UBS:: Motherson Sumi Systems - Margins miss on new plant costs at SMR

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UBS Investment Research
Motherson Sumi Systems
M argins miss on new plant costs at SMR
􀂄 Event: Q1 FY12 revenue beat; margins miss on SMR plant start-up costs
Motherson Sumi Sytems (MSSL) reported robust consolidated revenue growth of
22.2% YoY to Rs22.7bn (India sales rose 33.6%, international sales rose 16.4%),
which was higher than our estimate. However, its EBITDA margin was lower at
7% due to new plant start-up costs such as high volume tests, trials and operating
expenses. Lower other income, higher interest costs (Rs14.3bn in debt in Q1 FY12,
from Rs12.5bn as at end FY11) and a 43% tax rate (at Samvardhana Motherson
Reflectec (SMR), as new plant costs cannot be offset in tax calculations) limited
PAT to Rs653m, up 9.6%YoY.
􀂄 Impact: margins to improve; SMR/Peguform to support future growth
MSSL has significant capex planned over the next couple of years and expects
margins to improve through H2 FY12. The SMR/Peguform business synergies
from complementary products, internal material sourcing, and a global presence
should support future growth. Management highlighted its target to improve return
on capital employed (ROCE) to 40% by FY14-15. We maintain our estimates.
􀂄 Action: retain positive outlook due to management and SMR turnaround
We like management’s execution ability in turning around its acquisitions, its
capital discipline, and high dividend payout. The recent Peguform acquisition,
SMR improvement, and new order book execution should support high revenue
growth.
􀂄 Valuation: maintain Buy rating with a price target of Rs280.00
We reiterate our Buy rating and Rs280.00 price target. We derive our price target
from a DCF-based methodology and explicitly forecast long-term valuation drivers
using UBS’s VCAM tool. We assume a WACC of 12.0%.

Unitech:: Fine print of FY11 annual report ::CLSA

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Fine print
Unitech’s FY11 annual report highlights improving cashflow profile driven
by c.50% reduction in the working capital which was the key positive.
Reclassifying a part of previous year’s (Mar’10) cash balance as an exotic
investment and writing off half of that during FY11 was a big negative.
Near 4x jump in public deposit base of Unitech during FY11 and some
good response to recent launches indicate that retail investor / buyer
faith in Unitech has not been shaken as much. We lower target price to
Rs35/share (50% discount to NAV) implying 11xMar’13CL earnings.
Cash write-off of Rs1.14bn; understated operating margins
Unitech reclassified Rs2.3bn of cash (current account with foreign banks) to
an investment (yield enhancement certificate) for its Mar10 accounts.
Rs1.14bn or half of this was written off in FY11 via P&L – 14% of its FY11
PBT. Possibility of a further write-off of Rs1.16bn in FY12 exists as well. On
the positive side though, the write-off implies that Unitech’s Ebitda margins in
FY11 were actually higher by 3.6ppt in FY11 than reported 29%.
Improved FCF, warrant conversion supported land purchases
Unitech’s net debt was flat YoY during FY11. Company raised Rs6.8bn from
warrants in FY11 which largely supported the land purchase expense of
c.Rs8bn. Including capex and land purchase, improvement in cash flows from
operations (CFO) was substantial as Unitech reported a net negative Rs6.3bn
in CFO during FY11 vs. negative Rs16.9bn in FY10. If land purchases were to
stop, we expect Unitech to generate Rs4-5bn in annual positive cash
flows/debt reduction over FY12-13.
Public deposits grow as secured lending declines; debtors rise
While Unitech’s total gross debt declined by Rs1.6bn in FY11, its unsecured
debt rose Rs7.8bn to Rs20.0bn as it replaced secured debentures of Rs7.2bn
with public deposits. Public deposits at end Mar11 reached Rs9.3bn or 16% of
total gross debt – not very expensive though at 12-14% - same as the
debentures they replaced. Debtor situation deterioration is a concern with
debtors rising 69% YoY to Rs21.5bn. Pileup has mostly happened in GNoida
properties and certain commercial projects sold before FY09.
Execution to be focus in FY12
Unitech’s non-property revenues declined 22% YoY in FY11 to Rs2.3bn, as
construction business declined. Key disappointment was a slow 12% YoY rise
in realty revenues to Rs29.5bn. Unitech’s execution ramp-up was slower than
expected here. Deliveries declined 38% YoY to 4.3m sf. Management has
recognized project execution as a key focus area for FY12.

Indian Cement- Majors report y/y growth of 16% driven by deficient rains in July::JPMorgan

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Indian Cement
Majors report y/y growth of 16% driven by deficient
rains in July


 July dispatch growth for pan-India players: YY comparisons in the
rainy months of June-August in our view are not reliable as it can
vary sharply depending on the rainfall in that particular month.
Industry growth as reported by the 4 large players – ACC, ACEM,
UTCEM and JPA (NR), cumulatively stood at 8.28MT, +3% m/m but
up nearly 16% y/y. Inline with the trends seen in the last few months,
the sequential growth reported by the large players remained mixed with
strong numbers reported by ACC (+4.7% m/m) and JPA (+18% m/m),
while ACEM reported flat dispatches m/m and UTCEM reported a
decline of 2.8% m/m in July. ACC in particular has reported y/y growth
sharply ahead of industry YTD with growth rate of 14% v/s YTD CY11
industry growth rate of 6%.
 Benign base and sharply lower rainfall in July helps growth: The y/y
sales growth in July was strong with ACC up 28%, ACEM up 20%, JPA
+19% and UTCEM increasing 7% versus previous year. In our view, the
sharp y/y growth in July is more driven by a benign base of July-10 and
the sharply lower rains in July-11 y/y, which allowed steady state
construction in July. Data on y/y rainfall in July highlights indicates
sharply lower y/y rainfall in July in key cement consuming states such as
Rajasthan, Orissa, Punjab, Gujarat, MP, Maharashtra, AP and Karnataka
and rains were 10-60% y/y lower in the above states which in our view,
has led to sharply higher y/y growth.
 Pricing pressure continues in certain pockets: South India continues to
hold steady with weak demand trends and continued supply discipline.
Our dealer checks indicate that prices continue to remain under pressure,
particularly in North/Central India. Cement prices have declined ~8-15%
over the last month on lower demand and issues in Noida market
diverting surplus to neighbouring regions. Near term pricing trends do
not point to any positive signs given monsoons and festivals in North
India through August impacting demand from existing projects.
 Strong Jun quarter but not as rosy anymore: 1QFY12 earnings so far,
for the cement industry were ahead of expectation with strong realization
offsetting the impact from the 30% price hike implemented by Coal India
in end-Feb. Players with substantial South India exposure (UTCEM,
Orient, Rain, Kesoram, Sagar Cem) reported EBITDA/MT of
Rs1000+/MT as the peak prices in the region despite weak demand
trends. However, EBITDA/MT for the industry is expected to decline
from 2Q onwards given the recent price correction in most market
(except South) and impact from the fuel prices hike in end-June.
Volumes in 2QFY12 could be higher y/y if rains remain low in Aug/Sep.

India Market Strategy -Disappointing 1Q12 earnings so far: Margin pressures visible::Credit Suisse,

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● We are midway through the 1Q earnings season and 45% of CS
coverage universe and 50% of Nifty companies have reported.
● Results have largely been disappointing, with profits surprising
positively only in metals (HZL, JSW) and staples (ITC). Most
sectors missed (Fig 1), mainly financials (BOI, Union Bank),
utilities (NTPC) and capital goods (Crompton Greaves, BHEL). IT
and pharma as sectors were in-line.
● Margin compression so clearly visible in 4Q11 is obvious in 1Q12
as well, with sales growth outpacing EBITDA growth across
sectors excluding staples (Fig 2). Operating profit growth has
been sub-20% for almost all sectors except metals.
● The outlook seems to be decisively worse across sectors. All saw
earnings downgrades (Fig 3). The slight upgrade for Reliance has
been largely due to non-operating gains on cash from BP. The
revisions also imply lower margins going forward; the magnitude
of sales downgrades (Fig 4) is far smaller than earnings cuts.
● So far, CS FY12 Sensex EPS integer has fallen 1.25% in July to
1188 (up 16% YoY, and down 5.2% from peak). We continue to
believe multiples are much more volatile than earnings

NCC - No near-term relief in sight ::RBS

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NCC
No near-term relief in sight
Higher-than-expected interest expenses led to a 10% PAT disappointment in
1QFY12. With interest rates expected to remain elevated in the near term,
affecting the core business and subsidiaries alike, we cut our TP 19% but
maintain a Hold.



