India T&D: Weak ordering, intense competition ::CLSA

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Weak ordering, intense competition
We met two T&D companies, Areva T&D and Jyoti Structures, recently.
Order inflows from PowerGrid and SEBs have dried up, especially for
transformers; both Areva and Jyoti are hopeful of a revival in 2H.
Competition is intense, with pricing down 20-25% in the last three years.
We moderate our operating margin expectations for Crompton, leading to
3-4% cut in FY12-13 EPS. We are cutting our target price multiple for
Crompton to 15x FY13 PE (16x earlier), leading to 8% cut in TP, and
downgrade reco by one notch to O-PF (BUY earlier).
Weak PowerGrid and SEB ordering in 1Q
q PowerGrid awarded only Rs3bn orders in 1QFY12 (1Q is typically ~10% of annual
orders), down 52% YoY.
q Ordering for transformers has been particularly weak by PowerGrid over the last
few quarters (1QFY12: Rs154m; FY11: Rs9bn, down 63% YoY).
q Our conversations suggest that SEB orders have also dried up over last few
quarters, on account of procedural delays as well as poor financial health of SEBs.
PowerGrid ordering to revive in 2H; intense competition in short term
q Orders for transformers are typically placed 6-12 months after transmission
line/tower orders. Given that ordering for transmission towers has been strong over
the last few quarters, transformer orders should also pick up.
q Both the companies highlighted that PowerGrid has generally succeeded in meeting
its spending targets. In the XII plan, it targets doubling its spending to US$22bn.
q However, intense competition remains a concern. Pricing for transformers has fallen
by 20-25% over last three years; pressure has more severe for 765kV category.
q With PowerGrid now awarding sub-stations and circuit breakers separately,
competition in 765kV sub-station category has also intensified.
SEB orders are the key; hopefully state elections will help orders
q Competition is less intense in SEB orders, as Chinese and Korean players do not
participate. Margins are consequently better.
q SEB orders constitute 30-60% of order booking for most T&D companies. Revival of
SEB ordering will be the key for revenue and profit growth for most companies.
q Companies hoped that SEB ordering will recover with approaching elections. We
note that elections are due in seven states in 2012.
Cut Crompton’s EPS by 3-4%; TP by 8%; downgrade reco to O-PF
q We cut Crompton’s FY12-13 EPS by 3-4% as we build in lower margins.
q We now base our target price of Rs275/sh at 15x FY13 PE (16x earlier). Cut reco by
one notch to O-PF (from BUY earlier).
q From a longer term perspective, we continue to like Crompton. It is the most
efficiently managed T&D company, with a diversified presence across businesses
and geographies. We also like its strategy of making focussed acquisitions.

‘Removal of priority lending status impacts banks more than NBFCs' :Manappuram General Fin in: Business Line,

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Lured by high margins and scorching growth , investors have been flocking around gold financing stocks over the last two years However, this sector has been had a few challenges cropping up recent times, including tighter regulation, of late by the Reserve Bank of India, greater competition from banks and rising cost of funds. Business Line talked to Mr George Alexander Muthoot, Managing Director of Muthoot Finance and Mr V. P. Nanda Kumar, Chairman of Manappuram General Fin. and Leasing in separate interactions to get some clarity on issues affecting this NBFC segment.

Excerpts from the interview:

Impact of removal of priority lending status for gold finance by NBFCs:

V. P. Nandakumar: Our overall cost of borrowings has gone up by 3-4 per cent. However, that is not because of the removal of the priority sector tag. The rise in the cost of funds was due to banks hiking lending rates. The current rates are 3 per cent higher compared to the previous year. That apart, the actual impact of removal of priority tag by the RBI on Manappuram may be 1 per cent.

George Alexander Muthoot: The impact is greater on banks as they have to find priority lending sector customers to fill the gap. Banks were doing 10 per cent of their priority sector requirements through NBFCs, that include gold loans. As we far as we are concerned, we have always been charging lower interest on these loans. Now that the RBI has taken this tag away, new loans will be priced at the normal rates (that are higher).

Rising competition from banks:

Nandakumar: Around 30-35 per cent of our customers are shifting from the unorganised sector. Because the market is so large, I don't think we will face any real competition in the next two-three years.

Muthoot: The canvas is very big. Indian households have about 18,000 tonnes of gold. Banks and NBFCs may be financing around 1000 tonnes only. Gold loans are cheap when compared with a personal loan or a credit card loan We sometimes give loans at as low a rate as 12 per cent. Historically, people had inhibitions about taking a gold loan. Now that banks are also lending, this product is gaining respectability. Therefore we are able to attract more customers. Despite banks offering lesser rates, people are coming to us because of the convenience of transacting. For small loans, the interest difference is very marginal.

Recovery mechanism:

Nandakumar: The loans are granted for a year. After 100 days, we see 90 per cent of the loans getting pre-closed. For loan defaulters, after one year, we send an ordinary notice followed by a gazetted notice. We also publish the details of these defaulters in local vernacular dailies. After that, we conduct a public auction as per the Indian Contracts Act.

Muthoot: Loans which go beyond one year, is only 3 per cent of the total. And once they are not repaid for 18 months, we auction the gold. This is one per cent of the loan book. After 18 months, the loan becomes an NPA. Until 12 months, the interest accrued, but not received, is recognised as income.

High loan-to value (LTV) increasing risk of default when gold prices fall:

Nandakumar: When we estimate LTV, we take into account only the scrap value. Price of the new ornament has additional components such as making charges, VAT, and so on. The maximum LTV could be around 85 per cent of the scrap value.

