Goldman Sachs:: Analyzing risk/reward for large-cap IT in a hard landing scenario

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India: Technology: IT Services
Equity Research
Analyzing risk/reward for large-cap IT in a hard landing scenario
Analyzing risk/reward for large-cap IT – Infosys, TCS, HCLT, Wipro
Despite recent quarterly results and stable outlook comments from most
managements, at least for the near term, IT service stocks have corrected
sharply owing to negative macro headlines from the US and EU. While the
medium- to long-term impact of these events on corporate IT spending is
not clear, we analyze a hard landing scenario for FY2013E and the
risk/reward for the large-cap IT stocks in our coverage.
HL FY2013E: Revenue/EPS growth of 13%/2%(vs current 22%/23%)
Under our hard landing scenario, we calculate revenue growth declining
from 22% to 13% for the large caps. For OPM, we note that EBIT margins
peaked in 2009, expanding by 130 bps despite single digit revenue growth.
However, in a hard landing situation now, we expect companies to
continue investing for future growth and expect margins to compress by
170 bps from our current assumptions. This translates to EBIT growth of
just 3% and EPS growth of 2% for the four companies.
Risk/reward: Further downside of 11%-20%; upside of 24%-39%
In the event of our hard landing materializing, we expect the stocks to trade
lower and use the lower range of their historical trough multiples to set our
valuation range (Infosys 14X; TCS 14X; Wipro 12X; HCLT 10X). In this
scenario, we calculate further downside of 11%-20% for these companies,
vs our current upside potential of 24%-39%. We view HCL Technology and
Infosys as having a favorable risk/reward profile at current levels, offering
35%+ upside to our target prices relative to 21% and 11% downside,
respectively, under our hard landing scenario. TCS, on which we are
Neutral-rated, also has upside of 28% to our target price vs. 15% downside
under our hard landing scenario.
Management comments indicate reasonably positive stance
Recent statements by the management of these companies indicate a
reasonably positive stance toward being able to face current uncertainties.
Most managements also pointed to the experience of tiding over 2008/09
as being useful in facing the current situation. Finally, comments also
indicate a steady demand environment from clients currently, with none of
the companies experiencing any delays in project discussions or contract
awards

GMR Infrastructure:: In-line quarter § BNP Paribas,

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In-line quarter
§ Airports and roads results in line, positive surprise in power
§ Regulatory risk at DIAL remains an overhang
§ Stabilisation of operational assets key to re-rating
§ TP INR47: Airports INR22, Power INR22, Highways INR22
1QFY12 results
GMR reported in-line results in 1QFY12.
Revenue of INR20.8b (56% y-y increase)
was essentially in line with our estimate.
The increase was primarily due to higher
revenue at the four operational airports.
EBITDA of INR4.5b increased 32% y-y;
excluding contribution from various airport
JVs, EBITDA was 8% higher than our
estimate. Net loss of INR667m was higher
than our estimate of a loss of INR414m.
The net loss includes expenses of
INR240m associated with the closure of
the Intergen deal (closing down office
premises and currency losses). Excluding
these one-time expenses, net profit would have been essentially in line
with our estimate.
Key takeaways
We believe that the focus of the management on stabilising the
operational assets is a positive. The regulatory risk associated with the
Delhi Airport for tariff regulation remains a key overhang; management
indicated that the matter is pending with the regulator and should be
finalised by the end of the year. On the power front, PLF was higher than
the supply of gas primarily due to plant efficiency; the actual heat rate
was 8-9% lower than the normative. Fuel supply tie-up and a final power
purchase agreement for the Vemagiri expansion (768MW) should be a
positive catalyst. Management expects traffic at the operational roads to
stabilise and contribute to profits over the next 2-3 quarters.  
Valuation
We arrive at our TP of INR47 based on a SOTP valuation of GMR’s
assets. Airport assets contribute INR22, energy assets contribute INR22
and highway assets contribute INR3. All assets are valued using DCF
with a 13.5% cost of equity. Risks to our TP include: 1) regulatory risk at
DIAL and the corresponding real-estate assets, 2) fuel supply risks at
various energy assets, 3) traffic risk at highway assets, and 4) higher
interest costs.  

Goldman Sachs:: MRF Tyres : Market leader trading at normalized multiples

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MRF Tyres (MRF.BO): Market leader trading at normalized
multiples; initiate with Neutral
Investment view
We initiate coverage on MRF Tyres with a Neutral rating and a 12-month
1.2X FY12E (year-end September) P/B-based TP of Rs7029, implying 2%
downside potential.
(1) Largest operator with a diverse product mix: MRF Tyres is the
largest tyre manufacturer in the country with a diverse product mix that
includes heavy trucks and buses (about 51% of revenue), light
commercial vehicles (LCVs), passenger cars, tractors, and 2/3 wheelers.
The company is also a market leader in segments that include cars and
utility vehicles (UVs), LCV’s, and 2/3 wheelers.
(2) Raw material costs are likely to moderate: We expect 11% CAGR in
raw material costs per unit during FY10-FY13E vs. a historical average of
8% mainly driven by 15% CAGR in natural rubber costs (40% of revenue)
and 14% in nylon tyre chord fabric costs (NTC), which are driven by
rising crude prices (Exhibits 97-100).
(3) Revenue growth mainly driven by price increases: We expect prices
to increase by 7% CAGR during this period (historical average 4%) amid
a strong demand environment in the replacement market (Exhibits 101-
103).
(4) Impact of price increases on replacement demand is a key risk: We
believe the industry has been forced to undertake steep price increases
given abnormal increase in natural rubber prices over the past 2 years
and a weak balance sheet position. We believe this presents risks to
replacement demand cycle if customers choose to postpone purchases.
Valuation
Our target price is based on FY12E P/B, using the historical 5-year
average multiple of 1.2X. The stock is currently trading at mid-cycle on
P/E, P/B, and EV/EBITDA and our sensitivity analysis suggests that risks
are evenly balanced at current levels (Exhibits 89-95).
Key risks
Higher/lower-than-natural rubber prices, higher/lower-than-expected
crude oil prices through 2011E-2012E, higher/lower-than-expected tyre
pricing

Goldman Sachs:: Bharat Forge : Strong earnings growth but lower returns

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Bharat Forge (BFRG.BO): Strong earnings growth but lower returns
profile; initiate with Neutral
Investment view
We initiate coverage on Bharat Forge with a Neutral rating and a 12-m
2.3X FY13E P/B-based TP of Rs250 implying 10% downside potential.
(1) One of the strongest earnings growth profile in our coverage group:
Bloomberg consensus currently expects the company to more than
double its EPS over FY11-FY13 (Rs12.15 in FY11A vs. Rs24.86 in FY13),
which implies one of the strongest earnings growth profiles in our
Indian auto and capital goods sector (Exhibits 59 and 60). Our estimates
for FY12-FY13 are 14%-18% below consensus, which still implies higher
earnings growth relative to our auto coverage group. (2) Aggressive
investment and financing profile: We believe Bharat Forge has
historically had an aggressive investment profile among similarly sized
peers in the auto and capital goods space, that has generally lead to
higher financing requirements, in our view (Exhibits 61-65). (3) Declining
cash returns performance: After the pick-up in earnings post the 2008
financial crisis, we believe that the improvement in cash returns has
been largely in line with the rest of our global auto & auto parts
coverage group (Exhibit 63). This leads us to believe that the turnaround
in earnings is so far cyclical in nature. Even on strong earnings growth,
cash returns remain in the 3rd quartile relative to global auto peers. (4)
Execution & returns hold the key to stock price performance: The
company’s valuation on P/B and EV/IC has steadily de-rated since 2003
due to the company’s aggressive investment profile and poor execution,
which lead to a structural decline in earnings, in our view. Stock price
performance over FY12-FY14 will depend on its ability to execute on
several growth drivers, and the trajectory of returns on capital.
Core growth drivers
(1) Continued turnaround at the European subsidiaries with break-even
at the PBT level in our estimate. (2) Execution and greater visibility on
projects in the NTPC/Alstom JV’s and the EPC division (Exhibit 77). (3)
Increasing share of revenue from domestic non-auto businesses from
37% in FY11E to about 50% by FY14E, in our view.
Valuation
(1) We find that the stock is trading at a premium to global auto and
capital goods peers on relative returns-based metrics. We believe this
implies that the market is factoring a turnaround in cash returns, driven
by earnings growth from the various businesses. (2) Our target price is
based on P/B vs. ROE regression, relative to the global auto and capital
goods peer group. We back our calculations with another relative
returns-based valuation methodology, namely Director’s Cut (EV/GCI vs.
CROCI/WACC) (Exhibits 68-75). (3) Given the higher volatility in earnings
relative to our coverage group, and the structural de-rating in balance
sheet multiples over the past few years, we do not rely on P/E and
EV/EBITDA for valuations.
Key risks
Higher/lower-than-expected auto demand, infrastructure investments
and performance of overseas subsidiaries