High interest cost dented the healthy EBITDA
In 1Q, the standalone company reported a 44% yoy decline in PAT, driven by high interest
expenses (up 118% yoy and 11% qoq). EBITDA came in at Rs1.17bn, up 10% yoy on the
back of a 5% yoy increase in sales. Lower raw material cost led to an EBITDA surprise of
9%, with margins at 10.2% (up 47bp yoy). However, higher-than-expected interest expense
resulted in a 10% PAT disappointment for us. Net debt rose 5% qoq to Rs24.6bn.
Consolidated PAT declined 43% yoy, again on higher interest costs, despite a 15% increase
in consolidated sales.
We cut our EPS forecasts 16% for FY12 and 19% for FY13
Our EPS forecast cuts are driven mainly by increased interest expense forecasts as we build
in 1) a higher interest rate and 2) higher-than-expected debt levels. Apart from this, we also
raise our depreciation forecast and cut our FY13 sales growth forecast, due to a slightly
lower rate of execution. Our FY12 sales growth forecast of 11% is still lower than
management guidance of 15%. However, we built in a marginally higher margin for FY12.
Macro headwinds may continue to trouble in the near term
NCC’s core construction business may continue to underperform on higher interest costs.
Management indicated that interest costs are expected to rise an additional 50bp in the 2Q
after a recent rate hike by the Reserve Bank of India (RBI). Debt levels remained higher
during the 1Q, which should have a further impact on profitability. The prevailing higher
interest rates and inflationary environment should also have an impact on NCC’s real estate
subsidiary. We reduce our SOTP-based target price 19% to Rs68.70 from Rs84.40,
reflecting the EPS cut, a lower multiple for its core construction business due to slower
growth expectations and execution delays, and a lower valuation of its real estate subsidiary.
We maintain a Hold.

UBS:: Cement July volumes: strong growth, also aided by low base and capacity additions

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UBS Investment Research
Indian Cement Industry
July volumes: strong growth, also aided by
l ow base and capacity additions
�� Event: July volumes—Ultratech/ACC/Ambuja/JPA +7%/28%/17%/18%
July cement dispatches for UltraTech rose by 7.3% YoY (-2.8% MoM) to 3.1mt.
Ambuja’s volumes increased 17% YoY (+14% YoY including clinker, flat MoM)
to 1.66mt, aided by capacity addition at Maratha and lower volumes last year.
ACC’s volume rose 28% YoY to 2mt (+4.7% MoM) due to the combined effect of
low base in 2010 and Chanda capacity addition. Jaiprakash’s volumes increased
~18% YoY to 1.5mt (+5.6% MoM). In July-10, volumes of ACC/Ambuja had
declined by 12.4%/1.3% YoY.
�� Impact: Industry dispatches have remained flat till June
Industry dispatches remained flat over Apr-Jun 2011, the lowest growth in the past
10 years (7.2% CAGR). Dispatches for ACC/JPA rose 15.6%/13.9% and those for
UltraTech/Ambuja remained flat YoY YTD (April-Jul 2011). Industry data for
July is not yet available. Combined dispatches of these companies (together
comprising 47% of industry sales in FY11) has increased 5.5% YoY YTD.
�� Action: We are cautious on the sector
We are cautious on India’s cement sector due to: 1) industry over-capacity led by
large capacity additions; 2) weak demand; 3) rising input costs that are likely to
keep profitability in check; and 4) increasing industry fragmentation across regions
that could impact pricing power.
�� Valuation: Grasim remains our preferred pick
Our preferred pick in the sector is Grasim. We also have a Buy rating on
Jaiprakash Associates as we think its valuations are attractive.

GlaxoSmithKline Consumer Healthcare Q2CY11: Strong revenue growth; margins disappoint::JPMorgan,

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GlaxoSmithKline Consumer
Healthcare Limited Overweight
GLSM.BO, SKB IN
Q2CY11: Strong revenue growth; margins disappoint


 Revenue growth surprises; margins lower than expected. GSK
Consumer reported Net Sales, EBITDA and PAT growth of 22%, 10%
and 15% respectively for Q2CY11. While sales growth surprised on the
upside, margin contraction was higher than expected leading to lower
than estimated EBITDA growth during the qtr. Higher other income and
lower tax rate supported net earnings growth of 15%.
 Healthy sales growth of 22% y/y during the quarter is likely to be
supported by mid teens volume growth in our view. This revenue growth
trend is encouraging in light of disappointing volume growth of ~7% in
the prior quarter.
 RM inflation and high A&P weighs on margins. Gross margin
contraction of 300bp y/y was higher than expected. This could be on
account of higher milk, malt barley and packaging costs y/y in our view.
Further advertising and promotion spends rose 34% y/y aided by
investments behind recent launches. However moderate growth in other
expenses offset some of the impact and EBITDA margins declined
160bp y/y during the qtr. A&P/Sales at 15.3% during the qtr were up
140bp y/y and 70bp q/q. We believe A&P/Sales ratio should moderate
y/y during 2HCY11 as base becomes challenging (17.6% in 2HCY10).
 Other operational income grew 35% y/y supported by higher business
auxillary income.
 Valuation and Risk. We base our target price on PEG of 1.5x which is
in line with average PEG ratio for Indian consumer staple companies.
Our Dec-11 price target is Rs2580, implying CY11E and CY12E P/E of
29x and 25x respectively. Key risks to our recommendation and price
target are: (1) slowdown in consumption; (2) significant raw material
inflation; (3) aggressive competition; and (4) the entry of new players in
the malted food drink space.

Strategy: Follow the middle path and hope for the best ::Kotak Sec,

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Strategy
India
Follow the middle path and hope for the best. We base our ‘middle path’ portfolio
on the premise that (1) the world won’t see a repeat of the 2008 global financial crisis
(GFC) in the form of a global sovereign crisis and (2) India’s macro-economic situation
will stabilize over the next 2-3 months. We hope that the lessons from GFC 2008 have
sunk in sufficiently into the political class in the western world to avoid GFC 2011 (or a
later version) but we are less sure given the recent theatrics in Europe and the US.


‘Middle’ path portfolio hinges on subdued global economic growth and no catastrophic meltdown
Our ‘middle’ path portfolio is based on two critical assumptions—(1) India is at the fag end of its
rate tightening cycle; recent global events and strong evidence of a slowdown in India may force
the RBI to soften its hawkish stance as suggested by its last policy action and statement and (2)
Eurozone muddles through its sovereign-debt problems through a combination of austerity and
luck. The latter situation would keep oil prices in check but avoid a catastrophic meltdown in a
repeat of the 2008 global financial crisis possibly on a larger scale.
India looks good for the next 9-12 months; just don’t ask about the next three
(1) At 13.5X FY2012E ‘EPS’ (BSE-30 Index basis) and 11.5X FY2013E ‘EPS’, the Indian market is
attractively valued. (2) Earnings face downside risks but we note that our FY2012E BSE-30 Index
‘EPS’ is down only 2% to `1,200 from `1,225 at the start of the reporting season; 20 companies
have reported so far but most of the major sectors are already through. We will focus on earnings
in a subsequent report post the ongoing quarterly reporting season. (3) We expect inflation and
interest rates to peak out over the next 2-3 months and the RBI to reverse the current tightening
phase after another 6-7 months of stable interest rates once it is comfortable with the inflation
trajectory. (4) Crude oil supply-demand balance looks a lot better in CY2012E and may surprise
positively if Libya is able to come back to normalcy in 2HCY12E.
High on banks, technology and some fundamentally solid stocks; low on defensives and infra
We see low reward-risk balance in so-called defensive sectors (consumer, pharma) and prefer highquality
banks and companies with strong balance sheets. Consumer stocks are still very expensive
and won’t withstand a global meltdown; no portfolio barring cash will. Pharma companies
reported very poor 1QFY12/2QCY11 results and investors may reassess their positive bias in light
of expensive valuations. We avoid the broader infra space given a mix of high interest rates, policy
inertia, execution issues and high leverage in the case of several companies.

GlaxoSmithKline Consumer - Riding the health and wellness wave; maintain OW ::JPMorgan

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GlaxoSmithKline Consumer Healthcare Limited Overweight
GLSM.BO, SKB IN
Riding the health and wellness wave; maintain OW


We maintain our positive stance on GSK Consumer, which reported strong
volume growth for the domestic business (~14%) in 2Q CY11. Management
commentary post earnings was quite encouraging as it expects MFD sales
growth to be sustained at 15-20% and margins to improve sequentially driven
by price increases and better mix. The company’s growth strategy based on
nutrition, widening distribution reach (increase direct reach from 0.65mn to
0.7mn outlets by CY11 end), and expanded product portfolio should help it to
maintain a 17% and 19% revenue and EPS CAGR, respectively, over CY10-
13. We maintain OW with a raised Jun-12 PT of Rs2,750.
 Healthy domestic volume growth of 14% during 2Q CY11 supported by
16% and 11% volume growth for Horlicks and Boost brands respectively.
Price growth was 5% and 8% respectively for these brands. These rates are
encouraging after the poor performance in the prior quarter. Management
noted that market share across brands held up well. Value added premium
variants of Horlicks witnessed faster growth than core brands which grew by
14%. Faster growth for low-unit packs (+50% y/y) in rural areas during the
quarter also supported growth, with their share up now to ~2% of MFD sales.
 Price increases to support margins in the coming quarters: Gross margin
decline of 300bp y/y during 2Q CY11 was higher than expected. This was
attributed to a steep increase in raw materials such as milk and milk solids
(+16% y/y) and malt (+16% y/y). Faster growth for biscuits (lower margin
profile than MFD) also weighed on gross margins. Management noted that it
expects RM inflation for CY11 to be 8-9% y/y. The company made a 2.3%
wtd. price rise in Jul-11 which should help control gross margin erosion in
the coming quarters. Further, we believe the A&P/Sales ratio will moderate
y/y during 2H CY11 as the base becomes challenging (17.6% in 2H CY10).
 Non-MFD segment (6.2% of revenue): Mixed performance: While the
biscuit portfolio continues to witness strong growth (+49% y/y), the instant
noodle growth rates were subdued at 13% y/y during the quarter (market
share of 2.8% vs 3.5% in the prior quarter). Management said that while it has
scaled down its milk-based drinks and breakfast cereal bars business, its
recent entry into glucose segment had a good initial consumer response.
 Earnings and PT revision: We marginally reduce our CY11/12 EPS
estimates by 2-3% as we build in lower gross margins. However, as we also
roll forward our price target timeframe to Jun-12, we raise our PT to Rs2,750.
This implies a CY12E and CY13E P/E of 27x and 23x respectively.