Therefore, the cushion is more than 15 per cent to protect against decline in gold prices. Products are tailored based on the customer requirement. In high LTV product the pricing is also accordingly.

Muthoot: Our average loan-to-value is 72 per cent at origination, excluding the making charges. This is why we accept only gold ornaments and not gold bars.

Loans disbursed in 5 minutes:

Nandakumar: Almost 90 per cent of our customers are repeat customers. Only 20 per cent of the customers are new in a matured branch. Of the five customers coming in, only one needs to be closely appraised. Our computers at all the branches are inter-connected. It is possible to check an ornament in maximum 10 minutes.

Muthoot: For checking one ornament, we take five minutes. We take proof of the customer's address, photo id and a webcam photo. If it is one ornament, we can test it in three-four minutes.

Risks if gold prices decline sharply:

Muthoot: It depends on how fast the gold price is falling. If the rates are falling steadily, the new loans get re-priced at low rates. Since the average tenure is low at only four months, declining prices do not have a great impact.

Sentimental value attached to gold ensures that these loans do not get abandoned. In the 1990s, we had a dip when gold prices declined for six-seven months and then picked up. There was no panic seen among gold loan customers while the prices were falling.

Buy Tata Consultancy Services (TCS):: Angel Broking,

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For 1QFY2012, TCS reported strong set of numbers, outperforming our as well
as street expectations. The major highlight of the result was the 7.4% qoq volume
growth. Management has highlighted robust growth outlook for FY2012, with the
deal pipeline being strong and discretionary spend coming in. TCS continues to
remain our preferred pick along with HCL Tech in the IT pack. We maintain our
Buy rating on the stock.
Quarterly highlights: For 1QFY2012, TCS posted revenue of US$2,412mn, up
7.5% qoq, majorly led by volume growth. This is second best quarter where the
company reported qoq incremental revenue of US$168mn (after US$210mn in
2QFY2011). In rupee terms, revenue came in at `10,797cr, up 6.3% qoq.
EBITDA and EBIT margin of the company declined by 233bp and 214bp qoq,
respectively, due to wage hikes given in 1QFY2012, effective from April 1, 2011.
PAT came in at `2,380cr, almost flat qoq despite margin headwinds on the back
of higher other income due to forex gain of `79cr on hedges resulting in total
income yield of `289cr as against `224cr in 4QFY2011.
Outlook and valuation: Management has highlighted that the demand
environment is upbeat and it is chasing 15 large broad-based deals.
Management maintained its robust hiring guidance of 60,000 gross additions for
FY2012 and expects a like-to-like pricing increase in the far end of FY2012.
Even with such aggressive hiring plans, management targets to maintain the
utilisation levels excluding trainees at 82–84% in FY2012. Thus, over
FY2011–13E, we expect the company’s revenue to post a 21.7% CAGR (INR
terms) and a 24% CAGR (USD terms), surpassing the US$10bn revenue mark in
FY2012 itself. On the back of 1) strong growth expectations, 2) headroom to
scale up utilisations including trainees to 77% by FY2013 and 3) SGA expense
optimisation as a strong lever, we expect the company to swiftly counter the
headwinds of aggressive wage hike. We expect EBIT margin’s downside to be
limited to 108bp yoy and settle at 27% by FY2013. We value TCS at 22x (10%
premium to Infosys) FY2013E EPS of `62.2 with a target price of `1,368 and
maintain our Buy rating on the stock.

Power Finance Corp – Tipping point:: RBS

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In a recent development, the state ministers adopted resolution to bring down power distribution
losses. The proposed developments will likely put pressure on state governments to: (a) increase
tariffs and (b) reduce T&D losses. At 1.3x FY12F book value, we find PFC attractive. Re-iterate
Buy.


􀀟 We believe, the two weakest links in the Indian power sector are: (a) Weak financial health of
power distribution bodies, and (b) Coal shortage. To address the former issue, the Indian
Ministry of Power ( MoP) organised a State Power Ministers' Conference on "Distribution
Sector Reforms" in New Delhi yesterday.
􀀟 The conference focussed and agreed to implement measures on issues which are well known
like (i) tariff filing and tariff revision on time, (ii) preparation of state financials on time, (c)
automatic pass through in tariff for any increase in fuel cost, (iv) advance payment of subsidy
by state governments and payment of all outstanding subsidy as soon as possible, (v)
reduction in T&D losses to 15% (timeline to be different for different states), (vi) appointment
of distribution franchises in urban areas, and (vii) state governments to consider converting
loans due from them to the distribution utilities as state government equity to ensure capital
infusion and improvement in net worth of utility.
We believe this is a key positive for the sector as:
􀀟 The resolution highlighted state's responsibility for implementing the reforms. According to the
Indian power minister, power is a concurrent subject, while the Centre is always ready to help
the States, it is their responsibility to ensure implementation of the reforms. Hence it is
unlikely that Centre will chose to bail-out the state utilities, which in our view is a positive.
􀀟 States to increase tariffs to reflect the power purchase costs. States accorded to ensure that
the difference between average revenue realization (ARR) should exceed the average cost of
supply (ACS), so that the internal surpluses can be used for network expansion and
maintenance. Also, they agreed to the timely submission of annual tariff revision petition,
keeping in view the increase in the power purchase costs (accounting for 70-80% of the cost
of supply). Further, the state governments will consider converting the loans due from the
distribution utilities into state government equity to ensure capital infusion and boost the
networth.

