IPO, NCD GMP; Gray Market Preimum :: Aug 31, 2011

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Company Name	Offer Price (Rs)	Expected Listing Price Premium
Vaswani Ind.	52	Discount
Brooks Lab.	100	5 to 6
SRS Ltd.	58	1 to 2
T. D. Power Systems	256 to 261	Discount
Shriram City Union Bond	1000	1%
Manappuram Finance	1000	0.5%
MuthootFinance	1000	1%

Reliance Comm:: Lofty debt burden ::CLSA

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Lofty debt burden
Reliance Comm’s FY11 annual report confirms its lofty debt burden and
its low interest, licence and taxation charges. In the 2G case, the CBI has
filed only preliminary charges: three executives will defend themselves.
Management claims the charges are not connected to Reliance Comm or
listed group companies: we await the CBI’s third charge sheet to assess
regulatory risks. A stake sale in its tower company is under due diligence:
valuations will likely be a key hurdle. We maintain our Underperform call.
High capital work in progress and rising debt.
Reliance Comm’s FY11 annual report confirms continuing high capital work in
progress (CWIP) of Rs182bn/US$4bn (US$2.6-2.5bn in FY10-09). While CWIP has
been high in previous years due to the launch of GSM services, 3G-spectrum fees
of Rs86bn/US$1.9bn contributed to the jump in FY11. Meanwhile Reliance Comm
continues with an aggressive depreciation policy of 18 years, which risks a stepup
in future and/or one-time write-offs. Also its end-FY11 gross debt increased
31% to Rs391bn/US$8.7bn and net debt increased 38% to Rs342bn/US$7.6bn,
taking net debt to Ebitda to an uncomfortable 5.2x.
Low net interest cost and FCCB redemption.
Reliance Comm’s net interest cost in FY11 was Rs11bn, compared to positive
Rs11bn in FY10 (which had included Rs26.5bn of foreign exchange gains). In FY11
RCom had a foreign exchange loss of Rs1.2bn and its effective interest cost stood
at 3.7% (excluding FCCB (foreign currency convertible bonds)) - still low,
especially as its Indian rupee debt increased fivefold to Rs89bn (27% of the total).
Reliance Comm had two FCCBs of US$500m and US$1,000m outstanding on 31
March 2011 and in May it had redeemed US$500m: currently US$925m of FCCBs
are outstanding. Details also reveal a reduction in treasury operations, with
investment transactions 50% lower.
Lower licence fees, accounting change and towers.
Reliance Comm’s cost details reveal licence fees dropped 20bps to 5% - now
380bps lower than peer Bharti Airtel and its provision for tax fell 7ppt to 1%
against 10% for Idea Cellular. Also in FY11, Reliance Comm changed its
accounting for IRU’s on network capacity: it now recognises income received
upfront, a change from the previous straight line over the period of the contract.
This resulted in FY11 revenue being Rs25.5bn (11%) higher, but also led to
amortisation Rs25.6bn (39%) higher. RCom has 117 subsidiaries and the 95%-
owned Reliance Infratel profit was down 9% YoY to Rs8.3bn: it is evaluating offers
for a stake sale here, as well as in the 100%-owned DTH venture.
CBI charge sheet in 2G, high regulatory risk.
In the 2G case, the annual report details that the CBI has filed preliminary
charges against Reliance Telecom, a subsidiary, and three executives of the group.
The annual report states that the three executives will defend themselves and
that charges are not connected to Reliance Comm or any other listed group
companies. However we await CBI’s third charge sheet to confirm that Reliance
Comm did not violate any licence conditions. Meanwhile with Reliance Comm’s
lofty leverage and poor financial performance, we maintain our Underperform call
on the stock.

Industrials: Evaluating opportunity in mid-cap industrials; upgrade Voltas to BUY::Kotak Sec,

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Industrials
Evaluating opportunity in mid-cap industrials; upgrade Voltas to BUY. We
evaluate opportunity in mid-cap industrials based on recent correction and
characteristics such as strong balance sheet, low working capital, cash flow generation
and absence of corporate governance issues. We upgrade Voltas to BUY and reiterate
BUY on CRG as these companies are trading at low valuations even in stress-case
earnings assumptions. Retain REDUCE on Thermax for now.


Evaluate opportunity in mid-cap industrials on attractive valuations, strong B/S, corporate governance
We evaluate opportunity in mid-cap industrial companies (Voltas and Crompton) as (1) companies
are trading at relatively attractive valuations even on stress-case assumptions, (2) strong balance
sheet, low working capital requirements and cash flow generation characteristics, (3) strong track
record of managing business in terms of growth and margins and (4) no dilution.
We have conducted a stress-case analysis on Voltas and Crompton building in lower order inflow,
revenue and margin assumptions across most of the key segments of the companies.
Voltas: Upgrade to BUY (from ADD), TP unchanged (Rs150) as 2X P/B and 11XFY13E are attractive
We upgrade our rating on the company to BUY (from ADD) based on (1) attractive valuations -
trading at 11X FY2013E EPS, 2.1X FY2013E book value (20% RoE with no leverage) despite
building in relatively low expectations. Even in further stress case of (1) 25% order inflow decline
in FY2012E, 7% EBIT margin in EMP, (2) 8% margin in UCP, 10% CAGR during FY2012-13E,
stock still trades at only 13X FY2013E (Rs9 EPS in stress case). We believe geographical
diversification in EMP (India, Middle-East, S.E. Asia), low penetration in UCP would help in
mitigating risks.
Crompton: Reiterate BUY with a target price of Rs210/share (no change in estimates)
We reiterate BUY rating on Crompton as the stock traded at 10X FY2013E (on FY2013E EPS of
Rs13.5) post steep correction subsequent to the 1QFY12 results. Even in stress case of (1) 12.25%
standalone margins and 6% CAGR growth and (2) 5-7% growth in overseas with about 7-8%
margins, stock trades at 12XFY13E P/E only. Our positive stance is also based on (1) diversified
business profile in terms of geographies as well as business segments, (2) capability expansion in
drives (Emotron acquisition), generators, substation automation (QEI acquisition), motors,
consumer appliances, (3) strong balance sheet and cash flow generation characteristics.
Thermax: Marginally change estimates, retain REDUCE (TP Rs550); look for more valuation comfort
We have marginally changed estimates to earnings of Rs33 and Rs35 from Rs33.5 and Rs37 earlier
based on assumption of flattish order inflows versus 10% growth earlier. Stock trades at 14X
FY2013E (versus target multiple of 16X) and 3.7X FY2012E P/B. There has been evidence of
stronger competition in (1) small IPPs (Cethar Vessels winning large orders in that category), (2)
other components such as waste heat recovery boilers etc. (Tecpro Systems won orders from large
cement companies), (3) supercritical opportunity where even L&T has not won any incremental
third party order in the last one year and (4) early signs of weakness in margins that is not fully
priced-in (we build in only 50 bps decline). We revise our target price on the company to Rs550
(from Rs650/share) based on revision in estimates and change in valuation to 16X FY2013E EPS
(previously 17.5X FY2013E EPS). We would look for more valuation or business comfort before
turning positive.