UBS:: India Auto Sector July’11: PVs show negative growth

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UBS Investment Research
India Auto Sector
J uly’11: PVs show negative growth
􀂄 Passenger vehicles: All down sharply except M&M
Maruti volumes declined 25% YoY (-23%MoM). The vols. were lower by 17,000
units due to discontinuation of old Swift and shift of D’zire to Gurgaon from
Manesar. Adj. for the same domestic vols declined 7.5%YoY. Hyundai’s domestic
sales declined 11% YoY. Tata Motors reported a decline of 38%YoY for PVs with
cars down 43%YoY (incl. Nano which declined -64% YoY), and UVs (-2% YoY).
However, M&M UV sales grew 30% YoY.
􀂄 2Ws and Tractors: Steady growth continues
Hero Honda 2W sales grew 15%YoY (-4% MoM). TVS 2W domestic vols grew
14%YoY while 2W exports grew by 25%YoY. TVS 3W volumes recorded a
growth of +13% YoY on back of healthy exports. M&M domestic tractor
shipments grew at 16%YoY, while exports declined by 4% YoY.
􀂄 MHCV slows; LCVs - strong growth continues, M&M up sharply
Tata Motor’s LCV shipments grew 22%YoY, while MHCV segment grew only by
4%YoY. M&M LCVs (4-W pick ups) recorded a strong growth of 91%YoY (up
48%YoY FY12ytd).
􀂄 Preferred picks: Hero Honda, Maruti and M&M
We like Hero Honda and M&M as key beneficiaries of strong growth in rural
demand. We like Maruti as we believe margins have bottomed and valuations are
cheap.

UBS:: Crompton Greaves - Domestic T&D environment remains weak

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UBS Investment Research
Crompton Greaves Ltd
D omestic T&D environment remains weak
􀂄 Event: results from T&D equipment manufacturers indicate weakness
Post Crompton Greaves’ (Crompton) results, a few more domestic power
transmission and distribution (T&D) equipment manufacturers have declared their
results; Q1 FY12 data indicates strong competitive pressure in the space.
Transformers & Rectifiers (India) (a non-covered company) has reported a YoY
margin decline (from 15.9% in Q1 FY11 to 10.1% in Q1 FY12). Bharat Bijlee
(non-covered company) has also reported a revenue decline (17% YoY) and
negative PBIT in its power systems (transformers) business.
􀂄 Impact: strong headwinds should continue in domestic T&D space
Our channel checks suggest Indian T&D manufacturers are facing strong
competition from overseas manufacturers, which led to lower profitability. We also
expect this trend to continue in the near term. Crompton’s results also showed the
domestic power systems business has experienced significant pressure on revenue
growth and margins (from 16.6% in Q1 FY11 to 12.6% in Q1 FY12; YoY revenue
growth of just 11%).
􀂄 Action: no clarity in the near term on key businesses; maintain Sell
We believe Crompton’s power systems business is struggling in both the overseas
and domestic markets. There is also no clarity in the near term on the revival of its
consumer products business. Since these two businesses contribute around 85% of
its revenue, investor sentiment on the stock could remain negative.
􀂄 Valuation: maintain Rs160.00 price target
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. We assume a WACC of
13.2%.


􀁑 Crompton Greaves Ltd
Crompton Greaves (CG) is one of the largest engineering companies in India.
Part of the Avantha Group, CG has three main businesses - power systems,
consumer products, and industrial systems - nearly two-thirds of sales come
from electrical products. CG has 22 manufacturing divisions spread across India,
and a large customer base that includes state electricity boards and large
companies in the private and public sectors. CG has a significant presence in
overseas markets through its acquisitions; Pauwels (2005), Ganz (2006),
Microsol (2007), Sonomatra (2008), MSE Power Systems (2008), and PTS
(2010).
􀁑 Statement of Risk
We believe the key upside risks to our Sell rating on CG are: 1) a pick-up in
order activity at Power Grid and SEBs; 2) increased government focus; 3)
margin expansion; and 4) a better-than-expected performance in overseas
markets. We think the key downside risks for the company are: 1) competition;
2) delays in power generation projects; 3) rising raw material prices; 4) a
slower-than-expected recovery in government spending and industrial activity;
5) a slowdown in the international business; and 6) a decline in EBITDA margin

Phoenix Mills - 1QFY12- Operational performance remains healthy. Stake increased further in Bangalore market city:: JPMorgan,

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Phoenix Mills Overweight
PHOE.BO, PHNX IN
1QFY12- Operational performance remains healthy.
Stake increased further in Bangalore market city


Phoenix Mills (PML) reported 1Q earnings ahead of our expectations, aided
by higher other income. Operational performance remains satisfactory with
HSP registering steady occupancy/rentals and progress on the opening of
market cities is now largely on track (Pune already opened). Importantly, it
further increased its stake by 8.6% in Bangalore market city in 1Q. Its overall
stake has risen from 32.7% to 46.4% over the last 2Qs. The incremental stake
increase was done at 1x P/B, lower than our and street valuations (JPMe-
1.5xP/B), which is a positive and gives PML greater control over the asset.
 1QFY12 results above expectations: 1) 1Q standalone PAT at Rs272M
(flat Q/Q, +49% Y/Y), 5% above our expectation, aided by higher other
income (Rs110M); 2) EBITDA margin was at 70%, lower by 200bps Y/Y,
vs. management guidance of 73-75% due to higher legal and advertising
expenses (+70% Y/Y,+43% Q/Q); 3) consolidated debt at Rs7.9B, rising by
Rs1.5B during the Q due to capex on Pune market city/ShangriLa.
 Consolidated FY11 results: PHNX also reported consolidated FY11
results along with 1Q release. FY11 consol. revenues/PAT were up
71%/32% Y/Y primarily due to a) higher occupancy at Palladium; b) the
opening of Lucknow mall under BARE (~Rs110 rental) and c) recognition
of office sales in Pune market city (~Rs170M). Consol. PAT at Rs818M
was lower than standalone PAT (Rs916M) due to initial start-up losses in
Lucknow mall and higher interest expenses in Pune market city.
 Operational performance remains healthy: 1) occupancy at PML’s
flagship High Street Phoenix (HSP) mall remains steady at over 90% with
average rentals at Rs162psf pm; 2) Pune market city (1.2msf retail space)
was the first of four market cities to open in Jun-end (>80 stores operational
currently and the remaining at fit-out stage); 3) Bangalore/Kurla market
cities are at tenant fit-out stage and expected to be opened in Sep to Dec; 4)
pre-lease activity has been healthy in 1Q, esp. in Chennai/Kurla mall with
commitments in place for 70-80% across all market city projects; 4) soft
launch of ShangriLa pushed to Dec (vs. Oct earlier); 5) response to soft
launch of Chennai residential project has been encouraging, as per the co.
PML increased its holding further in Bangalore market city by 8.6% in 1Q
to 46.4% for ~Rs170M (at 1x P/B) by buying out co-promoters’ stake. This
follows a 5% increase done in 4Q at similar valuations (for Rs100M).

UBS :: Prestige Estates Projects - Good Q1; best proxy to Bangalore growth

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UBS Investment Research
Prestige Estates Projects
G ood Q1; best proxy to Bangalore growth
􀂄 Event: 1Q earnings beat UBS estimates, Operationally a good qtr
Q1 earnings of Rs364mn grew 46% YoY and 9% QoQ primarily driven by 1)
better than expected EBITDA margin of 27.7% (vs. our 24%) 2) lower interest
costs and 3) higher other income. Revenues however declined 8% QoQ more due
to revenue recognition mismatch. Consol net debt at 11.98bn (vs. 11.5bn in
4QFY11) with D/E at 0.5x. Operationally, pre-sales grew 11% QoQ to 0.46msf;
leasing was steady at 0.48msf (portfolio at 4.28msf); and launched residential
projects of 5.4msf and a mall in Mysore of 0.54msf.
􀂄 Impact: Maintain our 39% CAGR growth through FY12-14E
We expect strong revenue growth in 2H on higher recognition of high-value
projects and thus maintain our 39% earnings CAGR for FY11-FY14E. We expect
growing rental annuity, healthy pre-sales and execution pickup to drive earnings.
􀂄 Action: Reiterate Buy rating; good pre-sales & execution the catalyst
We see 1) strong response to its mid-income housing launches (10-12msf) over
next 9 mts; 2) 30%-plus growth in rentals in FY12E and 3) encouraging execution
for ongoing projects (47% of NAV). Key risks are 1) relatively high exposure to
luxury housing 2) oversupply in pockets of Bangalore e.g Whitefield.
􀂄 Valuation: Attractive at 52% discount to NAV
With stock trading at 1) 52% disc to base NAV of Rs 275 and 2) 31% disc to bear
case NAV of Rs 194, we see deep value here. We believe Prestige provides the
best exposure to Bangalore’s growth (84% of NAV), amongst the most promising
real estate market in India from demand perspective, in our view. Our price target
of Rs205 is based on a 25% discount to our FY11E NAV/share of Rs275.