Tata Consultancy – Staying on top::RBS

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TCS delivered another strong quarter, with broad-based revenue growth of 7.5% qoq in US$
terms, with margins meeting expectations. We expect TCS to remain ahead of the curve on topline
growth, which can sustain the premium valuations that it currently enjoys. Reiterate Buy.


Another strong quarter; we expect valuation premiums to be sustained
TCS again delivered a strong performance – US$ qoq revenue growth of 7.5%, which was broadbased
across most verticals, geographies and service lines. Management’s assessment of the
demand environment was uniformly bullish, highlighted by: 1) an increase in the discretionary
component of the deal pipeline; 2) strong demand in Europe (6.6% qoq growth); and 3) client
execution on projects on track despite macro concerns. Even with large deal traction, TCS closed
10 deals in 1Q12 and its deal pipeline remains healthy across verticals and markets. We raise our
FY12 and FY13 EPS forecasts 1.8% and 1.4%, respectively, given the company’s good
performance and confident outlook. We expect TCS to sustain its valuation premium in the
sector, given consistently higher profitable growth despite its high revenue base.
1Q12 revenues: broad-based growth is impressive on many counts, in our view
TCS’s 1Q12 revenues grew 7.5% qoq to US$2.41bn (6.2% in constant currency terms),
exceeding our forecast of 5.8%. Volume growth was 7.4% qoq, but realisation (ex-currency) was
0.5% lower qoq, partly due to higher growth outside developed markets. International revenues
rose 6.9% qoq (RBS forecast: 5.6%). Nearly all geographies, verticals and service lines grew
qoq, which we believe signals broad-based demand traction and strong execution.
1Q12 margin on expected lines – strong show of confidence on FY12
The EBIT margin was expectedly down 214bp qoq to 26.2% under IFRS (RBS US GAAP
forecast: 26.1%) due to the impact of salary hikes (-251bp), higher SG&A costs (-76bp) and forex
(-9bp), partly mitigated by realisation/productivity/offshoring (+122bp). Management expressed
confidence in sustaining the EBIT margin at least at 27% in FY12 (28.1% in FY11), and has more
confidence on a pricing tailwind in coming quarters, although price increases are being pushed
back. ‘Other income’ rose 28.9% to Rs2.89bn due to forex gains (qoq change of Rs910m) and
higher treasury yields. Consequently, PAT was flat at Rs23.8bn despite significant margin
compression.

Perplexity continues to prevail ::Emkay

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Perplexity continues to prevail

View: Perplexity continues to prevail over the direction of the index. F&O indicators suggest a cautious view while continued buying from FIIs in the cash segment favors bulls.  The Nifty has a strong support placed at around the 5580-5630 levels. A close below 5580 levels might indicate a reversal to the current rally.
The Nifty witnessed strong resistance at its 200-day moving average placed at around the 5740 levels. Selling pressure prevailed for most part of the session, forcing the index to close in the red. NSE cash volumes stood at Rs122.69 billion as against Rs120.23 billion seen in the penultimate session.

Nifty July futures witnessed closure of 0.14 million shares in open interest to 22.45 million shares from 22.59 million shares. Interestingly, open interest in FIIs index futures segment increased marginally to 0.45 million contracts from 0.44 million contracts. FIIs remained net sellers to the tune of Rs5620 million suggesting build up of short positions.

The Nifty put-call of open interest declined to 1.25 levels last Friday, reversing from 1.34 levels. Historically since January, 2011, reversals in the ratio are seen from levels of 1.35 -1.40 followed by a decline in the index. The ratio has a direct correlation with the index. Any further decline in the ratio will indicate weakness creeping into the trades. 

FIIs continued to buy in the cash segment. A massive inflow of Rs57.54 billion has been observed in the current month. Inflows from mutual funds stand at Rs2.52 billion.

Investors Help:: Identifying a tipsy market :: Business Line,

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Ashwin was worried. His track record as a good stock picker was taking a knock. Of late, the prices of stocks he bought invariably dipped, while those he sold headed north.

In fact-finding mode, Ashwin figured that he had been swaying along with extreme market sentiments, instead of being fearful when others are greedy and greedy when others are fearful. He had been buying shares at high valuations, and selling when they had already been battered. Digging deeper, Ashwin found he could have saved himself a lot of loss , had he paid attention to some well known contrarian indicators.

Contrarian indicators are based on the premise that the majority is often a collection of fools. Such indicators provide clues about mood extremities in markets and stocks - both about peaks when bullishness reaches its zenith, and bottoms when bearishness touches its nadir.

Like most overreactions, such mood extremities are often followed by reversals. Stocks which hit peaks start yielding to gravity, while those which hit rock bottom begin their ascent to saner levels. This is something astute investors are quick to catch on and cash in on. Here's an indicative list of contrarian indicators, which could help you avoid becoming part of the herd.

‘TIP'SY MARKET

Warning bells should ring when the world and its uncle starts talking stocks and doles out ‘tips'. A tips-driven market is usually tipply with exuberance. When the shoe-shine boy began giving stock buying tips before the Wall Street crash of 1929, smart investors took it as a strong sell signal.

People with little connection to or knowledge about investments taking bets on the market and even encouraging others to do so may be a good indicator of optimism reaching irrational levels.