Goldman Sachs:: BUY Exide Industries -: Replacement demand poised to recover

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Exide Industries (EXID.BO): Replacement demand poised to recover,
initiate with Buy, CL
Investment view
We initiate coverage on Exide Industries with a Buy (on Conviction Buy List)
and a 12-month target price of Rs184 (17X FY13E P/E) implying 20% upside
potential.
Replacement demand, the largest swing factor for industry revenues
will begin a strong recovery over next two quarters, in our view.
(1) Trailing auto demand growth (over the previous 24-48 months) is a key
swing factor for battery industry revenues (correlation implies 57% rsquared), in our view (Exhibit 11). (2) Indian auto industry experienced its
strongest demand growth across segments during FY10-FY11. Thus, trailing
auto demand will approach its peak in FY13-FY14. (3) As a result, we believe
India’s battery industry could witness its strongest revenue growth during
FY13-FY14, as vehicles sold in FY10-FY11 require replacement batteries.
Industry leader with a strong operating and financial profile, and
relatively defensive exposure in the auto sector, in our view.
(1) Exide Industries has 64% share of the organized market, with the widest
manufacturing and distribution presence in the country. (2) Top quartile
cash returns for six consecutive years, with one of the strongest financial
profiles relative to Indian and global industry peers (Exhibits 17-22).
Exploring key themes
(1) Dynamics of lead-acid battery recycling and regulation. We believe
production processes in the small scale sector are unsustainable due to
environmental and qualitative risks (Exhibits 35-37). (2) Industry
consolidation is the result of scale benefits, and a threat to smaller
operators (Exhibits 38-44). (3) Lead-acid technology is likely to remain the
preferred technology particularly in emerging markets over the long term.
Catalysts
(1) We think the Indian battery replacement cycle will begin a strong
recovery after the December 2011 quarter. This conclusion is based on our
study of the historical relationship between trailing auto demand growth
and battery demand. (2) We also think that demand in the power back-ups
segment will grow at a steady rate of 12%-13% over FY11-FY14E, given
significant under-investment in power transmission and distribution, driving
persistent unreliability of power supply in the country (Exhibits 32-34).
Valuation
(1) The stock is trading at mid-cycle on P/E, EV/EBITDA and P/B, which we
think is an attractive entry level given the potential upswing in replacement
demand. (2) Our valuation is backed by Director’s Cut and P/B vs. ROE
regression – we find a strong correlation of the stock’s valuation to changes
in returns, which are set to improve over FY11-FY14E.
Key risks
(1) Short-term volatility in lead prices, (2) weaker-than-expected demand in
the power back-ups and OEM segments, (3) higher-than-expected success
of Amara Raja Batteries, in gaining incremental market share, and (4)
further diversification or capital allocation to non-core business such as
insurance, which we would view as incrementally negative for investors.

Goldman Sachs, Initiate on Indian auto parts leaders: Exide Ind. (Buy, CL), Bharat Forge, MRF

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India: Automobiles: Parts
Equity Research
Initiate on Indian auto parts leaders: Exide Ind. (Buy, CL), Bharat Forge, MRF
Initiate on auto parts market leaders in India; Exide is our top pick
We initiate coverage on Exide Industries, India’s largest battery manufacturer,
with a Buy rating (on Conviction Buy List) and a 12-m FY13E P/E-based TP of
Rs184. We believe: (1) Trailing auto demand growth (over the previous 24-48
months) is a key swing factor for Indian battery industry revenues (57% rsquared). (2) Indian auto industry experienced its strongest demand growth over
10 years across segments during FY10-FY11. Thus, we expect trailing auto
demand to approach peak in FY13-FY14. (3) As a result of (1) and (2), India’s
battery industry could witness its strongest revenue growth during FY13-FY14,
as vehicles sold in FY10-FY11 require replacement batteries. We believe the
replacement market is likely to witness a strong recovery over the next 2
quarters. (4) Exide Industries represents ideal exposure to this investment
theme, given its strong operating and financial profile. We also initiate coverage
on Bharat Forge, India’s largest forging company, with a Neutral rating and a 12-
m FY13E P/E-based TP of Rs250 and MRF Tyres, India’s largest tyre maker, with a
Neutral rating and a 12-m FY12E (year-end Sept. 2012) P/E-based TP of Rs7,029.
Exide Ind. and Bosch India also attractive on quality, value, growth
We evaluate our Indian auto parts coverage group of 5 companies, which
includes Bosch India and Apollo Tyres, on 3 parameters: (1) Quality: Industry
position and company strategy, cash returns, and financial profile. (2) Value:
Valuation on relative returns (P/B vs. ROE, Director’s Cut), vs. peers and trading
history (earnings as well as balance sheet multiples). (3) Growth: Company’s
ability to grow faster than industry and sustainability of returns. Our evaluation
suggests that both our Buy-rated stocks, Exide Industries and Bosch India, look
attractive relative to our coverage on all three parameters. We believe Bharat
Forge is likely to achieve higher growth over the next 3 years, even though it
currently looks unattractive due to an aggressive historical investment strategy,
as well as from the perspective of a relative returns-based valuation.
Exploring key investment themes on Exide Ind. and Bharat Forge
We explore key themes in this report, which include: (1) Lead-acid battery
recycling – regulatory environment and its impact on industry structure. (2)
Battery industry consolidation – the result of scale benefits and a threat to
smaller operators. (3) The future of lead-acid battery technology. (4) Bharat
Forge – the turnaround in earnings appears to be driven by cyclical factors.
Key risks: Commodity costs and macroeconomic headwinds


Initiate coverage on segment leaders in Indian auto parts market
We initiate coverage on Exide Industries, India’s largest battery manufacturer, with a Buy
rating (on Conviction Buy List) and a 12-month FY13E P/E-based target price of Rs184. We
believe:
(1) Trailing auto demand growth (over the previous 24-48 months) is a key swing factor for
battery industry revenues (57% r-squared) (Exhibit 11).
(2) Indian auto industry experienced its strongest demand growth over 10 years across
segments during FY10-FY11. Thus, we believe trailing auto demand will approach its peak
in FY13-FY14.
(3) As a result the strong trailing autos demand, India’s battery industry could witness its
strongest revenue growth during FY13-FY14 as vehicles sold in FY10-FY11 require
replacement batteries. Our analysis shows that the replacement market could begin a
strong recovery over next 2 quarters.
(4) Market leader, Exide Industries, represents ideal exposure to this investment theme,
given its strong operating and financial profile (Exhibits 15-22).
We initiate coverage on Bharat Forge, India’s largest forging company, with a Neutral
rating and a 12-month FY13E P/E-based target price of Rs250. We believe that this company
has one of the strongest growth profiles vs. our Indian auto and capital goods coverage
universe (Exhibits 59 and 60). However, the company’s cash returns performance steadily
declined from the 1st quartile in 2004 to the 3rd quartile in 2009, and it now trades at a
premium to its peers on relative returns-based metrics (Exhibits 61-75).
We also initiate coverage on MRF Tyres, India’s largest tyre maker, with a Neutral rating
and a 12-month FY12E (year-end September 2012) P/E-based target price of Rs7,029. MRF
Tyres is the market leader in the Indian tyre market, and currently trades close to its
historical average in terms of earnings and balance sheet-based multiples


Evaluating Indian auto parts coverage on quality, value, growth
We evaluate our Indian auto parts coverage universe of 5 companies, which includes Bosch
India and Apollo Tyres, on 3 parameters:
(1) Quality: Industry position and company strategy, cash returns across the cycle and
financial profile.
(2) Value: Valuation on relative returns (P/B vs. ROE, Director’s cut) vs. peers and trading
history (earnings as well as balance sheet multiples).
(3) Growth: Company’s ability to grow faster than industry and sustainability of returns


Key conclusions: Our evaluation suggests that both our Buy-rated stocks, Exide Industries
(on Conviction Buy List) and Bosch India, look attractive relative to our coverage universe
on all three parameters (Exhibits 2-5). We believe Bharat Forge scores highly in terms of
growth relative to auto and capital goods peers, but does not compare favorably on quality
(particularly given the company’s aggressive investment strategy, and its historical impact
on cash returns) and value-based parameters (valuation relative to auto parts and capital
goods peers)


Valuation methodology: Director’s Cut to identify mispricing
The Director’s Cut framework aims to capture intra-sector value by identifying undervalued
and overvalued stocks on the basis of their sector relative EV/GCI (market value of gross
cash invested) to CROCI/WACC (excess returns) (please refer to our report titled “Asia:
Introducing Director’s Cut – Returns matter more than growth”, published on August 7,
2009 by our Asia Tactical Research team). We apply this framework, along with P/B vs. ROE
and previous valuation and returns history to identify mispriced opportunities in our Indian
auto parts coverage universe.
The basic Director’s Cut framework selects valuation outliers based on EV/GCI over
CROCI/WACC – the underlying assumption of the methodology is that a company’s EV/GCI
vs. CROCI/WACC ratio will converge with the sector average over time as
under/overvaluations are arbitraged away. Therefore:
(1) Stocks lying above the sector average line appear overvalued (i.e. the excess value
attributed by the market for a company’s excess returns are well above the sector average)
and therefore may represent good sell opportunities.
(2) Stocks lying below the sector average line appear undervalued (i.e. the excess value
attributed by the market for a company’s excess returns are well below the sector average)
and therefore may represent good buy opportunities.
(3) The basic Director’s Cut methodology ignores those companies that appear
appropriately valued at any point in time. These appropriately valued companies lie on the
sector average line, i.e. the multiple on which the market values the assets (EV/GCI) over
excess returns (CROCI/WACC) equates to the sector average multiple.