􀁑 Prestige Estates Projects
Prestige Estates Projects (Prestige) is a South India-focused real estate developer
with a diversified real estate portfolio in residential, commercial, retail, and
hospitality. Most of its developable area is in Bangalore (84%) and it is now
expanding to other South Indian cities. Prestige also provides allied services,
such as interior design, property management services, and sub-letting services.
Established 24 years ago, Prestige has developed a number of landmark
properties in Bangalore, including UB City, Prestige Shantiniketan, and the
Forum Mall.
􀁑 Statement of Risk
Risks to Prestige are a high exposure to high-end/luxury projects, high exposure
to Bangalore and a decline in commercial leasing and activity and regulatory
policy risks

UBS:: Sun TV- Weak Q1 FY12 results

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UBS Investment Research
Sun TV Limited
W eak Q1 FY12 results
􀂄 Event: Q1 FY12 results below UBS and consensus estimates
Sun TV reported Q1 standalone results—revenues grew 3% YoY to Rs4.54bn vs.
UBS-e Rs4.8bn. EBITDA grew 2% YoY to Rs3.66bn vs. UBS-e Rs3.8bn. The
EBITDA margin came in at 80.6%, ahead of UBS-e of 79.0%. Net profit grew
10% YoY to Rs1.88bn, below UBS-e of Rs2bn and consensus of Rs2.13bn.
􀂄 Impact: maintain earnings estimates
Sun TV has achieved 22% of our FY12 net profit estimate in Q1. We see limited
near-term impact on Sun TV financials due to the unfavourable Tamil Nadu (TN)
state assembly election result. We estimate a worst-case value of Rs300 for Sun
TV, assuming FY13E worst-case EPS of Rs17.6 and 17x PE. Refer to our note
‘Sun TV: Reiterate cautious view’ dated 17 June 2011 for further details.
􀂄 Action: maintain anti-consensus cautious view
Sun TV share price is down 42% YTD. We continue to maintain our anticonsensus
cautious view on Sun TV as we believe newsflow related to the 2G
scam could remain an overhang on Sun TV’s share price. The recent TN state
assembly election result was negative for sentiment given the chairman has family
ties with the DMK party.
􀂄 Valuation: maintain anti-consensus Sell rating with Rs330 price target
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. We assume a high WACC
of 15% to incorporate the high risk.


􀁑 Sun TV Limited
Sun TV Network Ltd (Sun) is the largest TV broadcaster in south India and has
channels catering for the four regional languages: Tamil; Telegu; Kannada; and
Malayalam. Kalanithi Maran is the majority shareholder with a 77% stake. Sun
and its two subsidiaries have radio licences in 44 cities.
􀁑 Statement of Risk
We believe the company faces regulatory risks and competitive risks in its core
business of broadcasting.

Technology: Increasing earnings uncertainty ::Kotak Sec

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Technology
India
Increasing earnings uncertainty. S&P’s downgrade of US sovereign debt and looming
macro risks in several other developed economies, especially the Eurozone, increase the
earnings uncertainty for the Indian IT services players. Memories of the 2008 global
financial crisis (GFC) and its delayed impact on offshore IT revenues are still fresh and
hence, the strong current micro indicators may not lend much confidence to the Street.
We would view an earnings blip, if any, as a cyclical hit, in a secular growth story for
offshore IT. Nonetheless, we present earnings sensitivity to potential volume/pricing hit.


US rating downgrade adds to the uncertainty
Fears of a double-dip recession-led demand slowdown for the IT services industry, including
offshore players, have been in the air for some time now. The recent S&P downgrade of long-term
US sovereign debt adds to the fear. Double-dip recession has the potential of impacting clients’ IT
budgets moving into CY2012E. Risks (mostly downside, some upside) to assumptions on several
other variables in our earnings model also come into play, consequently. Four key variables, in our
view, are
􀁠 Volume growth. A function of how the clients’ IT budgets shape up hereon, and more
importantly, what happens to the pace of decision-making on deal renewal, vendor
consolidations instances, etc. It is worthwhile to recall that the volume slowdown and
subsequent pick-up for the offshore players had less to do with what happened to the overall
client IT budgets and more to the decision-making cycle. A freeze in decision-making post the
Lehman crisis meant that the expected counter-cyclical benefits (market share gains) for
offshore players were delayed by 2-3 quarters. Clichéd as it may sound, we believe things could
be different this time – clients are better geared for a recessionary environment and the drive
for cost rationalization could pick some slack from IT budget cuts and potentially keep the
volume growth story going for the Indian players. Increased protectionism, if the recession
translates into a sharp rise in unemployment in client geographies, poses another volume risk.
􀁠 Pricing. This is where negative surprises could come in. In addition to the macro-led pressure
from clients, recent relative volume growth underperformance of Infosys and Wipro versus TCS
and Cognizant could also play a role in how pricing shapes up for the Tier-I pack. Mid-sized
companies, anyway, are price takers in the market.
􀁠 Currencies. Re/US$ as well as US$ versus the European currencies (GBP and EUR). Economists
are making arguments both ways; potential depreciation of the USD (versus the Re and/or
European currencies) of course, would be a negative for offshore Indian IT names.
􀁠 Supply-side pressure. This could potentially ease out if demand does slow down materially,
providing some buffer on margins.
Short-term pressure on stocks likely; long-term risk/reward favorable, on balance
Even as we are believers in the long-term market share gain story for the offshore IT services
players, macro events could induce cyclicality to the extent of gains in different time periods.
Macro and micro indicators, at this point, continue to paint different pictures – however,
memories of demand slowdown post 2008 GFC are fresh and could keep the scale tilted on the
side of caution, in the near term. We look at earnings sensitivity to volume/pricing risks for various
companies and find the longer-term risk/reward favorable at current valuations.

UBS: Asian Paints Ltd.- Raw material pressure to remain, Sell

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UBS Investment Research
Asian Paints Ltd.
R aw material pressure to remain, Sell
�� Event: good Q1 results; volume outlook robust
We raise our estimates for Asian Paints (APL) on good Q1FY12 results, and a
positive business outlook. Our thesis on slowing discretionary consumption in
times of inflation (outlined in our report, Asian Paints Ltd: Raw material cost
pressures to hurt margins, published on 29 March 2011) which assumed APL’s
volume growth would slow, has proved incorrect. APL demonstrated ~13%
volume growth underlying ~29% YoY growth in domestic revenue in Q1FY12.
�� Impact: increased estimates to incorporate price increases
We raise our estimates for APL to incorporate: 1) additional price increases to be
taken by APL (an estimated 5% increase for the rest of the year); and 2) our
marginally higher volume estimates for APL to incorporate higher demand than
expected earlier. We raise our EPS estimates for FY12/FY13 from
Rs102.6/Rs121.5 to Rs109.0/Rs133.7.
�� Action: raw material pressure to continue
We believe that the raw material pressure for Asian Paints will continue with TiO2
prices not showing any signs of declining. A ~16% increase in prices by Dupont
will only add to the raw material pressure for Asian Paints. Though there has been
a moderation in the rate of increase of raw material prices, we believe they will still
remain high with Asian Paints being forced to take further price increases.
�� Valuation: maintain Sell rating, raise price target to Rs2,750
We maintain our Sell rating and increase our price target from Rs2,500 to Rs2,750
on our higher estimates. We derive our price target from a DCF-based
methodology and explicitly forecast long-term valuation drivers using UBS’s
VCAM tool. We assume a WACC of 10.4%.


�� Asian Paints Ltd.
Asian Paints is the leading paint manufacturer in India with a 45% share of the
organised sector paint market. It ranks among the top 10 decorative coatings
companies in the world. Asian Paints operates in 20 countries across the world.
International business accounts for 17% of sales. Decorative paints accounted
for around 80% of the group's sales in FY08.
�� Statement of Risk
Asian Paints is the leading paint manufacturer in India with a ~60% share of the
organised decoratives paint market. It ranks among the top 10 decorative
coatings companies in the world. Asian Paints operates in 20 countries across
the world. International business accounts for ~13-14% of sales. Decorative
paints accounted for around 80% of the group's sales in FY11.