Also, at times like these, it is common to be bombarded with unsolicited calls and messages urging you to ‘not miss the golden opportunity' to invest in ‘sure-shot multi-baggers'. Many such stocks belong to the penny stock category, which vanish into thin air when the party ends. Be smart and avoid those who are out to make a quick buck at your expense.

Similarly, when the market is in panic mode and everyone is blindly rushing towards the exit door causing prices to crash, it may just be a good time to make great value buys.

VOLUME VARIATION

A huge change in trading volumes could also be an indicator of the markets entering the zone of irrationality. Towards the final stages of bull market frenzies, volumes may touch stratospheric levels with all and sundry eager for a share of the pie. Also, during severe market downturns, there can be a huge spike in volumes in the stampede to rush out. This could be followed by a sharp dip in volumes when fear dominates and paralyses investor decision-making. Such wild volume gyrations could serve as good contrarian indicators.

FUND-RAISING FRENZY

It is no coincidence that a majority of initial public offers (IPOs) and new fund offers (NFOs) hit the market during exuberant market cycles. After all, ‘happy' market conditions provide the best chance for companies and fund houses, especially those with poor track records, to be successful in their fund-raising efforts. Such situations could, however, also be red-flags. When companies with questionable fundamentals manage to raise money from the public, merely on the strength of market sentiment, then it may not be long before that sentiment turns sour.

PUT CALL RATIO

In the market, optimism and pessimism are often contagious, and may reach extreme levels beyond justification. The Put Call ratio is often used to assess whether the line is crossed. The ratio indicates market sentiment about the likely movement of the market or stock.

Puts represent an option to sell, while calls represent an option to buy. If puts are more than calls, overall sentiment would be negative, and the put call ratio (number of traded put options divided by number of traded call options) would be more than one. On the other hand, when calls exceed puts, the market sentiment would be positive and the put call ratio would be less than 1. If pessimism far exceeds optimism, put call ratio would be quite high, and is considered a contrarian buy indicator. On the other hand, when optimism overwhelms pessimism, the put call ratio falls sharply, and is considered a contrarian sell indicator.

VOLATILITY INDEX (VIX)

The volatility index (VIX), also known as the ‘fear gauge', measures expected market volatility and is used as another contrarian indicator. It tends to shoot up when market sentiment is bearish, and dips when sentiment is bullish. A sharp rise in the VIX is interpreted as unjustified pessimism and used as a contrarian buy indicator. On the other hand, a steep fall is interpreted as market complacency about risk and used as a contrarian sell indicator.

MAGAZINE SPLASH

Fame or infamy may also be a good contrarian indicator. When a company gets splashed all over the media and on magazine covers, there is a good possibility that the news which led it there has already been factored in by the markets.

Companies depicted in glowing terms in the media have often had a forgettable post-fame run on the markets. Likewise, companies which receive incessant bad press often do better than expected on the markets. Smart money seems to bet that often, companies appear on magazine covers only at the fag end of their best or the worst. So, the next time you see a company lionised or demonised, make an objective assessment before deciding to jump on to the bandwagon, or taking the route less travelled

Accumulate South Indian Bank: target price of Rs26: Angel Broking,

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For 1QFY2012, South Indian Bank (SIB) reported healthy net profit growth of
41.2% yoy (flat sequentially) to `82cr, slightly below our estimates of `86cr.
However, NIM compression was higher than expected, which was compensated
by higher treasury gains and lower-than-estimated provisions. Key highlights of
the results were strong balance sheet growth but with substantial NIM
compression and largely stable asset quality. We maintain our Accumulate
recommendation on the stock.
Healthy business growth but NIM disappoints: The bank’s business growth
continued to register strong traction, with advances growth at 31.2% yoy (8.1%
qoq) and deposits growth at 35.5% yoy (6.4% qoq). The bank’s CASA deposits
grew by relatively lower 16.0%, leading to compression in CASA ratio to 21.5%
from 25.1% in 1QFY2011. However, CASA ratio was stable on a sequential
basis. CASA deposits and low-cost NRE deposits put together formed 26.1% of
deposits. The asset quality was largely stable during 1QFY2012, with absolute
gross and net NPAs rising by relatively lower 2.6% and 5.8% qoq, respectively,
and provision coverage ratio excluding technical write-offs at a comfortable
73.1%. Slippages were flat sequentially at 0.8% (`43cr), which were largely
compensated by higher recoveries. The bank’s capital adequacy remains healthy
at 13.5%, with tier-I CAR of 10.9%.
Outlook and valuation: SIB plans to raise ~`1,000cr during FY2012, which will
enable it to maintain its strong growth, especially in its gold loan business.
Currently, the stock is trading at moderate valuations of 1.2x FY13E ABV. In light
of capital-raising and strong expansion plans, we value the bank at 1.35x FY13E
ABV and maintain our Accumulate rating on the stock with a target price of `26.

INDIA INFLATION – Elevated outcome warrants a rate hike::CLSA

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INDIA INFLATION – Elevated
outcome warrants a rate hike
Headline WPI inflation remained elevated at 9.4%
YoY in June, marginally better than expectations but
not meaningful enough to warrant any celebration on
the inflation front. More worryingly, April WPI
inflation was revised significantly higher to 9.7%
from 8.7% reported previously. The magnitude of
revisions so far in 2011 has averaged around 1ppt,
much higher than the 0.3-0.5ppt that is more typical
when inflation is showing a rising trend. Also, the
more complete impact of the fuel price hike will be
captured in the July monthly WPI data.
On a seasonally adjusted basis, WPI in June rose
0.8% MoM (May: 0.2%), with non-food
manufactured goods (core) sub-index rising 0.4%
(May: 0.6%). WPI-core inflation for April was
revised up to 7% (from 6.3%), but was still slightly
encouraging as it remained well below the 8.5% in
March. At 7.2% YoY, WPI-core inflation in June
was similar to 7.3% in the prior month. However,
the data for May and June are preliminary and will
be revised higher but unlikely to a level near the
peak of 8.5% in March.

