30 July 2011

Bharat Heavy Electricals (BHEL) - Profit beat led by unexplained variations in operating costs, but execution is weak::JPMorgan

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Bharat Heavy Electricals (BHEL) Overweight
BHEL.BO, BHEL IN
Profit beat led by unexplained variations in operating
costs, but execution is weak


 Sharp margin improvement caused profit beat, even as execution
falters: BHEL reported PAT of Rs8.15bn (up 22.1% YoY) ahead of our and
street expectations. Jun-q sales growth of 10% YoY was weak and well
below our expectation of ~20% YoY growth. The weakness mainly
stemmed from power project execution (power revenues up only 8%). On
the other hand, EBITDA margin improved 70bps to 15.3% on a high base of
Jun-q last year. In a tough commodity price environment, it is surprising to
us that RM/sales declined 55bps. Other expenses to sales was up sharply
(~240bps) but the impact was offset by lower staff cost (down 2.8% YoY).
 On a segmental basis, it was surprising to us that the industry segment
showed a sharp 870bps EBIT margin improvement (to 22.6%), but power
showed 340bps margin decline to 16.5%. Other income was 52% higher and
the tax rate declined by 230bps yoy to 31%. Thus, there are a few
unexplained aspects in BHEL’s results and higher non-operating income /
lower tax seems to have contributed to the beat, more than core execution
growth.
 Order inflows in Jun-q quite weak: BHEL reported an order backlog of
Rs1596bn down 2.8% qoq. We infer that order inflows (calculated) in Jun-q
were ~Rs29bn only, well below Rs108bn in 1QFY11. No major order had
been reported by BHEL during the quarter, but it has become a recent trend
with the PSU that orders are disclosed end of quarter rather than during the
quarter. Given this trend, the weak flow might be seen as disappointing.
Rising interest rates/fuel issues for IPPs seem to be causing delays in project
awards. As of today, 11x660MW NTPC boiler tenders have been delayed
and no progress seems to have been made in awarding of state JV orders.
 The stock is down, intra-day, post results, which we think is due to weak
execution, unexplainable aspects, and the fact that non-operational items
partly contributed to the beat. Management clarity on these aspects in
today’s earnings call will be a potential stock catalyst.

Jet Airways: Weak 1QFY12 results ::CLSA

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Weak 1QFY12 results
Jet reported a pre-exceptional and taxes loss of Rs2.8bn during 1QFY12
against a loss of Rs404m in 1QFY11, with yields undershooting fuel cost
increases. Ebitdar margins declined 1110bps YoY and 130bps QoQ at
9.3%. Results were weaker than expected with sequential yield
improvements being lower than expected. Performance through 2Q will
remain under pressure and yields will only improve in 3Q as the demand
supply situation turns favourable in the peak season. Maintain O-PF.
Jet 1QFY12: another weak quarter
Jet’s 1QFY12 results showcased the challenging operating environment. Domestic
seat factors were at 75% (79% in 1Q11) while yields were up 10% YoY and 6%
QoQ with price aggression moderating somewhat against 4Q. Fuel costs rose 57%
YoY (+27% QoQ) while operating expenses rose 21% YoY. Ebitdar margins were
6.7%, down more than 1200bps YoY but up 420bps QoQ, leading to negative
Ebitda for the quarter. The international business saw yields increase 6%YoY and
3% QoQ while loads remained above 80%. Revenues increased 22% YoY (+6%
QoQ) while fuel and selling costs increased at 57% and 37% YoY respectively
(20% and 8% QoQ). Ebitdar margins declined 1030bps YoY and 500bps QoQ to
11.2%. The high fuel prices and weak yield performance caused overall Ebitda
margins to drop to 3.4% and Jet report a pre tax/exceptionals loss of Rs2.76bn.
Looking ahead, the company expects to add 6 aircraft in domestic and 2 B777’s to
return in international in FY12. Given that 2Q is seasonally the weakest quarter
and competitive pressures remain high, yields are unlikely to recover in H1. The
demand supply situation may turn favourable in the peak season in 3Q.
JetLite: performance remains weak
JetLite’s performance in 1QFY12 remained weak with yields dropping 11% YoY
(+4% QoQ) while load factors dropped 290bps YoY (+390bps QoQ) as it was
more vulnerable to the aggressive price cuts by competitors, leading a YoY
revenue decline of 10% (+4% QoQ). Ebitdar margins remained negative at -3.9%
(+250bps QoQ) and normalised loss stood at Rs912m (Rs59m profit in 1QFY11).
H2 remains key for FY performance
Debt for Jet stood at Rs132bn while cash stood at Rs5.1bn and repayments for the
year would be ~Rs10-11bn. The company hopes to complete the BKC land deal as
well as a sale & leaseback of 4 737s in the current quarter given the developments
in the Sahara case. Given the weak outlook for 2Q, performance for the full year
will remain back ended and the demand trends later in the year will be the key
driver for profitability. Given the continuing momentum in passenger growth, the
outlook seems reasonably. However, oil prices remain a major risk (our forecasts
factor in jet fuel assumption to US$108-111 for FY12-13, broadly consistent with a
crude oil price of $97-100). We have retained our forecasts and valuation for now but
will watch yield and pax trends in the coming months ahead of the peak season. O-PF.

Shriram Transport Finance : 1Q profits in line but a downside risk to outlook post rate hike ::JPMorgan

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Shriram Transport Finance Overweight
SRTR.BO, SHTF IN
1Q profits in line but a downside risk to outlook post rate hike


Shriram transport 1QFY12 PAT of Rs3.5B (+20% Y/Y, 2% Q/Q) was
largely in line with our estimate. However, near-term downside risks exist
post RBI’s latest rate action. The company in an analyst meet today
highlighted concerns on growth guidance and NIMs ahead. Policy
environment near term too is likely to be in a state of flux pending clarity
on securitization norms and overall NBFC regulations. While we continue
to be believers in the core “franchise” of the business, we think RBI's rate
“shock” today accentuates near-term headwinds.
 Key financial highlights: 1) ROA maintained at 3.8% as NIM remained
stable Y/Y thanks to spreads locked in on securitized portfolio, 2) AUM
growth of 22% Y/Y was strong but sequentially has tapered off to 2%
Q/Q. Disbursement growth was 20% Y/Y, 3) Asset quality has slightly
deteriorated with Gross NPA moving to 2.66% from 2.64%.
Provisioning growth of 36% Y/Y outpaced loan growth. Overall ROE
respectable at 27.4% but down by 160 bps Y/Y and 110 bps Q/Q.
 Outlook ahead: 1) As of now, the company is maintaining its guidance
of 15-20% AUM growth but highlighted that this could come down to
10-15% levels depending on how the macro shapes up, 2) NIMs can
potentially go down by ~50 bps as a base case and 100 bps in a bear case
post today's rate action, 3) Clarity on regulation regarding securitization
and NBFC norms are expected over the next quarter. Regarding
securitization, tighter norms on capital adequacy/KYC/seasoning norms
could potentially be in the offing. Overall, the company is still hopeful
of keeping its off balance sheet portfolio between 30 and 35% of its
AUM (vs. 40% currently and JPMe 29% by FY13).
 No change to estimates: We are keeping our F12/13 estimates
unchanged which are 8-9% below consensus. Our estimates factor in
16% AUM growth for next year and a spread compression of 100 bps.
Our FY12E PAT is below company guidance of Rs14-15B.

