1 Sept: Expected listing price: IPO and NCD GMP; Gray Market Preimum

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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%

  

India Equity Strategy- Pockets of value in uncertain times:: Deutsche Bank

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Pockets of value in uncertain times
Following a sharp selloff in equity markets on macroeconomic concerns, we
polled our analyst team to identify five stocks (not restricted only to our current
top picks) which satisfied following conditions: (i) which have fallen sharply over
past one month and are currently pricing in unwarranted stress (ii) where we see
reasonable visibility over medium-term catalysts to trigger outperformance and
(iii) where the risk reward appears favorable in a scenario which does not factor in
a recession in US/Europe. The following stocks passed the tests - : Axis Bank,
ICICI Bank, JSPL, TCS and Tata Steel.
Axis Bank
The stock is trading at an attractive valuation of 1.9x FY12E P/B – implying a 24%
discount to its past five years’ trading band. Stock is pricing in exaggerated credit
costs of 442bps vs. our baseline estimate of 90bps. Reforms in SEB power tariffs
and any indication of pause in rate tightening cycle by RBI, will be the key triggers
for value unlocking.
ICICI Bank
Trading at 22% discount to past five year average valuation. Stock seems to be
pricing in a contraction in NIIs, versus our baseline estimate of +2.6%. Also, the
stock is pricing in a higher-than-expected rise in NPL from power exposure and
low NIM in the overseas operations. Policy reforms catering to infrastructure/
power sector would assuage asset quality concerns from this sector.
Jindal Steel and Power
The stock (ex- international mining assets) is trading at 8x FY12 EPS – levels similar
to those seen during Lehman crisis. Current stock price is suggesting steel
profits/tonne dropping to
from the steel business seen during FY2008/09. News-flow on commissioning of
captive power plant will help clear risk perception over execution abilities of the
company.
Tata Consultancy Service
The stock currently trades at 17x 1 year forward earnings – factoring in a 22%
CAGR in USD revenues over FY11-13E vs our baseline estimate of 30%. Stock is
pricing in 16% earnings growth expectations for FY11-13 vs. our current
expectation of 22%. : The internal planning for the 2012 IT budgets of most
financial services companies will be underway in Sept-Oct 2011. This will set the
tone for the near term and 2012 performance. Sept-Q results to be announced
mid- Oct
Tata Steel
Stock is currently trading at FY12 P/BV of 1.5x, - 24% discount to its last 18 year
average and close to levels seen in the aftermath of the Lehman event in FY09. At
the current stock price, the residual valuation of company’s European operations
implies a discount of 90% to corresponding valuations of its peers in Europe –
Arcelor Mittal and Thyssen Krupp. Concerns over pension fund deficit – though
legitimate - seem exaggerated. Commissioning of brownfield expansion at
Jamshedpur/decline in coking coal prices will be key triggers for stock
outperformance.

Axis Bank ( DB Rec: Buy) 􀂄 :: Deutsche Bank - Pockets of value in uncertain times

