21 August 2011

Second order derivative “core” WPI inflation accelerates in July ::Macquarie Research,

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Second order derivative “core” WPI
inflation accelerates in July
Event
􀂃 India announced wholesale price index (WPI) for July.
Impact
􀂃 Headline inflation remains high in July: WPI inflation for July came in at
9.22%YoY, broadly in line with consensus expectation (as per Bloomberg
survey) of 9.2%. This compares with 9.44%YoY registered in June. The data
for the month of May was also revised upwards to 9.6%YoY from 9.1%YoY
reported earlier. Headline WPI inflation has remained above the Reserve
Bank of India’s (RBI’s) comfort zone for the past 20 months, averaging 9.4%
during this period.
􀂃 Second order derivative “core” inflation picks up further: Non-food
manufactured inflation, an indicator that RBI tracks as a measure of core
inflation, accelerated to 7.5%YoY in July from 7.2%YoY in the previous
month. Indeed, this measure of core inflation has now accelerated to above
7%YoY over the past 6 months compared to an average of 5.3%YoY over the
previous 12 months, indicating a spill over of supply shocks to generalised
inflation through the input cost channel as well as the inflation expectations.
The pick-up in non-food manufactured inflation in July was driven by higher
prices of basic metals, alloys & metal products (10.1%YoY vs. 8.9% YoY in
June), chemicals & chemical products (7.9%YoY vs. 7.4% YoY in June) and
transport, equipment & parts respectively.
􀂃 Food inflation decelerates; non food remains sticky at high levels: Food
inflation (primary plus manufactured) decelerated to 8%YoY from 8.4%YoY in
June. Non-food inflation, on the other hand, remained largely sticky at
9.7%YoY in July (vs. 9.8% in the previous month).
Outlook
􀂃 Inflation to peak by Aug/Sept; global commodity prices are the key:
Considering that oil and other global commodity prices have come off over the
last few days in the context of US debt downgrade and evolving debt issues in
Europe, this will help to contain inflationary pressures. We expect headline
inflation (WPI) to remain sticky in FY12 and average around 9%YoY level. On
the monthly trend, we expect headline inflation to peak over the next 2-3
months and moderate to around 8%YoY in December 2011. We expect
inflation to reach near 7-8% YoY range as of end-March 2012.
􀂃 Policy outlook: We were expecting another 50bps hike in policy rates in the
rest of 2011. While high “core” inflation and hawkish rhetoric from policy
makers makes us believe that the RBI will continue on its anti inflationary
stance, the adverse global environment, on the other hand, suggests that the
RBI might be a little less aggressive than what we have been expecting. We
think the RBI has some time before the next policy review on September 16th
to monitor the global developments and the sustainability of commodity prices
to trend lower.

India power: merchant prices Pricing outlook remains soft ::Macquarie Research,

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India power: merchant prices
Pricing outlook remains soft
Event
􀂃 The CERC fwd curve released late last week suggests weaker pricing will be
a reality in 2Q12, averaging around Rs.3.70/kWh for the next three months.
This could see higher cost operators struggle in 2Q12, such as newer gasfired
units (LANCI IN, 17, Unrated) and imported coal based plant (JSW IN,
57, Underperform, TP: 55). We also touch on some industry feedback below.
Impact
􀂃 July volumes fall, average three month price Rs.3.70/kWh: July saw a
62% decline in reported contract volume, while 78% of power contracted was
below Rs.4.00/kWh (in-line with June at 80%). Of the 52 contracts in July,
34% were GMR trading, 19% NTPC trading, 10% PTC, 8% JSW trading.
􀂃 Chat with Ratings Agency: similar to us, they remain bearish on the sector
and believe that loans will go bad (NPLs). While acknowledging it is hard to
predict the extent of defaults, they commented that around 10% would
certainly be reasonable. Material ratings downgrades may not occur for a year
or so, simply due to many of the projects still being under construction. The
outcome in their view? Everyone is likely to take a little - consumers will pay
more for power, some developers won't make it and banks will have to
restructure bad loans.
􀂃 SEB's keeping it in the family: another trend that has been apparent over
the past two years is the increasing level of bilateral power trading between
discoms (33% of bilateral power traded in June - all time high vs 18% in
1Q10, 24% in 1Q11). That is, discoms trade power between themselves to
manage their respective peak loads at lower prices, rather than pay higher
prices to traders/gencos. An efficient tool for discoms, but it has the impact of
taking demand out of the system and softening prices.
􀂃 Merchant price drops in June to lowest in 3yrs: the weighted bilateral
merchant price in June was Rs.3.82/kWh, the lowest monthly price over
the past few years. Seasonally, the bilateral price usually drops further in
July/August/September and therefore we expect lower prices to flow
through into 2Q12 – as implied in CERC fwd curve.
Outlook
􀂃 Retain Underweight Utilities leading into 2Q12.

What’s in the Fed’s Toolbox? • Credit Suisse

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What’s in the Fed’s Toolbox?
• In a sharp departure from past practice, the Federal Open Market Committee announced last week that economic conditions “are likely to warrant exceptionally low levels for the federal funds rate at least through mid-
2013.”
• Although the words technically give the Fed an “out,” it has shown no sign of trying to disabuse the market of the expectation that fed funds is a fixed point for
at least the next two years. Moreover, the FOMC went on to suggest it would employ its available policy tools “as appropriate” to strengthen the recovery. • Now that the Fed has long since hit the zero bound on the federal funds rate and has expanded its balance sheet some 250%, what tools remain available for it to provide still more monetary accommodation? That’s the first question;
the second is whether further Fed easing would actually help boost growth.
• The US economy shows significant symptoms of being in a “liquidity trap,” which very much attenuates the potency of monetary policy.
Nonetheless, we would not expect Chairman Bernanke to stand idly by as cyclical economic momentum fizzles, risk assets swing wildly, and European
financial stability veers precariously near the edge.
• In his Semiannual Monetary Policy Report to Congress last month, Bernanke
cited several easing possibilities. We evaluate the suggestions the Chairman offered. Then we consider other easing options, ranging from the most
realistic to the borderline fantastic.

When cheap does not mean value : Business Line,

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Are the markets giving you a sense of deja vu? And why not; when they have fallen to levels that have dragged the valuations of quite a few stocks close to their 2008 lows. For instance, the PE multiple of blue chip BHEL, at 14 times its trailing earnings, is lower than the 22-25 times it managed during the low of October 2008. Mid-cap infrastructure play IVRCL at 7 times its trailing earnings has touched its March 2009 valuations. However, if you think a low PE automatically signals a buying opportunity, beware of the risks that lie beneath. To sift the wheat from the chaff, investors will have to go ‘micro'– looking at the earnings picture and the reasons behind stocks/sectors being beaten down.
Beaten for good reason
Let us first look at the beaten down sectors. A look at the themes that bore the brunt of the fall since November 2010 does not throw up too many surprises. The usual suspects – real estate, capital goods and infrastructure - featured there, with utilities,metals and oil joining this bandwagon. These sectors as represented by their indices in the BSE/NSE lost any where between 25-55 per cent between November 5, 2010 and now. That is a good 5-35 percentage points higher than the Sensex fall. A quick run-down on some of the sectors would immediately tell you that global cyclicals such as steel took a hit as a result of the commodity downturn. The stock of SAIL for instance, may appear attractive from 14 times PE in April to 9 times now but a 30 per cent decline in its net profits for June over a year ago, indicates lower realisations. For commodity stocks, valuations may be cheap, but the expected soft patch in commodity prices owing to slowdown suggests weaker earnings.
Are they fundamentally cheap?
Then there are cases where a seemingly cheap stock turns out to be more expensive because the earnings have dropped. Real estate is one such example. Despite their beaten down status, stocks such as Unitech or DLF trade at a higher PE thanks to decline in earnings. A 50-70 per cent decline in their stock prices between November and now has hardly made them cheaper, fundamentally. Infrastructure company IVRCL at 7 times PE is perhaps trading closer to its lowest-ever trailing PE. But steep delcine in earnings for last two quarters only weakens the case for a value investment. It however, needs to be said that for every underperformer within a sector there was in contrast an outperformer. A Carborundum Universal actually gained when BHEL fell. Power Grid Corporation stood tall when power generation utilities such as Adani Power were pummelled.
Even if identifying winners may be a tough task, passive investors can prevent further damage to their portfolio by holding safer bets. Going by the way markets have so far reacted, here are a few factors that you can keep in mind while scouting for ‘value' picks.
One, is the company a victim of a general downturn or does it have specific concerns? The litigation issues in Lanco Infratech for instance, may make it a high risk bet compared with a Tata Power which is beaten down on account of sector concerns over cost and availability of coal.
Two, after the 2008 downturn, highly leveraged companies are not favoured by the markets for a couple of reasons: one, leverage comes at very high cost in the current high interest rate scenario. Unless, there is clarity on such leverage contributing to improved top line, servicing debt would be a concern. Three, companies that derive high revenues from developed markets such as Europe and U.S may need a close watch. Suzlon Energy and Punj Lloyd have been victims of poor performance by their overseas subsidiaries.
Four, given the volatility in currency movements, high levels of unhedged currency exposure, especially in the case of mid-tier IT companies may pose a threat. Five, companies with corporate governance issues such as DB Realty or some of the scam-hit telecom stocks may look beaten down but may have fundamental concerns relating to their ability to function as a ‘going concern' .
What's the use of buying a stock cheap, if it not going to rebound when the market or the economy does?