India Telecoms --Putting India's tariff increases into perspective ::JPMorgan

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 Positive catalyst here sooner than expected: Tariff increases in the Indian
mobile segment are here, with Bharti Airtel having raised tariffs by 20%.
We had been looking for tariff stability in 2H FY12 with the potential for
some rate increases in FY13. We are incrementally positive on the sector
now as we believe indications of increased tariffs from market leaders leave
room for others to raise rates too.
 What's reflected already? Bharti and Idea’s stock prices have risen by 7%
and 13% over the last three trading sessions and we estimate the current
levels factor in 18 quarters of price stability. Our analysis of 10 emerging
markets across Asia, Latin America and Africa show that the maximum
period of price stability is eight quarters (five is more common) while price
increases have sustained for a maximum of five quarters (2-3 quarters is
more common).
 Paying for penetration: Another aspect we study is that all these markets
(including India) have paid for penetration with ARPM declines. India, with
49% underlying penetration, is unlikely to be an exception. We believe that
Indian telcos – market leaders especially – will see price increases in the
near term; we forecast six quarters for Bharti and Idea, followed by declines
in the medium-to-long term.
 Upgrading Idea to Neutral: We expect Idea to participate in rate increases
and have increased ARPM by 1.0/3.6 paisa for FY12/FY13 and EPS by
10%/22% to Rs2.8/4.7. However we are cognizant of Idea’s weaker market
position relative to Bharti, regulatory risks, and a slower turnaround in new
circles. We would be looking for a favorable resolution of regulatory issues
or a better entry point to turn more positive on Idea. Our Mar-12 PT is now
Rs80 (up from Rs62 earlier).
 Bharti preferred, reiterate Overweight and raise PT to Rs485: We
welcome Bharti’s tariff increase, which we believe highlights its pricing
power. Bharti is our preferred name in the sector – it is less exposed to
regulatory risks, has better exposure to the data opportunity in the next 2-3
years, and an improvement in the African business is expected. We raise our
FY12/FY13 ARPM estimates by 0.7/2.1 paisa, and our EPS moves up by
2.7%/4.3% to Rs20.1/31.7. Our price target is now Rs485, up from Rs444.
We turned positive on Bharti at the end of March and highlighted tariff
increases as a further potential positive catalyst.

Infosys Technologies - Five current concerns that are biting the Infosys shareholder- how well justified are they? ::JPMorgan

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Infosys Technologies Neutral
INFY.BO, INFO IN
Five current concerns that are biting the Infosys
shareholder- how well justified are they?


 Concern 1: Does Infosys still boast the same caliber of management as before?
Investors wonder whether the current Infosys management is of the same
pedigree as that led by industry icons such as Messrs. NRN Murthy and Nandan
Nilekani. We think this view is somewhat unfair noting that the Infosys of today
faces far stiffer competition than the Infosys of 2000-08 with the resurgence of
TCS, growing to scale of Cognizant and offshore aggression of Accenture.
 Concern 2: Is the Infosys business model “stuck in the middle”? What is its
primary articulation? TCS has supreme positioning in total (end-to-end)
outsourcing. Accenture has the pole position in consulting and sole-sourced
business, Cognizant has a ‘growth’ positioning. HCLT, coming from nowhere,
has shown the needed flexibility/adaptability to be relevant in the growth stakes.
What is the Infosys model premised on that stands out? Also, with TCS
overtaking Infosys on EBIT margins and given Infosys’ none-too-impressive
recent track record on margins, what does Infosys 3.0 (its latest avatar) mean
for Infosys’ margins going ahead? We debate this concern at length.
 Concern 3: Is Infosys losing ambition? Infosys’ own pronouncements seem to
suggest that their performance should be satisfactorily viewed versus the
guidance issued – a far cry from the practices of the old which accustomed
(indeed, almost spoiled) investors to significant guidance beat.
 Concern 4: Not flexible enough on pricing, engagement structures or, on
leveraging the mighty balance sheet. This might have been true of Infosys in the
past which held the company back but we believe that the four primary go-tomarket
verticals today have substantially more autonomy than before in
deciding on such matters. There are no sacred cows today including pricing.
 Concern 5: People or process? Is Infosys getting too fixated with
processes/systems rather than focusing on the profile/satisfaction of its people?
Infosys has boasted air-tight processes/systems through its evolution to where it
stands today. However, these do not always help as consequences of iRACE
reveal to us. However, in Infosys’ defense, we see some positive change here.
To conclude, some of the above concerns that investors have are legitimate
which we have identified in our prior research. Others may not be. We explain
where Infosys is changing and where we believe it might need to rethink. We
retain our Neutral rating on the stock continuing to prefer TCS (OW).


Colgate-Palmolive:: Healthy volume growth trends overshadowed by sharp margin compression::JPMorgan

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Colgate-Palmolive (India)
Limited Underweight
COLG.BO, CLGT IN
Healthy volume growth trends overshadowed by sharp
margin compression


Colgate-Palmolive (India) reported weak earnings for Q1FY12. While
sales growth of 15.6% y/y was healthy and inline with our expectations,
earnings declined 18% y/y impacted by weak gross margins, high brand
spends and increased tax rates.
 Healthy volume growth trends maintained… Colgate registered 12%
overall volume growth led by strong 14% volume growth for toothpaste.
These growth rates are encouraging, supported by faster growth for
premium products like Total, MaxFresh and Sensitive Pro-Relief
toothpaste. Management noted that rural growth rates have been 150-
200bps ahead of urban growth. Pricing growth during the qtr was 3.5%
on account of price hikes undertaken during May-June’11.
 …but EBITDA suffers from weak gross margins and higher ad
spends. High input costs (crude, essential oils, menthol and sorbitol in
particular) led to 320bp y/y compression in gross margins. Further A&P
spends rose 42% y/y led by investments behind new product launches.
Other expenses also witnessed higher than expected increase (+24% y/y)
on account of increased freight costs.
 Management discussion takeaways. 1) RM inflation is likely to abate
on a sequential basis on account of moderation in key RM prices, though
on y/y basis gross margin decline will continue over next 1-2 qtrs, 2)
A&P spends (though volatile on quarterly basis) likely to remain at
higher levels (~16-17% of sales) during FY12 as Colgate continues to
aggressively promote premium brands like Sensitive toothpastes, 3)
Market share trends for Colgate were stable for both toothpaste and
toothbrush segments, 4) Tax rate for FY12 to be ~24-25% with increase
of 200-300bp in FY13 as tax benefits for Baddi plant subside and
incremental production comes from non-tax benefit zones.
 Maintain UW. Current valuations at 29x FY12E and 25x FY13E are
expensive in our view.