United Spirits- 1Q FY12 - Domestic performance in-line; weak W&M margins and increased debt levels a concern ::JPMorgan

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 Standalone earnings marginally better than expected; consolidated
results weak: United Spirits reported 1Q FY12 Sales, EBITDA and
PAT growth of 32%, 17% and 14% y/y respectively on a standalone
basis. Adjusting for the Balaji distilleries merger, LTL Net Sales grew
22% y/y. Gross margin pressures were offset to some extent by a
moderate increase in advertising and promotional spends during the
quarter. However, consolidated Sales, EBITDA and PAT growth was
40%, 16% and 6% y/y, respectively, affected by lower profitability for
Whyte & Mackay.
 Healthy volume growth of 15.4% y/y during 1Q FY12 is encouraging,
though supported to some extent by a favorable base. LTL price/mix
growth was ~7% y/y on account of price increases and better mix.
 Gross margin erosion mitigated by lower trade spends: ENA costs at
Rs147/case were up 3% y/y, although they declined by ~2% q/q. While
higher ENA and glass costs weighed on gross margins, the reduction in
promotional trade spends supported EBITDA margins to some extent.
Management noted that it expects an increased share of in-house
distillation facilities and grain feedstock to help contain/improve gross
margins going forward. However it expects brand spends to increase in
coming quarters on account of impending new product launches.
 Rising debt levels and interest costs a concern: Consolidated debt rose
to Rs68B (+Rs4B q/q) largely on account of higher working-capitalrelated
loans. Standalone interest costs rose sharply (+27% y/y, +18%
q/q) on account of the higher cost of domestic borrowing and higher
working capital debt. On a consolidated basis interest costs rose 10% y/y.
 Whyte & Mackay posts weak margins: While W&M reported Net
Sales growth of 34% y/y during 1Q FY12, EBITDA declined 30% y/y.
Gross margins declined by 10% ppt y/y with a similar reduction in
EBITDA margins

Ranbaxy Laboratories: Base business still in doldrums::Kotak Sec,

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Ranbaxy Laboratories (RBXY)
Pharmaceuticals
Base business still in doldrums. PAT excluding forex gain of Rs1.4 bn was 7% below
estimate despite Aricept revenues reported in the quarter. While base business sales
growth picked up to 18%, profitability remained depressed on account of (1) sales
growth coming largely from low-margin API and Africa sales while India/CIS continue to
perform poorly and (2) high SG&A costs. Despite factoring in significant recovery in
base business sales and margin, at current levels, stock excluding FTF pipeline value is
trading at 21X 2012E base business EPS. Maintain SELL with PT of Rs435 (17X 2012E
core EPS + FTF pipeline value; Rs450 previously).


2Q2011 revenues were Rs20.5 bn, in line on reported basis; ex Aricept lower than estimate
Sales on a reported basis were in line with our estimates; however, excluding Aricept revenues of
around US$18 mn in the quarter were 5% lower than our estimate and grew 18% yoy marked by
(1) poor performance in India, CIS, LatAm with India finished dosage sales excluding consumer
business flat yoy, according to our estimates, (2) Africa and API sales reported high growth of over
30% yoy boosted by supplies of ARV exports and Nexium API and (3) Asia Pacific and Europe
reported healthy yoy growth of 15-24%.
2Q2011 EBITDA miss despite presence of exclusivity sales
Despite presence of exclusivity sales of Aricept, EBITDA (including other operating income) at Rs1.8
bn remains extremely poor with reported margin at 9%. Excluding margin on exclusivity sales, we
believe EBITDA margin was 7% in 2Q2011, flat qoq and down yoy due to increase in SG&A costs,
up 26% yoy and employee costs up 12% yoy. We believe the base business margin has not shown
any improvement in the past four quarters and, in fact, has declined yoy. However, Ranbaxy
expects margin to improve to double digit in 2012E, even if there is no resolution of US problems
largely on account of recovery in India and continuing growth in emerging markets. We factor in
9% base business EBITDA margin in 2H2011E versus 7% reported in 1H2011, increasing to
12.4% in 2012E (see Exhibit 3).
Maintain SELL with PT of Rs435 (from Rs450)
Ranbaxy expects sales in 2011E (including Aricept but excluding Lipitor) at US$1.87 bn. We believe
this implies 16% base business growth versus 18% growth reported in 2Q2011. We factor in
20% base business growth in 2011-12E (see Exhibit 5) and reduce our 2011-12E PAT estimates
before exceptional by 9-5% on account of lower margin (see Exhibit 4). In the near term, the stock
performance is likely to be driven by the resolution of (1) FDA/DOJ issue and (2) Lipitor launch; we
believe the focus post these will shift towards base business performance which still remains below
industry peers.

Economy: US debt downgrade: Still the King among equals? ::Kotak Sec,

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Economy
US Debt Rating
US debt downgrade: Still the King among equals? The S&P on Friday downgraded
the long-term debt rating of the US from AAA to AA+ and continued with its negative
outlook. This could lead to some immediate turbulence in financial markets, however,
investors are likely to focus on ‘relative’ ratings in their investment decisions. With no
precedence of such an event, financial markets could take some time to factor in the
implications. In the meanwhile, asset allocation in the immediate near term may be
biased more towards gold. Indian equities could also see a downward momentum as
risk aversion remains a dominant theme. Reflecting this, INR could also see some
depreciation bias in the near term.


Debt downgrade moves investment decisions into uncharted territory
In an unprecedented move, US long-term debt rating was downgraded by one notch to AA+ while
maintaining a negative outlook by S&P. Moody’s and Fitch, however, have maintained the highest
ratings for US debt. S&P points to broad concerns on achieving political consensus along with the
fiscal consolidation plan falling short of the amount needed to stabilize the debt burden over the
long run. The US debt ceiling agreement called for expenditure cuts of US$2.4 tn to be decided in
two tranches of US$917 bn immediately and US$1.5 tn to be recommended in November 2011.
Questions were, however, raised on the S&P’s assumptions of the pace of discretionary spending
in fixing the trajectory for the debt. The S&P clarified that the assumptions were not material
enough considering that the debt projection was at US$14.5 tn (79% of CY2015E GDP) versus
US$14.7 tn (81% of CY2015E GDP) with the initial assumption. The material difference
amounting to US$2 tn could only be seen if the projections were extended to CY2021E.
‘Relative’ ratings will be a key issue; knee-jerk reactions will be the order of the day
Even though US debt rating is no longer the coveted AAA, we do not see debt markets elsewhere
as a ‘safe haven’. Compared to the US economy, we believe that the European economies are
facing a more serious situation as the inter-holding of debt between the Euro zone economies
raises serious contagion issues. The ECB in its recent policy meeting agreed to start off again with
the bond purchases but restricted itself to purchasing Portuguese and Irish bonds while the market
was expecting some support in the Spanish or Italian bonds. In our opinion, much of the ratings
downgrade could have already been priced in during the last few trading sessions. Despite this,
the near term is likely to see some knee-jerk reactions to this news with strong volatility likely as
investors come to terms with the new reality of a US rating downgrade. In the interim, gold could
be the only safe haven asset and could see some price rises. For the longer term, we believe that
investors could focus more on the US growth aspects. US growth, in turn, could see some
downward bias as fiscal austerity kicks in and there could now be serious limitations on any further
liquidity injection in the US markets.
Indian equities likely to maintain a downward momentum and depreciation likely in INR
Indian equity markets could also see turbulence in the near term. However, there could be some
silver linings as the US economy slows on account of fiscal austerity. Any significant slowdown in
the global economies could lead to a downward bias for the commodity prices, a factor that is
likely to be most beneficial for emerging markets like India. India’s growth also remains relatively
resilient (our estimates at 7.3% for FY2012E) and hence, it is unlikely to see significant outflows.
However, our policy call for the RBI to increase the repo rate by a further 25-50 bps could be put
to test in the event that commodity prices globally come down sharply and risk aversion is
significant.

S h i p p i n g M o n t h l y R e p o r t – A u g u s t 2 0 1 1 • ::ICICI Securities,

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S h i p p i n g   M o n t h l y   R e p o r t   –   A u g u  s t   2 0 1 1
• The Baltic Dry Index (BDI) declined by 11% to 1264 in July 2011
due to a 14%, 6%, and 15% fall in Capesize, Panamax and
Supramax index respectively. Freight rates declined in July for
smaller vessels like Panamax and Supramax owing to lower Indian
exports of iron ore to China due to the  monsoon season in India.
• The Dirty Tanker Index declined  by 3% to 721 while the Clean
Tanker Index declined by 1% to 684 level in July 2011. It was
carnage for VLCC’s with freight  rates moving into negative
territory , while day rates for Suezmax rose by 61% (on a
abnormally low base) and Aframax freight rates declined by 8%.
• LPG freight rates displayed a steady to firm trend in July 2011
with VLGC’s day rates registering a sharp up move of 8%, while
MGC’s being constant in the range of 1%-2% with a positive bias.
• Utilisation levels for drill ships, semi-subs and jack-ups marginally
improved. Utilisation levels for drill ships, semi-subs and jack-up
rigs was reported at 80%, 87% and 80% in July 2011 as against
79%, 86% and 79% in June 2011. Day rates for rigs displayed a
mixed trend with Deep water depth rigs day rates moving up
marginally, while Mid water depth rigs moved up strongly,
whereas Jack-ups still continued to face pricing pressure.
Outlook
Dry bulkers
Dry bulk freight rates are expected to remain range bound with a negative
bias in August on the back of Indian monsoon season which will most
likely reduce iron ore exports from India. Also, China could be importing
lower volumes of iron ore due to current high level of inventories. China’s
iron ore inventory level is at an all-time high of 94 million tonnes and steel
production in China is expected to remain slow on account of restriction
of electricity allocation to steel plants. On the positive side, from a
medium term perspective, China’s thermal coal fixtures are likely to
remain firm, while the lifting of the Russian wheat export ban and the
recovery of Australian coal mines could lend support to the dry bulk
freight rates.
Tankers
Crude oil tanker freight rates are expected to remain subdued owing to
the oversupply of tonnage which would handicap the market. Even if
some demand emerges in the near term, the tonnage available is likely to
weigh on the charter rates and keep them subdued. Some positive
momentum is likely for VLCC’s, while Suezmax day rates are expected to
rise from its current appalling levels.
LPG carriers
LPG freight rates are expected to remain range-bound in August 2011 due
to availability of excess tonnage.
Offshore vessels
Utilisation levels for offshore vessels are expected to rise, while charter
rates are expected to remain stable in  Aug 2011. High capex spend by
major global oil exploration/drilling companies is likely to lead to higher
utilisation levels for offshore vessels.

