cannot be ruled out, which will worsen the picture further. We see Hindalco’s
EPS growth in single digits over FY12-14 and see a lack of triggers in the
stock on a 12m view. We cut FY12-14 EPS by 2-5% and downgrade Hindalco
to U-PF from O-PF with a target price of Rs195.
Utkal delay and Mahan coal block issues to impact Hindalco hard
We expect Hindalco’s Mahan smelter project to get commissioned in Apr-12
(company targets Dec-11) and the Utkal Alumina refinery in Apr-13 (company
targets Dec-12). As a result, Mahan might have to depend on imported alumina in
FY13. We don’t expect Hindalco to divert its existing surplus alumina to Mahan, as
it earns higher margins on it after converting to specialty alumina. Even if
clearances for the Mahan coal block come through soon, the mine is not likely to
start production in FY13. The Mahan smelter will have to depend on ‘tapering
linkage’ from Coal India, which might not fully come through given Coal India’s
coal supply issues and we don’t rule out Hindalco needing to use some eauction/
imported coal. With imported alumina and higher coal costs, Mahan’s
smelting costs will be higher than Hindalco’s existing smelting costs and we doubt
if Mahan can make much money at PBT level.
Cutting FY12-14 EPS by 2-5%; single-digit EPS CAGR over FY11-14
We cut FY12-14 consol EPS by 2-5% factoring in 1) 3-4% higher aluminium prices
based on CLSA’s new price forecasts; 2) Higher aluminium costs post Mahan
commissioning; 3) Higher Novelis capex; and 4) Higher ABML costs. We now see
Hindalco’s EPS growth in single-digits over the FY12-14 period. Any further delays
in Utkal will impact estimates further.
Lack of triggers in the stock; downgrade to U-PF with a TP of Rs195
We see risk of more project delays in Hindalco and believe that the only positive
triggers possible in the next 12m are higher aluminium prices or a surprise at
Novelis. Our estimates already factor in an expansion in Novelis’ margins. Given
the large delays announced in Utkal and our view that more delays are possible,
we remove Utkal from our valuations. Our new 12m SOTP target price for
Hindalco is Rs195 and given limited upside, anaemic earnings growth profile and
lack of positive triggers, we downgrade our rating to U-PF from O-PF. Any sign of
an early commissioning of Utkal or Mahan coal block could make us take a more
constructive view on the stock.

News headlines : June 16: RBS

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


News headlines
Oil & Gas
􀀟 ONGC to sell 30% stake in K-G block (Business Standard)
􀀟 Gas leak continues at ONGC well in Tripura (Economic Times)
􀀟 MHA clears sale of 30% stake in 23 RIL oil & gas blocks to BP (Economic Times)
􀀟 Oil firms hike ATF prices by 2.4% (Business Standard)
Banks
􀀟 Banks' deposit grow faster than credit so far in FY12 (Economic Times)
􀀟 ICICI denies talks with Nigeria's Spring Bank (Business Standard)
􀀟 HDFC sees 20% annual loan growth (Economic Times)
􀀟 Banks' reliance on market borrowings could impact liquidity: RBI (Business Line)
Pharma
􀀟 Lupin acquires global rights for Australian brand Goanna (Economic Times)
Commodity
􀀟 SAIL plans to raise $400 mn from overseas lenders (Business Standard)
􀀟 SFIO probing cartel in cement industry (Economic Times)
􀀟 CIL price hike to help Bengal mop up Rs6bn extra cess (Business Standard)
􀀟 Coal imports shoot up, CIL says no to new customers (Business Standard)
Consumer
􀀟 The ITC heir will be chosen from inside: Yogi Deveshwar, ITC Ltd (Economic Times)
IT & Telecom
􀀟 Infosys identifies seven teams that will build the company for tomorrow (Economic Times)
􀀟 IBM faced serious threat from Infosys, TCS, Wipro (Economic Times)
􀀟 IT sector: Staff utilisation, pricing power to decide margin (Economic Times)
􀀟 HCL Tech, Epicor in services partnership (Economic Times)
􀀟 TCS bags US$50-m-plus Swisspost deal (Business Line)
􀀟 Indian IT companies now turn to domestic market (Business Standard)
􀀟 Additional spectrum to mop up Rs80bn (Business Standard)
Power, engineering & infrastructure
􀀟 India set to produce 700 MW solar power in 2011 (Economic Times)
􀀟 Lanco Infra to invest Rs35bn in thermal power plant (Business Standard)
􀀟 Lanco Infra drops bid plan for Premier Coal (Business Standard)
􀀟 GVK Power to raise US$1.2bn debt for Hancock Assets buy (Economic Times)
􀀟 PGCIL to set up undersea power line from Lanka (Business Standard)
Automobiles
􀀟 Strike hits hard, Maruti mulls movement to Gurgaon (Economic Times)
􀀟 Labour unrest could dent Maruti Suzuki's growth prospects (Economic Times)
􀀟 Tata Motors says May global sales up 11% y/y (Economic Times)
􀀟 Ashok Leyland to issue bonus shares (Economic Times)