Hold Hotel Leela; Target : Rs 36 ::ICICI Securities

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B o t t o m l i n e   d i v e s   o n   h i g h e r   i n t e r e s t   c o s t …
Hotel Leela came out with dismal Q1FY12 results. It reported net sales of
| 125 crore (up 18% YoY) mainly due to incremental revenue from its
new property at Chanakyapuri Delhi, which was opened in Q4FY11.
However, the growth was lower than our expectation mainly due to
subdued growth in ARR (industry average: up ~3% YoY) across business
destinations. Besides, operating costs significantly surged 40% YoY to |
104.1 crore due to higher operating cost like employee cost (up 51% YoY)
and other expenses (up 47% YoY). This resulted in a sharp decline in
operating profit by 35% YoY to | 20.6 crore. There has also been a sharp
rise in interest costs, which increased from | 5.6 crore last year to | 37
crore in Q1FY12. Due to this combined effect, the company reported a
loss of | 26.5 crore against net profit of | 9.2 crore reported in Q1FY11.
ƒ New room additions help in topline growth
Hotel Leela’s net sales recorded a growth of 18% YoY to | 125 crore
backed by incremental revenue from its new property at
Chanakyapuri. The occupancy rate in Mumbai and Bangalore rose
~100 bps YoY while ARR remained subdued (up ~3-4% YoY)
ƒ Higher operating cost and interest outgo takes a toll on profitability
Leela’s operating margin got squeezed significantly by ~1330 bps to
16.5% mainly due to a sharp rise in operating cost by 40% YoY to |
104.1 crore. Major cost drivers like raw material cost, employee cost
and other cost went up by 29%, 51% and 47% YoY to | 9.7 crore, |
37.3 crore and | 44.7 crore, respectively. Due to higher debt in its
book, interest cost surged sharply by 560% YoY to | 37 crore, which
finally hit the bottomline. Leela reported a net loss of | 26.5 crore
against profit of | 9.2 crore in the same period last year.
V a l u a t i o n
At the CMP of | 40, the stock is trading at 23.8x and 19.7x its EV/EBITDA
in FY12E and FY13E, respectively. Looking at the current situation, we
believe high debt burden and flattish growth in its ARRs (Delhi property)
for the coming two years would hit its return ratios. At CMP, it is trading
at premium valuations compared to its peers. We assign HOLD rating to
the stock with target price of | 36 (i.e. at 19.0x FY13E EV/EBITDA).

Sterlite Industries:: Upgrade to Outperform::CLSA

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Upgrade to Outperform
We cut Sterlite’s FY12-14 EPS by 13-16% factoring the revised base metal
price forecasts of CLSA’s resources team. Sterlite has been besieged by
multiple negative developments in virtually all businesses but we believe that
31% YTD stock price correction has priced in all these. Valuations at 0.8x
FY13 P/B look attractive given that ROEs are unlikely to be lower than midteens
due to low cost advantages in the zinc business, which contributes 69%
to earnings. Despite the sharp EPS cut, Sterlite still provides decent 17% EPS
CAGR over FY11-13. We upgrade Sterlite to O-PF with a target price of Rs150.
Sharp cut to zinc-lead price forecasts; modest cut to aluminium
CLSA’s resources team has cut CY11-13 price forecasts for zinc by 4-9%, lead by
6-12% and aluminium by 2-4%. This factors in a limited impact of a potential QE3
and gives a higher weight to market fundamentals. Our new CY11-12 zinc-lead
price forecasts are just 1-4% above LME spot prices but the new aluminium
forecasts are a higher 5-10% above spot. The cut is higher in case of zinc-lead
given weaker market fundamentals. In aluminium, we are more positive and
expect RMB appreciation and rising Chinese cost curve to boost prices.
Multiple negatives have impacted Sterlite’s stock in the last 12-18m
Sterlite Energy (SEL) has disappointed in the last 12m thanks to project delays,
slow ramp-up of commissioned units and coal un-availability. Costs have risen in
the aluminium business thanks to lack of captive bauxite as well as coal issues
and losses have widened in Vedanta Aluminium (VAL). Rising loans from Sterlite
to VAL have further increased concerns. Zinc business costs, too, have risen
sharply and have moved up to a structurally higher level.
Recent correction has priced in all this; risk-reward much better now
Sterlite provides consol ROEs of 15-16% over FY12-13 even after the sharp
earnings cut. This is primarily driven by the zinc business (69% of EPS), which
has significant low-cost advantages despite the rise in costs in the last 12m. Our
estimates adequately factor the project delays and cost issues in SEL and the
aluminium business. Moreover, power and aluminium together account for just
6% of earnings and any further cuts here will not impact consol EPS much. In this
context, current valuations at 0.8x FY13 P/B seem too harsh. Our revised SOTP
target price is Rs150 (Rs175 before), which implies 7.5x FY13 P/E and 1.0x FY13
P/B. At 17% CAGR over FY11-13, Sterlite’s earnings growth is superior to most of
its peers in the sector. If SEL gets its act together and achieves timely
commissioning and smooth ramp-up in balance units, part of the concerns on the
stock will get assuaged and multiples would improve. Any improvement in LME
prices post a potential third round of QE would be another catalyst for the stock.

Q1 FY12 Results Update- TAKE Solutions::Nirmal Bang

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Results above expectations During Q1FY12, the company’s revenues grew by 46% YoY and 6% QoQ at Rs.158.6 crore. This was on the back of increase in revenues from the existing clients in both segments – SCM and lifesciences. EBDTA margins remained flat YoY while they moved up 190 bps at 21.5% during the quarter. PAT moved up 50% YoY, 5.5% QoQ at Rs.21.6 crore. This was lower due to higher tax rate. EPS for the quarter stood at Rs.1.8
Operating Margins to improve
EBIDTA margins remained flat at 21.5% YoY during the quarter. The vertical mix of the company in FY11 was of 53 : 41 of SCM and Lifesciences respectively. However, post WCI acquisition, revenues from lifesciences segment would move up to around 55-60% where they have higher margins of ~26-27%.
Geographical concentration to widen
The company drew 65% of its revenues from U.S.A. Post WCI acquisition, Take has entered into European markets where their synergies would bring in better geographical mix for the company. This would reduce dependence of revenues from USA.
Healthy OrderBook
The current orderbook of the company stands at USD 72.5 million which has moved up by 40% YoY. The strategic acquisition of WCI has widened the product portfolio for Take sol and also opened up newer markets.
Guidance from the company
The company has given guidance of 6-7% QoQ growth for the next 2 to 3 quarters. WCI is expected to post better results in 2nd half of the year. For the whole year it is expected to contribute ~ Rs.90 crore to the revenues. EBIDTA margins are expected to move up in the range of 22-23% for the company.
Valuation & Recommendations
At the current price of Rs.34.5, TAKE is trading at a PE of 4.8x FY12 estimated EPS & 3.59x FY13 estimated EPS. Considering the current global meltdown, we are assigning a lower target PE multiple of 6.0x (against earlier 7x) and arrive at a target price of Rs.43 per share for TAKE indicating a potential upside of 25% from current levels. We recommend to HOLD the stock.