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Axis Bank (AXSB IN; Last Price: INR1039; DB Rec: Buy)
􀂄 Stock down 16% since S&P downgrade The stock is down 16% since S&P downgrade
(Sensex down 5%) and is trading at an attractive valuation of 1.9x FY12E P/B – implying a
24% discount to its past five year’s average valuations. The valuation discount of Axis
Bank to HDFC Bank has now widened to ~44% (vs. average discount of 31% over past
five years), which is excessive in our view and should narrow going forward. The stock is
trading at a 1 Std dev. below its five year average of 1-yr fwd P/B.
􀂄 Stock is pricing in exaggerated credit costs of 442bps vs. our baseline estimate of
90bps. The current prices factor in a sharp rise in NPL from SME and power exposure –
which we believe is a low likelihood event. Increase in SME NPLs, if any, (a risk that
would materialize in the event of Indian GDP growth compressing to 6.5%) is likely to be
towards the end of FY12 or in early FY13. Similarly any increase in infrastructure NPL
would show up only in FY13. Even then, we do not expect Axis Bank’s NPLs to rise to
levels disproportionately higher than the rise in system wide NPLs. In our estimates we
are factoring credit costs of ~100bps for FY12E compared to ~40bps in 1QFY12 - hence
there is enough built-in cushion in our estimates for rising credit costs.
􀂄 Catalysts for near term outperformance: Change in sentiment towards power (SEB
reforms) and SME sector. This could be driven by policy reforms from the government
(for power and infra sectors) and any indication of pause in rate tightening cycle by RBI
leading to a cooling off in wholesale borrowing costs.
􀂄 Operating profit growth driven by NII and fee income continues to be strong. While
credit costs may rise from the low level of last two quarters, the bank should still be able
to deliver RoA of 1.5%+ after making adequate NPL provisions
􀂄 In case of a mild stress case (assuming India’s GDP growth of 7.5%), potential earnings
downside is 6% and in case of severe stress case (India’s GDP growth of 6.5%)
earnings downside is 15%. However, severe stress implying a recession in developed
market is not a central scenario of our global economists. As mentioned above we do
not expect a severe stress on asset quality and to that extent current valuation discount
of Axis Bank to HDFC Bank is excessive. We believe that risk-reward is favorable at
current levels.
􀂄 Key Risks: i) higher-than-expected slippages from SME loans (~20% of total) resulting in
higher credit costs and hence lower-than-expected earnings forecasts, and ii) a sharp
reduction in its high CASA (low-cost deposit) ratio due to rising term deposit rates.

ICICI Bank ( DB Rec: Hold) 􀂄 :: Deutsche Bank- Pockets of value in uncertain times

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ICICI Bank (ICICIBC IN; Last Price: INR858; DB Rec: Hold)
􀂄 Stock down 11% since S&P downgrade. Trading at 22% discount to past five year
average valuations The stock is down 17% over the past 1 month (Sensex down 10%)
and is trading at a valuation of 1.6x FY12E P/B. This implies that the core-banking
business (excluding the value of non-banking businesses and investments in
subsidiaries) is trading at 1x FY12E P/B. The stock is trading at a 1 Std dev. below its five
year average of 1-yr fwd P/B.
􀂄 Stock is pricing in a contraction in NIMs, versus our baseline estimate of +2.6%. In
addition, the stock is currently pricing in a higher-than-expected rise in NPL from power
exposure and low NIM in the overseas operations. However, we believe that any
increase in infrastructure NPL would show up only in FY13. We do not expect ICICI
Bank’s NPLs to rise to levels disproportionately higher than the rise in system wide
NPLs. Currently, the spreads in the overseas business is ~90bps. The management has
guided for spreads to increase to ~125bps over the next 4-6 quarters. There are
concerns on overseas cost of funds going up and adversely impacting spreads in the
overseas business.
􀂄 Catalysts for triggering near term outperformance Policy reforms catering to
infrastructure/power sector would assuage the asset quality concerns from this sector.
At the same time stability in overseas inter-bank funding market with adequate dollar
liquidity should reduce the concerns on overseas operations.
􀂄 The bank is firmly back on growth path and domestic operations are likely to grow in line
with the banking system. NIM has been stable at ~2.6% and the bank should be able to
better protect its NIM compared to other banks due to healthy CASA mix.
􀂄 In case of a mild stress case (India GDP growth slowing to 7.5%) earnings downside is
7% and in case of severe stress case (India GDP growth slowing to 6.5% and developed
markets moving into recession) earnings downside is 18%.
􀂄 Key Risks: (i) possible higher-than-expected slippage from restructured assets, if the
global sluggishness were to continue and ii) difficulties in re-energising the retail assets
franchise as ICICI has been keeping a low profile in many retail segments for the last two
years. Main upside possibilities are: i) a more emphatic return of corporate capex than
expected and hence corporate loan book ii) faster leveraging of the Bank of Rajasthan
network than estimated