Voltas: Upgrade to BUY with an unchanged target price of Rs150/share
We retain our earnings estimates of Rs9.6 and Rs10.5 for FY2012E and FY2013E,
respectively and retain our target price of Rs150/share based on 14X FY2013E EPS.
We upgrade our rating on the company to BUY (from ADD) based on (1) attractive
valuations - trading at 11X FY2013E EPS despite building in very low expectations in our
estimates (stock trades at 2.1X FY2013E book value, less than 1X sales), (2) no corporate
governance issues, (3) strong balance sheet in terms of no debt and low working capital, (4)
maintains strong focus on working capital, cash generation giving further comfort on
valuation, and (5) long-term track record of the company in managing its business through
cycles.
Our estimates are building relatively conservative assumptions of a 10% de-growth in EMP
segment order inflows, 15% de-growth in Engg products segment revenues and margin
contraction across most of the segments. We also note that penetration of AC market is
relatively low which could provide a potential for strong growth in the UCP segment


Stress-case analysis
Our stress-case analysis (builds in fairly high stress in the business) results in EPS of Rs9 for
FY2012E and FY2013E. Even on this EPS, the stock trades at a reasonable valuation of 13X
FY2013E EPS. The key changes in assumptions in our stress-case scenario include:
􀁠 Electromechanical projects segment (EMP). Build in sharp de-growth of 25% in
FY2012E order inflows and flat yoy inflows in FY2013E versus our base-case assumption
of 10% de-growth in FY2012E and 5% growth in FY2013E. Also build in slight
contraction in EBIT margins for FY2013E.
􀁠 Engg products and services segment. Build in 250 bps lower EBIT margin for FY2012E
and FY2013E at 15% (base-case assumption of 17.5%). This is versus 18.3% EBIT margin
recorded in FY2011
􀁠 Unitary cooling products segment (UCP). Build lower EBIT margin assumption for
FY2013E at 8%, 150 bps lower than base-case assumption of 9% (recorded 10.2% EBIT
margin in FY2011).

Maruti Suzuki: Second half likely to be better than first::Kotak Sec,

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Maruti Suzuki (MSIL)
Automobiles
Second half likely to be better than first. We expect volumes to improve by 9% yoy
between August 2011 and March 2012 driven by new product launches and strong
customer response to the new Swift. We expect margins to improve in FY2013E as
volumes recover, which is likely to lead to lower discounts and improvement in
operating margins. We maintain our BUY rating on the stock but revise our target price
marginally to Rs1,475 (Rs1,515 earlier) driven by 3-9% cut in our earnings estimates


New launches to boost volume growth in 2HFY12E
New Swift has recieved a very good response from customers and the company has already
accepted bookings for 50,000 units. Maruti Suzuki reported a 7% yoy decline in volumes during
April-July 2011, impacted by an economic slowdown and strike at the Manesar plant which has
resulted in a loss in production of its best-selling models of Swift and Dzire. We expect domestic
volumes to pick up in 2HFY12E (+9% yoy) as customer sentiment revives driven by a pick-up in
demand during the festive season, increase in diesel engine capacity and new model launches
(new Swift, new Dzire and new UV).
EBITDA margins to decline from 1QFY12 levels but likely to improve in FY2013E
We estimate a 270 bps negative impact on margins going forward due to a sharp appreciation of
Yen versus Rupee (-150 bps impact), increase in R&D expense (-20 bps impact) and sharp increase
in discounts in the domestic market (-100 bps impact). However, we believe Maruti will likely
offset this impact by localization of imported components (likely to positively impact margins by
100 bps), slight improvement in product mix (positive impact of 30 bps on margins) and decline in
raw material costs, especially rubber and aluminium (likely to add 90 bps to the margins). Hence,
we estimate EBITDA margins to decline by 50 bps from 1QFY12 levels over the next nine months.
We expect EBITDA margins to improve by 80 bps yoy in FY2013E driven by lower discounts and
cost-cutting benefits.
We maintain our BUY rating on the stock but revise our target price downwards
We maintain our BUY rating on the stock with a target price of Rs1,475 (from Rs1,515 earlier).
Our target price is based on 14X our FY2013E consolidated earnings estimate. We have revised
our consolidated earnings estimate to Rs84.9 and Rs105.3 (from Rs93.1 and Rs108.3 earlier) over
FY2012-13E factoring in a 3-4% cut in our volume forecasts and 40 bps decline in our EBITDA
margin estimate for FY2012E.


Sharp appreciation of Yen and higher discounts will likely impact margins in
2HFY12E
Yen has appreciated by 9% since 4QFY11 levels which is likely to impact margins in the
coming quarters. The company has hedged direct imports till October at a favorable rate,
however, vendor imports are still open. The company has hedged Euro and Dollar exports
for FY2012E at a favorable rate at the start of FY2012 and we do not foresee any impact on
exports due to currency movement. We expect a 150 bps negative impact on margins due
to sharp appreciation of Yen versus Rupee. The company has a net exposure of 27% of its
sales in Yen (8% of sales is direct imports, 5% of net sales is royalty expense and 14% of
net sales is indirect imports).
Discounts have also increased since 1QFY12 and we estimate average increase of
Rs1,000/vehicle qoq which could impact EBITDA margins by 100 bps in 2QFY12E. As
highlighted above, the share of diesel vehicles is expected to increase going forward while
Swift/Dzire volumes are also expected to increase in the product mix which will likely keep
average discounts/vehicle at Rs1,000/vehicle.
We estimate a 270 bps negative impact on margins going forward due to sharp appreciation
of Yen versus Rupee (-150 bps impact), increase in R&D expense (-20 bps impact) and sharp
increase in discounts in the domestic market (-100 bps impact). However, we believe Maruti
will likely offset the negative impact by localization of imported components (likely to have a
positive impact of 100 bps to the margins), slight improvement in product mix (likely to
positively impact margins by 30 bps) and decline in raw material costs, especially rubber and
aluminium (likely to add 90 bps to the margins). Hence, we estimate EBITDA margins to
decline by 50 bps from 1QFY12 levels over the next nine months.