NIIT TECHNOLOGIES :: BUY TARGET PRICE: RS.276 :Kotak Sec,

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NIIT TECHNOLOGIES LTD (NIITT)
PRICE: RS.196 RECOMMENDATION: BUY
TARGET PRICE: RS.276 FY12E P/E: 6X
We view the acquisition of Proyecta Sistemas de Informacion S.A. (Proyecta)
by NIITT as a good strategic step. It will likely enhance the presence of NIITT
in the European region and will also give it access to large accounts, which
can be scaled in the future. The valuations accorded to Proyecta are also not
demanding and we expect little impact on the EPS of NIITT. We have
tweaked our FY12E estimates. Our FY12E EPS stands at Rs.32.6 (Rs.32.5). Our
DCF - based price target stands at Rs.276 (Rs.280), based on FY12 earnings.
At our TP, our FY12 earnings will be discounted by about 8.5x which, we
believe, is undemanding. We maintain BUY. NIITT has been achieving
consistent revenue growth and margins over the past few quarters.
Acquisition of Proyecta
n NIITT has announced the acquisition of Proyecta Sistemas de Informacion S.A.
(Proyecta), a software services company headquartered in Madrid.
n NIIT Technologies, UK will acquire 100% stake in Proyecta and the company will
be run as a subsidiary by the present management team of that company.
n Proyecta currently has about 100 consultants which service clients predominantly
in Spain.
n It operates in BFSI and Travel segments where it has large accounts like Iberia,
Merill Lynch, Santander, etc.
n Proyecta had revenues of about $10mn in the previous fiscal with EBIT margins
of about 10%.
n While Travel vertical formed about 68% of revenues, BFSI contributed about
23% with the balance contributed by other verticals.
A good strategic acquisition
n We opine that, Proyecta will be a good strategic fit for the company.
n NIITT has been focusing on BFSI and Travel & Transportation verticals, where it
has developed significant capabilities. Proyecta is present in these very verticals
and will add to NIITT's capabilities. Proyecta provides services like Business Intelligence
and Web and Mobility applications and has strong relationships for these
services.
n The acquisition will also enable NIIT Technologies to enhance its European footprint
with Proyecta's experience in servicing large companies in the Travel and
Financial Services segments. The acquisition also provides a gateway to NIITT to
the traditional Spanish speaking countries in Latin America.
n NIITT can also get a foothold in the large accounts of Proyecta and cross sell its
services to them.
Financials - no major impact
n Proyecta had revenues of about $10mn in the previous fiscal with EBIT margins
of about 10%.
n According to the management, FY12 may see a marginal de-growth due to the
acquisition but margins are expected to be maintained.
n For the future, NIITT expects Proyecta to report a 14 - 15% rise in revenues.
n It also plans to improve margins through higher revenues, providing higher value
added services and eventually, off-shoring and cost control.

HIND DORR OLIVER:: : BUY TARGET PRICE: RS.52:: Kotak Sec,

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HIND DORR OLIVER
PRICE: RS.38 RECOMMENDATION: BUY
TARGET PRICE: RS.52 FY12E P/E: 8.4X
q HDO's Q1FY12 numbers are lower than our estimates on the revenue and
profit front. Subdued order backlog, delay in engineering/environment
clearances and cost pressures (material as well as financial) pull down
profits.
q Order intake of Rs 6.6 bn vs Rs 2.2 bn in Q1 FY11 was significantly higher
due to the Zambian order. Other noteworthy orders included NMDC order
worth Rs 1.3bn.
q Maintain BUY due to beaten down valuations but retain cautious stance
on the company in view of deteriorating cash generation and stagnant
order backlog. Prefer capital goods stocks with higher revenue visibility
and unleveraged balance sheets.


Subdued order backlog, delay in engineering/environment clearances
and cost pressures (material as well as financial) pull down
profits
n Revenue for the quarter declined 41% yoy due a combination of slow moving
orders and delay in getting engineering clearances for some large projects.
n The management highlighted that some of the large projects are still in the engineering
design phase. This is the initial phase of any project and once the design
is frozen the actual site/factory is mobilized. Hence during this phase the
revenue booking is low and picks up progressively.


n In terms of revenue mix, minerals, environmental, manufacturing and special
projects contributed 45%, 35%, 16% and 4% respectively.’
n At the beginning of the fiscal, the company had indicated that since order accretion
has not been robust, it might end up with flat revenues in FY12. However,
this target appears optimistic in light of subdued Q1 FY12 revenues, weakening
macroeconomic conditions and sluggish project execution marred by longer time
in statutory clearances (land and mining clearance). We have adjusted downwards
our revenue target for FY12.
n HDO has started to bid for mining projects with Davy Markham and the company
has indicated that significant success has been achieved in identifying opportunities.
IVRCL has recently received a Rs 12 bn mining related order in which
Davy Markham's contribution is to the tune of Rs 1.2 bn. The management is
positive on Davy Markham (specializing in underground mining equipment) in
view of the greater thrust on underground mining to limit environmental damage.
n Operating margins stood at 10.8% down 100 bps yoy. Margin loss was mainly
attributed to cost pressures, sluggish execution and general increase in competitive
intensity. Unlike the Q4 FY11 quarter, the company had no one-time provisions
related to cost-overruns.
Project Segments
(%) Indicative Margins
Environmental Engineering projects 8-12
Mineral beneficiation 15-18%
Fertilisers 20
Manufacturing 20
Source: Company
Order intake boosted by a large overseas order but undercurrent
remains weak
n HDO's order backlog at the end of Q1 FY12 stood at Rs 15.5 bn, which has more
or less remained at the same level since the past eight quarters.
n The order backlog was boosted by a USD 85 mn order from Zambia's Konkola
copper mines (also a Vedanta group project). The order execution period is 18
months and first dispatch would commence in September 2011. The profitability
on this order is expected to be healthy as major scope of the work includes supply
of mechanical equipments. This order has also opened up similar opportunities
in Zambia.
n Order intake of Rs 6.6 bn vs Rs 2.2 bn in Q1 FY11 was significantly higher due to
the Zambian order. Other noteworthy orders included NMDC order worth Rs
1.3bn.
n The company is the only bidder for a repeat order from UCIL worth Rs 3.5 bn.
This order has been delayed for the last six months for requisite environment
clearances.
n Revenue visibility is adequate at 22 months of trailing four quarter revenues,
boosted by the large order wins in Q1FY12.
n Order mix is Water - 16%, Minerals - 50% and Manufacturing -16% and special
projects 17%.


Other Highlights
n Davy Markham (wholy owned sub) had ended the FY11 with a marginal loss but
the management expects the company to end the current fiscal with a profit of
close to GBP 1 mn. The company's order backlog has improved to GBP 32 mn
pounds aided by the IVRCL order win. Davy Markham has expanded its geographical
coverage and in consortium with HDO/IVRCL, is well positioned for coal
mining projects in Indian market.
n Debtors outstanding have remained at elevated levels mainly due to receivables
pertaining to the Vedanta's Lanjigarh Alumina Refinery project (where work has
been stopped due to non compliance of environmental norms). The management
clarified that bulk of receivables is mainly retention money amounting to Rs
700-800 mn, which it expects to get it released through presentation of bank
guarantee.
n Borrowings have shot up further to Rs 2.8 bn vs 2.0 bn in Q4 FY11 mainly due to
expansion in working capital.
n The company expects to spend Rs 300-400 mn towards normal capex. It is yet to
decide on greenfield manufacturing plant.
Earnings Revision
We have significantly reduced our earnings estimates for the company on account of
lower revenue booking and consequent margin loss. We have not consolidated the
contribution of Davy Markham awaiting greater clarity of numbers.


Maintain BUY but prefer companies with higher revenue visibility
and unleveraged balance sheets
n At the current price, the stock offers an upside of 37% to our DCF based target
price of Rs 52 (Rs 61 earlier). At our target price, the stock would be valued at
11x FY12 earnings.
n We reiterate BUY on the stock but remain cautious in view of slowdown in order
inflow, increased competitive pressure and sustained cost pressures. An important
trigger for the stock could be award of UCIL order worth Rs 3.5 bn wherein
HDO is the only bidder.




ALLCARGO GLOBAL LOGISTICS :: ACCUMULATE ; TARGET PRICE: RS.195::Kotak Sec,

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ALLCARGO GLOBAL LOGISTICS LTD
PRICE: RS.167 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.195 CY12E P/E: 10.7X
Robust Operational Performance
Allcargo Global (AGLL) recorded better than expected results for the quarter
on the back of improved performance in the CFS and MTO segment. AGLL
PAT grew 75% YoY to Rs 665 mn. The EBIDTA margins for the quarter stood
at 12%, up 160bps YoY. Revenue grew ~34% YoY to Rs 8.5 bn on the back
of 35% and 60% YoY growth in revenue in EcuLine and CFS segment. CFS
segment revenue growth was mainly contributed by the 38% YoY increase
in average realization and 16% growth in total volume. We believe that
higher realisations follow our estimation of shift of northbound cargo to
the other western ports like Pipavav and Mundra. JNPT continues to handle
greater amount of Western India cargo, hence the throughput from the local
CFS's would increase. The NVOCC/MTO segment also saw healthy growth,
with EcuLine revenue growth at 35% YoY at Rs6.1 bn contributing 72% to
the total revenue. Consolidated MTO volume growth stood at 16% YoY, inline
with expectations (we expect 14% CAGR over CY10-CY12E). We
maintain our estimates and ACCUMULATE rating on the stock with a target
of Rs 195 with 16% upside from current levels.