Oil India (OILI.BO) Summary Takeaways from Citi India Investor Conference – Day 3

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Oil India (OILI.BO)
 Takeaways from Mumbai - Oil India Ltd (OIL) presented at our India Investor
Conference in Mumbai. Below are the key takeaways.
 Crude production in FY12E could beat 4% growth guidance – While OIL’s FY11
crude production was negatively impacted by the longer-than-expected shutdown of
the Numaligarh refinery in 1Q, the company expects strong production growth in
FY12 on the back of higher production from both existing and new fields. OIL has
officially guided towards a crude production target of 3.76 MMT for FY12 (implying a
4.4% yoy growth); however, the company is already producing crude at a run-rate of
c3.85 MMTPA and could exit FY12 at a higher rate of c3.90-3.95 MMTPA, implying
that FY12 production growth could be much stronger than guided.
 Foray into oilfield services, shale gas – OIL mgmt mentioned that as opposed to
the earlier strategy of the prospective acquisition of a conventional oil/gas producing
company, OIL is now looking to acquire: 1) an oilfield services company (national or
international) which would provide oilfield equipment (such as rigs) and/or services
(such as well logging) to both OIL and other E&P companies, and/or 2) a shale gas
asset in countries such as Argentina, Australia, or the US. The company stated that
this change has been driven by current high valuations for producing assets which
may not generate enough shareholder value. The company intends to complete at
least one such acquisition in FY12E.
 Gas supplies to Numaligarh refinery ramping up – OIL commissioned the
Numaligarh-Duliajan pipeline in Mar'11, which has boosted its gas
production and sales volumes. While the company initially expected the volume
ramp-up to c1 mmscmd to take ~6 months, ramp-up has progressed at a better
pace with NRL already drawing ~0.84 mmscmd of gas. This is the key driver of the
targeted 2.63 bcm of gas production in FY12E (implying a 12.1% yoy production
growth).
 Clarity on subsidy sharing mechanism awaited – While the higher upstream
subsidy share in FY11 (38.8% vs. 33.3% expected earlier) was disappointing, OIL
believes that a transparent crude-linked formula (on the lines of a slab-based
windfall tax mechanism) is the way forward. The timelines of implementation of this,
however, remain uncertain. Nearer term, we believe that crude price trends and
news flow on subsidy sharing and/or fuel price hikes would be key. We maintain
Hold..


Oil India
(OILI.BO; Rs1,267.30; 2L)
Valuation
Our target price of Rs1,466 comprises: (i) Business valued at P/E of 9x Mar-12E
core EPS and (ii) cash at Rs386/share (Mar-11E). The core P/E is at a 10%
discount. We believe a lower multiple is warranted on account of: (i) OIL's smaller
size, (ii) still-to-be-tested track record outside the North East, and (iii) risk pertaining
to use of OIL's significant cash balance, in addition to relatively higher leverage to
crude prices (thru OVL). Further re-rating from here would be dependent on higher
net crude realizations, i.e. significant price reforms esp. in diesel (full deregulation),
and any positive news flow from new exploration programs.
Risks
We rate Oil India shares Low Risk given the stable earnings profile and cash-rich
balance sheet. Drop in crude prices and sharp rupee appreciation remains the key
downside risks to earnings. Uncertainty on government policy on subsidy sharing
remains a key risk, in our opinion, although deregulation (especially of auto fuels)
and/or any clarity on this front would have a positive impact.
The government also determines the gas price realization for OIL to a large extent.
Any delay in implementation or reduction in the proposed APM gas price hike would

have negative impact on profitability and valuations. On the other hand a complete
de-regulation of gas price to the market determined levels would have a positive
impact on earnings and valuation.
Given the significant increase in exploratory activity likely to be initiated in the NELP
blocks, there are risks of failures and hence material dry well write-offs which could
impact earnings and cash flows in the short-term. However, OIL's ability to drive
exploration success in the new blocks and/or undertake a successful acquisition will
be value accretive esp. given its lower reserve base relative to ONGC.
For FY07-09, the MoPNG allowed OIL full recovery, on a net basis, of transportation
tariffs and sales tax for crude oil that it produced and transported to all public sector
refineries. Any reversal of the government decision on transportation tariff and sales
tax recovery would be a key negative for OIL.
Any of these risk factors could cause the shares to deviate from our target price.