Ta t a Power - Weak 1Q as 45% Indo tax pinch & weak merchant; ::BofA Merrill Lynch,

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Ta t a Power
   
Weak 1Q as 45% Indo tax pinch
& weak merchant; Neutral
„1QFY12 Cons Rec PAT -20%YoY on higher taxes; Neutral
TPC 1Q Cons Rec PAT fell by 20%YoY on 1) taxes +88%YoY led by growth in PAT
driven by Indo coal profits, taxable @ 45%, Rs550mn deferred tax on wind capex,
16% tax on dividend from coal SPVs to parent and 2) weak merchant power business
– tariff fell 23%YoY (Trombay U8 -14% & Haldia -28%) & -20%YoY merchant volume
at Trombay U8. Cons. EBITDA +27% was led by coal business (EBIT +77%YoY) and
NDPL (EBIT +150%) offset by weak Parent (EBITDA -2%). Maintain non-consensus
Neutral led by limited stock upside, declining RoE beyond FY12E on start of lossmaking UMPP and premium valuations - FY12E P/BV of 1.9x vs sector 1.4x.
Strong coal / NDPL offset by higher taxes & weak merchant
A 23%YoY fall in merchant power tariff and 11%YoY fall in generation led by
Trombay -13%YoY drove Parent EBITDA -2%YoY. However, Rs2.2bn of dividend
from Coal SPVs led Rec PAT +33%YoY. Indo coal mines did well with ASP
US$94/tn (+30%YoY) and contribution US$53.6/tn (+40%YoY) while volume
+1%YoY only. NDPL PAT grew by 161%YoY on past claims, while other power
subs had weak 1Q - Powerlinks PAT -2%YoY & TP Trading PAT -9%YoY.
Regulatory risk: Coal costs may +75%
Key risk ahead as per management its fixed price (~$40/tn) coal purchase contract
with BUMI for Mundra UMPP due change of Indonesian law. Should TPC fail
convince Govt of Indonesia to allow export ~2.5mtpa at fixed price for 5 years, it will
have to shell-out Rs3.5bn ($30/tn more to align with Index) at Mundra UMPP. This
may hike FY13E loss at Mundra UMPP by 270%.
Reiterate our non-consensus Neutral rating
Uplifting of coal resources, scale-up in production to 100mtpa in 3-4 years time at
Indonesian coal mines and securing coal linkages in India for 3.9GW of IPP
capacity, shall improve visibility of profitable growth. Potential depletion of high kCal
coal reserves (Prima), lower net-long coal position with the start of Mundra UMPP,
fall in merchant power prices in FY12 and onwards creates volatility in earnings

Tata Steel -Good results but doubts linger on :: Macquarie Research,

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Tata Steel
Good results but doubts linger on
Event
 In line results on operating line: Tata Steel reported in line results for 1Q
FY12, though profit was distorted with one-offs. We are worried about the
European markets, and have cut volume and margins assumptions for its
European business, leading to reduced earnings by 15-19% over the next
three years. However, we had already introduced a 20% discount to our target
PE multiple and hence are maintaining our Rs688 target price and Outperform
recommendation.
Impact
 Strong results – Tata Steel reported Net Sales of Rs328bn up 22%YoY
driven by 25% increase in realisation. EBITDA at Rs43bn is flat as higher raw
material costs also increased. PAT at Rs52bn was helped by Rs38bn of sale
of assets.
 Indian operations – cyclical peak: Indian operation reported US$420/t of
EBITDA. We have increased our full-year estimate to US$409 from US$382
earlier. This has resulted in upgrade to Indian earnings by 7%. However, we
do note that any reduction in raw material prices due to slackness in global
demand can actually push steel prices down and thereby risk on margins.
 European operations – highly susceptible: We are now assuming flat
volume at 14.9mnt and reduced EBITDA per ton to US$56 against earlier
15.6mnt volume and US$65/t EBITDA estimate. Clearly, the demand situation
is very fluid at the moment and sensitivity to earnings is very high. Every $10/t
reduction in margins wipes out 10% of profits from Tata’s consolidated
earnings.
 Balance sheet – now less of concern: After a spate of asset sales, net debt
has reduced to just US$8.4bn and debt: equity to 1.06x. We will be more
comfortable if company reduces its gross debt.
Earnings and target price revision
 We have reduced earnings by 15-19% over FY12-14 largely driven by cut in
its European business margins and volume.
Price catalyst
 12-month price target: Rs688.00 based on a PER methodology.
 Catalyst: Reduction in economic uncertainty in Europe.
Action and recommendation
 Maintain Outperform: Tata Steel appears to be attractively valued, but high
leverage and a fragile recovery in Europe make it a bit risky, in our view. We
recommend that long-term investors wait for the seasonal dip in the steel
market to make an entry

Havells India - 1QFY12: Strong Sylvania compensates for lower domestic growth. On track to meet full year estimates:JPMorgan,

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Havells India Ltd Overweight
HVEL.NS, HAVL IN
1QFY12: Strong Sylvania compensates for lower
domestic growth. On track to meet full year estimates


 Strong Sylvania performance mitigates subdued domestic business,
on track to meet our full year estimates: Consolidated 1Q net profit
growth of 41.4% yoy was ahead of our estimates. While domestic
business growth was below expectations, Sylvania fared better than
expectations. We believe HAVL is on track to meet our FY12E
estimates - it needs to deliver earnings growth of 31.4% over the 9m
FY12E v/s 41.4% growth delivered in 1Q. HAVL is currently trading at
10.9x FY12E P/E and 8.7x FY13E P/E, which we believe offer
attractive valuations. Remain OW with Mar-12 TP of Rs600.
 Domestic margins pared by higher ad spend. Domestic revenues grew
16% YoY, meeting management guidance range of 15%-20% (which
has been maintained). Revenue growth has to be viewed in light of flat
growth for switch-gears as HAVL discontinued exports to its European
OEM as it is looking to roll out switchgears under the Sylvania brand.
Growth for cables and wires (+26% YoY) and lighting (+21% YoY)
continued to be robust. Consumer durables growth slowed to 14% YoY
(fans +10% YoY), as per expectations. EBITDA margins declined 50bps
due to higher ad spend in 1Q (Rs420MM v/s Rs1B budget for full year).
Margins are likely to normalize going forward as ad spends are pared.
 Sylvania fares better than expected. Sylvania revenues were up 1%
YoY (13% in INR terms) with growth in Latin America (+8% YoY)
offsetting decline in Europe (-3% YoY). EBITDA margins improved by
190bps driven in equal measure from Europe (+180bps YoY) and Latin
America (+160bps YoY). Management reiterated its focus on improving
margins across regions for Sylvania through the rest of year.
Q1FY12 results summary. Consolidated revenues increased 15% YoY
driven by domestic business (+16% YoY) and Sylvania (+13% YoY).
Consolidated EBITDA margins improved 70bps YoY to 9.6% with
decline in domestic business (-50bps YoY) offset by strong EBITDA
margin improvement for Sylvania (+190bps YoY). Net profits increased
41% YoY to Rs796MM.