Financial highlights
n Consolidated revenue grew 34% YoY to Rs 8.5 bn with the ECU Line and CFS
segment acting as the major growth drivers with 35% and 60% YoY growth.
Revenue in the project cargo/equipment handling division also grew 20% YoY.
n EBIDTA margins improved on the back of improvement in CFS margins with the
CFS EBIT margin improving by 800 bps to ~52%% in Q2CY10. ECU Line margins
however remained stagnant at 5.7%. The ratio of Imports to Exports containers
handled in the CFS segment also improved for the quarter from 4.5:1 to
5.3:1, which also contributed for the margin improvement.


n PBT improved by 65% YoY to Rs802 mn and Adjusted PAT improved by 75%
YoY to Rs.665 mn mainly due to the higher realizations in CFS segment and improvement
in margins.
n The tax rate stood at a lower 13.8% due to higher MAT entitlement for the
quarter as the earnings contribution from the CFS segment increased.
n Overall volume growth in MTO and CFS segments stood at 16% YoY. The realization
growth in the CFS segment stood at 38% YoY and the ECU Line
realisation grew by 6% YoY


Outlook and Valuation
We expect the NVOCC realizations to come under pressure due to the correction in
freight rates in the container shipping market in Q2CY11. As the impact will take a
quarter's time to pass on, Q3CY11 is expected to show lower realizations for the
ECU Line entity. However, volume growth estimates are being maintained at 14%
over CY10 to CY12E. Any impact on the global trade post the recent signs of slowdown
would warrant downgrade at volume estimates.
The CFS segment has shown a growth of 38% in realization which we expect to
slow down from here. With capacity constraints at the JNPT port and expected slowdown
in trade, the CFS segment realization growth is expected to slow down in the
coming quarter. At CMP, the stock is trading at 10.7 x to CY12 earnings estimates
and available at ~20% discount to its peer group average of 13 x. We have valued
the stock at par with peers. We arrive at a target price of Rs 195 per share. The
target price implies a potential upside of 16% for an investment horizon of 12
months



Reliance Infrastructure: Step-up in execution by construction division::Kotak Sec,

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Reliance Infrastructure (RELI)
Utilities
Step-up in execution by construction division. Reliance Infrastructures (RELI)
reported a step-up increase in execution at the construction division, further aided by
write-back of depreciation (to align with regulatory norms) yielding a strong earnings
growth in the standalone business. We have revised our fair value estimate to
Rs920/share (Rs975 previously) factoring lower value for RELI’s ownership in Reliance
Power, though note that clarity on accounting of cash and equivalents remains key to
stock performance.


EPC business and prior-period write-backs drive outperformance
RELI reported standalone revenues of Rs33.7 bn (58% , 53% qoq), operating profit of Rs4.1 bn (-
153% yoy, 188% qoq) and net income of Rs4.3 bn (75% yoy, -14% qoq) against our estimates of
Rs25.9 bn, Rs2.2 bn and Rs2.8 bn, respectively. Strong operational outperformance was driven by
significantly higher-than-estimated EPC revenues of Rs18.8 bn (against our estimate of Rs9.3 bn)
along with gross margins of 20% against our estimate of 15%. Reported net income was further
boosted by prior-period depreciation write-back of Rs2.3 bn on account of retrospective change in
depreciation rate and corresponding lower-than-estimated depreciation during 1QFY12. We
discuss key highlights of the results in detail in a subsequent section
Improving visibility on infrastructure earnings
RELI reported consolidated net revenues of Rs49 bn (28% yoy, 29% qoq), EBITDA of Rs5 bn (23%
yoy, 50% qoq) and PAT of Rs4 bn (8% yoy, -1% qoq). We note that incremental earnings on a
consolidated basis were contributed by the Delhi distribution business, four operational road
projects and Delhi Metro project. Revenues from infrastructure projects jumped 121% sequentially
on account of commencement of tolling from Hosur Krishnagiri road and full quarter contribution
from Delhi Metro line. Effective tax rate increased to 45% on account of deferred tax component
of Rs1.3 bn at the standalone level.
Maintain rating with a revised target price of Rs920/share
We maintain our BUY rating with a revised target price of Rs920/share (previously Rs975/share) as
we adjust for revision in target price of Reliance Power (revised from Rs110/share to Rs88/share).
Our SOTP-based target price comprises—(1) Rs189/share from the existing generation,
transmission and distribution businesses, (2) Rs103/share for the EPC business, (3) Rs283/share for
38% stake in Reliance Power, (4) Rs55/share as the equity value of the BOT road projects underconstruction,
(5) Rs52/share for equity investment made in the various infrastructure projects and
(6) cash and investible surplus in books of Rs237/share. In our view, lack of clarity on cash and its
accounting will likely keep stock performance muted in the near term.


Highlights of 1QFY12 results
We summarize below some key highlights of 1QFY12 results
􀁠 Sharp jump in EPC revenues. Standalone EPC revenues jumped 238% yoy, 96% qoq
while EBIT margin in EPC business was stable at 13.5% in 1QFY12. We note that sharp
uptick in EPC revenues could likely be on account of pick-up in execution for Reliance
Power’s projects. RELI’s order book stood at Rs280 bn as of June 2011 and includes six
power projects (9,900 MW), one transmission project (1,500 km) and six road projects
(570 km).
􀁠 Change in depreciation rate. During the quarter, RELI changed its depreciation rates for
power business retrospectively from April 2009. Accordingly, prior-period depreciation
amounting to Rs2.27 bn (Rs2.26 bn a consolidated level) was written back during the
quarter and included in other income. Also, the impact on 1QFY12 depreciation was Rs96
mn (Rs108 mn at consolidated level).
􀁠 Higher effective tax rate. RELI’s effective tax rate was significantly high at 37% (45% at
consolidated level) primarily on account of deferred tax component of Rs1.3 bn in
1QFY12. This would likely be on account of deferred taxes materialized due to
retrospective change in depreciation rates.


􀁠 Mumbai distribution performance. RELI reported revenues of Rs11.9 bn (-15% yoy,
12% qoq) on sales of 1,815 MU (-15% yoy, 12% qoq) for the Mumbai distribution
business. RELI generated 1,154 MU (3% yoy, 2% qoq) from 500 MW Dahanu plant to
meet the demand for the distribution business and purchased another 1,023 MU at an
average price of Rs6.6/kwh. 15% yoy decline in unit sale of power is likely on account of
customer migration to TPWR network.


Regulatory relief for Mumbai distribution business
Recent order by Maharashtra Electricity Regulatory Commission (MERC) provided several
regulatory reliefs for RELI’s Mumbai distribution business. We summarize them below:
􀁠 Recovery of regulatory assets. MERC approved recovery of Rs23 bn of regulatory assets
accumulated on account of revenue gaps in previous years (FY2007-11). Further, MERC
has ruled that the said approved regulatory assets (along with the carrying cost) will be
recovered from not just the existing RELI consumers but all those consumers who have
migrated to Tata Power supply but still on RELI’s wires (~97% of total migrated
consumers). In our view, this ruling not only lends better cash visibility from distribution
business but also reduces to an extant the tariff gap between RELI and Tata Power.
􀁠 Cross subsidy surcharge. RELI has been contesting that since majority of the switchover
consumers are industrial and commercial that subsidizes the low-end and price sensitive
domestic consumers, migration to Tata Power supply has and will continue to burden the
consumers of RELI on account of loss on cross subsidy. RELI had accordingly applied for
levying a cross subsidy surcharge on consumers migrating to Tata Power network. MERC
has now approved the levy of cross subsidy surcharge on all consumers who have
migrated to Tata Power supply but still on RELI’s wires. Mechanism for calculation of
surcharge is yet to be finalized.
In our view, both these measures would reduce the gap between tariffs of RELI and Tata
Power and would help arrest the mass migration of consumers to Tata Power network.


Commencement of operations lends some visibility to infra revenues but overall
execution continues to be languid
RELI commenced commercial operations of its Delhi Metro from February 2012 and we note
that commissioning of Delhi Metro along with likely commissioning of road projects lend
visibility to earnings from Infrastructure portfolio in FY2012E. However, in our view,
execution remains languid at best with most of the road and transmission projects missing
their original guidance.
RELI is developing 25 projects with a total cost of Rs400 bn and is aggressively pursuing
other infrastructure opportunities. In our view, commissioning of these near-to-mid term
infra projects (especially the metro projects and the road projects) will likely drive
consolidated revenues of RELI in FY2012E and FY2013E.
Our earnings model currently factor earnings from 401 km of road projects (of which two
projects aggregating 97 km are already operational) being developed by the company in
Tamil Nadu for which we ascribe a value of Rs12.6 bn (Rs55/share). We value RELI’s balance
infrastructure projects at Rs52/share which includes book value of equity investments (1X P/B)
made in (1) Mumbai Metro (Rs1.72 bn), (2) CBD Tower (Rs1.63 bn), (3) transmission projects
(Rs3.4 bn) and (4) Delhi Metro (Rs7 bn). For Delhi Metro, management has guided for a
traffic of 30,000/day. Average fares would be Rs150 for journey from New Delhi Station and
IGI Airport.