Valuations attractive at current levels; maintain BUY
Stock trades at 13.6X FY2012E EPS and at 11X FY2013E EPS estimate given concerns of a
slowdown in passenger vehicle volume growth and flat earnings growth in FY2012E. We
believe macro environment is likely to improve with decline in fuel prices globally and likely
decline in interest rates from 4QFY12E which could boost pent-up demand. We believe
customers have deferred their purchases due to a sharp rise in cost of ownership of the
vehicle and we believe once cost of ownership starts declining, customer sentiment will
improve. We maintain our BUY rating on the stock with a target price of Rs1,475 (cut from
Rs1,515 earlier). Our target price is based on 14X our FY2013E consolidated earnings
estimate.

Tata Power Company - Indonesian woes trigger earnings downgrade ::IDBI

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Tata Power Company Ltd. (TPWR) approached Ministry of Power (MoP) in light of potential project losses expected at its Mundra UMPP (4000MW) due to rise in Indonesian coal prices after change in Indonesian coal mining laws. However, MoP seems to be staying away from the matter as it has directed TPWR to sort out the issue directly with the procurers. In absence of any positive development, we cut our revenue and APAT estimates by 5%/2% and 2%/23% for FY12E/FY13E respectively. Consequently, our RoEs stand revised down to 14.3%/10.5% (earlier 14.6%/13.4%) for FY12E/FY13E. Despite the cut in revenue and APAT estimates for TPWR, we remain positive on the company. Maintain BUY with a revised target price of Rs1,203/share.
 We revise down our Revenue and APAT estimates
We believe, due to increase in imported coal price, TPWR would incur potential losses at its Mundra UMPP. We have increased our coal price assumption to US$83/ton (earlier US$67/ton), which would lead to 54paisa/unit loss at average tariff of Rs2.26/unit in first year of full operation (FY14). That said, the cash loss over the life of UMPP would be Rs31 bn (-Rs130/share). In the given scenario, we have revised down our revenue estimate to Rs234 bn (-5%)/Rs283 bn (-2%) for FY12E/FY13E. Our APAT stands revised at Rs22.4 bn (-2%)/Rs18.7 bn (-23%) for FY12E/FY13E.


 Our target price stands cut at Rs1,203/share
We have increased our Average Selling Price (ASP) assumption for TPWR’s coal to be sold in Indonesia to US$85/tonne (earlier US$80/tonne) for FY12E and US$80/tonne (earlier US$75/tonne) sustainable over a long period. As we adjust for our new coal price assumptions at Mundra UMPP and Indonesian coal interest of TPWR, the combined value for Mundra and coal asset comes to Rs368/share. Wherein, coal asset contributes Rs498/share and Mundra UMPP negates Rs130/share. Our weighted average price target (equal weightage to SOTP and P/BV) stands cut to Rs1,203/share (earlier Rs1,407/share).
Key Risk: Indonesian coal price volatility

UBS -India Banking & Finance Sector - Draft NBFC guidelines

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UBS Investment Research
India Banking & Finance Sector
Draft NBFC guidelines
 
„ Event: Usha Thorat committee report, Not as disruptive as perceived
Usha Thorat Committee which has been reviewing current regulations regarding
NBFCs released its report today. Some of the key recommendations which the
report has proposed are 1) Tier-1 capital ratio increased to 12% from 10% 2)
Stricter compliance for government owned NBFC with existing guidelines 3) NPL
recognition and provisioning norms to be brought in line with banks 4) Liquidity
ratio to be introduced to cover any gaps in 30 day window 5) to be given benefit of
SARFAESI Act 6) RBI to review accounting norms & bring in line with banks.
„ Impact: Negative for NBFCs, positive for gold fincos
In our view higher tier-1 will structurally restrict leveraging capabilities and
therefore RoE in the medium term even though currently all NBFCs have
comfortable Tier-1; gold fin cos have higher risk weights compared to banks for
loan below Rs 100k ticket size, regulation parity with banks would bring down risk
weighted assets. Transitioning to 90 day recognition will lead to higher provisions
in the interim however we believe RBI will allow NBFCs to transition in a phased
manner. PFC & REC will need to make higher provisions to comply with general
provisioning requirements which could impact pre tax earnings by 5-10%.
„ Action: Buy gold finance companies, MGFL (buy rated)
Biggest overhang on gold fincos (MGFL, MUTHOOT) was perceived disruptive
regulatory changes which should now abate. In our view growth and asset quality
risks is the lowest for gold finance companies like MGFL (Buy, PT 77.5). Slowing
credit growth in 2H will help improve liquidity which will be positive for funding
costs. We also like infra finance companies given attractive valuations.  