NTPC - Jun-q results a tad below expectations ::JPMorgan

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NTPC Neutral
NTPC.BO, NTPC IN
Jun-q results a tad below expectations


 NTPC reported Jun-q standalone PAT of Rs20.8bn (up 13% YoY),
~4% below our and Street estimates. Other income of Rs10bn (including
other operating income) was up 70% YoY and includes a write-back of
Rs2.64bn provision toward tariff adjustment made in the previous year –
excluding this positive impact, bottom-line performance was even weaker.
 As usual, it was an accounting maze: Reported depreciation in 1Q was
down 6.1% YoY, a possible explanation lies in NTPC’s switch to lower
depreciation rates as notified by CERC vs. company’s act in Sep-q last year.
The company appears to have re-stated other operating income, other
expenditures and other income reported in 1QFY11. Tax was up 51% YoY,
despite a deferred tax credit in Jun-q, consol tax rate was up 300bps to
~27%.
 Focus on per unit realizations: NTPC has an assured regulated return
model and prima-facie realizations are simply indicative of tariff and cost
trends. In Jun-q, tariff increased ~12% to Rs2.6/unit, whereas O&M (29p,
up 26.5% YoY) and fuel cost (Rs1.8, up 14%) increase was sharper. Jun-q
EBITDA was down 4% YoY.
 Operating metrics weak. Based on monthly CEA data, we had estimated
PLF of 80% in 1QFY12 vs. 88% in Jun-q last year. Calculated PLF for coal
based capacity of 26.9GW was 83% (down 500bps) and sharply lower for
4GW gas based capacity at 62% (down from 79% in 1QFY11) [see July
edition of Know your Power]. Lower PLF could have impacted incentives
and contributed to the disappointment in operational performance, in our
view. At standalone level, operating capacity (~30.9GW) was 2GW higher
than Jun-q last year. In end-Jun NTPC commissioned its first supercritical
unit of 660MW at Sipat- taking total installed capacity (including JVs) to
34,854MW.
 NTPC is hosting an analyst meet on 1 Aug (Monday) at 4:00PM, where
we expect to get more details on: a) progress vs. MoU target of 4.32GW
capacity addition in FY12 (we factor in 3.3GW addition); b) extent of backdown
by SEBs in relation to their weak financial position; c) reasons for
weak operating level performance, extent of incentives and UI related
income booked during the quarter. Within the regulated utility space, NTPC
has underperformed PGCIL (PWGR IN, Rs108.50, rated OW) over the last
1-12 months time frame, we expect the trend to continue, given the latter’s
relatively superior execution track record and absence of fuel risk.

Tata Steel -Multiple Positive Drivers falling in place for H2FY12E; Re-iterate OW ::JPMorgan

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Tata Steel Ltd Overweight
TISC.BO, TATA IN
Multiple Positive Drivers falling in place for H2FY12E;
Re-iterate OW


High-margin India expansion by Dec-11, continued high elevated iron ore
prices (which aid India profitability), long product exposure in India, and
reduction in net debt post the recent asset sales (c.$1.7bn) positions TATA
attractively for a meaningful re-rating in H2FY12E, in our view. We view
current levels as a good entry point for an H2FY12E rebound as catalysts play
out.
 Global Steel- Stronger scrap and long product prices driven by China and
Japan: JPM European steel analyst Alessandro Abate (
highlights that reconstruction demand in Japan and social housing in China are
likely to lead to lower exports out of China and Japan in long steel, while scrap
imports by China would increase while scrap exports from Japan are likely to
decline. A pick up in RM costs, low inventory and IP rebound should drive a
steel price recovery by Q4 CY11. While Q2-Q3FY12E are likely to be weak
quarters as the ASP-RM mis-match is against Tata Steel Europe, given a) restructuring
in Europe and b) price recovery in Q4CY11E, we expect
$0.8/$1.05bn European EBITDA for FY12/13E.
 Stronger iron ore prices positive for TATA India: Domestic steel demand is
likely to remain depressed in the near term. However, continued high spot iron
ore prices (click here for report) is positive for TATA India’s profitability (we
increase India Steel EBITDA/MT to $376$/314/MT for FY12/13E). High spot
thermal coal, scrap and iron ore prices are likely to lead to continued elevated
DRI prices, which should in turn lead to continued higher long product prices
(~3MT TATA India sales).
 Leverage- Expect headline net debt to come off from $10.4bn of March-11.
The recent asset sales (Riversdale, Teeside), combined with working capital
pressures easing off, should result in net debt declining from March-11 levels
(we expect $9.7bn, March-12E). Orissa project capex is likely to pick up pace
once the Jamshedpur expansion spending declines, and thus a material pick up
in leverage would only be driven by any ‘corporate activity' .
 India expansion by Dec-11, another positive: The high-margin India capacity
commissioning by Dec-11E in our view would allow investors to start
discounting FY13E earnings (trades at 6.2x FY13E P/E). Key risks remain a
sharp decline in spot iron ore prices. We adjust our India multiple down by 4%
to adjust for the Mining bill overhang (worst case EPS impact 7%).

Reliance Industries - New report: back to refining:: Credit Suisse

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Reliance Industries ---------------------------------------------------------- Maintain OUTPERFORM
New report: back to refining