Indian auto parts coverage universe in the context of advanced
Director’s Cut
We find a strong relationship between sector-relative EV/GCI and sector relative
CROCI/WACC, with r-squared exceeding 50% as detailed later in this report. There are two
groups of companies with apparently anomalous valuations:
(1) Consistently high CROCI companies – There are companies with unusually high levels
of dispersion in the top end of the CROCI range, particularly those with returns in the top
quartile of their sector (e.g. Exide Industries and Bosch India). We found that companies in
this area of the chart can continually trade at a premium to the sector average line,
although they look overvalued. This dispersion is in effect due to differing expectations
about the sustainability of returns for these different companies.
To deal with this apparent anomaly in valuation, we refer to the company’s historical
trading pattern on earnings as well as balance sheet-based multiples, and also regress
changes in returns to arrive at our target price for the stock.
(2) Consistently low CROCI companies – Another smaller group, at the low end of the
CROCI range, also behaves differently from its peers in our analysis. These companies tend
to trade at a premium to their sector despite being among the worst performers and
destroy value when CROCI/WACC falls below 1X (e.g. Bharat Forge, and Indian tyre
companies).

Goldman Sachs, :: Tata Motors- Below Expectations: India operations remain weak

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EARNINGS REVIEW
Tata Motors (TAMO.BO)
Neutral  Equity Research
Below Expectations: India operations remain weak; retain Neutral
What surprised us
Tata Motors reported 1QFY2012 net income of Rs20bn, down 1% yoy, lower
than our estimates by 11% and Bloomberg consensus by 8%.  Margin
pressures including commodity price increases and overhead resulted in an
EBITDA decline by 164bps yoy. JLR accounted for 80% of net income which
was down 1% yoy despite an 8% yoy growth in volumes. India operations
continue to be weak with net income down 1% and 33% qoq. Key
takeaways: India operations - 1) Decline in market share in passenger car
segment amid rising competition, which management expects to reverse by
focused branding and strengthening the distribution network. 2) Freight rates
have been flat in domestic market on yoy and qoq basis, 3)
Manufacturing/other expenses increased by 4pp, adversely affecting EBITDA
margins. Management expects upward pressure on direct and indirect costs
resulting in subdued margins in the near term. JLR operations: 1) Results were
partially affected by an unfavorable exchange rate environment in 1Q, 2) UK
volumes declined 19% yoy whereas Europe (ex Russia) declined by 7%.
Impact of demand weakness in Europe was offset by yoy volume growth in
North America (up 10%) and China (up 48%).
What to do with the stock
We retain our Neutral rating on the stock and reduce our FY12E
EV/EBITDA-based 12m TP to Rs1,073 (from Rs1,186 earlier) mainly on
lower valuation multiple for the India business amid a worsening demand
and competitive environment. We lower FY12E-13E EPS by 2%-3% on
lower margin assumptions but raise 2014 assuming a cyclical
improvement in that year. Key risks: higher/lower than expected luxury
car demand, macro uncertainty affecting valuation multiples

Rural Electrification :: Concerns on asset quality overdone, Buy ::Deutsche bank,

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Rural Electrification Corp
Reuters: RURL.BO Bloomberg: RECL IN Exchange: BSE Ticker: RURL
Concerns on asset quality
overdone, maintaining Buy

Stable & profitable growth at attractive valuations; Buy - target price INR280
We believe that REC is on track to deliver a disbursement growth of ~22% over
FY11-13E on the back of healthy sanctions. A diversified funding mix – especially
access to low-cost overseas funds – should enable REC to maintain stable
spreads. SEBs are reforming themselves, which should enable them to bring
down their losses. The concerns over asset quality for REC are overdone, in our
view. The stock is down 21.5% over the past 6M (Sensex -5%) and is trading at an
attractive valuation of 1.2x FY12E P/B with FY12E RoE of 21%.


SEB reforms underway; asset quality unlikely to deteriorate much
1QFY12 NPL of INR2.5bn was on account of a single project which is delayed due
to a lack of equity funds and REC expects this to be resolved over the next 2-3
quarters. REC indicated that most of the State Electricity Boards (SEBs) are
implementing reforms to bring down their losses and are also contemplating
significant tariff increases. For incremental sanctions, REC is building in more
stringent pre-conditions like the signing of fuel supply agreements (FSA), power
purchase agreements (PPA), advance payments of cash for subsidies given by the
states, etc. Even in the case of private exposure, REC is pricing the risk by lending
at rates 75-100bps higher than for state projects.
Diversified funding mix; likely to make std. provisions
REC has a well diversified funding fix  – for FY12 they expect foreign currency
borrowings to contribute ~25% of incremental borrowings. Even on a fully-hedged
basis, foreign currency loans are ~200bps cheaper than domestic loans, which
lower the overall funding costs and hence should enable them to protect the NIM.
Management indicated that they are considering making standard asset provisions
at 2%-3% of PBT starting FY12. In our current estimates, we have factored in NPL
provisions of 15bps/20bps for FY12E/FY13E respectively.
P/BV-RoE valuation; sharp rise in wholesale funding cost is the key risk
We value RECL on a single stage GGM - P/BV = (RoE–g)/(CoE–g) - FY12E RoE
21.0%, schematic RoE 19.8%, COE 14.6%, TGR 5%. Key risks: a sharp rise in
funding costs could put pressure on spreads and the inability of SEBs to bring
down their losses could lead to higher-than-estimated NPLs.

Goldman Sachs, :: Apollo Tyres: In line with expectations: Operational challenges ahead

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EARNINGS REVIEW
Apollo Tyres (APLO.BO)
Neutral  Equity Research
In line with expectations: Operational challenges ahead; still Neutral
What surprised us
Apollo Tyres reported net income of Rs0.7bn, up 4% yoy, lower than our
estimates by 6% and Bloomberg consensus by 10%. EBITDA margin was
down 326bps qoq, and 239bps yoy. On the conference call, management
highlighted key concerns for the overall market, with an update on
company operations: 1) Materials costs as a percent of sales increased by
2pp qoq and 10pp yoy. 2) A price hike of 14pp was implemented in the
replacement market to partially offset rising costs. 3) International
operations: A) Higher cost of production coupled with the government’s
decision to remove anti-dumping duty was a  key headwind to the
performance of South African operations as imports from China increased.
B) Demand remained strong in European operations, also aided by
channel restocking in advance of the winter season. 4) Increasing
radialisation in the domestic market led to weak demand for and
production cuts in the cross-ply segment. 5) Interest cost was high on
increased expensing and capex for the Chennai plant and increase in
working capital.
What to do with the stock
We retain our Neutral rating and 12-month FY12E P/B-based TP of Rs69.
The stock is currently trading at a 7-year historical average of 1.3X FY12E
P/B vs. our global tire coverage group average of 1.4X. Key risks: 1)
Higher-/lower-than-expected material costs, particularly natural rubber; 2)
higher-/lower-than-expected replacement demand and pricing; and 3)
further weakening/strength in performance of European and South African
operations.