BHEL:: AR analysis; cut orders, earnings :: CLSA

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AR analysis; cut orders, earnings
BHEL’s working capital expanded from ~2% of revenues in FY10 to ~6%
in FY11, as debtor days increased from 220 to 230. Management
commentary has a cautious tone on new orders and competition. In the
current environment of coal shortages and delays in NTPC bulk tenders,
BHEL’s guidance of 10% growth in orders looks optimistic. We are cutting
our FY12 power sector order estimate by 27%, and FY12-13 revenues by
1-5% and PAT by 4-9%. We believe order flow should revive in FY13 as
NTPC bulk tenders are finalised and other bottlenecks are eased. BHEL is
trading at ~25% discount to its 10yr avg PE multiple and offers 17% EPS
Cagr over FY11-14. Maintain BUY with a lower TP of Rs2,150/sh.
Increase in working capital and investments
BHEL’s FY11 working capital rose to 6% of revenues (2% in FY10) due to a
30% YoY increase in debtors (debtor days rose from 220 to 230), while
customer advances grew modestly by 5% YoY. The company invested Rs3.3bn
in Raichur Power (51:49 JV with Karnataka govt) and spent Rs17bn to
increase its capacity from 15GW to 20GW by Mar-12. Higher working capital
and capex meant that cash stood flat YoY at Rs96bn (~Rs180/sh). The
change in accounting policy on warranty provisions could be one of the
reasons for higher working capital. The working capital is likely to remain
under pressure as we expect a decline in new orders going forward.
Accounting policy changes; cautious management commentary
BHEL’s FY11 performance (26% YoY revenue growth; 240bps Ebitda margin
expansion) was helped by changes in accounting policies relating to
warranties, employee costs and depreciation. Adjusted for these, revenues
rose 15% YoY and Ebitda margins improved by 150 bps. Management’s
commentary is cautious - suggesting that intensifying competition, volatile
commodity costs and worsening macro environment is resulting in order
finalisation delays and could put pressure on operating margins.
Cut FY12-13 EPS by 4-9%; maintain BUY
In 1QFY12 analyst call, management had remained hopeful of achieving its
10% order inflow growth target (~Rs660bn) in FY12. However, this was
largely dependent on the two NTPC bulk tender orders, where there is a risk
of delay. We are consequently cutting our FY12 total order inflow estimate by
22% (27% cut to power orders) to Rs495bn (-18% YoY). The impact on
revenues will be relatively lower (1-5%) due to BHEL’s large backlog. We cut
FY12-13 EPS by 4-9% and we lower our target price to Rs2,150 (TP multiple
lowered from 14x to 13x). BHEL is trading at ~25% discount to its 10-year
average PE and offers 17% EPS Cagr over FY11-14. We expect a revival in
orders in FY13 and BHEL remains most competitive producer of power
equipment in India. A longer term upside of slowdown in orders could be that
some of the potential competitors will shelve/scale down their capacity plans.

Goldman Sachs, : Few may be eligible for banking license, impact on NBFCs negative

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: Financial Services
Equity Research
Few may be eligible for banking license, impact on NBFCs negative
RBI issues guideline both for NBFCs and banking license
The RBI issued draft guidelines for new banks licenses in the private sector
as well as a report from the working committee on the issues and concerns
in the NBFC sector. These will be finalized post feedback from the industry.
NBFC required to keep higher capital and provisions
The working group has recommended higher Tier I requirement of 12% (vs.
7.5% now) and proposed to bring in line the asset classification and
provisioning requirement with the banks. Currently, NBFCs classify a loan
as NPLs if principal or interest is in default for 180 days vs. 90 days
classification norms for the banks.
Industrial houses can apply, NBFCs may be required to convert
Promoters with diversified ownership, sound credentials and integrity with
a successful track record for at least 10 years could apply for a license. RBI
has excluded businesses such as real estate, brokerages and capital
markets given their riskier nature. NBFCs, it appears, will have to either
convert into a bank or transfer businesses that can be departmentally
operated by the banks in order to be eligible for a license. The ownership
in the bank will have to be reduced from min. of 40% at the time of issuing
the license to 15% in 12 years. Foreign ownership will be restricted to 49%
for the first 5 years. The RBI retains the right to remain selective while
issuing licenses.
Working group’s recommendation negative for NBFCs
The NBFC working group report, if implemented, will be negative in our
view. The higher Tier I, we believe, could impact long term growth for
NBFCs, which may then need to raise capital more frequently and could
also impact profits from higher provisioning norms.
Few may get bank license, NBFC profitability to be impacted
As the RBI has not defined diversified ownership, it is therefore difficult to
assess which industrial houses will be eligible. In the case of NBFCs’
conversion into banks, we see additional burden from statutory liquidity
ratio (SLR), cash reserve ratio (CRR), and priority sector loans, all of which
could impact profitability.

Inflation eating into household financial savings ::Macquarie Research,

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Inflation eating into household
financial savings
Event
ƒ RBI released household gross financial savings data for FY11.
Impact
ƒ The gross financial savings of households moderated to 13.3% of GDP in
FY11 from the recent peak of 15.1% of GDP in FY10. Household net financial
savings (household financial assets less liabilities) also slowed to 9.7% of
GDP in FY11 (lowest since FY05) from 12.1% of GDP in FY10.
ƒ Household savings in deposit accounting for the bulk of households financial
savings slowed to 6.3% of GDP in FY11 from 7.1% of GDP in FY10. The
persistence of high inflation and lower real interest rates were the main
reasons for this moderation. Headline inflation (WPI) accelerated to 9.6% YoY
in FY11, the highest in 16 years.
ƒ High inflationary pressures also forced households to hold more currency.
Indeed, the currency holdings in financial savings of the household sector
increased to 1.8% of GDP in FY11 from 1.5% of GDP in FY10.
ƒ The volatility in equity markets resulted in a decline in household savings in
shares and debentures to -0.1% of GDP in FY11, similar to the levels seen in
FY09 (credit crisis), mainly driven by redemption of mutual fund units. This
compares with +0.7% of GDP in FY10.
ƒ Household financial liabilities, on the other hand, increased in FY11, reflecting
higher borrowings from commercial banks.
Outlook
ƒ Household aggregate savings would have remained largely stable in
FY11: While the data on total gross household savings (physical and
financial) is still not released, we believe there would have been some
reallocation of savings from financial assets to physical assets like gold and
property in FY11. The aggregate savings in the economy would have
remained largely stable at 33.8% of GDP in FY11, based on our estimates,
compared to 33.7% of GDP in FY10.
ƒ Reforms required to increase the share of financial savings: Historically,
Indian households have preferred physical savings (like land, houses, gold
and livestock) over financial savings. Indeed, the share of physical savings as
% of total household savings stood at nearly 50% in FY10. In rural areas, the
share would be higher, in our view. The low share of financial savings can be
largely attributed to low penetration of financial services and the inadequacy
of the social security scheme in India. Further deepening of financial sector
reforms and introduction of a long-term savings scheme would be key to
encouraging a shift towards financial assets. Similarly, there are instruments
available to monetise the savings in physical assets, such as gold, to channel
them productively in the real economy.