● RIL reported 1Q12 EPS of Rs17.3, in line with estimates and 5%
up QoQ. A GRM of US$10.3/bbl and throughput of 17 mtpa beat
estimates, but the petchem EBITDA was 15% below estimates.
KG gas output averaged 49 mmscmd (down 2.1 mmscmd QoQ).
● RIL has drilled another well at D1/D3, and plans to drill two more.
Yet RIL, at the analysts’ meeting, suggested it may not complete
and connect these wells for the next 2-3 years as it waits for:
1) drilling results from new wells; 2) government. approvals; and
3) has enough wells to economise the tendering of completion
equipment and services. This effectively means KG gas output will
continue to creep down over the next several quarters.
● We update our model to: 1) reflect the transaction with BP and
2) cut FY13/14 KG gas output from 70/85 to 43/40 mmscmd.
FY13E EPS falls marginally while FY14 EPS falls 5% to Rs93.
Our target price falls from Rs1,142 to Rs1,057/share.
● With a positive view on refining and undemanding valuations, we
retain our positive view on the stock. The seasonal, late year
strength in refining can help. We maintain our OUTPERFORM.
RIL reported 1QFY12 EPS of Rs17.3, in line with our estimates and
5% up QoQ (17% YoY). EBITDA grew only 1% QoQ and was behind
our estimates, but lower depreciation, higher other income and lower
interest costs meant PBT held up. RIL tax rates increased 260 bps
QoQ due to higher MAT incidence at the SEZ refinery.
Refining: The headline GRM of US$10.3/bbl was higher than our
estimates of US$10/bbl. Refining throughput of 17 mtpa also surprised
and contributed to refining EBITDA being 10% ahead of our estimates.
Despite this beat, RIL’s premium to Reuters Singapore Complex
margins has fallen QoQ, likely due to weaker naphtha margins and
flattish solids (pet-coke + sulphur) pricing. On a YoY basis, RIL’s
reported margins have also been hurt by the switch in natural gas input
to the refineries – from the inexpensive KG D6 gas to the much costlier
LNG.
Petchem: The petrochemicals business disappointed. EBITDA at
Rs26.8 bn was down 17% sequentially and 15% less than our
estimates. In its quarterly presentation, RIL pointed to a significant
slowdown in demand for both polymers and polyesters (on destocking
and a genuine slowdown in demand). Larger potential
discounting and a higher proportion of exports as a consequence
could have led to the petchem segment deviating from our tracker.
E&P: E&P EBITDA also fell 6% QoQ to Rs30.9 bn. KG D6 gas output
was at 48.6 mmscmd (down from 50.7 in 4Q11) and KG oil output fell
from 16.3k bopd to 15.5k bopd. The declines at PMT were sharper.
Oil output fell 12% QoQ, while gas output fell 4% QoQ.


At the analysts’ meeting, RIL suggested it has drilled another well at
the D1/D3 fields and will drill another two. RIL will, however, wait for:
1) results from these wells; 2) completion of all drilling; and
3) government approvals before tendering for well completion
equipment. RIL estimates that well completion, therefore, may not
occur for another 2-3 years. RIL believes KG gas output has stabilised
and declines henceforth will not be as sharp as witnessed over the
past few quarters. This is perhaps the first clear ‘guidance’ on KG gas
volume from RIL so we reduce our gas volume estimates through to
FY14. More importantly, this clarification also postpones the expected
near-term catalyst – clarity on (and actual increase of) gas volume
ramp-up at D6. With the petchem business also struggling near term,
RIL’s EPS prospects are now more reliant on refining margins.
We update our model: 1) for lower gas output, b) and update numbers
for the BP transaction (which for simplicity we account from FY13).
FY13E EPS falls marginally, FY14E EPS falls from Rs98 to Rs93. Our
target price falls from Rs1,142 to Rs1,057 (implying 20% upside).
Potential strength in refining and undemanding valuations are why we
maintain our positive bias on RIL. Maintain our OUTPERFORM.


Global Global Equity Strategy -- US debt scenarios::: Credit Suisse,

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● Our central scenario for the ongoing negotiations on the US debt
ceiling is that we will see a rise in the ceiling by August 2nd, with
the bulk of key decisions on fiscal tightening delayed until after the
2012 elections. We think there is a 50% chance of a ratings
downgrade on US sovereign debt.
● This could happen even if the debt ceiling is raised. We doubt it
will have much effect: Japan has a 1.1% yield and an AA- rating,
many US Treasury funds do not have credit-rating limitations and
national bank regulators would probably keep risk weightings for
US sovereign debt at zero.
● Alternative scenario 1 – an extended period of no rise in the debt
ceiling. As our economists point out, each month of no rise in the
ceiling could easily take 0.5%-1% off GDP. In this case, equity
markets would drop by 10%-15%, prompting Congress to find a
solution and bond yields would fall to 2.75% (according to Credit
Suisse fixed income team). Investors should focus on
defensiveness and quality growth. The dollar falls.
● Alternative scenario 2 – default. This is very unlikely, but if it
occurs, GDP could fall 5%+ and equities by 30%. Purely focus on
stocks with high FCF, low leverage.


US debt scenarios
We believe that there is a high probability that the debt ceiling is
raised, that there is a 50% probability of a credit downgrade, but only
a very tiny chance of a default. According to the US Treasury, the US
government will run out of money on August 3rd without a rise in the
debt ceiling. If the debt ceiling is not raised (from the current $14.3tn),
the government has the option of cutting government spending, selling
government assets or defaulting (missing coupon payments). We
believe that the most probable outcome is a rise in the debt ceiling.
Yet, we think little is being done to address the long term fiscal issues
until after November 2012 elections.
What if the debt ceiling is not raised within a few weeks of
the August 2nd deadline?
There would be huge fiscal tightening (11% of GDP on an annualized
basis, on our economists’ estimates, see their note Global Economy:
Monthly Review, July 22). With no agreement and with Social Security
due to be paid on August 3, our economists estimate that $134 bn of
government spending cuts will be required in August alone
The worst case: default
It is almost unthinkable to believe that the US would miss a coupon
payment ($29bn are due on August 15th). If the US does default,
there are massive ramifications. According to Credit Suisse chief
economist Neal Soss, the repo market would probably cease to work.
The inter-bank market would freeze up. The fallout would be far worse
than after the Lehman’s default.
50% probability of a US sovereign downgrade
We agree with our US rate team that the likelihood of a US sovereign
rating downgrade is around 50%. The lack of a long-term plan for
improving the public finances in combination with either no agreement
or a weak agreement on the debt ceiling clearly raises the probability
that rating agencies will downgrade the US credit rating.
Investment conclusions
No debt ceiling agreement: Equities markets down 15%. If there is
no increase in the debt ceiling for a prolonged period (say 3 months)
with no agreement in sight, we believe stock markets could easily fall
15%.
In case of default, just be overweight defensives. If there was a
default, we would simply focus on non-cyclical companies with high
FCF yield and low leverage (as we assume that funding markets
would dry up and the cost of debt would rise).
Focus on companies safer than governments. Regardless of the
outcome of the negotiations over the debt ceiling, we think investors
should focus on ultra-safe corporates (those that offer a CDS spread
below that of the average G7 sovereign in combination with a dividend
yield above the average G7 government bond yield). To the extent
that the debt ceiling negotiation in the US and the worries about
peripheral Europe drive home the uncertain outlook for government
finances, the strong financial position of these corporates will appear
increasingly attractive.
The risk/reward suggests we stay underweight of cyclicals,
especially in Europe. The price relative of cyclicals against defensive
is only 3% off its all-time high of July 2007, the P/B relative (against
defensives) is at the top end of its range, the implied CFROI on
HOLT® is above previous peaks (given our assumptions) and mutual
funds’ net long positions are close to all time highs. Furthermore, as
we have pointed out for a while, you can get defensive-led bull
markets. The areas of cyclicals we are most concerned about are
European capital goods and retailing.
Overall, however, we believe that within a week, politicians should see
sense and this would represent a buying opportunity for both markets
and for our favoured ‘beta’ sectors (infrastructure stocks and UK
REITs, luxury cars, luxury goods, software applications and
insurance).
Central scenario: equities are discounting a lot of risk. The equity risk
premium is 6.1% against our target of 4.5%. We believe that investors
tend to overdiscount the 'tail' risk. As some of these tail risks abate
(hard landing in China, default in US), markets should rally.
(This is an extract from Andrew Garthwaite’s Global Equity Strategy report,
US debt scenarios, published on 21 July. For details, please see the CS
Research and Analytics website.)