The food composite index rose 8.4% YoY in June,
higher than the 8% in the prior month. Most likely,
headline food composite inflation will rise further, as
last year’s base effect becomes less flattering. Also,
the ongoing monsoon season will be important for
the outlook of food inflation as well.
The latest inflation will offer no cheer to the RBI, and
it will have little choice but to hike the repo rate by
25bp to 7.75% at its quarterly review on 26 July. It
will remain focussed on inflation and be less
perturbed by the ongoing moderation in growth.
However, the RBI will reiterate the risk of external
factors on the growth outlook. Following the rate
hike later this month, we expect the RBI to hike again
25bp to 8% on the repo rate by the end of the current
quarter before pausing. Commodity prices and
possible global financial dislocation are also key
inputs but the timing of that rate hike is less certain
due to a possible change of guard at the RBI. The
current governor’s term ends in early September but
it is not yet clear if he will get an extension.

Mid-cap banking stocks likely to under-perform ::Emkay

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Mid-cap banking stocks likely to under-perform

Nifty July futures added close to 0.22 million shares in open interest to 22.67 million shares from 22.45 million shares. The cost of carry declined to 0.36% from 3.76% on a daily basis suggesting build up of short positions. Nifty July futures accumulated maximum open interest of 22.67 million shares in the current series, significantly lower than the past 3 series average of 26.62 million shares. With selling pressure continue to prevail, any significant increase in open interest in Nifty July futures will confirm the trend reversals.

Maximum open interest among Nifty July call options is seen at 5800 strike with an open interest of 8.56 million shares. Among Nifty July put options, the maximum open interest is concentrated at 5500 strike with an open interest of 7.68 million shares. With increased accumulation observed in lower strikes, we expect a shift down in the accumulation pattern. 

Selling pressure is likely to prevail in mid-cap banking stocks. Most of the stock futures have seen an increase in open interest along with a decline in cost of carry suggesting build up of short positions. Open interest in Bank of India increased to 3.22 million shares from 3.10 million shares along with a decline in cost of carry to -15.26% from -9.28%. IOB added 2.27% shares in open interest to 1.53 million shares on back a decline in cost of carry to -10.58% from -1.27%. We expect the sector to under perform in the near term.

India Power & NBFC: Positive moves -CLSA

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Positive moves
Resolution of state power ministers to curtail losses and improve finances of
SEBs is a positive step. While we did not expect SEBs to default on PPA, these
initiatives may also encourage investments. However, we still see fuel supply
as key risk over the next few years, hence prefer low-risk companies. This
may also abate asset quality concerns for PFC and REC as loans to states is
66-83% of loans. However, our concern has been on loan growth where see
moderation to 16-20% over FY12-13. Earnings growth will be lower due to
pressure on spreads and increased provisioning. PFC is a better bet on the
improving growth outlook than REC as PFC faces lower competition risks.
Power ministers agree to take steps to curtail SEB losses
q Most proposals are actually restatement of the provisions in the Electricity Act– like
(1) automatic pass through of fuel costs (Section 62 (4)), (2) advance payment of
subsidies in the future (Section 65) and (3) annual filing of tariff petition by states.
q Key new proposals announced were (1) state government to consider conversion of
loans into equity (Rs400bn- 14% of assets in FY09), (2) states to clear outstanding
subsidies & dues and (3) widening of scope of R-APDRP scheme to smaller towns.
Positive for gencos as well, but we still prefer low-risk models
q We never expected default from SEBs on PPAs, but better finances of SEBs would
imply higher utilization of assets and in turn improve profitability.
q Improving finances of SEBs by any of the measures proposed would be a positive
outcome for power generation utilities and would encourage investments.
q Fuel supply (both coal and gas), however, still remains the key concern for gencos.
q The recent dilution in norms by MoEF could improve domestic supply of coal in
medium term; however, next couple of years are expected to be tough.
q Our preference is for low risk business model i.e. NTPC, Power Grid and Tata Power.
Positive for financiers, but inline with base-case
q These recommendations should abate concerns on asset quality of largest exposure
of PFC and REC (66-83% of loans are to states)- this is also inline with our view.
q Looking forward we focus on two key questions (1) has the risk to our loan growth
estimates for FY12-13 abated considerably and (2) are valuations attractive enough
to drive a significant re-rating from here.
PFC and REC to face pressure on earnings growth
q We see moderation in loan growth to 20% in FY12 and 16-17% in FY13 as the
impact of recent events and shortage of fuel supply will be evident with a lag.
q Earnings growth could be even lower (~10% Cagr over FY11-13) because we see
pressure on spreads and increase in provisioning costs.
q We see ~30bps compression in spreads over FY11-13 due to rise in cost of
wholesale funds; forex gains/ loss is a wild card.
q We think 15% of exposure to private gencos (7-10% of loans) may become NPL or
have to be restructured- this may appear high, but exposures are concentrated.
q This along with expected RBI’s norm on standard asset provision will lead to rise in
provisioning - we build 25bps general provision on new loans over FY12-13.
Prefer PFC over REC
q We think valuations of PFC and REC will remain closer to those of profitable and
well capitalised PSU banks like PNB and BOB that also have the advantage of
diversified loan-mix and better liability-mix.
q We believe that PFC (O-PF) is a better bet on the improving growth outlook in the
power financing sector than REC (U-PF) as we believe that PFC faces lower risk of
market share loss to banks due to higher share of generation portfolio (larger ticket
size and longer duration of project).
q Recent developments at state government level warrant some re-rating which we
build in 10-12% upgrade to target prices.
q Our target prices for PFC (Rs250) and REC (Rs245) are based on 1.5-1.6x FY13
adjusted PB and imply 10-18% upside.