Coal India: Annual report analysis : CLSA

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Annual report analysis
Key highlights from Coal India’s (CIL) FY11 annual report (AR) are – 1) OCF
and FCF dropped YoY despite higher profits due to a large increase in working
capital, 2) Quality of coal and law & order seem to be factors impacting coal
despatches in addition to logistical constraints, 3) 35% of CIL’s ongoing
projects are delayed, mostly due to land acquisition issues, 4) CIL is focused
on setting up coal washeries and is also looking for diversification
opportunities in related areas including power generation. There is no
discussion on many crucial issues – status of ‘Go-No go’, rake availability,
future price hikes, likely extent of wage hike, risk to e-auctions etc. O-PF.
CIL’s cash pile continues to rise
In FY11, CIL’s OCF fell 36% YoY despite 13% higher profits due to sharp increase
in working capital (higher debtors, inventories, loans & advances). FCF also fell
40% YoY but was a strong US$1.7bn in absolute terms. CIL’s net cash position
expanded further to US$9.8bn in FY11 (US$8.2bn in FY10). In the absence of a
special dividend/large acquisition, cash should rise further to US$16bn by FY13.
Coal quality and law & order impacting coal despatches as well
The AR mentions that some of CIL’s subsidiaries (CCL & MCL) missed their
despatch targets in FY11 due to non-acceptance of coal by end-users due to
quality issues. We note that quality of coal was an issue that was raised by all
end-users in an inter-ministerial meeting in June-11. CIL seems to be taking note
of this and has initiated steps to improve coal quality – usage of surface miners,
expansion of crushing capacity etc. Law & order is also mentioned as being a
factor impacting coal despatches. We highlight this since the common perception
is that rake availability is the only factor impacting CIL’s despatch targets.
Land acquisition main reason for project delays; focus on coal washeries
Out of 117 ongoing mining projects, 41 (35%) are delayed with land acquisition
being cited as the reason in 59% of delayed projects. CIL will set up 20 new
washeries with capacity of 111mt. Tenders for 3 washeries with capacity of 20mt
have already been awarded. We don’t expect these to get commissioned before
FY14. There are also plans to develop abandoned and underground mines under
joint ventures with global mining companies or on turnkey contract basis.
CIL is looking for diversification opportunities in related areas incl power
The AR mentions that CIL is looking for diversification opportunities in the areas of
Coal Bed Methane, Coal Gasification, Coal Liquefaction and Power Generation. We
believe that these are long-term ambitions and are unlikely to fructify in the nearterm.
We continue to like CIL given strong earnings growth in FY12 and lower risk
to FY12-13 earnings as compared to sector peers. Maintain O-PF.

‘Dynamic bond fund provides opportunities across debt market' ::Business Line

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Our Dynamic Bond Fund has taken advantage of the volatility in both the government and corporate bond markets. A fund like that can yield better returns for retail investors for whom timing could be extremely tricky.

With interest rates expected to soften from next quarter, investors can look at options such as dynamic bond fund that shift between long and short-dated securities based on interest cycles, suggests Mr Navneet Munot, Chief Investment Officer of SBI Funds Management. He also recommends locking in to attractive yields of short-term FMPs.

Excerpts from the interview:

The recent 50 basis point-hike by the RBI came as a surprise for many. What are your rate expectations from hereon?

 The hawkish stance of the RBI, with its 50 basis-point hike, did come as a surprise to the markets. With that, we believe that we are closer to the end of the tightening cycle.

The growth moderation in developed as well as developing economies, the lag effect of the monetary tightening 11 times now and fall in commodity prices all suggest that we may be at the peak of rate hikes.

We expect interest rates to soften from here on. The only concern as of now is the fiscal situation. However, we believe that the positive factors for the bond yields outweigh the negatives.

The global environment is very positive for bonds.

Given the deflationary forces in the developed world and that the central bank's stance there would be accommodative for a long period, the sheer interest rate differential between us and rest of the world will attract more flows.

I also believe that the worst of liquidity issues in the banking system is behind us as credit deposit ratio becomes more favourable going forward.

The tightening so far in the emerging markets will start hurting growth as well as commodity prices. Inflation is likely to soften in the next one year.

We expect it to be around 7 per cent by the end of the fiscal, even as growth is expected to taper to similar levels. Our belief is that the RBI may announce one more policy hike of 25 basis points and then take a pause. 

We turned positive on the bond market post monetary policy and we expect yields to fall further.

If we are nearing the end of the rate hike cycle, should investors still favour short-term funds? 

 Investors with some risk appetite and investment horizon of over six months to one year should surely look at short-term funds, given that the core portfolio yield is pretty attractive and there is a good possibility of making capital gains in the next quarter, given our view on the interest rate.

What has been the yield as of now in your short term funds?

It has been around 9 per cent per annum.

What is your current average portfolio maturity and have you been reducing it?

 In short-term funds we have been running a two-year maturity with a portfolio across short-term bank CDs and few medium-term government and corporate bonds. It is a high quality portfolio as credit quality is something that we do not wish to dilute.

At what juncture can investors looking at benefiting from falling yields, move to long-dated funds?

For retail investors, timing could be extremely tricky. We therefore recommend products like our Dynamic Bond Fund. We have been able to manage the duration of the portfolio quite dynamically. It can move from almost 100 per cent cash to being fully invested in a 10-year bond. We have seen both the scenarios.

We have been able to take advantage of the volatility in both the government bond as well as the corporate bond market.

A fund like that may yield better returns. Investors wanting to enter a 10-year bond fund or long term gilts by timing it can instead go for the Dynamic Bond Fund. The average maturity in this fund is currently four years. A couple of weeks ago, it was as low as one year.

 So are gilt funds not really suitable for retail investors?

Retail investors have options such as dynamic bond funds but there are investors who like the high credit quality that gilt funds offer.

The possibility of a high duration as and when the interest rate environment is positive is also an attractive proposition for investors.

Having said that, the alternative we are suggesting is a dynamic bond fund, which can move across sectors, such as government bonds, corporate bonds and money market and across the yield-curve spectrum right from a three-month CD to a 30-year bond. It provides enough opportunities across the bond market.

What other options can investors look at now?

Fixed maturity plans look attractive, especially given the attractive levels at the short end of the curve.

We expect credit growth to surprise on the downside and deposit growth on the upside; so short-term yields can soften from next quarter onwards.

Investors should take advantage by locking in at current rates in products such as fixed maturity plans.  

 Non-convertible debentures (NCDs) offer attractive yields now. Would this make for a good opportunity now for retail investors?