Bank of India- Weak 1Q12 results:: Credit Suisse,

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Bank of India-------------------------------------------------------------------------- Maintain NEUTRAL
Weak 1Q12 results


● BoI’s 1Q profits of Rs5.2 bn (-29% YoY; 0.6% RoAs) were well
below estimates driven by very weak operating perf. (weak NII,
fee, higher provisions). Operating profits were down 13% YoY.
● NIMs witnessed a steep 75 bp QoQ drop driven by a sharp rise in
funding costs (+77 bp QoQ) & interest reversal from NPLs (25 bp
NIM impact). Deposit franchise (30% CASA), fee growth (+6%
YoY) continued to be weak. Loan growth was in line with system.
● Asset quality had disappointed again with slippages picking up to
3.2% of loans (vs 2.1% in 4Q). About 50% slippages are due to
system based NPL recognition and mgmt expects slippages to be
high even in 2Q. Our FY12-13 credit cost forecasts are at 0.7%-
0.85%. BoI’s asset quality volatility & quantum continues to be
high vs peers, making it tough to get clarity on the future outlook.
● Our FY12-13 estimates reduce by 16-5% on the back of lower
margins & higher provisions (target price reduces to Rs419 from
Rs433 earlier). At 1.1x FY13B/V (10-20% discount to peers) and
RoAs below peers (0.7-0.8% FY12-13 RoAs), retain NEUTRAL.
Weak operating performance
Loan book was flat sequentially (vs +3% system growth) and YoY loan
growth (22%) was in line with system growth. Corporate and agri were
key growth drivers. Management is targeting 20% growth in FY12.
Margins contracted a sharp 75 bp QoQ (vs our expectation of a 20 bp
drop) to 2.9% due to a 77 bp QoQ rise in the cost of funds (yield on
advances were up only 8 bp QoQ). 25 bp NIM impact was due to the
interest reversal from system generated NPLs. Domestic NIMs were
down 95 bp QoQ to 2.4%. Management expects NIMs to rebound to
2.5% levels in the next quarter. Fee income growth continued to be
weak (6% YoY) and the bank expects fee growth to lag asset growth
in FY12. Share of CASA continued to be low at 30% (down 234 bp
YoY). Cost-income during the quarter declined to 46% (vs 64% in
4Q11) with the absence of second pension provisions for retired
employees. Tier I is currently at 8.0% and might be looking to raise
capital in the near term.

Asset quality deteriorates
Gross slippages during the period were higher than expected at 3.2%
of loans (vs 2.1% in 4Q) leading to credit costs of 0.9% (vs 0.9% in
3Q). Half the slippages are due to the movement to system-based
NPLs. Despite the higher credit costs, gross NPLs were up a sharp
20% QoQ (to 2.7%) and the coverage dropped 542 bp QoQ to 67%
(from 72% incl. write-offs in 4Q). Management has indicated slippages
are likely to be high even in 2Q12 (loans below Rs0.5 mn are yet to be
shifted to system-based NPLs) and expects slippages of 1.5-1.7% in
FY12. The bank has further restructured Rs9.5 bn (0.45% of loans)
during the quarter and o/s restr’d loans are at 5.2% of the loans. Our
forecast FY12-13 credit costs are at 0.7-0.85%.

Indian Pharma:: Filing trends Recent US FDA’s quarterly data on filings ::CLSA

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Filing trends
Recent US FDA’s quarterly data on filings (DMFs) shows strong momentum in
number of filings by Indian pharmaceutical companies with noticeable exception
being Lupin. Dr Reddy’s has filed a number of niche DMFs during late 1Q and
2QCY11 with likes of bendamustine and two others. Some other smaller Indian
companies have also filed for complex generics which we believe will be the trend
in coming years as simple formulations will be mostly out of patent protection.
Such filings provide long term visibility to their earnings. Based on the pipeline of
near term launches, we prefer Dr Reddy’s as play on the US generics opportunity.
We see Sun Pharma, Lupin and Cadila as companies that can sustain growth over
medium to long term.
India maintains strong filing trend
q We have analysed recent quarterly data on DMF filings released by the US FDA. The
date shows a continued momentum in DMF filings by Indian pharmaceutical
companies that comprised more than 50% of total DMFs filed with the US FDA.
q During the quarter (2QCY11), IPCA, Dr Reddy’s and Ranbaxy have filed for a couple
of products though Lupin did not file any this quarter. Some of the filings done by
Dr Reddy’s in previous quarter were fairly interesting.
q Considering that the US market comprises a big proportion (20-40%) of total
revenues for most of the Indian pharmaceutical companies, we expect the pace of
filings to be maintained going forward as well.
Niche filings – long term earnings visibility
q We see a number of niche filings by Dr Reddy’s and expect that it could be one of
the early generic entrants in those products.
q Dr Reddy’s filing in bendamustine could be fairly lucrative as it is a US$1bn+
product in the US market. Other filings like lubiprostone, febuxostat could also be
potential early entries.
Strong upcoming quarters Dr. Reddy’s
q We see strong earnings growth in Dr Reddy’s over the near term led by
opportunities in the US generics space.
q Over the longer term, we expect strong prospects for Sun Pharma, Lupin, and
Cadila based on their filings in complex generics segment.
q Sun Pharma and Lupin have the highest pending ANDA pipeline among the Indian
pharma companies.