Idea Cellular-- Modest outlook and rich valuations:: BofA Merrill Lynch,

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Idea Cellular Ltd.
Modest outlook and rich valuations
􀂄 Modest profits & regulatory risk at rich valuations
We forecast Idea’s earnings to stay flattish over next 2 years as better than peers
2G revenue growth will likely be dragged by 3G-related costs and margin
pressures. Idea’s 3G licence footprint has low revenue exposure to relatively rich
metro & category-A circles; this may imply slow 3G revenue scale-up. We also
worry about Idea’s financial ability to withstand potential regulatory shocks. These
factors coupled with +50% valuation premium vs GEM telecom majors
overshadow Idea’s potential M&A attractiveness; maintain Underperform.
Recent revenue share trends may trigger fresh competition
The regulator’s (TRAI) wireless revenue data for 4Q FY11 indicates that Idea
clocked the strongest YoY improvement in revenue market share (+100bps)
among leading wireless operators in India, while Reliance Com (-170bps) & Bharti
(-130bps) were major losers. We expect Bharti to respond via increased
aggression in the market place going forward. For FY12E, we do not foresee any
directional change in the industry’s declining revenue per minute trend.
FY12-13 EBITDA trimmed; DCF intact on lower capex
We have trimmed EBITDA forecasts for Idea by 2% for FY12 & 8% for FY13 due
to lower margins in line with 4Q levels. Earnings cut for FY12 is steeper at 9%
owing to 3G interest & amortization (except for Punjab circle). Despite lower
profits, our DCF-based PO stays unchanged at Rs65/sh due to lower capex outgo
Mgt call highlights still intense competition & deep 3G plans
On its post-results call, Idea said that its high monthly subscriber churn (~10.7%)
reflects continued overcapacity in the sector. Idea aims to rollout 3G services in
3200 towns by end-FY12 vs 700 towns covered by end-May ‘11. Note, Idea
appears to be the only listed telco in India with YoY rise in FY12E capex guidance

Management call highlights
Competition remains intense: Idea said that competition from economically
challenged operators has moderated but overcapacity in the sector remains high.
Consequently, the sector continues to witness pricing pressure and high
subscriber churn.
Deep 3G rollout on the anvil: Idea started rolling out 3G services from end-
March ‘11 onwards. The Co offers 3G services in 700 towns across 9 (out of 11)
licenced service areas as of May ’11 and aims to be present in 3200 towns
across its licenced footprint by end-FY12.
Early days for 3G user behavior: Idea has garnered ~1.55mn 3G users in 2-
months since launch. The numbers are still small (~2% of sub base) and Idea
said it is still early to discuss usage or revenue trends for 3G. On a bullish note,
however, Idea indicated that 3G users drive 40% of data traffic for the company in
markets where 3G is already rolled out.


Focus is on cash profit and leverage levels; 3G amortization & interest
to kick-in: Pending 3G rollout, Idea’s FY11 results were mostly unaffected by 3G
related costs especially interest and amortization. A full-blown 3G launch will
result in ~Rs1.2bn interest charge and ~Rs3bn amortization charge on an
annualized basis. However, Idea said management focus is on cash profits and
net-debt/EBITDA (implying 3G accounting is not a major concern per se). We
forecast Idea’s cash profit CAGR at ~18% over FY11A-13E and net debt/EBITDA
at 2.2x FY13E.
Handset bundling underway; no major subsidies yet: Idea said it is working
closely with vendors to bring down device prices and is looking at handset
bundling options without necessarily offering cash subsidies. The Co expects 3G
device prices to fall sharply over next 6 months.
Drop in VAS revenues reflects restructuring of product suite: Idea said its
non-voice revenue fell 100bps QoQ in 4Q FY11 as the product portfolio is being
corrected and upgraded.

Idea Cellular Ltd. F4Q11 Results Showcase Highest Leverage to Wireless::Morgan Stanley Research,

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Idea Cellular Ltd.
F4Q11 Results Showcase
Highest Leverage to Wireless
Idea reported better than expected F4Q11 results
both at the top-line and EBITDA level: This took place
in a relatively stable pricing environment, depicting its
high leverage to the wireless segment. Overall revenues
grew 26% YoY and 7% QoQ; while absolute EBITDA
grew 16% YoY and 13% QoQ. EBITDA margins
expanded 142bps QoQ to 25.4%, vs. our expectations
of marginal decline, but were down 220bps on a YoY
basis. Profits grew 3% YoY and 13% QoQ.
Overall revenue and EBITDA were 2% and 9% above
our expectations respectively due to higher traffic,
coupled with overall reduction in operating expenses.
Profits were 12% ahead of expectations.
Key Positives:
1) Traffic grew 9% QoQ and 49% YoY to 102bn
minutes. The company carried an additional 8.5bn
minutes for the quarter, similar to F3Q11. Bharti
carried an additional 12.7bn minutes for F4Q11, 6%
QoQ growth (albeit on a higher base).
2) Margins in the established 11 circles expanded
115bps to 27.9% vs. our estimate of 26.2%. Losses
in the remaining new circles fell from Rs1.4bn in
F3Q11 to Rs1.2bn this quarter. We had expected
the losses to be maintained at ~Rs1.4bn levels.
Key Negative:
1) Effective tax rate rose to 17.5% during the quarter,
up from the nine-month average of 6%. Assuming
this average for the quarter, profit growth would
have been >25% QoQ. We estimate effective tax
rate of 20% in our forecasts for F2012.
What does this do to our earnings outlook? We see
upside risk to our F2012 numbers, but await the
earnings conference call and maintain our Overweight
rating and estimates for the company currently.