The fund route would be obviously better because of the way liquidity, credit and interest rate risks are managed by a fund manager compared to a portfolio of NCDs created by a retail investor. Investors normally chase yields and don't pay adequate attention on credit risks in these long-term NCDs.

Along with the tax advantage in mutual funds there is the convenience of investing in a liquid avenue. Retail investors cannot easily sell an NCD in the bond market.  All these benefits that funds offer make them a superior option.

Is there a dearth of high-quality debt instruments in the market now? 

There have been lot of issuances from public sector companies where we have participated.

That is the most liquid segment within the corporate bond market and also matches our cautious view on the credit environment as of now

Director’s Cut -- Resources sector growth stands out ::::Macquarie Research,

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Director’s Cut
Resources sector growth stands out
As expected, Ben Bernanke did not foreshadow a QE3 at Jackson Hole. While
he made it relatively clear that fiscal policy was needed to address demand
issues, if US economic data remains weak we are likely to see even more QE3
speculation prior to the Fed’s now extended September meeting.
Still on monetary policy issues, Paul Cavey’s latest note highlights the policy
uncertainty in China, which appears to be suffering some of the indecisiveness
apparent in the world’s major economies. While there is a risk China could over
tighten, Paul believes a policy moderation is more likely in the next few months,
with market-led rates falling. This would be positive for commodities, although
prices have performed well relative to equities in recent months, which suggests
the market is not anticipating over-tightening in China.

The positive outlook for China is reflected in the earnings growth outlook for
Australia’s resources sector. After the 3rd week of reporting season, Tanya
Branwhite says the FY12 EPS growth forecast for Australian resources now
stands at 37%. This is down a little on the pre-reporting season number, but
given the much larger downgrades in industrials, it is clear that resources will
remain the earnings leader in Australia. Given China remains one of the few
major economies with the scope to stimulate growth using monetary policy, we
would expect resources stocks would also be earnings leaders in other
developed markets such as North America and Europe.


Highlights
 Asustek (2357 TT) beat Andrew Chang’s Street high profit estimate and the
stock remains a conviction buy in the Asia MarQuee.
 Nicholas Cunningham remains bullish on JR East (9020 JP) despite the
expected entry of three new low cost carriers in Japan in 2012.

UBS:: India Metals & Mining- Karnataka Mining ban – Round II

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UBS Investment Research
India Metals & Mining
K arnataka Mining ban – Round II
􀂄 Event: Supreme Court (SC) bans mining in Chitradurga/Tumkur regions
SC has extended the mining ban to Chitradurga and Tumkur districts (apart from
Bellary) based on CEC’s report on environmental damage. We estimate these 2
regions together account for c10-12 mt of production. Though CEC had
recommended sale of 25mt inventory held by the miners, the SC has not allowed it.
􀂄 Impact: -ve for Sesa Goa, JSW; no impact on NMDC
1) Sesa has 6mt capacity in Chittradurga and this ban could in the worst case
(assuming it’s not lifted) impact FY13E PAT by 30%. 2) JSW is currently
procuring c50% of its iron ore needs from Chittradurga/Tumkur. a) If mining ban
is not lifted, JSW will have to buy from Goa/Chattisgarh which would mean
cUS$35-40/t of additional logistics cost impacting EBITDA by cUS$60-70/t
(JSW’s EBITDA/t for Q1FY12/FY12E was/is US$180/US$137). However, this
will be partially offset by increase in steel prices (as 25% of Indian steel production
to be impacted) 2) Even if SC allows sale of the 25mt iron ore inventory in its next
hearing we believe JSW’s production is likely to get impacted by a month. NMDC
is positively impacted by the ban.
􀂄 Our View
We believe (after speaking to couple of iron ore traders) that in its Sep 2 hearing,
the Supreme Court might allow the sale of 25mt inventory to the steel mills in the
region. We also believe the SC will take a more practical approach on the blanket
mining ban given its impact on the steel industry and employment. Media reports
indicate there could be violation of norms (environmental/wildlife) by mines in
Goa as well. We are revisiting our estimate for Sesa & JSW.

Technology: Question marks on earnings power unwarranted::Kotak Sec,

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Technology
India
Question marks on earnings power unwarranted. Even as uncertainty on FY2013E
remains high and there could be potential downgrades ahead, we believe the Tier-I
stocks are reaching close to levels that would reflect pessimism on longer-term earnings
growth potential of these companies. We view such pessimism unwarranted. Growth
cyclicality in the secular market share gain story for the IT offshore names is not new.
Risk/reward is favorable even at current levels. TCS and Infosys are our top picks.


An uncertain FY2013E, but earnings growth power of Tier-I names intact, in our view
Borrowing from Mohnish Pabrai’s Dhandho Investor—‘Risk means the chance of a loss of capital.
Uncertainty is the range of different outcomes. So a stock may have high uncertainty but may not
be risky, if no one knows what will happen but the worst case scenario would not result in a huge
loss. These investments provide the greatest opportunities for investors.’
We believe the Tier-I Indian IT names are approaching levels (we are possibly 10-15% away) where
an uncertain macro environment is being extrapolated into a severe, sharp, and permanent loss of
earnings growth power of these companies. Business model, and consequently, earnings power of
these companies based upon market share gains for IT offshoring remains intact, in our view. Post
recent macro developments, we are headed into an uncertain environment and we do not know
how FY2013E would pan out—our estimates depict our current view on a highly uncertain
2HFY12E/ FY2013E; there could be downside risks—we present scenarios. Nonetheless, the key is
to appreciate the risk/reward at current levels—this appears favorable to us. We see the recent
correction as an opportunity to BUY into the long-term secular market share gain story for IT
offshoring through high-quality names. TCS and Infosys are our top picks.
A closer look at the potential worst-case, trading multiples, and risk-reward
We present FY2013E earnings scenarios for the Tier-I names in Exhibits 1-6. These stocks have
now corrected to 13-17X FY2013E worst-case EPS—not necessarily cheap but presenting a good
risk-reward ratio, in our view. We note that our worst-case EPS scenarios build in the possibility of
a Lehman repeat in terms of severe volume slowdown (though we still build in some growth) and
pricing correction. However, we do not factor in any of the upside risks in the form of (1) countercyclical
accelerated push for offshoring, (2) rupee depreciation, and (3) margin kicker from
enhanced ability to control wage costs in a low-growth environment. We note that all these
upside risks played out in the FY2009-10 timeframe—counter-cyclical benefits admittedly came
with a lag, but the rebound was sharp and substantial.
On trading multiples, we believe Infosys and TCS should bottom at normalized PE range of 12-14X
FY2013E—comprising an ex-growth multiple of 8X and assuming earnings grow at par with global
IT services spend growth to perpetuity beyond FY2013E. This bottom is still 10-15% away, but we
note that such fall would factor in a no market share gain scenario beyond a worst-case
FY2013E—as low as expectations should (not can) get. From an FCF perspective, to take Infosys as
an example, we estimate FY2013E FCF of Rs61 bn for the company in the worst case (see Exhibit
7)—implying an FCF yield (FCF/EV) of 5.9%, fairly attractive, in our view. A 10% correction in the
stock from current levels would take this yield to 6.9%.
Protectionist measures the key risk to our call
IT budget cuts for a year or two leading to volume slowdown and/or pricing pressure are likely but
would not impact our long-term positive view on revenue growth for the sector. However,
protectionism-related shocks are also a possibility and remain the key risk to our constructive
thesis.