Godrej Consumer:: Conference call update --, CLSA,

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Conference call update
Godrej Consumer’s 1Q pre-ex earnings grew by a moderate 8% YoY to
Rs992m, lower than our estimates due to higher costs (input, A&P). A
strong topline growth, particularly strong volumes in domestic business
was key positive. The management indicated that GCPL would focus on
topline and may sacrifice margins in coming quarters which could keep
A&P at high levels. We maintain our earnings estimates as well as Opf
rating; raising target price to Rs475/sh as we roll-over target to Mar-13.
1QFY12 consol. results below our and street estimates
GCPL’s 1Q pre-ex earnings grew ~8% YoY to Rs992m which was much below
our and street estimates. This is despite a 40% rise in net revenues, though
we note that YoY numbers are not comparable due to series of acquisitions.
While other income more than doubled, depreciation and interest rose 60-
80%. Tax rate too rose 190bps YoY to 24.6%. Net earnings benefitted from
compensation for sale of ‘Kiwi’ manufacturing/distribution rights and came in
at Rs2.4bn (+94% YoY).
Strong revenue growth in most segments had been a positive…
Domestic revenue growth had been strong during 1Q driven by high focus on
innovations and A&P as evident from – a) soaps: 17% revenue growth (9%
volume); b) hair colour: 19% (10%); c) home care: 40%. Like-to-like growth
rates in international businesses too had been strong in most cases: a)
Indonesia (54% of international revenues): 19% YoY revenue growth; b)
Africa (12%): 30% YoY; c) LaAm (16%): 22% YoY; UK (17%): 16% YoY.
… while costs in general had been higher impacting margins
Domestic business Ebitda margins at 14.9% were lower than our estimates
due to higher input costs (+150bps YoY; mix impact) as well as higher A&P
(120bps). The management indicated that the step up in A&P was not due to
competitive pressures but to support innovation pipeline and the company
expects to continue the trend even in the coming quarters. A&P spends at
consol. level were also high mainly to support new innovations in Indonesia.
Maintain earning estimates; raise target px to Rs475/sh
The management also indicated that the company would focus on topline
growth cf. margins and hence, A&P in general would stay high on a YoY basis.
Darling acquisition could add Rs200m as per management guidance to FY12
net profits (~3.5%), not built in our numbers as yet and we do not see risk to
our current estimates despite lower than 1Q. Maintain Opf, revise target price
to Rs475/sh (23x FY13CL earnings).

Sterlite Industries : Downgrade to Underperform ::CLSA

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Downgrade to Underperform
Sterlite’s 1Q results were inline with estimates but were accompanied by
many negatives. Sterlite Energy’s (SEL) costs in 1Q were much higher than
expected. Units 3 and 4 of SEL are delayed by another 3m and could be
delayed further if the coal situation does not improve. Vedanta Aluminium’s
(VAL) costs and losses widened and Sterlite’s loan to VAL has gone up by
Rs9bn. Hindustan Zinc’s costs increased sharply and Anglo Zinc’s profits, too,
were lower than expected. We cut FY12-13 consol EPS by 5-9% and
downgrade Sterlite to U-PF with a target price of Rs175.
Sterlite Energy under pressure
SEL’s cost of production was a high Rs2.86/unit as it received just 30% of coal
requirements from Coal India and had to depend on e-auction/imported coal for
the rest. With Coal India’s production and despatch issues continuing, we are not
hopeful of an early decline in costs. With realizations at Rs3.5/unit, SEL’s
profitability is much lower than we expected. Units 3 & 4 of SEL now stand
delayed by a further 3m and management is implicitly linking commissioning to an
improvement in the coal situation.
VAL losses set to widen; loan from Sterlite to VAL rises 11% QoQ
VAL’s cost of production has risen 12% QoQ to US$2,344/t due to higher coal and
imported alumina costs. VAL, too, is receiving insufficient coal from Coal India and
captive bauxite remains elusive. VAL’s losses have risen by 33% QoQ and given
the costs related to a power outage in 1Q, should rise further in balance FY12.
Sterlite’s loan to VAL has risen by Rs9bn QoQ and has replaced the Sesa Goa
loan, which was paid back by VAL during 1Q. We don’t treat loans to VAL as cash.
Zinc costs continue to move up; copper the sole positive in 1Q
HZL’s total costs (excl royalty) rose 17% QoQ to US$1,121/t and management’s
guidance of a US$100/t decline three quarters back has not materialized. Higher
production and other income, though, ensured an earnings beat by HZL in 1Q.
Anglo Zinc’s profits, too, missed our estimates due to higher depreciation. Copper
division was the only positive in 1Q results with higher by-product credits driving
a 34% EBITDA beat versus our estimates.
Cutting estimates by 5-9%; downgrade to U-PF
The 5-9% cut in FY12-13 EPS is mainly due to – 1) Further delays and higher coal
costs in SEL; 2) Higher losses in VAL; 3) Higher costs in zinc; with higher copper
margins not compensating for the same. We believe that operational improvement
in power and aluminium businesses is needed for stock performance to improve.
YoY earnings growth will be strong in 2Q and 3Q but will slide 4QFY12 onwards.
We downgrade Sterlite to U-PF from O-PF.

Banking monthly -July 2011: CLSA

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Banking monthly
What’s inside?
Key takeaways- management interaction and interviews
Round-up on news flows- regulatory and company-specific
Banking sector round-up- Credit growth, interest rates and liquidity
Update on insurance and mutual funds– Flow and market-share
Valuation– Price performance, comparative matrix, P/B band charts
Take a look!, ‘Banking Calendar’, links to our recent reports
Takeaways-management meeting and interviews
Our recent interactions with banks indicate that loan growth has moderated due
to (1) fall in credit demand, (2) some risk-averseness among banks and (3) focus
on margins that is forcing banks to distance from low-yielding loans. However,
there is an interesting disconnect in the loan growth trend of the sector and banks
that have reported 1QFY12 results. While sector’s loan growth has moderated by
just 100bps between March-June, most banks that reported 1Q results so far have
shown much stronger moderation. This may indicate that some banks that are yet
to report 1Q result, may see uptick in growth. Banks’ intent to defend margins,
even at cost of moderation in loan growth, is evident from recent hikes in lending
rates, by ~25bps; deposit rates have been rather stable- inline with trends 3rd
phase of cycle highlighted in our recent note (click to download report).
Sector round-up– Bounce back
Over past month, banking stocks (up 4%) have marginally outperformed Sensex
(up 3%) and among banks SBI and PNB have significantly outperformed regaining
from the correction in the past few months. Valuations of most banks are close to
average for the past five years and this should provide support to stock prices.
During 1QFY12, we expect Indian banks to report just 6% YoY growth in profit,
but ex-SBI profit growth would be higher at 17%. While the core profit (PPP ex
treasury) should see a healthy 20% growth, lower treasury gains and rise in NPL
provisions will suppress profit growth.
Update on insurance and mutual funds- May-11/ Jun-11
During May-11, annualised NBP of sector fell by 16% YoY (compared to 3%
decline in Apr-11), primarily due to 47% YoY fall in NBP of private sector whereas
LIC reported growth by 7% YoY. In Jun-11, AUMs of mutual funds fell by 8% MoM
to Rs6.7tn (up 7% YoY). Banks have nearly halved their investment in mutual
funds to Rs540bn (~8% of total AUM).