What happens when a country defaults : Business Line,

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The US has shown little responsibility in how much it borrows.
It's pretty easy to picture a person or company going broke, but how about a country? Let's start with the basics. You are at the dinner table and your dad is dropping hints about how bad his brother's business is going and how he is having trouble paying his kids fees and making ends meet and keeping the loan sharks at bay. He's sold his house, cars, paintings and bankers circle his defunct plant trying to figure out what they can salvage by selling it.
It's quite easy to extrapolate this painful scenario to companies as well. A company has its assets such as plants, patents among other things which can be sold to pay off debtors.

GOVERNMENTS ARE PEOPLE TOO…

Much like a company or an individual, a state does borrow money from both its own citizens and lenders outside the state such as large banks, pension funds, other governments and institutions such as the International Monetary Fund.
However, unlike an individual or a corporate, a sovereign's assets and obligations are much harder to quantify. Spending on numerous welfare schemes, building infrastructure, salary obligations, medical care, military, government pension schemes are difficult to quantify. To better gauge how sustainable a country's borrowing tendencies are investors use measures such the net-debt GDP ratio or trends in a country's trade surplus or deficit, government revenue growth or lack of it.
The scary part of government borrowings is that a sovereign default can have a fallout on so many aspects. This spills over very quickly into the realm of private and public consumption. In a connected world, perception is everything and the panic that follows can be blind and cause serious damage as we currently are witnessing in the markets.
The past two decades have actually seen major economies getting into a debt crisis, getting pushed to the brink and requiring external assistance to get the house in order.

PRECEDENTS

Three big countries have come close to going broke in the last two decades- Mexico in 1994, Russia in 1998 and Greece last year. Here's what happened. Mexico in 1994 fell prey to crisis after an attempted coup and assassination of a presidential hopeful, spooking investors into demanding higher returns for money they lent to the country. Splurging by the government in the years to 1994 led to weakening finances. The story ended with the country's central bank running out of reserves. The US Government along with IMF stepped in to avert an actual default and arrest the slide in the local currency.
A sharp fall in prices of crude oil, Russia's main export, crippled the economy too. Not only did the country default on payments to mining employees, but there were reports of the military going unpaid. This, after the collapse of the Soviet Union, sparked a series of events which led to the Russian government requiring a bail-out by the IMF and the World Bank.
Greece as a member of the European Union has proven to be one of the more challenging cases so far. The country is saddled with economic obligations, which stretch far into the future in the form of pension and salaries for a large government workforce. Various Greek cities have seen wide-scale social unrest in response to its efforts to cut down on spending. Various European states continue to haggle over the size and structure of a bail-out as investor fears over the debt-led contagion spreading to Italy, Spain and Portugal continues to grow.

TAKEAWAY

The government or a sovereign in the modern setting has evolved to become a much larger entity than anyone envisaged a century ago. This is due in part to the need to provide basic services to much larger populations. However, as the Spiderman quote goes “With great power comes great responsibility”. In the government's case, the power is the ability to borrow to their heart's desire and the ability to print paper money whenever the need arises. Keeping both in check is the great responsibility. In the case of most developing countries, both the borrowing and printing abilities are restricted by the lender and global appetite for a certain currency. This is directly related to how responsible a country is perceived as with its finances and obligation. Current fears facing the global economy include the ramifications of Greece dragging down Spain, Portugal and Italy in a global flight of lenders from sovereigns perceived as irresponsible with their books.
However, while global lenders or investors can easily turn their nose up at a small nation, the real problem arises when the crisis involves a nation as large and important as the US. Dollar notes are the currency of choice across the world for transactions and borrowing. The same sovereign has also shown little responsibility in how much they borrow and how many notes they print. With the recent downgrade the question which has the global marketplace scratching its head is: should the currency of an indebted giant be the world's currency of choice?

Maharashtra Seamless:: Q1 FY12 Result Update :: BP Equities

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Steady Performance
Maharashtra Seamless Ltd (MSL) reported net sales of Rs. 4,785 mn for Q1FY12 vs Rs. 3,994 mn
YoY registering 19.8% growth and net profit of Rs. 716.5 mn as compared to Rs. 100.46 mn YoY,
however last year there was higher other income due to profit on redemption of investments in debt
mutual funds.
Result Highlights
⇒ The company reported Q1FY12 volumes of 58,494 tones vs 52,489 and 27,2387 tones vs
23,932 YoY in the seamless and Electric Resistance Welded (ERW) segment respectively. The
company reported volumes of 68,840 tones in Q4FY11 due to specific 2 to 3 big orders from
customers. We expect volumes of 2,50,000 tones in seamless segment for the entire year.
⇒ EBITDA margin per ton in the seamless category was at Rs 15,786 per ton as compared to Rs.
15,580 per tone last year. The company had achieved impressive EBIDTA margin of Rs. 18,250
per tone in Q4FY11 due to higher realizations in the export market, however which was not sustainable
and we expect margins to be in range of Rs. 15,000 to 15,500 per tone as sustainable
on long term basis. EBITDA margin per ton in the ERW category was at Rs 3,018 per ton vs
6,147 YoY. The margins have decreased due to rise in raw material prices.
⇒ Order book position stands at Rs. 7,080 mn with seamless pipe segment contributing Rs. 5,910
mn and ERW segment Rs. 1,1170 mn.
Foray into solar power segment
The company is foraying into solar power segment. The company will invest over Rs. 1.2bn over
FY12 in a solar farm in Pokhran, Rajasthan. It has tendered for the EPC portion of solar farm and
has already signed a PPA with NTPC Vidyut Vyapar Nigam Ltd for sale of power at a rate of
INR12.24/unit.
Outlook and Valuation
The company is debt-free and currently has Rs. 6.90 bn of cash with book value of Rs. 369 per
share. Currently there is intense competition in the domestic market especially from Chinese players.
At current price of Rs 363.5 stock is trading at P/E and P/B of 10.5x and 1.0x respectively. We maintain
our HOLD rating with target price of Rs. 405 per share.

Simplex Infrastructures :: 1Q12 results marginally ahead of our estimates but expect tepid growth in FY12::Credit Suisse,

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● Simplex’s 1Q12 recurring PAT at Rs287 mn declined 21% YoY
but was 7% ahead of our estimates. Positive surprise was driven
by EBITDA margin at 10.1%, marginally ahead of our estimates
and slightly lower than the expected tax rate.
● Domestic sales grew by 16% YoY; the decline in international
sales was key reason for weak sales growth. Besides, the
continuation of high working capital cycle (121 days net of cash)
and rising cost of debt at 9.85% during 1Q12, resulting in net
interest expenses being up 56% YoY, led to weak profits.
● The company has guided to 10% sales growth, Rs80 bn of order
inflow and EBITDA margin at 10.3–10.5% during FY12. However,
our estimates are slightly conservative. We thus expect a tepid
3% YoY earnings growth during FY12.
● Led by slower sales growth, the continuation of high working
capital cycle, weakening ordering activity and rising interest rates,
we cut our earnings for FY12 by 18% and for FY13 by 27%.
Consequently, we cut our target price by 15%, to Rs321, and
maintain our NEUTRAL rating on Simplex.
1Q12 marginally better than estimates
Simplex Infra’s 1Q12 recurring PAT at Rs287 mn declined 21% YoY but
was 7% ahead of our estimates. Positive surprise was mainly driven by
EBITDA margin at 10.1%, marginally ahead of our estimates and slightly
lower than the expected tax rate. 1Q12 results were weak, mainly hurt by
tepid international sales (10% of sales), the rising cost of debt and the
continuation of higher working capital cycle. Domestic sales (90% of
sales at Rs11.3 bn) growth was reasonable at 16% YoY. Including Rs70
mn of stamp duty paid during the quarter for one of its project under
arbitration, reported profit at Rs241mn declined 34% YoY.