CDSL:: Updating profile details ::Business Line

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I have recently moved from Bangalore to Chennai and submitted a redemption transaction form in Chennai along with a request to change my address. However, my address has not been changed and I have been informed that I should have submitted the request to CDSL Ventures Limited (CVL), a subsidiary of Central Depository Services (India) Limited (CDSL). Queries of this nature often come from investors. Here are a few frequently asked questions on this subject.

I requested a mutual fund to change my address details and was asked to submit the request to a Point of Service of CDSL Ventures.

Investors in mutual funds have to comply with the Know Your Customer (KYC) norms. This is a one-time exercise and the investors need to provide proof of identity and address to CVL. The KYC database of investors is maintained by CVL and is provided to the mutual funds.

The investor address with the mutual fund is updated from the CVL database. Mutual funds send dividend warrants, statements etc. to the registered investor address and it is imperative for investors to keep the information updated in the records of CVL.

An investor who is KYC compliant and has registered his KYC status with mutual funds in which he has investments, would have to submit a change request form to a Point of Service (POS) of CDSL Ventures Limited.

The CVL verifies the information with the supporting documents provided, updates its records, and passes on this information to the mutual funds.

Validity of documents: If the document provided has an expiry / validity date; such as a passport, for instance,it must be valid at the time of submission.

The documents provided with the change request form for a change of address must have the address that is mentioned in the form.

The new address details would be automatically updated in all the investor folios across funds where he / she has updated KYC status and investors don't have to inform details of the change of address to each mutual fund.

Where can I get the form to change my address?

CVL has a prescribed form for change of details. This form can be downloaded from http://www.cvlindia.com. All details, such as the documents to be submitted as proof of address, are given in the form.

I am KYC compliant. However, I wish to record a change only in e-mail and mobile number in my folio. Can I approach the funds directly?

Yes. Requests for a change in e-mail ID and telephone numbers may be given to the funds or the registrar directly and you don't have to submit such requests to CVL.

I have old investments in mutual funds and am yet to get KYC compliant. Can I submit a request to change my address to the mutual fund?

Investors who are yet to complete the KYC formalities may submit a change of address request to the mutual fund directly and it will be updated in the folios in these cases.

A point to note: It takes a few days for CVL to effect the change of address and for the updated information to reflect in the records of the mutual funds. Transaction confirmations and cheques for transactions made during this period would be sent to the old address.

CVL contact information for enquiries: The enquiry e-mail ID of CVL is cvlhelpdesk@cdslindia.com and the telephone numbers are 022-61216908 / 6909 / 6910 / 6911 / 6912.

(Contributed by CAMS Viveka, an Investor Education Initiative from CAMS. The views expressed herein are general ractices in the mutual fund industry and may vary on a case-to-case basis.)

NMDC: Buy ::Business Line

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The stock of India's largest iron ore producer, NMDC, appears an attractive buy at the current prices. The company has good potential to improve sales volumes by supplying to the steel industry, which is on expansion mode. Working in the company's favour is the fact that steel capacity additions are outpacing those of quality mine additions; this should ensure that demand for NMDC's ore remains robust. The current share price at Rs 209 values the company at around 12.2 times the trailing 12- months earnings, a level which is at a premium to Rio Tinto and Vale but on par with BHP Billiton. The company's valuation appears attractive, given its ongoing efforts to increase iron ore production by 60 per cent over the next three years. Sweetening the deal is its foray into steel production, margins that are the best in the industry, sizable cash holdings and continued efforts to augment its high quality ore base.

STRONG PERFORMER

FY-11 saw domestic steel production rise by over 8.8 per cent to 65 million tonnes. During the same period, NMDC managed to increase its sales volumes by six per cent to 25 million tonnes. 2011 has seen iron ore prices hold firm as a result of the ban on mining in iron-ore rich regions of Karnataka and global constraints on supply.

With global iron ore prices ruling higher in the last fiscal, NMDC's net sales and profits rose by 82 and 88 per cent to Rs 11,400 crore and Rs 6,500 crore respectively. Despite having to sell at rates well below global prices, a low operating cost structure enables NMDC to enjoy net profit margins in the mid-50 per cent range. The recent June quarter also saw a continuation of the momentum.  

With the legacy advantage of having relatively low-cost mines and being among the few big domestic players with quality iron ore, NMDC is a veritable cash-generating machine. It has accumulated cash and equivalents of Rs 17,200 crore (Rs 44 per share) and has no borrowings. This should come handy as the company heads into expansion mode over the next three years.     

PRAGMATIC EXPANSION

The company's expansion plans include increasing iron ore output from the existing mines to 40 million tonnes from the current 25 million tonnes per annum. The company should be able to capitalise on Indian steel consumption, which is expected to track GDP growth over the next five years. Given that companies in India have had a hard time acquiring domestic greenfield mines, NMDC is reported to be in the final stages of acquiring sizable Australian iron ore assets. The addition of these Australian mines to its portfolio should more than double NMDC’s iron ore resources and lower its EV/tonne.   Given its government ownership, economic compulsions force NMDC to price its iron ore at a substantial discount to global prices. To mitigate this handicap, the company plans to increase its rupee earnings per tonne of ore sold by producing steel. With the prices of steel being subject to less ‘restrictive' pricing practices, the company plans to set up two steel plants of three million tonnes each at Chhattisgarh and Karnataka. By FY-15, at least 20 per cent of the company's iron ore output should enjoy substantially higher earnings per tonne of ore sold than current levels.    