Bharti Airtel:: Hike amid market-share loss In a positive move ::CLSA

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Hike amid market-share loss
In a positive move Bharti Airtel has raised tariffs by 20% albeit only for
calls on the same network, for new subscribers and in six of 22 circles,
limiting the upside to 1% on consolidated earnings. While Bharti’s rate
hike is targeted at improving core mobile business, if this is not matched
by key competitors it could result in further market-share loss. In these
six circles, Bharti has seen a 460bps QoQ drop in revenue market share.
At 15x FY13CL earnings, we believe the stock is factoring in the turn in
earnings but does not recognise risks of US$5-6bn in regulatory
payments for spectrum. Maintain Underperform.
Selective rate hike limits financial upside.
In a positive move Bharti Airtel has raised mobile tariffs by 20% from Rs0.01/sec
to 0.012/second however this is only for calls on the same network, for “new”
subscribers and in six of 22 circles across India. Typically, existing Airtel
subscribers on per-second plans have a tariff validity of one year which changes
only at the end of the year, and/or if subscribers fail to recharge within six
months. Our analysis reveals that although a rate hike results in 4% increase in
revenue per minute (RPM) the earnings impact is limited to 1% with six circles,
even if 50% of subscribers face a hike and with no change on usage. Should
usage be just 5% lower, upside is negligible. Prepaid subscribers typically
recharge based on “spend” rather than “usage” therefore adverse impact on
minutes of usage is likely. We await the spill of these hikes in the balance 16
circles and counter offers by key competitors.
Hike amid market-share loss and awaited consolidation.
While Bharti’s rate hike is targeted at improving core mobile business, if this is not
matched by key competitors it could result in further market-share loss. In these
six circles, which account for 40% of mobile revenue, Bharti has seen a
460bps QoQ drop in revenue market share (110bps QoQ on all India basis to
30%). Also, while we eventually expect Bharti to gain from sector consolidation,
for now the M&A guidelines are still awaited and may keep Bharti away from being
an active participant. The key hurdles for Bharti will be proposals to further limit
the market share of a combined entity at 30% of subscribers as well as adjusted
gross revenue in the circles (from 40% now) and that post merger total spectrum
cannot exceed 14.4MHz (GSM).
Telecom minister ‘No operator paid for 2G spectrum since 2002’.
Even as the New Telecom Policy 2011 is expected only in October, the latest
statement by the telecom minster reiterates the high regulatory overhang also for
incumbents. Kapil Sibal has said: ‘Since 2002 none of the operators (incumbents
as well as new licensees of 2008) have paid for 2G spectrum other than the entry
fee and also that the upcoming policy will delink licence from spectrum.’ This
again brings alive the risk of US$5-6bn of regulatory payments on spectrum for
Bharti. These include US$800m for excess 2G spectrum >6.2MHz, US$2.7bn NPV
for 2G licence renewals, besides investments required to complete spectrum
footprint in 3G (nine circles) and 4G (18 circles). Further spectrum auctions will
likely be at end-FY12, after the New Telecom Policy 2011. Meanwhile, the stock’s
valuations at 15x FY13CL earnings leave no room for negative surprises. We
maintain our Underperform with Rs395 target price.

Reliance Industries: 1QFY12 results ::CLSA

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1QFY12 results
Reliance’s 1QFY12 net rose 5%QoQ to Rs56.5bn – inline with expectations but
boosted by below Ebitda items. Ebitda was flat QoQ; higher than expected refining
offset weaker petchem. The approval of the BP deal is a welcome step but a
rebound in output may take 2-3 years while output from other discoveries may
take even longer given the slowdown in government approvals. During this time
the overseas shale ventures should gain scale, though, and add 8-10% to Ebitda.
With valuations attractive at a 25% discount to Sensex, we maintain BUY.
1QFY12 net profits up 5% QoQ. Reliance’s 1QFY12 net profits rose 17%YoY/5%QoQ
to Rs56.6bn (Rs17.4/sh) – inline with estimates. Lower than expected depreciation
(petchem, E&P) and interest costs, higher other income (+Rs34bn QoQ cash balance)
and Rs1.37bn in forex gains boosted the bottom-line. Core Ebitda was flat QoQ at
Rs98bn (US$8.8bn annualised), though, as stronger refining offset weaker petchem.
With the SEZ refinery now liable for MAT, effective tax rates also rose 2.5ppt to 22%.
Refining boosted by higher throughput. Refining Ebit rose 28% QoQ – better than
expected led by marginally higher GRMs (US$10.3/bbl) and higher throughput (17mt,
+2%QoQ). While the trend up in GRMs was expected we have been disappointed in the
recent past by Reliance’s inability to capture the strength in benchmark spreads in
realised margins; management indicated soft light-heavy spreads, product mix, higher
solid spread losses, usage of higher cost LNG (after a government order) as reasons.
Weak petchem on higher exports. Petrochem Ebit fell 16%QoQ (much weaker than
expected) on lower polymer and polyester intermediate spreads as also from higher
proportion of lower margin export sales due to a 4-5%YoY fall in domestic demand.
Creditably, though, production volumes rose while inventories remained under control.
Domestic E&P a drag. E&P Ebit also fell 6% QoQ despite higher crude as lower gas
production at PMT, KG-D6 weighed. Declining KG-D6 gas volumes (now ~39mmscmd
in D1-D3) remains the key headwind for Reliance. While the approval of the BP deal
paves the way for greater cooperation in understanding the KG-D6 reservoir issues,
our interactions during the analyst meet indicates that drilling and completions of
additional wells may take 2-3 years implying that a rebound in output is unlikely soon.
Monetisation of other discoveries may take longer as government approvals drag on.
But expectations are low. This may be largely factored into consensus estimates,
though; further the sensitivity of EPS to ~10mmscmd lower volumes is also less salient
now at just ~4%. Pertinently, E&P valuation expectations are also near five year lows;
our own valuation of Rs223/sh, for example, is ~Rs60/sh lower than that implied by
the BP transaction. Meanwhile, we are encouraged by the progress in the shale-gas
ventures where net output is now at ~2-3mmscmd plus ~7-8kbpd of condensate.
BUY. After its 18% YTD correction, Reliance trades at a five year high discount of
~25% to the market Sensex and 8-20% lower than global peers on Mar12/13 PE. BUY.

11.9% Interest on India Infoline Investment Services NCD; opens Rs. 7.5bn NCD issue from Aug 4th

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The NCDs will be listed on National Stock Exchange and Bombay Stock Exchange and will have a tradable lot size of 1 NCD.

India Infoline Investment Services Limited (IIISL or “the Company”), an NBFC subsidiary of India Infoline Limited (IIFL) will open, its maiden public issue of Secured Redeemable NCDs of the face-value of Rs. 1,000 each aggregating to Rs. 375 crore, with an option to retain over-subscription up to Rs. 375 crore, aggregating up to a total of Rs. 750 crore (the “Issue”). The NCD Issue with 3 investment options and yield on redemption of up to 11.90% (per annum) opens on August 4, 2011 and closes on August 12, 2011.

The NCDs will be listed on National Stock Exchange and Bombay Stock Exchange and will have a tradable lot size of 1 NCD. The face value of NCD is Rs. 1,000 and minimum application is Rs. 5,000.