Ordering activity slow, expect order inflow at Rs80 bn
The company acknowledged that the new ordering activity has
weakened, the quality of bids/competition is deteriorating and the
conversion of bids into orders has also slowed. However, Simplex has
well diversified operations based on business segments (buildings and
housing; power and urban infra are the largest segments constituting
64% of order book), mix of private sector (59% of order book),
government sector (31% of order book) and PPP projects(10% of order
book) and national (86% of order book) versus international operations.
Based on this, the company expects to maintain flat order inflow YoY
during FY12 at Rs80 bn; translating into order book at Rs180 bn (20%
YoY growth) and sales growth of about 10%. Order inflow during 1Q12 at
Rs8.6 bn was very weak; however, it improved in July 2011 with Rs12.7
bn of new orders won. The company has currently bid for projects worth
Rs320 bn in the domestic market, Rs40 bn internationally and is
negotiating for a further Rs40 bn orders with the private sector.
Expect tepid earnings growth during FY12
Given its high share of contracts with escalable clauses (85% of order
book) and improvement in international operations, the company expects
to maintain its EBITDA margin during FY12 at 10.3–10.5%. However, we
believe these estimates are slightly aggressive and build 9.8% EBITDA
margin for FY12 in our estimates. We expect working capital cycle to
remain high and the cost of debt to increase further; it has already gone
up from 9.85% in 1Q12 to 10.2% in August 2011. Led by our estimates of
8% YoY sales growth, high working capital cycle and interest rates, we
expect tepid earnings growth at 3% in FY12.
Cut EPS 18–27% over FY12–13E, lower target price to Rs321
Led by slower sales growth, weakening ordering activity, continuation
of high working capital cycle and rising interest rates, we cut our
earnings for FY12E by 18% and FY13E by 27%. Consequently, we
lower our target price by 15%, to Rs321 from Rs376, and maintain our
NEUTRAL rating on Simplex.

IVRCL - Muted performance triggers sharp downgrade in earnings :IDFC research,

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Q1FY12 result highlights
Quarterly performance: IVRCL’s Q1FY12 performance was sharply below our estimates led mainly by lower revenues and
margins. Revenues remained almost flat yoy at Rs11.2bn (below estimate of Rs12.2bn) due to sluggish execution during the
quarter. EBIDTA margin dropped 170bp yoy to 7.4% driven by lower revenues as well as higher commodity prices (below
estimate of 9.3%). EBIDTA declined by 17%yoy to Rs832m (below estimate of Rs1.1bn). Interest expenses grew by 39%yoy
to Rs628m led by higher debt levels & higher borrowing costs (in line with estimates). Debt as on June 30th 2011 increased
to Rs24bn from Rs21bn as on March 31st 2011 led by higher advances to subsidiaries as also to suppliers. IVRCL has
indicated that debt levels have since come down (post June 30th 2011) to Rs22bn. Depreciation charges grew by 45%yoy to
Rs228m. PBT declined by 88%yoy to Rs49m and PAT declined by 85%yoy to Rs42m (sharply below our estimate of
Rs183m). Order backlog declined by 9.7%yoy to Rs183bn (excluding L1 of Rs33bn). IVRCL removed ~Rs19bn of slow
moving orders from Saudi Arabia from the order backlog during the quarter.
Key positives: None
Key negatives: Rise in debt levels to ~Rs24bn and increase in interest rates
Impact on financials
We have downgraded our EBIDTA estimates by 18% in FY12 and 16% in FY13 to account for lower than expected traction in
revenues and margins in Q1, cancellation of Rs19bn order from Saudi Arabia as also further delay in final award of
Maharashtra-Goa border-Karnataka-Goa border project. This has translated into a sharp 42% earnings downgrade in FY12E
and 36% in FY13E with our revised EPS being Rs4.1 in FY12E and Rs5.4 in FY13E.
Valuations & view
We expect near term stress on IVRCL’s earnings led mainly by sluggish revenue growth and high leverage. The stock,
however, has corrected very sharply (46% over 3 months) and we see limited downside from current levels. Any softening in
interest rates and fund raise by stake divestment in infra assets/land monetization would be key triggers for the stock in the
near term. As a result, we maintain our Outperformer rating on IVRCL with a price target of Rs73.

Buy Shree Renuka Sugar; Target : Rs 80::ICICI Securities

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S t r o n g   g l o b a l   p r i c e s   b o o s t   m a r g i n s …
Shree Renuka Sugars reported robust results for Q3SY11 as the topline
grew 21.7% QoQ to | 2240.1 crore on  the back of higher volumes from
both Indian and Brazilian operations. EBITDA margins improved from
15.1% to 19.3% led by higher realisations of sugar and ethanol in Brazil.
Depreciation provisioning increased ~60%  to | 179.1 crore due to
capacity addition in Brazil and commissioning of the Kandla refinery in
India. Interest cost declined 12.9%  to | 162.2 crore due to repayment of
working capital debt in India. Other income increased 39.6% to | 125.9
crore on the back of | 100 crore of forex gain in the Brazilian subsidiary
due to appreciation of the Brazilian  Real against the rupee. Net profit
increased 214.8% to | 187 crore on the back of higher EBITDA and other
income.
ƒ Operational details
The company sold 2,88,000 tonnes of sugar in India with average
realisations of | 29.9 per kg. Out of this, it has exported 1.95 lakh tonnes
with average realisations of | 33.2 per kg and 0.97 lakh  tonnes sold with
the average realisations of | 23.5 per kg. The company got the benefit of
prevailing higher global sugar prices. The company has sold 33,741
kilolitres (kl) ethanol with average realisations of | 26.5 per litre and 8.0
crore units in power with average tariff of | 6.37 per unit.
V a l u a t i o n
At the current price of | 62, the stock is trading at 6.1x its SY11E EPS of |
9.9 and 6.5x its SY12E EPS of | 9.3. The upsurge in global sugar prices,
lower sugarcane cost in India and exports allowance by government
would boost the earnings for the company in future. We expect the
government to further allow at least 0.5 million tonnes (MT) of exports,
which would improve the domestic sugar realisations for the company.
We believe strong cash flows generations would help in repayment of
debt, which would strengthen balance sheet, going forward. We value the
stock at 8x its SY12 EPS of | 9.9 to arrive at a target price of | 80.

Energy: Some relief finally but it should last ::Kotak Sec,

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Energy
India
Some relief finally but it should last. We see the recent sharp decline in crude prices
(Dated Brent) to around US$100/bbl as a positive for the oil sector if prices sustain at
those levels. Lower crude prices will result in (1) likely lower gross under-recoveries and
(2) a favorable environment to usher in further reforms in the sector. We maintain our
positive view on government-owned oil stocks but are more positively inclined towards
the upstream companies noting their better reward-risk balance.


Crude around US$100/bbl means a better situation for everyone (almost)
We see the recent correction in crude prices as providing some relief to all the participants in the
subsidy-sharing mechanism (government, upstream and downstream companies) as decline in
crude oil prices will result in lower overall gross under-recoveries. We compute FY2012E gross
under-recoveries at `920 bn if crude remains at US$100/bbl for the remainder of the year versus
our current estimate of `1.04 tn based on average crude price of US$110/bbl for FY2012E. We
compute marketing margin of –`0.5/liter for diesel, subsidy loss of `21/liter for kerosene and
`261/cylinder for LPG at crude price of US$100/bbl.
Diesel deregulation a possibility with some luck and pluck; breakeven price for diesel is US$98/bbl
We see the possibility of diesel deregulation if crude prices sustain at around US$100/bbl for some
time. We note that the current breakeven price for diesel is US$98/bbl at an exchange rate of
`44.75/US$ and under-recovery at crude oil price of US$100/bbl is `0.5/liter. ‘Low’ crude prices
may give the government a good opportunity to deregulate diesel prices as was done with
gasoline in June 2010 (although with some hiccups). However, the government would need to
display commitment to the process of deregulation in sharp contrast to its past track record.
LPG and kerosene reforms may take some time but steps being taken in the right direction
We would watch for any positive developments on reforms related to subsidy on kerosene and
LPG. We highlight that an Empowered Group of Ministers (EGoM) has given an in-principle
approval to the interim report of the Task Force on Direct Transfer of Subsidies on Kerosene, LPG,
and Fertilizers. Please see our note ‘A new approach to some old problems’ released on July 11,
2011 on the same. We see the direct transfer of subsidy as recommended by the Task Force as a
pragmatic and implementable solution to tackle the problem of burgeoning subsidies.
Good potential upside in stocks but biased towards upstream stocks
We would advise investors to stay invested in the government-owned names given that the stocks
still offer decent potential upside of 16-35% to our fair valuations (see Exhibit 1) but give more
weight to the upstream stocks in their portfolios. We maintain our BUY ratings on ONGC (TP:
`385) and OIL (TP: `1,800) and ADD ratings on BPCL (TP: `800), HPCL (TP: `500), IOCL (TP: `435)
and GAIL (TP: `560).

GSPL: A good quarter, but how much does it change the valuation of business?:: Kotak Sec,

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GSPL (GUJS)
Energy
A good quarter, but how much does it change the valuation of business? GSPL
reported 1QFY11 EBITDA at `2.65 bn (+14.1% qoq, +10.1% yoy) versus our estimate
of `2.5 bn; the qoq increase in net income reflects (1) higher transmission volumes at
36.8 mcm/d (+3.4% qoq and +1.2% yoy); our estimate was 36 mcm/d and (2) higher
transmission tariffs at `0.81/cu m versus `0.79 in 4QFY11. Yoy comparison is not valid
due to change in depreciation rates effected in FY2011. We maintain our REDUCE
rating on the stock with a target price of `92 given unfavorable risk-reward balance.