Goldman Sachs, ::India Cements:: Above expectations: strong pricing in weak market led the beat

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EARNINGS REVIEW
India Cements (ICMN.BO)
Neutral  Equity Research
Above expectations: strong pricing in weak market led the beat
What surprised us
India Cements reported 1QFY12 net income of Rs1.0bn (+308% yoy, +85%
qoq), 117% / 120% ahead of GS and Bloomberg consensus estimates
respectively. The significant beat was mainly on the back of stronger than
expected realisations (up 35% yoy, vs GSe of +18% yoy), which is all the
more surprising given that it is for a period when cement demand in South
India (key market for the company) saw a decline in growth of 7.7%. Sales
volume at 2.31mn ton was largely in line. At the operating level, 1QFY12
EBITDA came in at Rs2,461mn, (+141% yoy, +177% qoq) 45% ahead of our
and 43% ahead of consensus estimates. EBITDA/ton came in at Rs1,065 (vs
GSe Rs720). The company reported a deferred tax credit which led to
lower effective tax rate of 16.4% in 1Q, driving a better than expected
bottomline. The capex projects in India are on track – and the company
expects to commence mining operations at the Indonesian coal
concession by Jan 2012. The company’s subsidiary Trinetra Cement,
which houses the Rajasthan plant is ramping up and reported sales of
220kT, EBITDA/ton of Rs620 and loss of Rs20 mn.
What to do with the stock
We revise our FY12/13/14 EPS estimates by 26%/13%/7% as a result of
strong operating performance and better pricing performance in key
markets. However, we lower our 12-m EV/RC based TP to Rs95 (from
Rs103) on lower EV/RC of 65% (from 70% earlier) due to near-term
headwinds to demand, and retain our Neutral rating. Key risks: Upside:
Sustained strength in pricing; Downside: Higher coal costs and lower-thanexpected increase in volumes

BPCL - In the red in 1Q; outlook better from 2Q -::BofA Merrill Lynch,

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BPCL
   
In the red in 1Q; outlook
better from 2Q
„1Q in the red, as R&M had to bear 32% of subsidy; Neutral
Bharat Petroleum (BPCL) was in the red in 1Q FY12, with a loss of Rs25.6bn.
In 1Q, BPCL had to bear 32.6% of the subsidy with the upstream (33%) and
government (34.3%) contributing only 68%. In the last 3 years (FY09-FY11), R&M
companies like BPCL had borne 0-12% of the subsidy. We are assuming that
they will bear 8% of FY12 subsidy. R&M companies also had to bear the entire
subsidy on petrol in 1Q. We expect 2Q subsidy to be 45% lower than in 1Q, due
to the fuel price hike and tax cuts at the end of 1Q. There is also unlikely to be
any subsidy on petrol from 2Q. The earnings outlook is, thus, likely to be better
from 2Q. HPCL (XHTPF, Rs383.95, Buy), which is trading at just 1x FY12 NAV
vis-à-vis 1.5x for BPCL, is our top pick among R&M companies. We retain our
Neutral on BPCL.
Refining margin down 15% YoY, but inventory gain up 157%
BPCL’s 1Q loss rose 49% YoY, to Rs25.6bn, as its subsidy (including petrol) net
of compensation is up Rs9bn YoY. Also, BPCL’s 1Q FY12 GRM was 15% YoY
lower, at US$3.0/bbl, vis-à-vis US$3.6/bbl in 1Q FY11. Crude throughput, at
5.2mmt, was also 7% YoY lower. However, BPCL reported a 157% YoY higher
inventory gain, at Rs12.1bn in 1Q FY12 vis-à-vis Rs4.7bn in 1Q FY11.
Outlook much better from 2Q; FY12 EPS kept unchanged
We are assuming that BPCL will have to bear 8% of FY12 subsidy, whereas they
had to bear 32.6% of 1Q subsidy. BPCL’s 1Q FY12 loss would have been just
Rs0.4bn (98% lower) if they had to bear 8% of the 1Q subsidy. Subsidy will be
much lower in 2Q, due to gains from the cut in subsidy at the end of 1Q. The
earnings outlook from 2Q is, thus, likely to be much better. We have kept BPCL’s
FY12 EPS forecast unchanged at Rs54.4 (1% YoY decline).

Reliance Infrastructure - E&C surprise; Mumbai discom turn; Buy 0.5x P/BV ::BofA Merrill Lynch,

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Reliance Infrastructure
   
E&C surprise;  Mumbai discom
turn; Buy 0.5x P/BV
„1Q Rec PAT +24% on robust E&C; Buy value @ 0.54x Cons P/BV
RELI (Parent) 1QFY12 surprised Rec PAT +24%YoY (+9% BofAMLe) on 1)
robust E&C execution (sales +214%YoY) led by R. Power’s Samalkot project and
2) improved profitability of Mumbai discom (EBIT +54%). Quality of earnings was
better with a 39%YoY fall in treasury income and higher tax rate @ 38.8% (vs
24.7%). Buy RELI on: a) Bottoming of Mumbai license area (MLA) profit, b) pickup in execution – start of Delhi Metro, 4488 lane kms / 10 toll roads & 900MW
Rosa TPP in FY12, c) cash chest (Rs73bn) and d) Cons. P/BV of 0.54x 1QFY12.
Risk: delay in Rs160bn Krishnapatnam UMPP E&C order & execution at R. Power
(44% of SOTP) and group concerns, may limit the stock upside near term.
Backlog strong +51%YoY; Margin up 208bps led by E&C
RELI (Parent) 1Q backlog strong at Rs280bn +51%YoY led by orders from power
projects (9.9GW), Transmission (1500kms) and Road (570kms). E&C execution picks
up at R Power’s Samalkot and Sasan projects while EBIT +205%YoY (margin -40bps)
despite 788bps increase in material / direct expenses. Power did well with EBIT
+54%YoY on tariff hike (ASP +11%YoY @ Rs6.7/kWh) and end of regulatory assets.
Client migration led to volume -16%YoY. Rep PAT +75%YoY on Rs2.3bn
depreciation write-back for FY10-11. RELI completed buy-back of Rs1.4bn of Rs10bn.
Rs48bn equity put-in avg.RoE Infra asset, execution pick-up
1) Roads: Out of 11road project 4 toll roads projects are operational and 6 roads to
start in FY12E; likely delivery of Bandra-Worli sealink in 2HFY12. RELI has a well
diversified portfolio of 4772 lane kms of road and 92 lane kms of sea-link.
2) Metro: Delhi airport express started in 4Q11 and should cash BEP in 1QFY13
per co.; Mumbai metro line 1 should start in CY2012 and execution of Rs110bn
Mumbai metro line 2 with attached 1.2mn sq ft of realty is likely start 2HF12.
3) 5 Transco projects of Rs66bn: Commissioned line 1 & 2 of the 1500kms
WRSS project in 4Q11 & 1QFY12.


Price objective basis & risk
Reliance Infrastructure (RCTDF)
Our PO of Rs1081 is based on SOTP valuation. The parent business is valued at
Rs271/share based on DCF. We value the stake of 29-51pct in power projects of
Reliance Power at Rs475/share at 15% discount to DCF valuation, while we value the
stake of 49pct in Power distribution business at Rs72/share. Its 74-100pct stake in
Power Transmission business is valued at Rs22/share at 1.2x book value and stakes
of 69pct in the Mumbai Metro project, 95pct in Delhi Metro Airport Express line and
100pct in road projects are valued based on DCF at Rs145/share. A stake of 66pct in
real estate business is valued at Rs25/share on DCF basis. Other investments are
valued at Rs75/per share on book value. Based on this, we arrive at an SOTP value
of Rs1086/share. Our PO translates into 1.6x FY12E P/BV (Parent), which is below
the utility sector leaders such as NTPC 2x.
Risks to our PO are: ability to source quality power, viable gas supply,
discontinuity/delay of power  sector reforms, delay in project execution, nonavailability of fuel, currency and freight risks, potential  matching of demandsupply of power in India leading fall in power rates.

Goldman Sachs:: SELL Mahanagar Telephone Nigam (MTNL) Below expectations due to higher staff costs, interest expenses

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EARNINGS REVIEW
Mahanagar Telephone Nigam (MTNL.BO)
Sell  Equity Research
Below expectations due to higher staff costs, interest expenses; Sell
What surprised us
We maintain Sell on MTNL after the company reported in-line 1QFY12
revenues but higher than estimated EBITDA loss of Rs3.6 bn vs.
our/Bloomberg consensus estimate of Rs3 bn/Rs2.6bn. Even net loss of
Rs8.5 bn was higher than our/consensus estimates of Rs7.7 bn/Rs8.2 bn
mainly due to EBITDA miss and higher net interest expenses. Results
highlights: 1) Total revenues increased 0.7% qoq led by 1.6% increase in
revenues from basic services, partially offset by a 2.6% qoq decline in
cellular revenues (due to 3.5% qoq decline in implied ARPU). 2) Although
EBITDA loss decreased sequentially to Rs3.6 bn (from Rs5.3 bn in 4Q), it
was higher than our estimate of Rs3 bn mainly due to higher than
estimated staff costs at Rs8.5 bn vs. our estimate of Rs7.4 bn (and Rs9.3 bn
in 4Q). Admin expenses declined 30.6% qoq and were -14.1% vs. our
estimates while network charges and revenue share decreased 7.4% qoq
and were -8.2% vs. our estimates. 3)  Net interest expenses increased
28.9% qoq and were 43.2% higher than our estimates leading to a higher
than expected net loss.
What to do with the stock
Although we keep our revenue estimates largely unchanged after the
company reported in-line revenues, we increase our FY12E/FY13E/FY14E
loss per share estimates by 5.3%/7.8%/11.1% to Rs46.51/Rs44.17/Rs40.96
on the back of higher staff cost than our estimates. Accordingly, we lower
our 12-month SOTP-based target price by 1% to Rs38 (ADR: US$1.56) as
we also roll forward our valuation timeframe by one quarter. Risks: Lower
than expected staff costs.