Wireless operational parameters: In line with our estimates,
ARPMs declined by 3.2% QoQ to Rs0.406/min, while MOUs
fell 1% to 397/sub/month. This led an ARPU decline of 4% to
Rs161/month.
Capex: Idea spent Rs31bn in F2011, almost half of which
came in F4Q11. The management has guided toward capex of
Rs40bn for F2012.


Valuation Methodology
Our 12-month target price for Idea is Rs82/share. It is based on
our DCF model and the value we attribute to the company’s
towers. Our sum-of-the-parts valuation is shown in Exhibit 3.
Our core business value for Idea remains the midpoint of the
value derived from our DCF calculation on a one-year forward
basis, assuming a terminal growth rate of 3% and cost of
capital of 12%, as shown in Exhibit 4. Based on our revised
estimates, we arrive at our new core business enterprise value
of Rs88/share. The company’s net debt equates to Rs36/share.
However, since in our base case we do not include any
revenue upside due to 3G, we add back the book value of the
3G license to the net debt for the company. This equates to
Rs17/share.
We value Idea’s towers in Indus using DCF and use an
EV/tower of 100k to value the company’s directly owned towers.
The combined value for Idea’s towers is US$2.2bn or
Rs30/share. We add this tower value to our core business
equity value (Exhibit 3).
We also incorporate regulatory payouts for excess spectrum
beyond 6.2MHz and cost of renewal of total spectrum on expiry
of licenses. These amount to US$322mn or Rs4 per share and
US$862mn or Rs12 per share respectively.
Exhibit 3
Idea Cellular: Sum of the Parts Valuation
Core Business Enterprise Value 88
Net Debt 19
Core Business Equity Value 68
Tower Valuation 30
Regulatory Payouts (16)
Target Price 82
Source: Company data, Morgan Stanley Research
Exhibit 4
Idea Cellular: Cost of Capital Assumptions
Risk Free Return (Rf) 8.0%
Market Premium (Rm) 6.0%
Assumed Beta 0.98
Cost of Equity (Re) 13.9%
Equity (%) 60.0%
Cost of Debt (Rd) 12.0%
Tax rate 22.5%
After-tax cost of debt (Rd [1-t]) 9.3%
Debt (%) 40.0%
WACC 12.0%
Assumed WACC 12.0%
Source: Company data, Morgan Stanley Research
Company Description
Idea Cellular is part of the Aditya Birla Group. It provides
pan-India wireless telecom services and also has a national
long-distance license. Idea Cellular is the fifth-largest wireless
operator in India. It had over 89mn subscribers as of March 2011
India Telecommunications
Industry View: Attractive


Downside risks to our price target
• Greater-than-expected fall in tariffs due to aggressive
pricing from new operators to gain subscribers.
• Regulatory uncertainty regarding spectrum and Idea’s
need to pay additional spectrum charges.
Catalysts
The recent entry of players such as Sistema and Telenor to the
Indian market as well as the auction of 3G has highlighted the
scarcity value of Indian spectrum. As the smallest of the listed,
pan-Indian wireless players, with one of the largest spectrums
in the country, Idea might offer strategic value in any future
industry consolidation – a prominent industry theme that has
been discussed widely in numerous leading news media
outlets. (Please see “Consolidation in the sector: Telcos seek
M&A-friendly policy,” The Financial Express, 17 January 2011;
and “Government to redraw M&A rules in new telecom policy,”
Business Standard, 2 January 2011.)
• Lower-than-expected losses in new circles could improve
EBITDA margins.
• License fee reduction for the industry as a whole.
• Having higher spectrum relative to its subscriber base,
leading to future reduction in capex.

Morning meeting notes from CLSA India Thursday, 16 June 2011

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


News headlines: Corporate
􀂉 ONGC is in talks with BG and ENI to sell up to 30% stake in its
Krishna-Godavari DWN 98/2 block. (ET)
􀂉 The Ministry of Home Affairs gave the final nod to BP to buy a
30% stake in RIL’s oil and gas blocks, including KGD6 gas fields
for US$7.2bn. (BS)
􀂉 Maruti plans to produce Swift, Dzire and SX4 models from its
Gurgaon plant as the strike at the Manesar facility has impacted
car production. (ET)
􀂉 ITC’s chairman, YC Deveshwar has indicated that the company
would prefer insider over external candidates for the next CEO.
(ET)
News headlines: Economic and political
􀂉 Minister for Programme Implementation has written to the coal,
steel and shipping ministries to review those central sector projects
where scheduled completion has been delayed by over a year. (BS)
􀂉 Bank-promoted life insurance companies have opposed Irda’s
bancassurance committee recommendation to allow banks to tieup
with two life insurance companies for selling life covers. (BS)
􀂉 Insurance companies will get yet another opportunity to bid for the
central government’s health insurance project. (BS)
􀂉 State oil firms have raised jet fuel prices by 2.4%, with the rise in
the international oil prices. (BS)