JSPL ( DB Rec: Buy) 􀂄 :: Deutsche Bank- Pockets of value in uncertain times

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JSPL (JSP IN; Last Price: INR494; DB Rec: Buy)
􀂄 Stock down 24% in past three months. Fears over timely commissioning appear
overdone. JSPL’s stock is down 24% in the last three months v/s market decline of
11%, driven in good part by investor's heightened concerns over timely commissioning
of upcoming projects - especially that of 10x135MW captive power plants supplied by
Chinese equipment suppliers. In addition, we believe that given the continuation of
strong power demand, the consensus spot tariffs could move up to 3.75 to 4.2/unit
while the current price seem to be factoring in a power tariff of INR3.5/unit.
􀂄 Steel and Power business trading at levels seen during Lehman crisis. The stock
currently trades at 11x FY12e headline EPS and 8x FY12e cash EPS. Attributing INR 90-
100/share to the international mining reserves (ex-Bolivian mines) in Australia, Indonesia
and South Africa, implies that ex-international mining reserves, the stock is trading at 8x
FY12 EPS – levels similar to those seen during Lehman crisis.
􀂄 At a stock price of INR 490/sh - and assuming the value of mines at INR 90/sh the value
for power and steel business is INR 400/sh. Assuming a stressed case steel valuations at
7xFY12 P/E we find that residual power business is trading at 6x FY12EPS. This is 70%
cheaper than PSU utility companies such as Power Grid/NTPC and also cheaper than
Adani Power. Assuming that company is not able to set up any additional power assets
beyond ongoing captive power plants- we find the valuations of the residual steel
business at 6xFY12 EPS.
􀂄 Current stock price seems to suggest that steel profits/tonne would drop to less than
INR 8000/t –which is lower than the average profits from the steel business seen during
FY2008/09. Over the last two years the company’s reliance on imported coking coal has
come down from 30% to less than 18%.
􀂄 We find the current stock price and valuations very attractive given that JSPL’s balance
sheet is relatively less encumbered by leverage and cash generation is far higher than
reported earnings. We forecast that the next 6-7 quarters the company would be able to
meet our EBIT growth expectations of 15-25% yoy
􀂄 Catalysts to trigger near term outperformance: News-flow on commissioning of captive
power plant will help clear the risk perception over the execution abilities of the
company. We expect that company will be able to meet our expectations of 650 MW of
commissioning by March FY12 and another 650MW by MarchFY13. In addition, stock
will also take direction from any near term uptick in long steel demand. Long steel prices
have risen by 3-5% and seem set for additional increases as inventory levels are
negligible. With continued demand in power sector - we estimate that the consensus
tariffs for spots would move up to 3.75 to 4.2/unit v/s a current expectations of INR
3.5/unit. This could lead to 5-8% higher earnings for H2Fy12.
􀂄 JSPL is among best placed to capitalize on the power reforms being carried out by six
large power-consuming states. Power demand has grown by 7-8% for the past six
months (a record high over last five years) while spot merchant rates at INR 4.5/unit in
slack season is a surprise (up 30% yoy). With most of the peers facing rising fuel costwe
find integrated energy model of JSPL, a big direct beneficiary.
􀂄 Key Risks: Company-specific risks include a slowdown in project implementation,
thereby missing the capacity addition targets, a reduction in the utilization levels, and a
delay in the development of captive mines and obtaining fuel linkages, and also
regulatory intervention in the form of capping merchant tariffs. A 10% lower-thanexpected
steel realization could decrease FY12E, FY13E and FY14E earnings by 12%,
10% and 9% respectively.