Goldman Sachs, : Healthcare - Introducing our framework for regulatory action vs. valuations

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India: Healthcare
Equity Research
Introducing our framework for regulatory action vs. valuations
Regulatory compliance critical for US opportunity over 2011/12
In our report “Deep dive into US opportunity; $3 bn opportunity for Indian
cos,” dated Feb. 18, 2011, we highlighted about 80 product opportunities in
the US for top 6 firms under our coverage. In our view, these launches will
be key drivers of stock performance in 2011/12, and therefore it is critical
for companies to maintain a good regulatory compliance record to ensure
these limited-period opportunities are capitalized upon. We introduce our
Regulatory Matrix to map how our covered stocks stack up currently.
No news is good news on FDA; valuations recover after 18 months
Case studies point to a 3-stage impact on valuations following regulatory
action: Near-term: Multiples compress by 10%-25% in the first 6 months.
Medium-term: Valuations remain stagnant for 12-18 months before the
market starts looking beyond the FDA issues. Longer-term: If there is no
further bad news multiples recover to pre-event levels (e.g., RBX, SUN)
after 18-24 months, assuming there is sufficient basis in the fundamentals.
In light of this, we believe there is limited scope for valuations to expand
for firms affected recently — DRL, Cadila & Aurobindo (all Neutral) — and
expect any upward stock performance to be driven by earnings upgrades.
Introducing our Regulatory Matrix; best placed – LUPN,JUBL,GLEN
Our Regulatory Matrix maps pharma companies on their past and current
regulatory record (483s/WLs/IAs, resolution speed, number of approved
facilities) vs. exposure to FDA (% of US sales/no. of facilities selling to the
US). We are cognizant of factors like nature and quantum of sales from
affected plants, quality of FDA observations (hygiene factors/GMP
violations/credibility factors) and broader market conditions. Re-enforcing
our stock picks, Lupin (Buy), Jubilant (Buy), Glenmark (Neutral) that screen
better than Aurobindo (Neutral), Ranbaxy (Neutral), Sun (Sell).
Rolling valuation forward to  FY13; top picks – Lupin, Jubilant
We roll over valuations to FY13E from FY12E and raise our 12-m Director’s
Cut-based TPs by 11%-15% (except for Jubilant +34%, Aurobindo -10%, and
12-m SOTP-based TP for Piramal by -7%). We revise our  FY12E-FY14E EPS by
+1% to -22%, except Ranbaxy by -62% for CY11E as we factor in a potential
US$300 mn payment to resolve FDA issues. Sector risks: Delayed product
approvals from the FDA, regulatory actions, currency volatility.

Unitech -- Poor results - Cloudy skies :: Macquarie Research,

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Unitech
Poor results - Cloudy skies
Event
 Unitech’s 1QFY12 PAT was 29% below our forecast due to weaker sales and
EBITDA margins. We were 9% below street estimates. We cut our earnings
estimates and NAV. We maintain our Neutral rating with a revised target price
of Rs30 (Rs40 earlier). We prefer DLF, HDIL, Prestige and Sobha in the sector.
Impact
 Sales momentum intact but outlook worrisome: The operational update
provided by Unitech showed an encouraging performance of sales (1.9mn
sqf). However, we remain concerned about the sustainability of the residential
market sales run rate across the NCR (National Capital Region). The
overhang is caused by shadow inventory. Our channel checks suggest that
speculators contributed 35-70% of sales in the NCR in FY10 and FY11.
 Margins may bounce back but not to original levels: What worries us most
is the EBITDA margin which fell from 39% in 2QFY11 to around 20% now.
With cost inflation and product mix impacting margins, we expect a minor
rebound. It may however take at least 4 quarters for margins to go back to the
normalised level (mid-30s). This is because pricing power has been impacted
by competition from the secondary market as speculators exit completed and
half built inventory – which is more attractive than a newly launched project.
 Telecom still a strain: Our channel checks and calculations (we also cover the
telecom sector) suggest that the annual run rate of cash loss in Unitech’s
telecom associate (Uninor) is ~US$1bn. With bank funding likely to get tough,
we believe Unitech will be forced to consider contributing equity to maintain its
stake and fund roll out. We believe this is the core issue which has driven
Unitech and Telenor to arbitration. We also can’t rule out the possibility of fines
imposed by the government if telecom investigation goes against Unitech.
Earnings and target price revision
 Reduction in NAV estimate: Our NAV estimate has been reduced by Rs21
(to Rs59) to account for the factors discussed above. Our revised target price
now stands at Rs30 vs Rs40 previously.
 Cut in earnings estimates: Similarly, our FY12, FY13 and FY14 EPS
estimates have fallen by around 19%, 20% and 12%, respectively.
Price catalyst
 12-month price target: Rs30.00 based on a Sum of Parts methodology.
 Catalyst: Residential price/ volume trends, noise around 2G investigation
Action and recommendation
 Unitech is trading at a 51% discount to our revised NAV. This is (obviously)
due to noise related to the telecom investigation. Under a normalised
scenario, we would expect this stock to trade at a 20-30% NAV discount.
However in the prevailing scenario, we expect the stock to remain volatile and
a 50% discount seems more appropriate.

Goldman Sachs:India June industrial production: Upside surprise due to volatile capital goods

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The Industrial Production Index (IP) increased sharply by 8.7% yoy in June, much above the revised 5.9%
yoy (from 5.6% yoy) growth in May. The IP reading was significantly higher than the Bloomberg consensus
expectation of 5.5% yoy and our expectations of 5.9% yoy growth. Sequentially, IP rose by 1.8% mom, s.a. in
June, compared to the 1.2% mom decline in May. Despite the increase, IP witnessed a decline of 0.8% on a qoq
basis. For the first quarter of FY12, IP grew 6.8% yoy compared to 9.7% yoy growth in FY11.
Today’s upward surprise in the IP print was mainly from the usually volatile Capital Goods Index. The
Capital Goods Index rose significantly by 9.5% mom, s.a., after having negative growth for the last two months.
Sequentially, the Consumer Goods Index continued to have negative growth for the fourth consecutive month,
driven by both consumer durables and non-durables. Both consumer durables and non-durables remained anemic
and sequentially declined by 0.5% mom, s.a. and 0.8% mom, s.a. respectively.
Today’s increase in IP was unexpected after the general slow down of economic activity being seen in
India. The government recently revised its GDP growth numbers for 2011-2012 to 8.6% from 9.0%. The past hikes
of the Reserve Bank of India (RBI) have begun to and will increasingly show up in future data releases of the IP—
barring the surprise this time.
In this context, the economy has been experiencing a slowdown in interest-rate sensitive sectors, worsened by
rising input prices. The July manufacturing PMI fell to 53.6 from 55.3 in June and 57.5 in May. Out of the
components of the PMI, new export orders and quantity of purchases declined the most. Passenger car sales fell
by 16% yoy in July. Credit growth was at 19.2% yoy in June.


We have recently revised our FY12 GDP growth numbers to 7.3% from 7.5%. We continue to expect the RBI to
not raise rates in FY12 having surprised the market already with its anti-inflationary stance.  After the recent
move, which put the RBI ahead of the curve, we believe it is likely to cut rates next fiscal year by 100 bp. Also,
the recent volatility in global markets increases the probability that the RBI will not increase rates any further
(see The Reserve Bank of India—hikes done for now, Asia Policy Watch, July 26, 2011). The next important
data release is WPI inflation for July on August 16, where we expect the print to be 9.3% yoy.

Jaypee Infratech -- Wait for better timing :: Macquarie Research,

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Jaypee Infratech
Wait for better timing
Event
 Jaypee Infratech (JPIN) released 1Q FY12 results today. PAT was 6% below
our forecast due to weaker-than-expected sales. Our earnings estimates and
NAV are unchanged. However, we have increased our target discount to NAV
from 30% to 50%. This reflects increased uncertainty from the political
environment in the state of Uttar Pradesh, where JPIN holds all its land bank
and road assets. We maintain our Neutral rating and prefer Prestige Estates
(PEPL IN, Rs110.65, Outperform, TP: Rs210.00), Sobha Developers (SOBHA
IN, Rs233.60, Outperform, TP: Rs430.00), HDIL Housing Development and
Infrastructure (HDIL IN, Rs117.30, Outperform, TP: Rs230.00) and DLF
(DLFU IN, Rs200.90, Outperform, TP: Rs302.00) in the sector.
Impact
 Sales momentum likely to take a hit: Sales momentum had already started
to slow in the last 3 quarters. We remain concerned about the sustainability of
the residential market sales run-rate across the NCR (National Capital
Region). The overhang is caused by shadow inventory held by speculators
that contributed 35-70% of sales in individual projects in FY10 and FY11.
 We therefore continue to expect primary market run-rates to decline by at
least 20% in FY12/13. We think this is likely to be driven by satisfaction of
latent demand and rising borrowing costs. This is likely to be exacerbated by
competition from the secondary market as speculators look to exit property
bought in FY10 and FY11. In the near term, we also highlight the possibility of
delays in land acquisition, execution and the impact on buyer confidence
caused by news flow related to the political environment in the state.
 Margin pressure possible on built-up units: Cost inflation and product mix
are likely to affect margins. This is because pricing power has been affected
by competition from the secondary market as speculators have exited
completed and half-built inventory, which is more attractive than newly
launched projects.
Earnings and target price revision
 No change to our NAV and earnings estimates. We have increased our target
NAV discount from 30% to 50% and cut our target price to Rs43 from Rs63.
Price catalyst
 12-month price target: Rs43.00 based on a Sum of Parts methodology.
 Catalyst: Sales volume and price trend in the NCR over next 6-12 months.
Action and recommendation
 JPIN is trading at a 54% discount to our NAV estimate. This discount is
primarily due to noise related to farmer protests against land acquisition and
litigation related to land parcels near the Yamuna expressway project and
JPIN’s real estate land parcels. Under a normalised scenario, we would
expect this stock to trade at a 20-30% NAV discount. However, in the
prevailing scenario, we expect the stock to remain volatile. We think a 50%
discount seems more appropriate until the political noise dies down. This may
happen closer to the state elections in May 2012, in our view.