Power Sector Forward curve; buyers shying away from bilateral-Emkay

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Power Sector

Forward curve; buyers shying away from bilateral

n     In CERC's May 2011 report, more than price what’s important to note is 50%+ contracts are 'less than a week' and contract volumes are at just 18% of April month contract volumes

n     This means buyers are shying away from entering into '1 week +' contracts. This we believe is after-effect of exchange prices being lower than bilateral prices for past one year

n     Other observations – 1) 65% of volumes signed in May11 are at Rs3.58/unit, 5% volumes at Rs4/unit + and 2) Aug11 price prediction is Rs3.84/unit and Sep11 even lower at Rs3.58/unit.

n     Foresee bilateral merchant prices heading towards avg. Rs3.5-3.7/unit in FY12E & Rs3.0-3.2/unit in FY13E (Rs4.7/unit in FY11); Use any upswings to reduce weights

Bajaj Auto – Results disappoint sharply::RBS

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1Q EBIDTA was 7.6% below our forecast due to raw material cost increases and weak domestic
product mix. We believe domestic market share pressure, seen in the past few quarters, and the
recent launch of Boxer 150cc will continue to put pressure on EBIDTA margins. Our EPS
forecasts and Sell rating are unchanged.


1Q results disappoint sharply on EBIDTA and PBT
Bajaj’s 1Q results revealed EBIDTA 7.6% lower than our forecast and PBT 9.6% lower. A sharp
spike in raw material expenses to net sales (up 170bp qoq and 140bp yoy) caused the EBIDTA
margin to collapse to 19.1%. This, coupled with a dip in other income, led to an even bigger
disappointment on PBT. A lower-than-expected tax rate helped reduce the impact on PAT.
Capital employed in the auto segment rose a sharp 37% qoq vs a 13.7% increase in sales.
Management noted that nearly half of the increase was attributable to cash stuck with state
government due to a delay in a sales tax refund.
We retain our EPS forecasts as 2Q should represent a peak in volumes
Sales volume momentum in recent months has been better than we expected on the export front,
whereas domestic segments face qoq market share pressure. We believe the product lifecycle of
the Discover family of motorcycles will peak by the start of this festival season, causing the
company’s total sales volume to peak in 2Q. Hence, we marginally increase our FY12 sales
volume forecast, but maintain our EBIDTA margin forecast at 19%, prompting us to leave our
EPS forecasts unchanged.
Brand-reshuffling strategy returns, we reiterate Sell
We believe the rise of the Discover brand (since 2009) is nearing its peak. We believe the
churning of engine capacities within this brand (100cc, 135cc, 125cc) helps it retain total brand
sales, but at the cost of its older engine configurations. However, with the company exhausting
engine configurations for the brand, the shift seems to be towards revitalising the Boxer brand
with 150cc engine capacity. We believe aggressive pricing of Boxer 150cc could be margindilutive
vs the Discover and Pulsar brands. This, coupled with bad 1Q results, could lead to a
downward revision in consensus EPS (RBS FY12-13F are 4-5% lower than Bloomberg
consensus). We believe the lack of clarity on continuation of the DEPB (duty entitlement
passbook) scheme will put pressure on valuations (PE). We reiterate Sell and just marginally
adjust our TP, which offers 25% potential downside from the current price.

Setco Automotive: Buy :: Business Line,

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Investors with a perspective of two-to-three years can buy the Setco Automotive stock. The company is the market leader in the supply of clutches for medium and heavy commercial vehicles (MHCVs) and counts Tata Motors, Ashok Leyland, Volvo-Eicher and AMW, among its clients.

Given that after two successive years of 26 per cent growth, the auto industry may face a slowdown, the investment does carry an element of risk. However, the company's superior margins, its strong presence in the replacement market and diversification efforts lend promise. At the current market price of Rs 159, the stock trades at a reasonable PE of about eight times its trailing 12-month earnings.

SUPPORT FOR CV DEMAND

Although headwinds in the form of slower GDP growth, high inflation and interest rates pose a threat, the auto industry is expected to face only a moderation in growth and not a slowdown of the order of 2008-09. As against a 0.71 per cent growth registered in 2008-09, SIAM expects the auto industry to grow at around 12 per cent in the current year. Besides, robust agricultural produce, good export-import growth and the picking up of the infrastructure and construction industry in the last few months suggests that there is room for growth in the CV industry.

This apart, the new BS-III emission norms for CVs introduced in October 2010 will do their bit to keep demand going as BS-III compliant engines require technologically superior clutches. These clutches, being value-added products, would also improve realisations for Setco Automotive. Another factor that will help OE (original equipment) demand trickle in is the launches planned by CV majors. In 2010, Setco has been approved as the sole clutch provider for Tata Motors' ‘World Truck' range of vehicles. Ashok Leyland too is launching about 25 vehicles types in its new ‘U-Truck' platform.