Tata Consultancy Services (DB Rec: Buy) 􀂄 :: Deutsche Bank- Pockets of value in uncertain times

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Tata Consultancy Services (TCS IN; Last Price: INR1020; DB Rec:
Buy)
􀂄 Stock down 10.3% over past one month: The stock currently trades at 17x 1 year
forward earnings – which is at slight discount to long term average. Even though the
stock currently trades at a 40% premium to the Sensex, we believe that the premium is
justified given: (i) Long term earnings growth visibility of 20-30% for the company. (ii)
FCF yield of 5%, (iii) ROE of 40%+
􀂄 The stock is factoring in a 22% CAGR in USD revenues over FY11-13E vs our baseline
estimate of 30%. Stock is pricing in 16% earnings growth expectations for FY11-13 vs.
our current expectation of 22%.
􀂄 Why is stock weakness unjustified: (i) Revenue/ volume growth concerns as implied in
the current stock valuation are excessive? (ii) Our checks with management indicate that
despite heightened worries over the macroeconomic outlook in western markets, we
have seen neither any change in clients’ IT services spending, nor any early signs to
believe so. (iii) TCS’ largest exposure is to the financial services sector (43% of revenues)
and in the event of another recession induced credit crisis, will be the first sector to
curtail spending. Our checks with three of TCS’ top 5 financial services customers
indicates that they are: (a) Continuing with their long term IT services spending plans
with the offshore vendors which have been used as an important tool to reduce or make
cost variable and also to drive efficiency. (b) With offshore now being viewed as a
strategic advantage, TCS is making market share gains vs its MNC counterparts like
Accenture and IBM.
􀂄 Triggers for near term outperformance: The internal planning for the 2012 IT budgets of
most financial services companies will be underway in Sept-Oct 2011. This will set the
tone for the near term and 2012 performance. Sept-Q results to be announced mid- Oct
􀂄 Key Risks: We identify three industry-level risks: a) a more severe-than-anticipated global
slowdown, b) global vendor competition, c) aggressive steps taken by global vendors to
adopt the offshore model and increasing wage inflation with supply side issues. For TCS,
the key company-specific downside risks remains that of relatively higher exposure to
the BFSI vertical and consequent compression of its earnings multiple due to greater
impact of the financial market turmoil.

Tata Steel ( DB Rec: Buy) 􀂄 :: Deutsche Bank- Pockets of value in uncertain times

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Tata Steel (TATA IN; Last Price: INR447; DB Rec: Buy)
􀂄 Stock down 16% since S&P downgrade, trading at 24% discount to past eighteen year
average valuations. Following fears of a sharp slowdown in Europe, Tata Steel has come
off sharply. Stock is currently trading at FY12 P/BV of 1.5x, - 24% discount to its last 18
year average and close to levels seen in the aftermath of the Lehman event in FY09.
With a recession in Europe not our central assumption, we reiterate that these fears are
exaggerated and consequent stock weakness is overdone.
􀂄 European operations trading at 90% discount to European peers: At the current stock
price, the residual valuation of company’s European operations implies a discount of
90% to corresponding valuations of its peers in Europe – Arcelor Mittal and Thyssen
Krupp.
􀂄 Concerns over pension fund deficit – though legitimate - seem exaggerated: With a total
pension fund corpus of GBP12bn, investor fears of volatile markets creating pension
shortfalls are legitimate. in a highly adverse scenario where we assume a 15% decline
(400bps underperformance versus FTSE) in the value of equity assets (29% of total
pension fund assets) and no gains in the debt and government securities portfolio (61%
of pension assets), we estimate a deficit of GBP400mn in the pension fund (which would
impact stock by only Rs28/share).
􀂄 Triggers for near term outperformance: Stabilization/rebound of European steel prices.
Also, timely commissioning of the 3mt brown-field expansion at its highly profitable
Indian operations (normalized EBITDA/t is ~2.5x of global peers) which will further de-risk
Tata Steel's earnings from the vagaries of volatile raw material prices (with Indian
operations contributing 76-77% of the consolidated EBITDA.) and any statement from
company assuaging investors that its pension fund concerns are overdone.
􀂄 Strong operating cash flows from India to provide support: With the commissioning of
Jamshedpur brownfield expansion by FY12 end,, we expect the Indian operations to
constitute 76-77% of consolidated EBITDA over FY12-13, thus, reducing the company's
earnings dependence on its low margin international operations.
􀂄 Stock trading at modest premium to our mild stress case scenario In our base case, we
estimate the fair value of the stock to be ~INR620/share implying 45% upside from
present stock price levels. In a mild stress scenario (India GDP grows by 7.5%;
Developed Market just skirts recession), we estimate the fair value to be ~INR402/share
and in the extreme stress scenario (India GDP grows by 6.5%; Developed Market move
into recession, which is not our central assumption), the fair value comes to
INR260/share, as per our calculations.
􀂄 Key Risks: 1) Higher than anticipated increase in steel making raw material prices, (2)
Delay in capacity expansions in India,(3) Steel demand environment remaining
challenging in Europe especially in the long product segment into CY11 and delay in steel
demand recovery,(4) The overhang of an inflation wary government of India. In case, an
inflation wary government of India begins frowning on the price hikes, sentiment for all
steel stocks, including Tata Steel may be impacted negatively.