The proposed NCDs have been rated ‘[ICRA]AA- (stable)’ by ICRA, and 'CARE AA-' by CARE, indicating high degree of safety for timely servicing of financial obligations.
There are three investment options:

Option I (Annual interest payment): The redemption date or maturity period is 36 months from the deemed date of allotment and the coupon rate is 11.7% p.a. The interest payment is annual and the face value plus any interest that may have accrued is payable on redemption.

Option II:. NCDs will be redeemed at Rs. 1446.18 at the end of 40 months from the deemed date of allotment with an effective yield of 11.7% per annum.

Option III (Annual interest payment): The redemption date or maturity period is 60 months from the deemed date of allotment.  The coupon rate is 11.9% p.a. for Category III investors and 11.7% p.a. for others. The interest payment is annual and the face value plus any interest that may have accrued is payable on redemption.
The funds raised through this Issue will be used by the Company for various financing activities.

The Lead Managers to the Issue are Axis Bank Limited, JM Financial Consultants Private Limited and A.K. Capital Services Limited.  The Prospectus is available on the website of the Company at www.iiflinvestments.com; and Exchanges atwww.nseindia.com; www.bseindia.com and on the websites of Lead Managers atwww.axisbank.comwww.jmfinancial.in and www.akcapindia.com.

China nickel – higher supply and use:: Macquarie Research

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China nickel – higher supply and use
Feature article
 We review Chinese first-half nickel data, which shows a strong increase in
supply and demand. Higher nickel pig iron production also appears to be
stimulating greater production of 300-series stainless steel production.
Latest news
 Base metals edged lower on Monday as the market awaited a decision on the
US debt ceiling. Meanwhile, gold fixed at another new high of $1,614/oz.
Monday was the fourth day of a strike by around 2,375 workers at the world's
largest copper mine, Chile's Escondida, with no immediate solution apparent.
Talks are at an impasse over an $11,000 bonus demand. The potential for
the situation to escalate is increasing, with contract workers at the mine set to
join the strike on Tuesday and unions at state-owned miner Codelco also
offering their support to Escondida workers. We would note that, while a force
majeure declaration by Escondida would certainly support the copper price,
Chinese buyers remain uninterested at current price levels and only when
they are encouraged to increase their call on the international market (either
through low inventories or lower prices) will any disruptions be deeply felt.
 There remain little signs of life in the US construction sector, with the
American Institute of Architects Architecture Billings Index (ABI) falling for the
third consecutive month. At 46.2, the index suggests a contraction in activity
and has now hit the lowest point since June 2010. Historically, the ABI has
been a key leading indicator for the non-residential construction sector, and
the lack of design activity suggests little pickup in steel purchases in 2011.
 Emirates Aluminium (EMAL) has announced plans to boost its production
capacity by 570ktpa through introduction of a new potline. This will take the
company's total capacity to 1.3 mtpa, with scheduled completion by the end of
2012. Boosted by recent ramp-ups at EMAL, Dubal and Qatalum aluminium
production in the Gulf region has increased by ~600kt over the past year – all
of which has been absorbed by rising demand in the area. Meanwhile,
German aluminium industry association GDA noted that output in the country
rose 5.3% YoY to 428kt in the January-May period, while output of rolled
aluminium products rose 4.3% YoY to 814kt in the same period.
 Anglo American Platinum reported 1H11 production, with the results mixed.
Equivalent ounce production for platinum was poor, falling 28koz due to a
combination of safety-related issues and difficult mining/geological conditions.
Refined production, however, was up almost 100koz as platinum in the
pipeline was reduced. Meanwhile, cash operating costs rose 13% YoY to
R12,991 ($1,921/t) before by-product credits, yet another example of the cost
pressures afflicting the mining industry.
 South African coal miners who are members of the National Union of
Mineworkers and Solidarity have gone on strike over current pay negotiations.
It is believed that mines should have enough stocks to keep demand satisfied if
the strikes are short-lived. In addition the main user, Eskom, also holds
“adequate” stocks. Richards Bay port currently reportedly holds ~3mt of stock.

Tata Steel- Multiple Positive Drivers falling in place for H2FY12E; JPMorgan

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Tata Steel Ltd Overweight
TISC.BO, TATA IN
Multiple Positive Drivers falling in place for H2FY12E;
Re-iterate OW


High-margin India expansion by Dec-11, continued high elevated iron ore
prices (which aid India profitability), long product exposure in India, and
reduction in net debt post the recent asset sales (c.$1.7bn) positions TATA
attractively for a meaningful re-rating in H2FY12E, in our view. We view
current levels as a good entry point for an H2FY12E rebound as catalysts play
out.
 Global Steel- Stronger scrap and long product prices driven by China and
Japan: JPM European steel analyst Alessandro Abate (click here for report)
highlights that reconstruction demand in Japan and social housing in China are
likely to lead to lower exports out of China and Japan in long steel, while scrap
imports by China would increase while scrap exports from Japan are likely to
decline. A pick up in RM costs, low inventory and IP rebound should drive a
steel price recovery by Q4 CY11. While Q2-Q3FY12E are likely to be weak
quarters as the ASP-RM mis-match is against Tata Steel Europe, given a) restructuring
in Europe and b) price recovery in Q4CY11E, we expect
$0.8/$1.05bn European EBITDA for FY12/13E.
 Stronger iron ore prices positive for TATA India: Domestic steel demand is
likely to remain depressed in the near term. However, continued high spot iron
ore prices (click here for report) is positive for TATA India’s profitability (we
increase India Steel EBITDA/MT to $376$/314/MT for FY12/13E). High spot
thermal coal, scrap and iron ore prices are likely to lead to continued elevated
DRI prices, which should in turn lead to continued higher long product prices
(~3MT TATA India sales).
 Leverage- Expect headline net debt to come off from $10.4bn of March-11.
The recent asset sales (Riversdale, Teeside), combined with working capital
pressures easing off, should result in net debt declining from March-11 levels
(we expect $9.7bn, March-12E). Orissa project capex is likely to pick up pace
once the Jamshedpur expansion spending declines, and thus a material pick up
in leverage would only be driven by any ‘corporate activity' .
 India expansion by Dec-11, another positive: The high-margin India capacity
commissioning by Dec-11E in our view would allow investors to start
discounting FY13E earnings (trades at 6.2x FY13E P/E). Key risks remain a
sharp decline in spot iron ore prices. We adjust our India multiple down by 4%
to adjust for the Mining bill overhang (worst case EPS impact 7%).


Price target and valuation analysis
Our Jun-12 PT of Rs785 is based on sum of the parts based on FY13E
estimates. We lower our valuation multiple for the India operations to
6.3x, but maintain Asia at 5x and European operations at 5x FY13E
EBITDA.
Aside from generic risks of steel prices, steel demand and the proposed
Indian mining bill, the company specific risks for TATA are as follows:
a) Large deficit in pensions in Europe
b) Sharp decline in spot iron ore prices as it could erode India
profitability
c) Delay in India capacity commissioning