􀂉 Advance tax payments rose 15% YoY in 1QFY12 for the Indian
companies. (ET)
􀂉 The talks between the government and society activists broke
down without any agreement on the shape of Lokpal bill. (ET)
News headlines: Corporate
􀂉 SAIL plans to borrow US$400m from overseas lenders to part
finance its expansion and modernisation plans. (ET)
􀂉 The Serious Fraud Investigation Office (SFIO) is investigation
allegations of cartelisation against cement majors, UltraTech,
Ambuja and ACC. (ET)
􀂉 Shareholders of Caraco Pharma, US subsidiary of Sun Pharma
have approved the merger with Sun Pharma. (BS)
􀂉 Future group is planning to set up 12 large scale logistics parks
across nine cities in the next five years. (BS)
􀂉 Lanco Infratech has dropped plans to bid for Australia’s Premier
Coal, owned by Wesfarmers. (ET)
􀂉 Malaysian telco, Maxis reportedly controls 35% in Aircel and is
supposed to represent the Indian shareholding interest as per
domestic laws. (ET)

Your risk appetite should be reflected in your investment:: Business Line

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��

I am 43-year-old and am employed in a private organisation and my wife is a home maker, aged 40. We have a daughter aged 14. My take home salary is Rs 1 lakh a month and our expenses is Rs 30,000. For paying our life insurance premium of Rs 2 lakh I have an RD of Rs 8,500, and in addition through mutual fund SIPs, we invest Rs 20,000 a month. After meeting other expenses, we save Rs 25,000 a month in fixed deposits. My family is covered under the employer's group medical insurance. Our current investments are:

Post Office Monthly Income Scheme for Rs 5 lakh and the monthly interest is ploughed into postal RD. The current value is Rs 2 lakh.

When I moved job recently, I closed my PF account and received a sum of Rs 12 lakh and it is currently in my SB account. I have life insurance cover for Rs 26 lakh and both the policies mature in 2024.

My investment in stocks and bonds is Rs 3.5 lakh. My current investments in mutual funds is Rs 5.5 lakh. I have a fixed deposit for Rs 9 lakh. I have a plot worth Rs 6 lakh which I have earmarked it for my daughter's marriage.

Goals:

Next year, I plan to buy a flat for Rs 55-60 lakh. I am accumulating Rs 25,000 in RD to meet down payment of 20 per cent. I expect a salary hike of Rs 20,000 which would allow me to pay an EMI of up to Rs 40,000. I may rent out the new flat for Rs 10,000 a month. Do I take a loan for 80 per cent of the value or shall I use my PF proceeds?

For my daughter's education, I may need Rs 8 lakh at today's value in 2015 and Rs 10 lakh for post-graduation in 2019. For marriage, I have already made provisions. For our investment i wish to take high risk.

My other short term goal is to buy a car for Rs 5 lakh in 2013.

I wish to retire in 2024 and my life expectancy is 80 years. Based on my current monthly expenses, suggest me how much corpus I need to build for a comfortable life. We wish to use our life insurance maturity proceeds for our retired life.

— RJ Chennai.

Solutions: Your current investments do not reflect your risk appetite. You want high returns, but you are investing in post office monthly income scheme, postal RD and traditional insurance.

Achieving a portfolio return of 15-20 per cent year-on-year is a tough task. Having said that, a portfolio, constructed with 70-80 per cent exposure to equity (with the rest devoted to debt), can help you achieve a return of 12 per cent.

It is very important that you re-evaluate your portfolio once every six months to meet your financial goals.

Education: Your current savings needs a top-up of Rs 5,300 to achieve a future value of Rs 10 lakh. To reach the target, you need to save a sum of Rs 15,330 for the next 48 months, and it should earn a return of 12 per cent. Since it is a short-term goal, it may be prudent to invest 60 per cent in equity and the rest in debt. For post-graduation, to reach a target of Rs 17 lakh, you need to save Rs 8,800 for the next 108 months and the portfolio should earn a return of 12 per cent. For all calculations, we have assumed an inflation of 7 per cent.

Buying a car: Although it is a short-term goal, you need not tone down your equity exposure. If the equity market condition is not favourable in 2013, you can dilute your debt portion in other goals and use the same to buy the car. To accumulate Rs 2.3 lakh in the next 24 months, you need to save a sum of Rs 8,500 and for the shortfall use the postal RD accumulation.