UBS :Asia Oil Explorer - Downstream margins hanging on 􀂄 Top picks -Reliance Industries

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UBS Investment Research
Asia Oil Explorer
D ownstream margins hanging on
􀂄 Refining margins flat WoW; petchem spreads rise
Despite weak global sentiment, the Reuters Singapore complex refining margin
index averaged a high US$10.4/bbl last week, down from an average US$10.5/bbl
the previous week. The index has been boosted by strong gasoline spreads near
US$18.3/bbl while fuel oil spreads rose unexpectedly above US$10/bbl.
Meanwhile diesel spreads fell US$0.7/bbl to US$17.2/bbl. PX-naphtha spreads
rose 13.8% WoW to close at US$735/t. The HDPE spread of US$475/t is up from
the May level of below US$300/t.
􀂄 US crude stocks rise unexpectedly
The WTI crude oil price fell 3.7%, ending last week at US$82.3/bbl, while Brent
price rose 2.0% to US$109.5/bbl. Brent's premium to WTI touched a record
US$27.3/bbl. WTI fell on renewed fears that the US may slide into recession.
According to the US Department of Energy (DOE), for the week ended 12 August,
crude inventories rose 4.2mbbls versus Reuters’ consensus of 0.8mbbls draw. Rise
in imports and release from strategic petroleum reserves pushed crude stock higher.
􀂄 Oil and chemical stocks have declined in the past month
For the month ended 19 August and based on simple average performance,
integrated stocks in Asia under UBS coverage fell 17.8%, while, on an average,
E&P and refining stocks fell 10.9% and 13.0%, respectively.
􀂄 Top picks
Our most preferred stocks in Asia are Sinopec, PTT Chemical, Reliance Industries,
and SK Innovation.


􀁑 Statement of Risk
We believe oil prices are the top risk in the sector. Our valuation of oil
companies is based on UBS’s global crude oil price forecasts. UBS forecasts
Brent crude oil prices of US$103.8/bbl in 2011 and US$95/bbl in 2012. We
have a normalised long-term Brent oil price assumption of US$95/bbl. Any
deviation from the above forecasts could change our investment conclusions.
Petrochemical plants are generally high-risk operations (particularly during new
plant start-ups), and accidents could significantly reduce plant operating rates,
leading to lower-than-expected earnings. Exploration and production activities
face risks such as volatility in oil and natural gas prices, and operational,
financial, geological and meteorological issues.

UBS :: Infosys - Downgrade to Neutral

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UBS Investment Research
Infosys Ltd
D owngrade to Neutral [EXTRACT]
􀂄 Our Buy thesis presumed a catch up in performance relative to TCS
Our Buy thesis was based on the view that Infosys’s relative revenue
underperformance to TCS would begin to narrow and that there was significant
earnings upside potential. With the weak start in Q1 FY12 and lower-thanexpected
Q2 FY11 guidance, we now think the relative underperformance is likely
to continue in FY12 as well.
􀂄 Troubles with large clients could impact revenue growth
Infosys has significant exposure to large European banking clients, many of which
have announced headcount cuts and other austerity measures. British Telecom,
another large European client, has invited a rebid of its contracts, which could
result in pricing and volume pressure. We expect this to add pressure on revenue in
the next few quarters.
􀂄 Why not a Sell?
We believe that any potential miss to FY12 revenue guidance would likely be
triggered by a slowdown in global IT spending, rather than company specific
reasons. We do not see a structural impact for the company as yet and view the
Infosys3.0 strategy as a step towards a clear direction for medium- to long-term
growth. We also expect the stock to perform at least in line with the sector in a
prolonged sectoral downtrend.
􀂄 Valuation: lower price target from Rs3,550 to Rs2,450
We downgrade our rating from Buy to Neutral. We derive our price target from a
DCF-based methodology and explicitly forecast long-term valuation drivers using
UBS’s VCAM tool, assuming a WACC of 12.3% and a terminal growth rate of
3%. Our price target implies a one-year forward PE multiple of 17.2x.