Jindal Saw Limited -- Order inflow disappoints:: Macquarie Research,

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Jindal Saw Limited
Order inflow disappoints
Event
 JSAW reported 1Q FY12 net sales and profit of Rs11.3bn and Rs828mn,
respectively. Results were in line with our expectation at EBITDA level,
however, 5% below our expectations on PAT due to higher tax rate. Blended
EBITDA margin was Rs9,500/t in 1Q. We believe the order inflow will be the
key driver for the stock in medium term. JSAW is trading at a modest 3x
FY12E EV/EBITDA. We re-iterate Outperform recommendation.
Impact
 Volumes came in at 184k tonnes, margin at US$215/t. During 1Q, SAW
pipes volume dropped by 23% to 92k tonnes (15k tonnes of HSAW and 78k
tonnes of LSAW) due to shipment delay in some of the orders. Ductile Iron
pipe volumes were lower than expected due to a shutdown in the plant.
Overall, JSAW sold 185k tonnes of pipes in 1Q FY12E. Blended EBITDA was
Rs9,577/tonne in 1Q, up from Rs8,212/t in 4Q.
 JSAW’s current order book is US$800mn. The company has an order book
of US$800mn, which it expects to execute by March 2012. The order book
includes SAW pipes (US$565mn), DI pipes (US$170mn) and seamless pipes
(US$65mn). 65% of the order book is from the export markets. We estimate
the average EBITDA on its current order book to be ~US$175/tonne.
 Expansion projects on track. The company’s current expansion plans for a
new DI pipe facility (US$75m, Sep’11), Mundra DI plant expansion (US$60m,
Sep’11) and a drill pipe facility in the US (trial has started) are on track. JSAW
has also entered into lease agreement with Sertubi SPA, Italy to operate their
DI manufacturing plant in Italy. The plant has a capacity to produce 0.1mn
tonne of ductile iron (DI) pipes and is currently operating at 35-40% capacity.
 Iron ore mines to start in 1Q CY12, provide 30% valuation upside. JSAW
has started the development of iron ore mine and has initiated necessary
steps such as civil work, finalization of engineering and installation of the plant
and machinery to implement projects. Based on our iron ore price forecast,
we believe these resources have a value of US$375m (using NPV
methodology). This translates to a value of US$2/t, which is significantly lower
than that of other listed iron ore mine companies.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs245.00 based on a Sum of Parts methodology.
 Catalyst: New order inflow and start of production at iron ore mines
Action and recommendation
 Outperform maintained. JSAW is our preferred pick in the pipe space, given
its healthy order book and multiple triggers. We believe the start of iron ore
mines in 1Q CY12 will provide a significant boost to its earnings.

Coal India - Certain in uncertain environment:: Macquarie Research,

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Coal India
Certain in uncertain environment
Event
 1QFY12 results in line: Coal India (CIL) reported earnings for 1Q FY12,
which were mostly in line with Street estimates. CIL remains a good
defensive play in the current environment. However, we believe valuations
remain rich and we maintain our Neutral recommendation and target price.
Impact
 Robust 1QFY12 results:  CIL reported net sales at Rs141bn with sales of
106mt of coal, up 5% YoY, and realisations up 12% YoY. EBITDA at
Rs48bn is up 59% YoY as costs remained flat. PAT reported at Rs41bn, up
64% helped by 32% increase in other income.
 Wage renegotiation – still to start: The NCWA renegotiation is yet to start,
and we continue to believe that this will take time, versus the Street’s
expectation of a quick resolution and price increase in September itself. The
company will start providing around 20% increase from current quarter and
has already taken a price increase in Feb this year as an offset.
 Tax on profit – remains a risk: The new draft of the mining bill talks about
levying a 26% tax on profits to share with traditional land owners. This would
directly affect CIL and could erase c.13% of its FY12E earnings; thus, it is a
key overhang on the stock.
 Inventory liquidation – but production lower: CIL has liquidated 10mnt of
inventory in this quarter but production is a lowly 96mnt. We are building in
456mnt for the full year. Q2 is normally a weak quarter due to the rainy
season; hence any visible increase is possible only in second half.
Earnings and target price revision
 We fine-tune 2012-13E EPS after the quarterly results.
Price catalyst
 12-month price target: Rs382.00 based on a DCF methodology.
 Catalyst: Increase in e auction prices
Action and recommendation
 Maintain Neutral: CIL looks fully valued at 17x PER on FY12E. We think that
a better entry will be available if proposed profit sharing clause is actually
implemented. Maintain Neutral.

Infosys Technologies -NDR takeaways- still enough headroom for growth :: Deutsche bank,

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Infosys Technologies 
Reuters: INFY.BO Bloomberg: INFO IN Exchange: BSE
Ticker: INFY
NDR takeaways- still enough 
headroom for growth

 
Improved business mix a key catalyst to medium-term business performance
We hosted Infosys' CFO, Mr. V Balakrishnan, for investor meetings in the US last
week. While it is too early to comment on the company's ability to beat and raise
earnings or FY12 revenue guidance in  the Sept-Q (which is a much-needed
catalyst for the stock price), we are convinced that the company has a solid longterm strategy to improve business fundamentals over the next 3-5 years. We also
believe that the improved service mix should reap benefits over the medium term,
making it a fairly defensive stock. Reiterating Buy with a target price of INR3,200.


Potential for long-term growth of 20-30% yoy under the new business model
Management believes that India’s share of the global IT services spend is still in
single digits and there is enough headroom for growth. Thus, concerns over the
company’s ability to maintain its historically high revenue growth rates are
unwarranted. Infosys is thus targeting growth in higher value-added services. Also,
as the lower-margin, people-intensive operations business drops from 65% to
33%, utilisation rates diminish in importance. Moreover, with business
transformation and innovation accounting for two-thirds of the revenues of the
company, the total contract value of deal wins will be the key profitability driver.
Demand resilient despite volatility in the macroeconomic environment
Demand in all verticals except telecom  continues to be strong. Moreover, unlike
the last downturn when growth in the flagship banking and financial services and
insurance vertical was dependant on discretionary spending, the majority of the
current spending is driven by compliance and regulatory changes. This leaves very
little scope for alterations in spending  due to changes in the macroeconomic
environment. We would thus see the recent correction as an opportunity to buy.
Maintaining Buy with a target price of INR3,200 (28% upside potential)
We value Infosys at 21x FY12E/06 and a  PEG of 1.1x. Key downside risks: (a)
global recession impacting IT services spending (b) greater-than-expected
appreciation of the rupee, (c) global vendor competition, and (d) stronger political
rhetoric against outsourcing affecting client spending


Valuation and risks
Valuation
We value Indian IT services firms on a PE basis relative to their historical trading range,
compared with both peers and growth rates. We value Infosys at 21x FY12E/06. While this
factors in the benefit from an uptick in spending across all key verticals and geographies and
a likely ramp-up in demand from potentially new avenues of growth like continental Europe,
cloud computing, etc, over the next three to five years, it also incorporates the risk to IT
services spending by clients on account of volatility in the macroeconomic environment. We
believe the multiple is justified since the company should report an earnings CAGR of 18.5%
over FY12-14E and is better positioned than it was in 2003 on such key factors as revenue
size, net worth, dependence on the US and client concentration. We intend to capture the
potential upside using the recent average PEG of 1.1x.
Risks
Key downside risks include a severe and protracted global recession, significant rupee
appreciation in the near term, global vendor competition, Infosys' execution on its consulting
agenda and its ability to maintain its premium position in terms of billing rates (and
consequently in margins) and managing rapid growth. We believe the rhetoric over
outsourcing will likely remain strong and may  even become a sector overhang as political
pressure on outsourcing increases.