Home loan: Since you are going to rent out your house, maximize permissible loan and enjoy the tax benefit for the entire interest paid. This will also help you to bring down your cost of borrowing. For instance, if you avail a loan of Rs 48 lakh for a 12-year period, the total interest outgo works out to Rs 5 lakh. If you avail 48 lakh loans at 10.5 per cent your EMI works out to Rs 58770.

Retirement: With too many goals, your current surplus may not be sufficient to meet retirement needs. Although your current monthly expenses may be Rs 30,000, you will require only 70-80 per cent of the same post retirement. So, your monthly expenses of Rs 25,000, when inflated at seven per cent, would at 55 become Rs 56,000.

To get this pension at 55, you should have a corpus of Rs 2.1 crore and it should earn a return of at least two per cent over and above the inflation. If you continue to hold MFs and direct equity exposure till retirement, you can reach a target of Rs 40 lakh. Your PF balance (if allowed to grow at 12 per cent) and the maturity proceeds of life insurance will not suffice and would still leave a short fall of Rs 1 crore. With your current surplus, you will find it difficult to save beyond Rs 15,000. If you save this for the next 144 months and if it earns 12 per cent, you can reach a target of Rs 48 lakh.

Once your education and car targets are achieved, you can save for the retirement and the short fall can be met comfortably. If you still have a shortfall in your retirement corpus, your current savings in POMIS, current monthly saving in EPF and Gratuity will come handy.

However, you need to protect your liability with life cover. Any death of close family members before 55 due to critical illnesses has to be kept in mind, and adequate health insurance taken for you and your spouse. It is advisable to take a term insurance for Rs 1.6 crore to protect all your goals

State Bank of India: Setting high targets ::CLSA

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Setting high targets
Presenting to investors in US and UK, the management of SBI presented three
key targets for FY12- loan growth of ~18%, 20bps expansion in margins and
keeping gross NPLs flat (in absolute terms). Among the three targets, we
understand that asset quality is deservingly getting most attention and recent
initiatives instil some confidence. However, it will be challenging for SBI to
achieve all three targets concurrently and we see highest potential risk to its
loan growth target, as it focuses on quality of lending and recovery from NPA
accounts. While these initiatives will make SBI a stronger bank in the longer
run, we remain cautious in the near term. Maintain U-PF.
Focusing on asset quality improvement
With high delinquencies over past three years (fresh delinquency ratio averaged at
2.6% of last years’ loans), SBI’s management has intensified its vigilance and is
taking corrective actions. These include (1) appointment of a Dy. MD to oversee
the stressed asset portfolio (2) set-up of a call centre to focus on recoveries and
(3) assignment of recovery responsibilities individually to the staff. With these
initiatives, SBI targets to keep absolute amount of gross NPLs flat YoY in FY12.
Margin improvement will be a challenge
The management also targets to improve its margins by 20bps YoY during FY12 to
3.5%. In this direction, it had recently raised lending rates by 75bps, about 25bps
higher than peers to make-good the delay in rate hike strategically done to gain
market share. While its high CASA ratio and recent lending rate hikes position it
well to defend margins, it will be a challenge to report margin expansion in a high
interest rate environment with a leveraged balance sheet and near peak LDR.
Loan growth target appears to be the key risk
We understand that focus on asset quality improvement and margin expansion is
quite intense. While management’s loan growth target of ~18% is a bit lower than
consensus estimate of 19-20%, we believe that even the internal target could be
difficult to achieve as focus on asset quality and margin targets may require it to
consolidate in FY12. As the bank increases rigour on credit as well as profitability
appraisal and branch staff takes much more accountability for recoveries, fresh
disbursals could slow. Moreover, the macro economic conditions and bank’s lower
Tier I ratio will add to the pressure.
Maintain U-PF
SBI has one of the best liability franchises in the Indian banking sector and focus
on asset quality will help to improve profitability and uplift investor confidence.
However in the near term, SBI’s consolidation may help peers to strengthen their
position. With valuations at 1.6x FY12 adjusted consolidated PB for 18% ROE we
believe that the stock will continue to underperform.