􀁑 Infosys Ltd
Infosys is the second largest IT services company in India with US$4.8bn
revenue and around 114,000 employees in FY10. Its services include application
development and maintenance, consulting services and package implementation,
business process management, infrastructure management, and testing services.
It provides these services to international clients through offshore development
facilities in India and other global centres. Infosys derives 66% of its revenue
from the US, 23% from Europe, and the rest from Asia Pacific.
􀁑 Statement of Risk
We think the possibility of significantly lower revenue guidance led by the
potential macro slowdown is a key downside risk to our earnings estimates.
Appreciation of the Indian rupee against major global currencies could also
impact profitability for the company.

UBS:: Crompton Greaves- Outlook remains uncertain

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UBS Investment Research
Crompton Greaves Ltd
O utlook remains uncertain
􀂄 Event: we believe the outlook is still uncertain in core businesses
We think the near-term outlook for Crompton is still uncertain because: a) as
indicated by Indian T&D equipment manufacturers’ results, the companies are
facing severe competition from overseas and this has led to a structural decline in
profitability; b) the overseas markets remain challenging for Crompton; c) interest
rate hikes continue and inflation is not under control, which is bad for the
consumer products business; and d) ordering activity has slowed down in
industrials.
􀂄 Impact: power systems business is the key
We think that in both domestic and overseas markets for power systems, Crompton
is facing severe challenges. The company has highlighted that Q2 FY12 may also
be a difficult quarter but the situation may improve in H2 FY12 if there is a
positive change in the Middle East and India. We think this revival (earlier
expected in H2 FY12) may get delayed by another six months at least.
􀂄 Action: we lower our EPS estimates by 10%/8%/4% for FY12/13/14
We lower our FY12/FY13/FY14 EPS estimates from Rs10.70/13.53/16.34 to
Rs9.66/12.43/15.65 due to lower and less profitable growth. We have lowered our
estimates mainly for the power systems business and for the current year i.e. FY12.
However, we are still close to the top end of company guidance for FY12.
􀂄 Valuation: maintain Sell, lower price target to Rs130
We lower our price target 19% to Rs130 from Rs160 on lower near-term estimates
and an updated discount rate. We derive our price target from a DCF-based
methodology and explicitly forecast long-term valuation drivers using UBS’s
VCAM tool (assuming a WACC of 13.3%).


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

Sun Pharma-::2011 AR: Improvements in WC, return on investments and contingent liabilities::Credit Suisse,