Good quarter boosted by healthy transmission volumes
GSPL reported 1QFY12 EBITDA at `2.65 bn (+14.1% qoq and +10.1% yoy) versus our estimate of
`2.5 bn. The strong performance qoq reflects (1) higher gas transmission volumes at 36.8 mcm/d
versus 35.6 mcm/d in 4QFY11, (2) higher transmission tariffs at `0.81/cu m versus `0.79/cu m in
4QFY11 and (3) higher profitability of electricity segment. The reported net income was at `1.37
bn (-8.8% qoq and +30.7% yoy). There is no merit in qoq and yoy comparison given the change
in depreciation rates effected in FY2011.
Volumes good in 1QFY12 but no certainty about source of incremental volumes in the near term
We do not see meaningful upside to GSPL’s transmission volumes unless there is a quick ramp-up
in gas supplies from RIL’s KG D-6 block, which seems unlikely given the management guidance on
the same. We also do not see imported LNG contributing meaningfully to incremental volumes for
GSPL as Petronet LNG is already operating its LNG terminal at Dahej at 105% of its nameplate
capacity. We note that GSPL will benefit from LNG volumes imported by the new LNG terminals at
Kochi and Dabhol; it does not have pipelines originating from these terminals.
Retain REDUCE with a revised target price of `92
We maintain our REDUCE rating given (1) 10% potential downside to our revised target price of
`92 and (2) potential downside from cut in GSPL’s transportation tariffs for its existing network.
We find the current tariff too high since it translates into an estimated pre-tax ROCE of 25.6%
based on FY2011 data versus 18% allowed returns. It is possible that the regulator may allow
higher-than-expected tariffs (note the case of IGL and GAIL’s HVJ system) but we do not want to
rely on regulatory oversight as an investment thesis.
Revised earnings
We have revised FY2012E, FY2013E and FY2014E EPS to `8.5, `8.4 and `10 from `8.1, `9 and
`10.7 to reflect (1) 1QFY12 results and (2) other minor changes. We model gas transmission
volumes for FY2012E, FY2013E and FY2014E at 37.1 mcm/d, 43.6 mcm/d and 47.1 mcm/d,
respectively versus 36.8 mcm/d in 1QFY12 and 35.6 mcm/d in FY2011.

Tata Steel:: Is the price correction overdone? :Deutsche bank,

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Cutting estimates/target price to factor weakening European steel market
Following downward revision to our Euroland economic growth forecasts
(2011/12 GDP growth revised down by 20/70bps), we are cutting our volume
estimates for TS Europe by 11% and 6%, respectively. We cut our FY12 EBITDA
for TS Europe by 30% to INR32bn. We remain more sanguine about Indian
operations where we have made only a modest downward adjustment of 2% to
our estimates. We cut our consolidated FY12 EBITDA estimate by 9% and EPS by
16%. We cut target price by 12.4% to INR620. Maintain Buy on valuation.


TS Europe trading at steep discount to European peers
Following fears of slowing demand and weakening steel prices in the western
world, Tata Steel stock is down by 17% over past two weeks. While we cannot
rule out any further stock price weakness if the panic selling in global equity
markets continues, we do believe that the stock weakness looks overdone with
the European operations trading at a residual valuation of only 1.9x FY12
EV/EBITDA, implying a ~67% discount to the corresponding valuation of Arcelor
Mittal (Hold; EUR16.06) and ~60% discount to Thyssen Krupp (Buy; EUR24.71).
Capacity expansions in India to incrementally de-risk earnings
The company’s vulnerability to a volatile steel environment and vagaries of raw
material prices has been progressively brought down through investments in
European operations and higher volume growth in India. Following the
commissioning of the 2.8mn tonne expansion at Jamshedpur, the company will be
able to de risk its earnings far more with Indian operations contributing 76-77% of
the consolidated EBITDA. We estimate that the normalized EBITDA/t of Indian
operations at US$375/t, ~2.5x of the normalized EBITDA of global peers.
Target price of INR620/share; reiterate Buy
We value Tata Steel on SOTP valuation: Indian/European/Asian ops valued at
FY12E EV/EBITDA of 7x/6x/4.5x. Key risks: delay in commissioning of projects in
India, and a higher than-anticipated rise in raw material prices


Downside risks
􀂄 Higher-than-anticipated increase in steel-making raw material prices: In the case that
raw material price hikes are higher than our assumptions, there could be a risk to our
target price and recommendation.
􀂄 Delay in commissioning of projects in India: The timely commissioning of India
projects remains critical to the de-risking of company’s earnings to the vagaries of the
volatile raw material price and also the finance management’s capital expenditure over
FY12-14 without putting undue stress on the balance sheet.
􀂄 Overhang of the inflation-wary government of India: In the case that the inflation-wary
government of India frowns on the price hikes, the sentiment for all steel stocks,
including Tata Steel, may be affected negatively.
􀂄 Steel demand environment remaining challenging in Europe, especially in the long
product segment into CY11 and delay in steel demand recovery.


Coal India:: Is the company on a roll? :: Deutsche bank,

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Reiterate buy with target price of INR450
Looking at the 1QFY12 PAT at 64% YoY much above our and consensus estimates
and management confidence post the results explaining that, barring seasonal
issues, the company is well on course to meet its performance targets for FY12
(as well as its production targets for FY17), we came out of the meeting quite
positive and feeling reassured on initiatives for protecting shareholders’ interests.
Our revised estimates – down 7% for FY12E and up 1% for FY13E – factor in
some cushioning for upcoming wage negotiations in FY12E. Buy.

A strong Q1 performance driven by inventory draw-down
With continued partial stoppage of iron ore exports from Karnataka, the railway
rake availability was up 13% YoY and led to a 5.3% YoY jump in off-take, largely
from inventory draw-down. Coupled with a price jump of 20% YoY, at INR145bn
the top line was 2% ahead of expectations. The cost increase at cash levels up
7% YoY was also a shade lower than our expectations while net income was up
64% YoY at INR 41.4bn.
A lot of initiatives taken to protect shareholders’ interests
Apart from standing up to the planning commission proposal to import coal and
distribute at subsidized rates (at cost of higher normative prices), the company has
also communicated to the Ministry of Power that stoppage of e-auction coal
would not increase coal availability for the power sector. Also, should wage
negotiations result in a margin drop, the company would seek a price hike at the
end of year. In the long run, the mining tax could accelerate the land acquisition
process and be earnings accretive.
A follow-on offering in prospect?
Looking at the management’s business outlook and the fact that the stock is the
2nd highest in market capitalization in India today, we would not be surprised if the
government decides to go for an FPO in the 2nd half. Our valuation matrix remains
the same with a 12M target price at INR450 based on an average of life of mine
DCF and exit P/E of 18. Key downside risks are volume risk and mining tax.


Valuation and risks
Valuations
We use an average of the values derived using life-of-mine DCF and P/E of 18x FY12E to
arrive at our target price of INR450 (rounded off). In the life-of-mine DCF methodology, we
value the currently-stated extractable coal reserves of 22.3bn ton, yielding a value of
INR479/share. This excludes any potential upside from conversion of the company's
remaining c.30.1bn tons of proven reserves into extractable reserves. We assume volume
growth of 3% until FY17 and then assume volume growth of 4% until extractable reserves
become zero. We assume constant prices post FY17 and rising costs, implying diminishing
profitability. We assume a discount rate of 12.3% (beta of 0.8, a risk-free rate of 8.1% and an
equity risk premium of 5.3%). In the P/E methodology we assume an exit P/E of 18x FY12E
(vs. 16x earlier), as we believe the valuation paid for Indonesian coal mines by Indian
developers and the upcoming auction of captive mines within India warrant a premium for
Coal India's operating assets which have among the lowest cost structures. However, this
multiple is at a modest premium to international peers. We believe the premium is justified
largely on account of understated profits at CIL, a strong balance sheet with ~USD9.5bn of
net cash, and also because CIL works with negative operating assets, which results in very
high returns. Furthermore, we estimate earnings CAGR for FY11E-13E of c.26%, implying a
PEG of lower than 1, which looks reasonable.
Continues to be expensive on headline P/E and EV/EBITDA basis
Coal India’s earnings are understated to an extent of 20-29% as under Indian accounting
standards CIL charges INR20-30bn annually as additional overburden removal charges.
According to management, under the IFRS accounting standards, these charges cannot be
provided, resulting in net profit for the company being understated. Historically, we estimate
that the understatement has been to the extent of 20-29% over the past few years. Also,
thanks to high shortages of coal in the country, there is a reasonable chance that net working
capital would fall – read rising customer advances which would also drive up cash earnings –
but are not reflected in earnings.
Please see next page for global peer valuation table
Risks
Key downside risks are lower-than-expected production growth due to delays in
environmental clearance, higher-than-expected operating costs and the profit-sharing
provisions in the proposed new 'Mining Bill' leading to earnings dips (depending on when
and how the act is implemented). Our sensitivity analysis shows that if the sales volume for
FY12 is 2% lower than expected, then FY12 EPS could fall by 4%. Diversion of e-auction coal
to the power sector with a regulated price increase of less than 4% could have a negative
impact on earnings. In the event the proposed mining bill is imposed and in the adverse
scenario of the government not allowing any price hike, Coal India’s FY12E profit could be
reduced by c40%.