Indian Consumer: On the road ::CLSA

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


On the road
A personal visit to Nadiad in the state of Gujarat served as an eye-opener
on the fast changing consumer landscape in small town India. From the
outside, it appeared that the stores had little to offer, but the shelves told
a different story altogether. With domestic brands and MNCs jostling for
shelf space, the rural consumer is clearly spoilt for choice and the
surprisingly high share for premium brands mirror the rising aspiration
levels. While the sheer variety of products available in a low unit pack
(LUPs) format was a revelation to us, it also underscores that marketers'
rural strategies are still focussed on penetration, with competitive pricing
a key element of this. Expect margins to remain under pressure.
Spoilt for choice; LUPs clearly dominate
q It was interesting (as well as surprising) to find that products/ brands that are
available in top cities are pretty much available in places like Nadiad.
q In segments like biscuits, it seemed that the consumers there have more choices
(than say in Mumbai) due to the presence of both, MNCs and local brands.
q Low Price Points (LUP) strategy remains the key for rural markets with price points
of Re1/Rs2/5/10 dominating across segments.
q For example, Parle’s low-end biscuits, Parle G were priced at just Re1 for a pack of
four biscuits and there were cream biscuits (local brand) of Re1 for a pack of two.
Packaged foods occupy a decent space; so does aspirational HPC
q It was a revelation to find packaged foods/ aspirational HPC products on the
shelves, which are generally perceived to be targeted to urban baskets.
q For example, Nestle's recent launch, Nestea Iced tea premix, Nestle’s Seasoning
mix and Smith & Jones’ Ginger Garlic Paste were available in small packs.
q The retailers indicated that while convenience is important, quality and consistency
are also the rationale for buying these products.
q In home and personal care segments, high-end segments like HUL's Comfort (fabric
care), hair gels (in sachets) were witnessing decent offtakes.
Rural shelves also witnessing competitive action
q Given the significance of rural consumer markets, almost all the MNCs and
domestic giants were present in the stores that we visited.
q Cadbury’s (Kraft) recent launch Oreo biscuits (Mar-11) were available in all the
three stores, with good consumer response in two of the outlets.
q While HUL's Rs7/pack for Fair & Lovely occupied lion's share in all the three stores,
ITC's Vivel Fairness cream at Rs5/pack also appears to be doing well.
q Detergent brand Ghari (regional) was dominating the volumes despite P&G’s
aggressive price cuts in Tide Naturals which seemed to have seen modest response.
Some rural focussed products as well
q While it seemed difficult to find bottled drinking water, locally made water sachets
were perhaps the hottest selling products (considering the peak summer season).
q Priced at Rs1/pack for 250ml pack, these were 70% cheaper than the bottled water
available in Mumbai.
q Interestingly, the margins for retailer were around 35%, though, adjusting for
refrigeration cost, it comes down to around 15% or so.
Outlets need touch up; HUL’s store initiative is a step in the right direction
q The stores, in general, were much inferior (in display, cleanliness etc).
q For example, some of the sachets, despite being right at the entrance of the store,
were just not visible.
q Retailers normally do not make any effort in pushing a product but just sell what
consumers ask for.
q In this context, HUL's initiative of creating perfect store should yield dividends.

Shree Cement: Investor interaction ::CLSA

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Investor interaction
We hosted Mr. Ashok Bhandari, CFO for an investor interaction in Mumbai. He
expressed disappointment over the weak demand growth trend for the past
several months. The supply pressures are likely to continue for the next 4-6
quarters and cement pricing should remain under pressure in the medium
term, therefore. Petcoke prices have been softening and the trend is likely to
continue, thanks to new refining capacities coming on-stream in the next few
months. Management would wait for greater clarity in the cement business
before announcing next round of expansions. Concerns also persist in power
business where it plans to sell higher units under contracts now.
Muted demand is a concern for the industry
q The recent demand trend has been a disappointment; in the past, whenever
annual demand growth lagged GDP, the next year growth had been quite strong
(which compensated for the earlier year’s weakness).
q Despite a weak FY11 (<5%), demand trend has been weak in the first two months
of FY12 and the trend is expected to continue in the next few months.
q It is difficult to gauge reasons for demand slowdown given that ~90% of the sales
are through retail (difficult to estimate sector-wise usage); overall slowdown in
corporate capex, weak infra spending etc. could be the reasons.
q The management expects excess supply to continue for the next 4-6 quarters.
Cement prices to be under pressure; lower petcoke prices to help
q Weak industry demand-supply would continue to weigh on the cement prices,
which are also likely to remain under pressure in the medium term.
q While seasonality would play a role, on the whole, a low utilisation level would cap
significant upside on cement pricing.
q Petcoke prices (4Q: US$140/t) have been showing a downward trend and the
management expects further declines, thanks to new refining capacities in north.
Power business, not as lucrative now; New 300MW to come up by Sep-11
q The weakness in merchant power rates too has been disappointing; the weakness
in merchant power demand (and tariff) shall result in lower in PLF.
q The management expects realisations to trend down from Rs4.6/unit in 4QFY11;
new capacities (300MW) would come up by Sep-11, which should help.
q SRCM plans to sell higher units in contract (cf. earlier strategy of selling more units
in merchant) which should reduce cyclicality (may restrict margin upside, though).
No expansion plans in the near-term; entry barriers rising in cement
q Despite its positive long term outlook for cement, the management would look for
an improvement in the cycle before announcing next round of expansions.
q The management views high capex as well as physical resource constraints like
land, fresh mining lease approvals as key entry barriers in the cement business.