Hold Edelweiss Capital; Target : Rs 32 ::ICICI Securities,

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I n v e s t m e  n t   i n   n e w   b u s i n e s s   b o g s   d o w n   P A  T
Edelweiss Capital reported 39% YoY (2% QoQ) jump in total revenues to
|396 crore which was ahead of our expectation of | 361 crore buoyed by
higher interest income at | 234.8 crore (up 87% YoY). Fee and
commission declined from |128 crore in Q4FY11 to |97 crore in Q1FY12.
However, higher interest expenses  led to inline profits at |33 crore.
Agency business which had a share of 33% in total revenues in FY11 has
declined to 25%, while interest income now contributes 59% as against
51% in FY11. Moreover, investments in Life Insurance and retail
businesses (currently non-yielding)  are weighing down on profits. We
expect these investments to linger on PAT for few more quarters. We
expect | 191 crore of PAT in FY13E against | 233 crore in FY11.
ƒ Financing income- the growth engine
Edelweiss reported a marginal |40 crore QoQ dip in loan book to |
2600 crore. The company started housing finance in H2FY11
(portfolio now stands at | 185 crore). It plans to grow in this
segment by | 100 crore (monthly run rate) and reach size of | 5000
crore by FY14. We therefore see a  good traction in this segment
supporting top-line growth, even at 50% achievement rate which we
have  modelled  in.  In  this  backdrop  we  expect  31%  CAGR  in
financing income over FY11-13E to | 1294 crore and expect 69%
contribution to total income in FY13E.
ƒ Fee based income growth looks flat
Edelweiss reported 24%QoQ decline in fee income in Q1FY12 to |
97 crore (subdued performance from broking and investment
banking). Daily average turnover declined 11.3% QoQ to | 5190
crore with yields declining from 4.2% to 4%. We expect Edelweiss
to maintain its market share of  3.8-4% and yield of 4-4.2bps and
estimate fee based income to contribute 20% to total income in
FY13E at |375crore.
V a l u a t i o n
On  SOTP  basis,  we  have  valued  the agency business (brokerage and
investment banking) at 10x FY13E EPS and capital business (net worth
based-generating treasury and financing income) at 0.7x FY13E BV. We
revise our TP to | 32 and recommend to Hold the stock. In near term
bleak capital market outlook is likely to weigh on stock performance
despite compelling valuations

ICICI Bank: Balancing growth and quality :::CLSA

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Balancing growth and quality
ICICI Bank’s 1QFY12 profit of Rs13.3bn, up 30% YoY, was inline with our
estimates. We were positively surprised by uptick in loan growth to 20%
YoY as well as higher than expected NIMs. Management is confident of
18-20% growth in loans and stable margins during FY12. Asset quality
trends were also encouraging, but provision towards new norms lowered
profit by 8%. Management comments on quality of exposures to some
risky sectors were also reassuring. Slower fee growth was key negative in
the results. We see 26% Cagr in earnings over FY11-14 and triggers for
re-rating from ROE expansion and reasonable valuations. Maintain BUY.
Margin stability in volatile environments
ICICI’s focus to improvement in its liability franchise through increase the in
CASA ratio and balanced ALM is helping it to sustain stable margins in spite of
market volatilities. This reflects in margins that have been in a narrow band
of 2.5-2.7% over past 8 quarters; 1Q NIM at 2.6% was above expectations.
CASA growth of 14% YoY and CASA ratio of 42% indicates some moderations,
but management indicated that average CASA profile was better than 4Q.
Expect healthy growth and stable margins in FY12
Management expects 18-20% growth in loans during FY12 and NIMs to be
stable near current levels- higher CASA ratio will help ICICI to leverage on
working capital demand to offset slowdown in investment linked disbursals.
We were tad disappointed by slower fee growth of 12% and an uptick here
will be linked closely to pick-up in investment-linked loan growth.
Asset quality holding-up
During 1Q, fresh NPL formation was at manageable levels, but bank also
recognised ~Rs2bn of exposure to micro finance institutions (MFI) as NPL and
another ~Rs7bn may be restructured in 2Q. Management was also confident
of quality of exposures in power and real estate sectors. While conversion of
loans to GTL Ltd into equity by revoking pledged shares raises concerns, we
believe that there is low risk of loss on this exposure as the bank possesses
sufficient security.
Attractively valued; Maintain BUY
We expect ICICI to report 26% growth in profit over FY11-14 driven by a
healthy loan growth and lower credit costs. High ROA and rise in leverage will
drive +500bps expansion in ROE to 18% in FY14. During 1Q, consolidated
profit was 25% higher than standalone profit and valuations are reasonable at
15x FY12CL consolidated PE. We retain our BUY reco with target price of
Rs1,390 that includes value of bank at 2.5x FY13 adjusted PB.

India Market Outlook: Who gains when commodities wane? BNP paribas

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Who gains when commodities wane? 
ƒ Declining commodity prices favourably impact Indian economy
ƒ Gain to equity market unclear; commodity makers contribute 33% of Sensex profit
ƒ HMCL, BJAUT, APNT and GCPL gained in the previous cycle
ƒ Profits decline for MSIL, TTMT, AL and MM, due to revenue slowdown
 
We seem to be approaching the era of declining commodity prices again – a usual offshoot
of global economic slowdown and consumer retrenchment. We believe there are interesting
ways of playing a downturn in the commodity cycle.
Economy gains, but do stock markets?
It is well known that the Indian economy tends to benefit when commodity prices decline.
Benefits accrue through a decline in imported inflation, and through a decline in fiscal and
current account deficits. But since 33% of Sensex free-float earnings are contributed by
commodity manufacturers (metals, oil, petrochemicals), it’s not very clear whether the Indian
equity market benefits from a commodity price decline.
Commodity users are gainers, but not all of them…
About 33% of Sensex free-float earnings come from commodity users (auto, engineering,
consumer staples). It may appear that investing in these sectors is an easy way to make
money during a commodity downturn, but it’s not so simple. During an economic slowdown,
consumer retrenchment leads to a decline in demand for consumer staples and
discretionaries – more so for the latter. The consequent increase in SG&A and working
capital and pressure on top-line may more than negate the benefit to gross margins –
leading to a decline in earnings. So, only commodity users with stable demand generate
super-normal returns.
…and sometimes there’s a time lag
In cases where the manufacturing company’s raw material procurement is on fixed time
contracts, margin benefit may come well after raw material prices begin to decline. For
instance, our analysis shows that auto ancillaries’ margins begin to improve one quarter
after metal prices begin to decline and auto (OEM) companies have a two-quarter time lag.
Gainers in last cycle: Hero MotoCorp, Bajaj Auto, Asian Paints, Godrej
Consumer Products
These companies have the benefit of stable demand from their products. Hero MotoCorp
(HMCL IN, Not rated) and Bajaj Auto (BJAUT IN) benefit from declines in aluminium and
steel prices, while Asian Paints’ (APNT IN, Not  rated) raw material price is linked to crude
oil. Godrej Consumers (GCPL IN, Not rated) is a significant user of soft commodities like
palm oil.
Losers in last cycle: Maruti, Tata Motors, Ashok Leyland, M&M
In general, the profitability of companies that depend on discretionary spending suffers as
margin benefit from lower commodity prices is more than offset by declining revenues.
Maruti (MSIL IN), Tata Motors (TTMT IN), Ashok Leyland (AL IN) and Mahindra & Mahindra
(MM IN) are examples where profits declined sharply during the commodity downturn phase.
Similarly, auto ancillaries, such as Amtek Auto (AMTK IN, Not rated), Bharat Forge (BHFC
IN, Not rated), which derive significant proportion of their revenues from exports, also
suffered a decline in profitability despite improving gross margins.
Oil companies also gain due to regulatory paradox
Due to the subsidy structure in the Indian oil sector, both oil marketing companies (OMCs)
and E&P companies tend to gain when crude oil price declines. OMCs – BPCL (BPCL IN),
HPCL (HPCL IN), IOC (IOC IN, Not rated) – are direct gainers of reduced subsidies. For
ONGC, a sweet spot is when oil is between USD55/bbl and USD85/bbl.

Jindal Steel & Power -1QFY12 results::CLSA

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1QFY12 results
JSPL’s 1Q consol net profit fell 3% YoY and was 6% below estimates. The
profit miss was due to lower steel volumes and higher stand-alone interest
costs versus expectations. Jindal Power net profit fell 19% YoY due to lower
realizations but was as per expectations. JSPL is on track to fully commission
the 1,350MW power capacity by end-FY12 but the Angul steel plant is seeing
delays. Start of production in Bolivia is a positive. We will re-visit estimates
soon factoring in Bolivia iron ore sales, Angul plant delays and lower
utilization of captive power units. Maintain O-PF.
Stand-alone net profit 16% below estimates
Stand-alone EBITDA at Rs9.6bn grew 22% YoY in 1Q but was 6% below
estimates. The EBITDA miss was due to lower steel volumes, which missed our
estimates by 4% while growing 13% YoY. Management commented that
inventories have risen 22% QoQ, which is a bit of concern. ASPs and costs were
inline with estimates. Interest costs rose a sharp 25% QoQ due to commissioning
of 3 units of the 1350MW captive power capacity. As a result, standalone net
profit missed estimates by 16% - higher than EBITDA miss of 6%.
Power business performance was inline
Jindal Power reported a net profit of Rs4.5bn – down 19% YoY but was inline with
estimates. The YoY profit drop was mainly due to lower power tariffs. Average
tariff in 1Q was Rs3.92/unit while PLF was 99%. Three units of the 1350MW
capacity are commissioned. These units operated at 50% PLF in 1Q and did not
sell much power externally post captive consumption. The 1350MW captive power
capacity will be fully commissioned by end-FY12. JSPL has received environment
clearance for its 2400MW Tamnar – II project and will start construction after
meeting some pre-conditions in 30-40 days.
Steel project delayed; sales to start in Bolivia in 2Q, which is positive
JSPL’s Angul steel project is delayed further. Management now expects to
commission the plate mill by FY12-end, the DRI unit by early-FY13 and the steel
melting shop by June-12 (all by end-FY12 previously). Our estimates assume full
commissioning by mid-FY13 but we believe that it can be delayed further. A key
positive is that iron ore mining has finally started in Bolivia and JSPL is targeting
to start shipments in 2Q. Shadeed, too, has started contributing to consol profits
and has registered a net profit of Rs370m in 1Q.
Maintain O-PF; will review estimates shortly
We will review our estimates shortly after receiving some clarifications from
management. We plan to incorporate Bolivia in estimates along with some
delays in the Angul plant and lower utilization of captive power units. Till
then, we maintain O-PF.