State Bank of India F1Q12 Preview – What Are We Expecting :: Morgan Stanley Research,

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State Bank of India
F1Q12 Preview – What Are
We Expecting For Tomorrow
Quick Comment: State Bank of India is due to
announce its quarterly results on August 13, 2011
(Saturday). Reported earnings this quarter are likely to
be volatile. We expect profits of Rs. 27 bn at the parent
level (up from Rs. 0.2 bn in the previous quarter and
down 7% YoY). There are no IBES / Factset estimates
available for quarterly profits but Bloomberg consensus
profit estimate for SBI is much lower at Rs. 20 bn. In our
view, the difference could possibly be due to the
assumption on loan loss charges for the quarter.
Below, we highlight our expectations for the key
variables:
a) NII growth: We are building in headline NII growth of
9% QoQ and 23% YoY. In the previous quarter –
reported margins at 3.07% were suppressed on account
of multiple one-offs. Adjusted margins were closer to
3.25-3.3%. Given the aggressive lending rate increases
by SBI, we expect margins to be supported and remain
broadly stable QoQ – unlike other SOE banks where
NIM’s were down materially.
We highlight that the SBI Chairman in press reports in
mid-July had indicated that margins in the quarter had
improved to 3.6%
(http://articles.economictimes.indiatimes.com/2011-07-15/news/2
9778005_1_rights-issue-sbi-chairman-pratip-chaudhuri-state-ban
k). We find it tough to see how NIM would have
expanded 30 bps sequentially on an underlying basis in
1Q – especially given the sharp margin compression
seen at most SOE banks this quarter. But we will wait for
clarity in the earnings report tomorrow.
We maintain our view that full year NIM’s will likely be
pressured by continued increase in funding cost. At the
same time, all assets (bonds) will not reprice given
duration mis-match. If banks raise lending rates
aggressively, then NIM’s can be better than our
estimates but provisioning will then be higher than our
current muted forecasts.


Price Target Discussion
We arrive at our price target of Rs2,000 using a probability
weighted sum of the parts method.
The two components to SBI from a valuation perspective are
the banking and life insurance businesses. We value them on
the following basis:
Consolidated banking business: We value the banking
entities using a three-phase residual income model – a
five-year high growth period, a 10-year maturity period,
followed by a declining period.
Life insurance business: We use an appraised value method.
We add to the embedded value the value of new business to
get a base-case value for the life business of Rs140 per share.
Risks to Our Price Target
Key downside risks to our price target include slower-than-
expected loan growth, sharp compression in NIMs, and
significant deterioration in asset quality (restructured loans
slippage).
Upside risks include: stronger-than-expected fee income and
lower-than-expected credit costs.

Goldman Sachs:: Hindalco Industries - In line with expectations: Progress on growth projects is key

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EARNINGS REVIEW
Hindalco Industries (HALC.BO)
Neutral  Equity Research
In line with expectations: Progress on growth projects is key
What surprised us
Hindalco reported 1QFY12 stand-alone net income of Rs6.4 bn (+21% yoy and
-9% qoq), which was in line with our and consensus expectations. EBITDA
came in at Rs8.6 bn, which is 5% below our estimates – on lower sales volume
in both aluminium and copper and continued cost pressures. Key highlights:
Aluminium (35% of Sales, 75% of EBIT): Despite lower volumes in alumina
(constrained bauxite availability at Renukoot) and unfavourable product mix
(lower volumes in downstream aluminium due to sluggish demand and
continued lock-out at Alupuram extrusion plant), aluminium revenues grew
12% yoy due to higher realisations. EBIT margins were maintained qoq at 25%
(down 460bps yoy) despite higher energy costs. Copper: Copper volumes
were impacted by a bi-annual maintenance shutdown at one of the smelters,
and CCR volumes were down due to weak demand.  EBIT margins were
maintained (+30bps yoy) on the back of better by-product realizations and
higher Tc/Rc rates. The company reported higher-than-expected other income,
mainly due to dividend of Rs690mn from its Australian subsidiary,  Aditya
Birla Minerals. The Mahan smelter is expected to be commissioned by Dec
2011 and Utkal Alumina is now expected by 2HCY12. Mahan coal block is now
awaiting the decision of a GoM meeting for forest clearance.  
What to do with the stock
We fine-tune our FY12E-14E EPS estimates by 1%/-9%/1%: the cut in FY13E is
being driven by expected delays in commissioning of the Utkal project. We
maintain our Neutral rating and 12-m P/B based TP of Rs190. At current
valuations – FY12E P/B of 0.9X with 10.4% ROE – the risk/reward looks
balanced. Risks: higher LME prices, delayed project execution

Bajaj Hindustan F3Q11: Strong Distillery Volumes but High Interest :: Morgan Stanley Research,

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Bajaj Hindustan
F3Q11: Strong Distillery
Volumes but High Interest
Quick Comment – Strong profitability across
businesses: BJH reported F3Q11 results with revenue,
EBITDA, and PAT of Rs10.6bn, Rs2.2bn, and R11mn,
respectively.
Key highlights of the results: 1) Sugar sales were up
39% driven by volume growth (39%); 2) Free sugar
realizations improved by 3% YoY and EBIT margin
improved 950bp YoY; and 3) interest costs increased
9% QoQ and 101% YoY on higher working capital
requirements and higher borrowing costs; management
expects the interest cost to be lower in F4Q11.
Strong profitability in sugar division: Margins in the
sugar business increased 950bp YoY driven by a 3%
improvement in realizations, lower cane costs, and
better absorption of fixed costs. Sugar business
reported strong EBIT of Rs2,940/MT of sugar sold, up
2% qoq. BJH holds 0.49mn MT of sugar inventory with
free sugar inventory valued at Rs28,010/MT.
Strong performance in Distillery division: Distillery
revenue growth (+139%) was driven by volumes
(+125%). Profit/ltr was up 80% YoY driven by lower
bagasse costs and better absorption of fixed overheads.
Margins in the Distillery business were up 20% YoY
(47% in F3Q11). Interestingly, BJH distillery division’s
realization at Rs26.3/ltr (down 3% QoQ) was better than
Balrampur Chini’s Rs23.8/ltr (down 9% QoQ).
Retain EW on BJH: BJH has underperformed (Sensex)
by 33% YTD. In our view, BJH is most levered to sugar
prices, and hence it might reverse its recent
underperformance as markets discount tighter sugar
balance. Even so, we would not chase the stock. At this
stage of the cycle, we do not feel the need to build an
aggressive scenario to justify a more positive rating on
the stock despite our positive industry view.

SVOG (Maintain Buy) - 1QFY12 - Result Update (IFIN) -IFCI research,

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Play on valuation, Maintain BUY

Results above expectations: Shiv-Vani Oil & Gas’ (SVOG) 1QFY12 results were above our expectations, with revenue at Rs4,086mn (up 3% YoY), EBITDA margin at 46.2% (up 255bps YoY) and PAT at Rs683mn (up 10% YoY). Improvement in margins and a lower effective tax rate boosted the bottom line.     

Order book position at Rs27bn: SVOG’s order book stood at Rs27bn, almost flat sequentially. Its order book includes orders worth Rs17bn from drilling, Rs6bn from Oman, Rs4bn from CBM, and Rs1bn from seismic survey, providing revenue visibility over the next two years.

Small order wins in 1QFY12: SVOG expects total order inflow at Rs4-5bn in FY12; in 1QFY12, it secured small orders of Rs500mn from ONGC (for deployment of a 1,000HP rig) and Rs500mn from GAIL (for seismic survey).

Debt repayment to reduce D/E ratio to 1.4x in FY13: Given the limited capex requirement for execution of existing orders, we expect SVOG to generate aggregate free cash flow of Rs4,346mn in FY12-13. Hence, we expect it to repay Rs4,000mn of debt in the period. Consequently, its D/E ratio should improve to 1.4x in FY13 from 2x in FY11.

Valuations and Recommendation: We maintain our estimates and Buy recommendation with target price of Rs328 on the stock given its strong earnings visibility and compelling valuations. At CMP, SVOG trades at 2.9x FY13E EPS and 3.8x EV/EBITDA. A key potential trigger for the stock would be announcement of large orders and re-payment of non-FCCB debt. 

 

Cox & Kings - F1Q12: Operationally in Line:: Morgan Stanley Research,

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Cox & Kings Ltd
F1Q12: Operationally in Line
Quick Comment – Strong-than-expected revenue
and operating profit growth: Cox & Kings reported
revenue, operating profit, and PAT growth of 28%, 22%,
and 5% vs. our expectations of 20%, 17%, and 13%,
respectively. Key highlight of the results: 1) Strong
broad-based revenue growth in domestic and
international business. 2) Operating profit growth was
stronger than our expectations while margins came in
110bp lower than expectations largely on continuing
adverse impact of the earthquake in Japan, in our view.
3) Adjusted PAT growth came in 8% lower than our
expectations driven by lower other income (down 31%
YoY) and higher tax rate (up 500bp YoY).
Key Positives: 1) Domestic revenues grew 30% in
F1Q12, driven by strong growth in leisure travel
business. International business revenue growth was
also strong (23%). 2) Operating profit growth (28%) was
5% higher than our expectations, largely on 29% growth
in the domestic business. 3) C&K continues to invest for
future growth with consolidated ad spending up 31%
YoY in F1Q12, driven by higher ad spending in the
international business.
Key Negatives: 1) Consolidated margin was down
210bp, 110bp higher than our expectations, driven by
international margins (down 570bp YoY). Margin decline
in F1Q12 reflected the 130bp increase in employee cost.
2) Other income was lower than expected (down 31%
YoY vs. anticipated 34% growth). We await clarity from
management on the same. 3) The tax rate at 38% was
500bp YoY higher than our expectations.
What’s in the price: C&K is currently trading at 17x
F2012E earnings (of existing business). In our view, the
potential acquisition of Holidaybreak Plc (HBR) is likely
to be a game changer for C&K. We believe that the
potential to drive synergies in the international business
is large. If consummated, the acquisition will likely be
earnings accretive by ~40-45% for C&K for F2013
(based on our current valuations for C&K and
Bloomberg consensus estimates for HBR).