Jain Irrigation Systems:: The ground remains fertile:: Nomura research,

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The ground remains fertile
Concerns on NBFC and debtors overdone; valuations lowest since 2008-09 crisis period


Action: Reiterate BUY with an upside of 41%
We reiterate our BUY rating on Jain Irrigation with a target price of
INR229, an upside potential of 41%. We believe that currently valuations
are close to the lows witnessed during the crisis period of 2008-09, with
the stock trading at 11.6x its one-year-rolling forward EPS. This is much
lower than the past five years’ average of 17x. In our view, these low
valuations are unjustified and the concerns on the NBFC and receivables
front are overdone. We estimate receivables are likely to come down over
the next 2-3 quarters while the NBFC scale-up will take time and the EPS
dilutive impact, if any, will not be as much as the market fears. It is too
early to worry about increasing competition, in our view, as it would take
competitors 3-5 years to scale up to a meaningful level. We look for a
28.9% CAGR in MIS revenue and 19% CAGR in overall revenue until
FY14F. Structural expansion in margins and lower growth in interest costs
should help net profit show a 30% CAGR until FY14.
Catalyst: Robust MIS business growth and lower receivables
Strong growth in the MIS business, in the region of 30% y-y, and falling
receivables are likely to boost sentiment.
Valuation: Valuing at 16x one-year rolling forward EPS
We value the company at 16x one-year-rolling forward EPS (average of
FY13F and FY14F EPS), slightly lower than the 17x at which it has traded,
on average, in the past five years and lower than our earlier multiple of
20x, to account for the possible risks emanating from the investments in
the proposed NBFC, possible equity dilution and a lower level of growth
than earlier estimated.

UBS:: Coal India- 1 QFY12 EBITDA in line; PAT higher

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UBS Investment Research
Coal India
1 QFY12 EBITDA in line; PAT higher
􀂄 Event: 1QFY12 operational results in line; PAT higher than estimates
Pre-ex PAT of Rs41.4bn (-2%QoQ, +63%YoY) was higher than UBS-e/consensus
of Rs37.7bn / Rs36.4bn. EBITDA at Rs48.2bn (-7%QoQ, +55%YoY) was in line
with UBS-e/consensus of Rs48.4bn/Rs48.6bn. Net sales was marginally higher at
Rs144.99bn (-3%QoQ, +27%YoY, UBS-e/consensus of Rs144.2bn/Rs144.3bn).
PAT was higher than estimates due to lower depreciation, marginally higher other
income and lower tax rate (30.4%). EBITDA margin was 33.3% (UBS-e 33.6%).
􀂄 Impact: Short term positive impact though remain cautious on the stock
While higher than expected PAT could have a short term positive impact on the
stock we remain cautious on CIL with a one year view given concerns on
execution. Sales volume was up 5%YoY to 106.25mt while ASP rose 3%QoQ to
Rs1,365/t (US$30/t). EBITDA/t was Rs454/t (US$10/t, -1%QoQ, +48%YoY).
􀂄 Action: Maintain current estimates; execution/wagon supply remains key
As highlighted in our recent ‘Asia on the Ground’ note ‘What’s happening on the
execution side’ dated 28th July 2011, we remain cautious on CIL as: 1) Progress on
washeries is slow - only one out of 20 has been contracted. 2) Production /despatch
target of 452mt /477mt for FY12 could disappoint due to execution/wagon
availability issues. 3) Railway wagon ordering is delayed— Budget 2012 had
targeted 18,000 new wagons in FY12—ordering expected by Sept. 4) Delay in start
of wage negotiations (due in July). CIL is hosting an analyst meet tomorrow.
􀂄 Valuation: Maintain Buy and PT of Rs400
We continue to value CIL on 15x PE on FY13E EPS & maintain our price target.


􀁑 Coal India
Coal India is the largest coal company in the world (primarily thermal coal). The
government owns 90% of the company. It sells its entire output (415Mt in
FY10) in the domestic market. Coal India sells coal at a significant discount (55-
60%) to international coal prices.
􀁑 Statement of Risk
Coal India is a public sector enterprise and hence, may not be able to raise coal
prices in line with input costs (given inflation concerns), negatively impacting
earnings. Coal India is expanding capacity significantly; any delay in capacity is
likely to impact earnings. Valuation: We value Coal India on 15x FY13E EPS.

Jaiprakash Associates - Construction margins ahead than estimates:: Prabhudas Lilladher,

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􀂄 Flat Revenue growth: Construction revenues (constituting 40% of the total
revenues) de-grew by 11.3% YoY for Q1FY11; however, cement sales were up by
12.9% YoY. This was mainly on account of a 20% growth in despatches YoY to
4.2m tonnes. Realisations were a tad lower at Rs3,800/tonne down by 5.4% YoY
and up by 14.8% QoQ.
􀂄 Real Estate, EPC aids EBITDA, while Cement EBIT margins suffer: EBIT margins
for construction which disappointed in Q4FY11 and which were lower in Q1FY11
rose to 19.6% in Q1FY12. This was above our expectation of 6% as we had
considered in house construction to have higher share in revenue booking. For
cement, the EBIT per tonne declined to Rs464/tonne from Rs482/tonne in
Q4FY12 and Rs818/tonne in Q1FY11. EBIT margin for cement stood at 11.9%
which was in line our expectation of 12% lower by 800bps YoY. Real Estate EBIT
margins were the surprise factor with a 1100bps improvement YoY which aided
the overall results. Overall EBIDTA margins stood at 23.4% which was up by
317bps YoY on back of better EPC and Real Estate margins.
􀂄 Higher interest continues to dent PAT: Interest continues to increase YoY by
30.6% and QoQ by 5% to Rs4.3bn. Tax rate was also higher to 40% as compared
to 28% YoY which led to a APAT growth of 1% YoY. However the profits were
higher than our expectations of Rs791m.
􀂄 Valuations: Triggers in terms of commissioning of YEW, increased land sales in
JPI and pick-up in construction revenues in JPA fares well for upsides in the
stock, going forward. The stock is available at a core P/E of 7.7x FY13E. Maintain
‘Accumulate’

Adani Power :: Re-setting expectations in sync with environment :: Deutsche bank,

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Adani Power
Reuters: ADAN.BO Bloomberg: ADANI IN Exchange: BSE Ticker: ADAN
Re-setting expectations in sync with environment

Strong growth phase and reasonable valuations on our estimates: Buy
Adani Power has commanded a premium for its execution capabilities and has
demonstrated timely capacity addition which only a few of its peers can emulate.
However, come 2013, important investor issues should include adequate fuel
supplies and incremental merchant volumes/pricing. The share price has corrected
c16% since the recent quarterly miss. Despite lower expectations, at 2.0x FY13E
BV we see upside potential: Maintain Buy with new TP of INR105.


Management confident of coal availability over next 18 months
While long-term coal availability looks reasonably assured from supplies from
recent acquisitions by Adani Enterprises (AEL), the issue is more key over the next
18 months. Post the recent results announcement, the company’s communiqué
mentioned that even with lower coal availability from domestic supplies, the rampup
of coal o/p from Indonesia should ensure 80-85% operations in all units.
Our estimates are based on company being able to run 6,600 MW in FY13e
Given the strong commissioning schedule of 3,960 MW over the next 12 months
and the ramp-up of generation volumes, we believe FY13 net income will be a key
point to monitor. Accordingly, on lower volume assumptions (22/6% cut), despite
our revised EPS estimates of INR5.8 for FY12e (40% below street) and INR12.8
EPS for FY13e (6% below street), we estimate an earnings run-rate of c100% YoY
starting 2HFY12e. At USD36 /t coal, we estimate 31% RoE for FY13e.
Reiterating Buy at INR105 target price; fuel could be a game changer
We lower our target price to INR105, valuing Adani on SOTP of project values on
NPV considering a 12.5-15% cost of equity. Risks are a change in Indonesian Coal
Law, as a USD15/t change in the coal price would reduce our target price by
INR24 (APL has 9.6mnt supply contracts with AEL’s mine in Indonesia) and a
shortfall in domestic coal availability