RISKS

The proposed Mining Bill may require NMDC and other iron ore miners to pay an amount equivalent to royalty. For NMDC, this amount averaged at eight per cent of net sales in FY-11. Given the company's relatively low realisations currently, it may have the wiggle room to pass through increased cost, if any.

Electric Utilities-Tale of SEB defaults / losses driving large tariff hikes! :::BofA Merrill Lynch,

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Electric Utilities
Tale of SEB defaults / losses
driving large tariff hikes!
„Delhi hikes power tariffs by 21% to avoid a Tamil Nadu!
Delhi regulators saved discoms from the brink of bankruptcy with a) an avg. tariff
hike of 21% (v/s 67.7% demanded), b) made tariffs dynamic – allowed fuel passthrough, and c) resolved to cover past dues of ~Rs75bn (FY08-11E) in the next
multi-year tariff period. This should be an example of how the mess created by
lack of tariff hikes, regulatory lapses and political interference can be cleaned by
regulators, when pushed to the wall (losses/bankruptcy). This should support
valuations of discom owners – R Infra (7% of SOTP, Buy, Rs437) and Tata Power
(5% of SOTP, Neutral, Rs1045). In the meantime, situation in Tamil Nadu (TN)
has worsened with defaults of Rs21bn in payments (not NPA yet) to many
commercial banks (not PFC/REC) and utilities (Neyveli – main genco’s debtor
days 187 v/s 30 days normal). We see a Delhi-like price hike as the only
alternative (esp. given poor collection track record of TN discoms), which though
may have to wait for Panchayat elections to get over.
DERC approve 21% tariff hike +FAC & promise past recovery
Delhi Electricity Regulatory Commission (DERC) has approved ~21% tariff hike
(see Table 2-5) @ 99.5% collection efficiency, applicable from Sep’11 yielding the
three discoms Rs12.1bn - BSES Rajdhani (BRPL) – Rs5.2bn, BSES Yamuna
(BYPL) – Rs2.9bn and NDPL - Rs4bn in FY12. The tariff hike preceded discoms
not only accumulated under-recovery (revenue gap) of Rs33bn till FY10 – BRPL
(16.8bn), BYPL (Rs5.1bn) and NDPL (11.1bn) but also >2x by FY11-end, wipingoff networth of discoms. Tariff hike is actually higher then 21%, when we add fuel
pass-through allowed v/s static tariff earlier. Also regulator has mentioned its
resolve to cover past dues (incl. carrying cost) of ~Rs75bn (FY08-11E) in the next
multi-year tariff period to fix the balance sheet.
TNEB default in repayment of Rs21bn to banks
TNEB defaulted on loan repayment of Rs21bn to banks. Therefore, now banks
are hesitant to lend the money. The Govt. is now initiating action to mobilize
Rs60bn through the TN Power Finance Corporation (TNPFC). TNEB is by its own
admission in tariff petition is likely to have under-recovery of Rs86bn in FY12E
without tariff revision on Rs305bn revenue.
Financial Institutions go slow on lending to SEBs
Several financial institutions have decided to stop disbursing short-term loans to
power distributors in five states where the losses of utilities have exceeded
Rs50bn each, raising fears of prolonged blackouts and weaker electricity demand
for IPPs. The affected states are TN, Haryana, Rajasthan, Uttar Pradesh and
Punjab, per the media. A power ministry official was quoted in media saying that
“while there have been no defaults yet, some distribution utilities have failed to
pay installments on time causing concern to lenders like Oriental Bank of
Commerce, Bank of Baroda, Corporation Bank and State Bank of India”.

India Telecoms -GSM adds continued to decline in July ::JPMorgan,

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 India’s GSM net  adds weakened  further in  July to 7.6m, down 11% M/M,
according to data from COAI. July compares worse than the 9.7m monthly net
add rate in the quarter to June, which for  the GSM market was 32% lower vs.
Q4.
 Large  GSM  telcos  see  continued  net  add  declines:  Bharti,  Vodafone  and
Idea,  which  saw  their  monthly  net  adds  rates  decline  28%/33%/27%  in  the
quarter  to  June  vs.  the  previous  quarter,  witnessed  further  declines  of
29%/29%/26% vs. June. This is rather a slow start to Q2. However, we believe
this likely  reflects GSM telcos’ continued  focus  on “quality”  subs i.e., minute
and revenue generating subs as well as selectively raising tariffs. We also note
recent reports of dealer commissions being cut by some telcos which limits the
incentive  of  dealers in  our  view to  push  SIMs  aggressively  – sometimes lowARPU generating SIMS.
 Smaller  telcos: Grouping  Uninor,  Videocon,  S Tel  and Etisalat  as the  “new”
players, their  cumulative  net  adds are  down  only  1.4% M/M. They  accounted
for  16%  of  GSM  net  adds  (14% in  June,  13% May,  16% April),  contributing
6.5%  of  the  GSM  sub  base  (6.4%  in  June).  However, the  highest  VLR  ratio
(active  data)  among  these  telcos  is  only  58%  (Uninor).  Uninor’s  net  adds
increased 12.1% after the 17.5% decline in June.
 VLR update for June:  Idea, Bharti and Vodafone continue to have the highest
ratio of “active” subs at 93%, 89%, 81%, vs. 70% for the market
 According  to  revenue  data  for  the  quarter  to June:  Bharti,  Idea  and
Vodafone's  cumulative  market  share  increased  modestly  by  120pp  to  66.3%
Q/Q. BSNL lost the  highest market  share  (100  bps) in the  June  quarter,  while
Bharti gained 70 bps. “New” players now account for 2.3% of the revenue base,
up from 2.0% in the quarter-to-March driven by Uninor.

IPO, NCD GMP; Grey Market Preimum:: Aug 31, 2011

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Company Name	Offer Price (Rs)	Expected Listing Price Premium
Vaswani Ind.	52	Discount
Brooks Lab.	100	5 to 6
SRS Ltd.	58	1 to 2
T. D. Power Systems	256 to 261	Discount
Shriram City Union Bond	1000	1%
Manappuram Finance	1000	0.5%
MuthootFinance	1000	1%