Outside of this, considering that clutches generally have a life-span of two-three years, the company will shortly begin benefitting from the clutch replacement demand for the vehicles sold since 2009. Stronger replacement demand also means better margins for the company. It currently derives about 55 per cent of revenues from the replacement segment and has partnered with existing OE clients to cater to the replacement market using their (OEMs') distribution network.

DIVERSIFICATION INITIATIVES

Setco has recently entered into supply of clutches for light commercial vehicles (LCVs). This acts as a good diversifier, considering that LCVs are not subject as much to the cyclicality of the industry as the MHCVs. Besides, from about 44 per cent of total goods carrier sales in 2007-08, LCVs now garner about 55 per cent of the total volumes, indicating that supplies to LCVs can partly help sustain component makers in times of a slowdown. In the next few years, Setco also expects its exports revenues to scale up to 15 per cent of total revenues from about 8 per cent currently.

Another positive for the company is its efforts to move up the value chain. Towards this, the company has entered into a JV with FTE automotive GmBH, Germany, a leading global manufacturer of hydraulic brake and clutch actuation systems. Setco expects to commence its hydraulic pressure convertor business in India and manufacture clutch actuation systems over the medium-term.

FINANCIALS

For the year-ended March 2011, net sales grew by 43 per cent year-on-year to Rs 303 crore, while net profits came in at Rs 33 crore, growing by about 85 per cent. Given its status as the market leader and Tier-I supplier, the company has been able to maintain EBITDA margins at a healthy 19-21 per cent in all the four quarters of 2010-11.

Techcheck Daily DAX final suckers rally possible n Emkay

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Techcheck Daily

DAX final suckers rally possible

n     Chart in Focus: DAX patterns look incomplete one final move pending, expect one final suckers rally before the move ends, DXY shows a similar picture

n     DXY a golden chance gone a begging, 200 DEMA around 77 does the undoing, final E leg declines seem pending

n     BSE 500 hurdles at 7450-7500, prices break and trade below a trend channel, medium term view hence remains negative

n     Nifty a bearish breakaway gap on the 200 DEMA holds, daily momentum too rolls over and confirms; expect weakness as long as 5602 holds

n     Bank Nifty daily momentum rolls over as prices continue trade weak, odds are now in favour of further downsides, the 200 DEMA around 10970 might offer support for a session or two, short term view though remains negative

n     Gold prices back near all time highs, next one week should set the tone, either a double top or upside price extensions

n     Stocks with positive short term view

n     RIL (stop 839), DLF (stop 216)

n     Stocks with negative short term view

n     HDFC, Axis Bank, Bank Nifty, Asian Paints, Bharti, ITC, Sun Pharma, Wipro  

  

Strategy: Capital Ideas:: Kotak Sec

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Strategy
Capital Ideas
Capital Ideas. Continuing our regular meetings with policy makers in the capital of the
country, our second edition of Capital Ideas this financial year led us to meet with
movers and shakers in various fields of infrastructure: water, power, coal and oil. We
also met with two soft infrastructure creators: media and skills-development. We came
back with a positive stance on India’s current ’corrective phase‘ and skilling, while the
concerns on coal and power remain. Expect tariffs for water and power to rise.


Patrick Rousseau, CMD, Veolia India: Water distribution in India
India is increasingly beginning to realize that ’water is free but service needs to be priced‘. India
currently is in the process of developing transparent and fair rules and accountability provisions
that can facilitate private sector entry. Veolia has recently signed up a water supply agreement
with Nagpur Municipal Corporation where it will meter and bill its 2.7 mn people. Veolia believes
that Indian cities have enough water if the distribution is well-managed—expensive production
options like desalination are best avoided, except in certain areas.
Shoma Chaudhury, Editor, Tehelka: Corrective phase
India is passing through a corrective phase in its politics and governance: the excessive land-grab
attitude of business without consideration for the people or environment is manifesting itself in
the inevitable collision. The right lesson to draw from the current phase is not that there should be
flight of capital from India but that Indian business and politics need to take into account the
current and future generations along with them: the idea should be to create long-term
sustainable profits, rather than short-term gains.
Dilip Chenoy, MD and CEO, National Skills Development Corporation: Skilling India
Lack of skilled workers is creating bottlenecks in growth (while inflating costs) and is creating
capital-intensive projects. India needs to upgrade the skills of its workforce to make them
employable and more productive. The current issue in skill-development is the lack of scale of
current operators: NSDC is helping various ventures scale up by creating the right eco-system and
via funding as it goes about its task of creating 150 mn skilled employees over the next 10 years.
Tantra Narayan Thakur, MD, PTC India: Rising tariffs
Power tariff rise is going to be the new reality as state governments try to find a mechanism to fill
the annual losses of the SEBs and repay the bonds issued in 2002. Bihar and Punjab recently raised
tariffs by 19% and 9%, respectively and Delhi is expected to follow suit soon. The power purchase
agreements may need to be revised to take into account the new realities of coal prices, Chinese
currency appreciation and interest rates.
GC Chaturvedi, Secretary, Ministry of Oil: Updating the understanding
Recent government moves on oil pricing have led to an easing of pressure on the OMCs: a more
sustainable and rule-based method is under evaluation. On the Reliance gas block, he expressed
confidence that the stated reserves exist though technical issues on pumping them out need to be
solved. On ONGC, he expects the subsidy to go back the levels as earlier. On Iran, there is no clear
path on how to resolve the issue. He expects LPG subsidy-targeting to start soon.
Alok Perti, Special Secretary, Coal: Auctions and availability
Coal-block auctions should become a reality in the near future as guidelines get formalized in the
next 2-3 months. His bigger concern is on the availability of coal for the ambitious XIIth Plan
targets for power generation: there can be an annual gap of around 110 mn tons by end of the
next plan period, even after accounting for imported coal. Such a shortfall could inevitably lead to
deficit in power generation.