India Industrial Production (Apr) - The right kind of slowdown :: Credit Suisse,

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


● Year-on-year industrial production growth slowed in April both on
the old (1993/94) and new (2004/05) base years. The former was
below the consensus market expectation as well our own 5.0%
forecast.
● The reason for the downturn was a sharp slowing in consumer
durables and non-durables production, while capital goods output
growth held up surprisingly well. Given India needs to ease
bottlenecks in the economy, this is the right kind of slowdown.
● The Reserve Bank of India remains on course to raise rates again
next week (16 June). After the surprise 50 bp hike in May, we are
looking for a more modest 25 bp increase this time, followed by
two further 25 bp hikes at the end-July and mid-September
meetings. This would take the repo rate up to a peak of 8%.
● The tightening of monetary policy in India is meaningful on
virtually any measure and we believe the economy is only just
beginning to feel the effects. We continue to expect GDP growth
to average a bottom-of-range 7.5% in both 2011/12 and 2012/13.

Essar Oil (ESRO.BO; Summary Takeaways from Citi India Investor Conference – Day 3

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Essar Oil (ESRO.BO; Rs126.05; 2M)
 Takeaways from Mumbai – Essar Oil presented at our India Investor
Conference in Mumbai. Below are the key takeaways.
 Refinery expansion project on track – Essar’s refinery expansion project (14 to
18 MMTPA) is expected to be complete by 2Q/3QFY12E, with a shutdown of the
current units expected in Sep-end for maintenance and to tie-in the new units.
The mgmt expects this expansion cum upgrade project to add ~US$4-5/bbl to its
GRMs on account: of 1) greater use of heavier and cheaper crudes (complexity
to increase from 6.1 to 11.8), and 2) an enhanced product slate maximizing the
production of high-value products, such as diesel and gasoline.
 Refinery currently using LNG – With KG gas production not ramping up and
the Gov’t allocating domestic gas to priority customers (power, fertilizer, city gas),
Essar has been using imported LNG as a fuel in its refinery. While imported LNG
at US$11- 12/mmbtu is significantly more expensive than domestic gas, the
company stated that it is still economical vs. alternatives such as fuel oil.
 Raniganj CBM - Environmental clearances are expected shortly - Essar is
currently producing ~35,000 scmd of gas from its Raniganj CBM field, which is
being sold to industrial consumers. Mgmt expects environmental clearance for
the commencement of commercial production from the field to come in soon,
now that the West Bengal elections are over.
 Strong refining outlook – Essar expects refining margins to remain healthy, on
the back of strong diesel and gasoline demand. While margins in the last few
months have been boosted by the Japan crisis, going forward mgmt expects
strong product demand to keep margins firm.
 Expansion of fuel retail business contingent on Gov’t policy – Essar
currently has ~1,700 retail outlets, of which 1,381 are operational. With domestic
diesel prices still significantly below international prices, the company expects its
retail volumes to pick up only if 1) crude prices soften from current levels and/or
2) fuel prices are hiked or deregulated.
 Timely project execution remains key – Essar is currently executing two key
projects: refinery expansion and the Raniganj CBM project. The refinery
expansion project currently remains on track, and the company expects the
environmental clearance for commercial production of gas from the Raniganj field
to come in soon. We believe that 1) trends in regional refining margins and 2)
timely commissioning of new projects would be key determinants of earnings and
valuations going forward. Maintain Hold (2M).


Essar Oil
(ESRO.BO; Rs126.05; 2M)
Valuation
Our SOTP-based target price of Rs161 for EOL comprises: i) existing refinery (postexpansion
to 18 MMTPA) valued at Rs76/share based on 6.5x FY12E EV/EBITDA
and discounted back to Mar-11E; ii) value of E&P (Raniganj, Rajmahal & Ratna,
Rajmahal 25% risk-weighted) at Rs73/share; and iii) value of tax benefits (IT & sales
tax) at Rs13/share. Our target price is based on GRMs of US$10.0 in FY13E (incl.
sales tax benefits) after completion of the expansion project.
Risks
We rate Essar Oil Medium Risk, as diversified earnings from both refining and E&P
partly mitigate impacts of the global slowdown. Key downside risks to our target
price include: 1) Execution risks for refinery expansion projects, especially in the
light of significant delays in commissioning the existing refinery, 2) Refining margins
are immensely volatile owing to dependence on product demand and global
economic conditions; this exposes EOL's margins to global refining cycles, 3)
Government policy which could include private refiners within the subsidy-sharing
regime, 4) the Gujarat government is contesting EOL's sales tax benefit and the
matter is sub-judice in the Supreme Court, and 5) Execution of the PSC for the
Ratna & R-Series block has already faced considerable delay, further delays could
increase risks; besides there might be a risk to the assets which are in the process
of being transferred from EEPL, a group company, to EOL. Upside risks to our
target include: 1) Significant improvement in the global refining environment and
uptick in distillate demand, 2) Positive outcome of the sales tax-deferment case and
signing the Ratna PSC with the Gov't, and 3) Timely and cost-efficient
commissioning of the expanded capacity.