India Utilities - Panel recommends scrapping of 'go/ no-go zone' policy:: Credit Suisse,

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● A media report in The Economic Times suggests that the panel,
set up to review the legality of ‘go/ no-go zone’ policy for captive
coal blocks, has indicated that the policy does not have any legal
standing and hence should be abandoned.
● The committee has highlighted that the ‘go, no-go’ policy is neither
mandated under the Forest Conservation Rules, 2003 nor under
any circular issued by the Environment and Forests Ministry. The
Ministry of Law and the Attorney General too agree with this view.
● We believe the panel recommendations improve visibility for faster
approvals of the eight captive coal blocks being prioritised. The
panel has also recommended a single-window clearance and
incentives for state forest departments to expedite environment/
forest clearance. Incrementally, implementation of these
recommendations would be positive for the sector in long run.
● Scrapping the ‘go/ no-go zone’ policy would be positive for the
sector in long term, but, coal deficits would continue over mediumterm
as these blocks would still need to apply for environment/
forest clearances; implying coal production would not commence
before 3-4 years. We maintain our cautious view on the sector.


Background of the case
The erstwhile environmental minister, Mr Jairam Ramesh, classified
the coal mining areas into either ‘go or no-go zone’ in 2009. Blocks
classified under the ‘no-go zone’ are in dense forest areas and
expected to be rejected for environmental/ forest clearances. A total of
203 coal blocks are classified under the ‘no-go zone’, cumulatively
having the potential to produce about 660 mmtpa of coal, sufficient to
meet the fuel requirements of about 130 GW of power capacity.
Group of Ministers formed to resolve the issue
In Feb 2011, the Government constituted a committee of 12 ministers
(GoM) from concerned ministries, headed by the finance minister Mr
Pranab Mukherjee, to resolve the ‘go/ no-go zone’ issue. Prior to that,
another committee appointed by the Prime Minister’s Office had
recommended relaxation of the ‘no-go zone’ issue for eight (of total
203) captive coal blocks (refer Figure 1); after considering that
substantial investments had already been made in these projects.
The first two meetings of the GoM (conducted in Feb/ Apr 2011)
remained inconclusive on this issue. During the third meeting in Jun
2011, the GoM supported faster clearances for these eight captive
coal blocks, but it decided to take a final decision on this in its fourth
GoM meeting (was to be held in July 2011, but has been delayed). In
the meanwhile, of these eight blocks, Mr Jairam Ramesh approved
the Parsa East and Kante Basan blocks but denied approval for
Morga-II and Mahan blocks


Panel set up to review legality of ‘go/ no-go zone’ policy
The GoM, in its Jun 11 meeting, also set up a panel headed by Mr B.K.
Chaturvedi (member of Planning Commission) and comprising of
representatives from the ministries of power, coal and finance, to
review the legality and efficacy of existing forest clearance procedures
and submit its recommendations within six weeks.
Panel recommends abandoning ‘go / no-go’ policy
A media report in The Economic Times suggests that the panel has
indicated that the 'go, no-go' policy for captive coal blocks does not
have any legal standing, and hence, should be abandoned. The
committee highlighted that the ‘go, no-go’ policy is neither mandated
under the Forest Conservation Rules, 2003 nor under any circular
issued by the Ministry of Environment and Forests. As per the news
report, the Ministry of Law and the Attorney General also agree with
this view.
Improves visibility on clearance of 8 blocks
We believe the panel recommendations improve visibility for faster
approvals of the eight captive coal blocks (Figure 1), primarily
benefitting projects of Adani Power, JPVL, KSK, Essar Power,
Hindalco and Reliance Power. Besides, the panel has also
recommended a single-window clearance and incentives for state
forest departments to expedite environment/ forest clearance.
Incrementally, implementing these recommendations would be
positive for the sector.
Coal deficit to remain medium term even if policy scrapped
Certainly, scrapping the ‘go/ no-go zone’ policy will be positive for the
sector as it can potentially raise coal production over the long run.
However, even if cleared from the ‘no-go zone’, these blocks would
have to apply for Environment & Forest Ministry approvals. We expect
these blocks to take at least 3-4 years to commence coal production,
even if cleared. Hence, the coal deficit issue is unlikely to be resolved
over the medium term. We maintain our cautious sector view.

UBS:: United Phosphorus - Acquisitions to boost sales growth

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UBS Investment Research
United Phosphorus Limited
A cquisitions to boost sales growth
􀂄 Event: Favourable sales growth; margins slightly lower
United Phosphorus (UPL) Q1FY12 PAT was Rs1.84bn (up 30.0% YoY), slightly
lower than our and street estimates due cost pressures, higher interest expenses
(higher cost and working capital) and 20% tax rate (higher India mix). However,
revenue growth was robust at 27.4% (volume growth at 25%, rest price and
exchange rate) YoY due to high India, rest of World and North America sales.
DVA acquisition of US$150mn will largely be used to de-leverage, strengthen
balance-sheet. EBITDA margin guidance maintained at 20-21%.
􀂄 Impact: Increase revenue growth, higher tax-rate and margins
Management upgraded revenue growth guidance from earlier 12-15% to 25-30%
on DVA acquisition, but maintained EBITDA margin outlook at 20-21%. We now
assume higher FY12E sales growth at 23% YoY; lower margin increase and higher
tax rate due to India mix. In line with these and incorporating FY11 reported
financials, our estimates are broadly maintained.
􀂄 Action: Maintain Buy, attractive valuations and strong growth in FY12E
Strong Q4FY11/Q1FY12 indicates recovery in growth, after earlier muted
quarters. Acquisitions to support sales growth. UPL stock looks attractive at 9.2
FY12E P/E, given forecast 23% FY11-14 CAGR earnings, and healthier balancesheet.
Management continues to scout for inorganic growth opportunities.
􀂄 Valuation: Maintain Buy with a PT of Rs210
We derive our price target of Rs210 from a DCF-based methodology using UBS’s
VCAM tool. We reiterate Buy.


􀁑 United Phosphorus Limited
United Phosphorus Limited (UPL) is the largest producer of crop protection
products in India with a range of products that include fumigants, fungicides,
insecticides, rodenticides and herbicides. The company's main business is
agrochemicals and industrial & specialty chemicals. Earlier this year, UPL made
its largest acquisition to date by acquiring Cerexagri, which has a significant
presence in the US and Europe. Post this acquisition, UPL is the 12th largest
agrochemical and 3rd largest generic agrochemical company globally. UPL has
fully owned subsidiaries in the US, UK, China, Australia, and Russia.
􀁑 Statement of Risk
The chief risks facing United Phosphorus are execution risk in integration of its
various acquisitions, regulatory risk in different markets, currency risk and
weather related risk.

UBS:: Suzlon Energy 1 Q FY12: Results better than expectations

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UBS Investment Research
Suzlon Energy
1 Q FY12: Results better than expectations
􀂄 1Q FY12 – Rs66m PAT on a recurring basis
In 1Q FY12, Suzlon’s operating income increased 82% y/y to Rs43.8 and EBITDA
was Rs4.9bn (with 11.2% margins). Reported profit was Rs601m (vs. Rs9.1bn loss
in 1Q FY11) and post adjustment for Rs535m forex gain, the recurring profit was
Rs66m (vs. Rs7.3bn loss in 1Q FY11). The results are significantly ahead of UBS
estimates (UBS-e of Rs1bn loss for 1Q FY12). The key reason was strong MW
delivery in 1Q FY12 (437MW vs. 207MW in 1Q FY11) from Suzlon.
􀂄 237MW new orders for Suzlon in 1QFY12, Order book decline is a worry
Suzlon has won 237MW of new orders in 1Q FY12 (205MW in India and 32MW
in North America) and after strong sales in 1Q, the Suzlon order book has declined
to 2,030MW (from 2,231MW as of end FY11). There is also a marginal decline in
Suzlon’s group order book to Rs293bn (from Rs301bn as of end FY11). The group
order book includes Rs180bn order book of REPower.
􀂄 Conference call on Monday, 1st August 2011 at 4:00pm IST
We expect to receive more details on Suzlon’s business performance and near-term
outlook in the call. However, the key developments for 1Q FY12 are as follows; a)
REPower ‘squeeze out’ process is on track with Suzlon’s offer of
Euro142.77/share for acquiring remaining shares, the total ‘squeeze out’ costs to be
~Euro63m, b) Hansen stake sale to generate Rs8.3bn, exit from Hansen has been
completed.
􀂄 Valuation: Sell rating with a DCF based PT of Rs50
We have a Sell rating on poor order inflow from overseas markets for Suzlon and
no near-term catalysts.