Pharmaceuticals: Who will surprise in 1QFY12E? We think its SUN :::: Kotak Sec

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Pharmaceuticals
India
Who will surprise in 1QFY12E? We think it’s SUN. We notice maximum variability of
47% in PAT Street estimate for SUN. We believe a positive surprise is most likely for SUN
versus average Street estimate of Rs4.7 bn on account of US launches. We reiterate our
PAT estimate at Rs5.2 bn, 11% higher than Street’s. We don’t make much of PAT
variability for Ranbaxy, Glenmark as it’s likely on account of (1) Aricept sales and (2)
research milestone assumptions, both not part of recurring business. We expect a steady
quarter for KIE pharma universe with strong yoy average sales growth of 21%, though
lower yoy PAT growth of 9% for generics. We expect PAT to decline qoq for Ranbaxy,
DRL, Lupin, Divis and Dishman due to (1) lower US revenues, (2) high base in previous
quarter for CRAMS. Key trends to watch out for, (1) domestic growth, (2) margin trend.
We remain positive on SUN, Cadila, Lupin in generics; Divis, Biocon in CRAMS.

Hindustan Media Ventures: Weak 1QFY12 on expected lines:: Kotak Sec

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Hindustan Media Ventures (HMVL)
Media
Weak 1QFY12 on expected lines. HMVL reported weak 1QFY12 EBITDA at Rs260
mn (-19% yoy, +30% qoq), largely in line with expectations, on account of (1) weak
education advertising and (2) unfavorable base (1QFY11 was FY2011’s best quarter
before cover price decline in Jharkhand). Reiterate BUY with TP of Rs220 on HMVL led
by (1) strong leadership position in Bihar (industry-leading advertising growth), (2) UPU
expansion in its final stages and (3) attractive valuations at 11X FY2013E EPS estimates
but more important, ~70% EV/reader discount versus peers; the streak of weak
earnings momentum has likely ended with 1QFY12.


1QFY12 results analysis: Optically weak due to soft advertising environment, unfavorable base
�� HMVL reported optically weak 1QFY12 EBITDA at Rs260 mn (-19% yoy, +30% yoy), in line with
expectation on account of (1) soft advertising environment (weak education advertising in
UP/Bihar) and (2) unfavorable base (1QFY12 was the FY2011’s best quarter before cover price
decline in Jharkhand result in weak financials; see Exhibit 2). 1QFY11 financials are not
comparable below the EBITDA line due to HMVL’s IPO in 3QFY11.
�� HMVL reported weak 1QFY12 advertising revenue at Rs1.11 bn (+15% yoy) versus average
27% yoy growth due to (1) generally soft advertising environment (economic slowdown) but
also (2) weak education sector advertising (spend bias in 1Q).
Reiterate BUY: Leadership position in Bihar market with UPU expansion in the final stage
HMVL’s weak 1QFY12 must be seen in the context of large investments in UPU market (larger
than the size of its existing markets combined). We view the weakness in advertising environment
as cyclical led by the slowdown in the Indian economy, likely to rebound with renewed economic
growth. The fundamentals of advertising growth remain unchanged led by (1) continued high
competitive intensity across advertising sectors (auto, telecom, BFSI, retail), (2) robust traction in
new brands turning to advertising (SMEs/foreign companies/expanded portfolio of existing players)
as well as (3) expanding Hindi print readership.
Hindustan witnessed a 19% yoy growth in readership in IRS Q1 2011 led by (1) strong growth in
UPU market (expansion/new editions) as well as (2) consolidation of its position in the BJH market
(re-launch of Patna edition in March 2010). HMVL’s leadership position in BJH holds it in good
stead as the economic transformation underway in the market will likely result in industry-leading
advertising growth. HMVL’s expansion in UPU market, the largest Hindi print market in India, will
get completed in FY2012E and benefits will start accruing from FY2013E given it achieves a strong
market position. Reiterate BUY on attractive valuations at 11X FY2013E EPS estimates but more
important, ~70% EV/reader discount to peers.

Bajaj Auto Ltd. Weak start to FY12, Maintain BUY :Emkay

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Bajaj Auto Ltd.

Weak start to FY12, Maintain BUY

BUY

CMP: Rs1,421                                        Target Price: Rs1,700

---

n     APAT at Rs 7.1bn is below est. (Rs 7.8bn) due to lower sales (Rs 47.8bn vs est-Rs.49.3bn) and other inc. (Rs 731mn vs est.-Rs 1bn). Margins at 19.1% was below est of 20.4%

n     2.2% QoQ decline in domestic ASP to Rs 43,563 is the key reason for disappointment in sales. Exports ASP at Rs 39,498 was in line with est.

n     Outlook remains positive driven by strong momentum in two wheelers, launch of Boxer and exports

n     Currently, retain our FY13E EPS of Rs 113 and BUY rating.  Shall further update  post conference call scheduled on 18th  July