Long-term story intact; geared to disposable income
growth: Cox & Kings is well placed to capitalize on a potential
inflection in travel expenditure in India and increase value
through synergistic international acquisitions. Indian
operations account for ~50% of consolidated revenue, for
which we expect a 22% CAGR in the next five years. Rising
disposable income, favorable demographics, travel aspirations
of India’s large middle class, combined with food, language
and cultural barriers, are among the key structural drivers of
growth in outbound group tours from India. We reiterate our
OW rating.
Valuation and PT Methodology –We value C&K at Rs327.5
per share based on our base-case DCF model. We assume
NOPAT growth of 15% during F2016-26 and a terminal growth
rate of 5%. We assume that the company will earn a long-term
return on incremental capital employed (ROIC) of around 15%
versus its cost of capital of 11%.
Downside Risks to Our Price Target: 1) Promoter interest in
associate companies; 2) capital investments by C&K in
associate companies; 3) macroeconomic shock; 4) competitive
and fragmented industry; 5) integrating acquired companies.

Areva T&D : Turning cautious on margin recovery ::HSBC Research,

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Areva T&D (AREV BO)
OW: Turning cautious on margin recovery
 Areva reported weak Q2 earnings with muted outlook;
margin recovery remains subdued and seems distant
 We lower our margin estimates by c130-170bp, driving an
EPS cut of c20%/15% for CY11/12e
 We lower our TP to INR270 (before INR310) implying a
further de-rating of c15% over the next 12m; maintain OW


Areva T&D reported a weak set of Q2 CY11 earnings, missing consensus EPS estimate by
c16% in spite of in line performance on sales growth (c13%). EBITDA margins not only
declined y-o-y (c140bps) but also q-o-q (c60bp) to c7.8% in Q2. The order intake at INR9.6bn
remained weak and declined by c6% y-o-y, while order book of INR51.5bn largely remained
flat over the last quarter.
Margin recovery remains subdued: We view Areva T&D as a restructuring story, as in the
wake of abrupt margin erosion in CY09-10, the company has focused on several self-help
initiatives such as cost optimization, localization of design & production and exit from
underperforming distribution projects. We had expected margins to recover to c12-13% during
CY11-12e; however, such a recovery now seems difficult as the increasing downward
pressure on margins from the external factors (such as competition, pricing pressure, rising
input costs, interest rates etc) will most likely offset any benefit from cost optimization. In
fact, given weak performance in the first half this year, we believe EBITDA margin will most
likely fall another 50bps in CY11 compared to last year.
Outlook remains opaque, lower our CY11/12e EPS by c20%/15%: Mgmt maintained a
cautious tone on the business outlook and highlighted that order growth will at best be flat this
year, which is broadly in line with our expectations. However, commentary on pricing
remained significantly negative and it became apparent that margin recovery will not be as
swift as we had anticipated. Therefore at this stage, we keep our sales estimates unchanged but
we reduce our margin expectations for CY11e and CY12e by c170bps and c130bps thus
driving an EPS cut of c20% and c15%, respectively.
Lower our TP to INR270, maintain OW: Driven by our cautious view on margin recovery
and ‘sustainable’ margins, we have reduced our through cycle margin assumption in our EVA
valuation model to c10% from c11% earlier. This has driven a cut in our target price (TP) to
INR270 from INR310. On our new estimates, the stock is currently trading at c25.8x CY11e
PE and c20.8x CY12e PE compared to historical trading average of c35x (12m fwd PE for last
5 yrs). In our opinion, given the risks to margin recovery and a muted outlook in the near term,
the stock should de-rate further. Our TP implies that 12 months from now, the stock should
trade a 12m fwd PE of c21x on 24m fwd EPS of around INR13.0. Our TP implies a potential
return of 19.5%, hence we reiterate OW on the stock.


We lower our TP to INR270, maintain OW
We have taken a cautious view on margin recovery as the earnings are finding little support from
restructuring benefits and the competitive intensity will likely keep margins under pressure in the near
term for all the players in the sector, with Areva T&D being no exception. Hence we have reduced our
through cycle margin assumption in our preferred EVA valuation methodology to c10% from c11%
earlier, while we have kept our assumptions for target sales growth and WACC unchanged at c9.0% and
c12.1%, respectively. Consequently, we lower our target price to INR270 from INR310 earlier.
On our new estimates, the stock is currently trading at c25.8x CY11e PE and c20.8x CY12e PE compared
to historical trading average of c35x (12m fwd PE for last 5 yrs). In our opinion, given that the risks to
margin recovery have increased and the near term outlook for growth remains muted, the stock should derate further from the current levels. Our price target implies that 12 months from now, the stock should
trade a 12m fwd PE of c21x on 24m fwd EPS of around INR13.0.


Under HSBC’s research model, for stocks without a volatility indicator, the Neutral rating band is five
percentage points above and below the hurdle rate for India stocks of 11%. This translates into a Neutral
rating band of 6% to 16% above the current share price. Our 12-month target price of INR270 implies a
potential return of 19.5%, which is above the Neutral rating band; hence, we maintain our Overweight
rating on the stock.
Key investment risks
 Increasing competition in the domestic T&D space
 Adverse change in qualification requirements on future tenders
 Weaker than expected improvement in the profitability
 Poor valuation of the distribution business during de-merger

JPMorgan, :: Reliance Power- Strong operating performance, but stock remains expensive

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Reliance Power
Underweight
RPOL.BO, RPWR IN
Strong operating performance, but stock remains expensive


RPWR’s  Rosa  plant  (600MW)  based  in  UP  reported  a  strong  PLF  of  91%  and
PAF of 94% in the June quarter, in line with expectations. This was despite June
being a monsoon month and, of late, SEBs  reducing  power  from imported coalbased gencos like Adani and JSW. Jun-q EBITDA was 12% ahead of expectation
while  PAT  of  Rs1.96B  was  well  ahead  of  our  est.  of  Rs1.26B,  higher  other
income and lower tax rate contributing to the beat.
 Rosa  benefits  from  use  of  market-priced  coal. Rosa  reported  a  PAT  of
Rs1.1B  benefiting  from  a lower  station  heat  rate  on  using imported/e-auction
coal and PLF  based incentives. Management  guided to Rs2.75-3B  of PAT  for
the  year  (well above  our  estimate  of Rs1.4B with an  80% PLF) implying 30-
33% return on invested equity for this cost-plus project.
 Continued bullishness on project pipeline. At the analyst meet, management
was  once  again  positive  on  gas  availability for  its  Samalkot  plant to  meet
requirement for ~70% PLF. On the other hand, companies like GMR and GVK
have  cited difficulties in  gas availability. Since  tariffs  in South  India  are
relatively  higher,  top  ups  from  LNG  are  also  an  option.  Commissioning
schedules  for  under-construction  projects  (Butibori, Rosa  2,  Samalkot,  Sasan)
and pipeline projects (Tilaiya, Chitrangi) were maintained.
 Krishnapatnam  project  was  the  centre  of  discussion. Reliance  Power  has
been  lobbying  to  renegotiate  the  PPA,  given the  change  in  regulation  by  the
Indonesian  Govt  on  establishing  a  minimum  reference  price  for  coal  exports,
making the project unviable. The company has stalled all activity  on the project
and as per the PPA, ~Rs3B of penalties are applicable if the performance is not
as  per contract  - a small amount  for a Rs175B  project. However management
was  clear  that  the  Indonesian  Govt  was  not  interested  in  only  the  requisite
royalties and taxes (an opp stance taken by Adani) and the applicable reference
price AND consequent duties/taxes are to be levied (reiterated by TPWR in its
last con call).
 Maintain Mar-12  PT  of  Rs90  and  UW  rating. RPWR  trades  at  16x  FY13
P/E, well ahead of other IPPs. Given the company’s back ended pipeline, delays
in  project  execution,  questions  on  profitability  of  Krishnapatnam  UMPP
(increase  in  Indo  coal  prices)  and  uncertainty  of  gas  supply  for  the  upcoming
Samalkot project (2.4GW) we think the premium is not justified. Maintain UW
rating.