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● FY11 Annual Report is positive on several fronts including
reductions in working capital and contingent income tax liabilities,
and improvement in returns on investment.
● The WC cycle has now reduced to 4.5 months from 6+ last year.
Taro’s integration also helped as WC for Taro is shorter at 3.5-4
months. Receivable days halved from those in FY08 but
receivables more than 6M now account for 40+% vs. 10% earlier.
● Return on the investments (US$1 bn) improved as the proportion
invested in fixed deposits increased to 35% (versus 6% last year).
In the past, return on FDs had been in line with the market but
return on rest of the portfolio had been low (Fig. 2). Currently 15%
of the portfolio is in current accounts yielding zero returns.
● Sun Pharma created another partnership firm ‘Sun Pharma Drugs’
with a 98% holding by Sun. We believe the entity is created for the
new capacities for which Sun is investing in FY12. Partnership
firms are not required to pay MAT.
● Contingent income tax liability declined from Rs4.3 bn to Rs2.6 bn
and after four years, cash taxes paid were in line with P&L tax.
Figure 1: Partnership profits now almost moved fully to the Sikkim site
FY09 FY10 FY11
Sikkim 0% 68% 93%
Jammu & Dadra 100% 32% 7%
Source: Company data, Credit Suisse estimates.
Another partnership firm created in FY11
Sun Pharma has two operational partnership firms in Sikkim and
Jammu & Dadra. These firms mainly cater to the domestic market and
are not required to pay MAT. As the tax advantage expired in Jammu
& Dadra facilities, the production has now mainly shifted to the Sikkim
facility (Fig. 1). In addition, a new partnership firm, Sun Pharma Drugs,
has been created with a 98% holding by Sun and 2% by key
Employees’ Benefit Trust. We believe this entity has been created for
the new capacities for which Sun is investing in FY12.
Return on investments improved in FY11
The return on the investments (now US$1 bn) has been weak for Sun
over the last three years (Fig. 2). Although the return on fixed deposits
has been in line with the market, the return on rest of the portfolio has
been low. About 15% of total portfolio is in current accounts yielding
zero returns. Overall returns improved in FY11, as percent of portfolio
invested in fixed deposits increased to 35% (from 6% in FY10).


Working capital cycle improved as receivables declined
The WC cycle for Sun has now reduced to 4.5 months from 6+
months in FY10. Taro’s integration also helped as the WC cycle for
Taro is shorter at ~3.5-4 months. Receivable days have now almost
halved from highs of 2008 but the profiles of receivable days have
changed now. Receivables more than six months used to be only 10%
of total receivables earlier but now have increased to 40+%.


Contingent liability for income tax declined in FY11
Contingent liability for income tax on account of disallowances has
now come down to Rs2.6 bn from Rs4.3 bn in FY10. Additionally, after
four years, cash taxes paid were in line with the P&L tax rate


● Taro has net deferred tax assets of Rs3 bn which would be
available to reduce tax in future. These tax losses have arisen due
to excessive product returns in the past.
● Caraco 4Q11 sales were US$33.3 mn with a US$4.7 mn PAT loss.
● In LatAm markets, the filing of products from the facilities at
Mexico and Brazil has commenced.

India Ports: Limited growth avenues ::CLSA

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Limited growth avenues
The government targets to treble India’s port capacity, from 960mtpa to
3,100mtpa by FY20, through a combination of new berths at major ports and
greenfield developments at non-major ports. There have been significant delays in
major ports, though, while aggressive bidding for the ones tendered out could
erode returns. Greenfield non-major ports should offer stronger growth and better
returns, but take longer to fructify. Notwithstanding the limited organic growth
avenues near term, all three listed plays on the Indian ports sector (MPSEZ, GPPV,
Essar) are trading at a premium to global ports. Maintain U-PF on MPSEZ.
Sharp capacity expansion required in Indian port sector
The government has recently indicated its plans to treble India’s port capacity over the
next decade (to 3,100mtpa by FY20 cf. 960mtpa currently) to cater to the incremental
traffic and bring down utilisation rates (currently 85% cf. optimum levels of 65-75%).
At the 12 major ports administered by the Central government, it targets to increase
capacity by 2.4x by adding new berths and modernising the existing ones. At nonmajor
ports administered by respective state governments, it targets to raise capacity
by 4.8x with several of states planning to develop greenfield projects on a PPP basis.
Major port projects delayed, aggressive bidding eroding returns
In FY12, the government is targeting to award 15 major port projects, aggregating
196mtpa of capacity. While this is encouraging, we have seen numerous delays in
project awards in the past. For instance, the process of awarding the two most salient
projects (JNPT container terminal IV, Chennai mega container terminal) had been
pending for three years. Moreover, bidding aggression has increased recently; this can
erode profitability, especially as tariffs are still controlled and determined by TAMP.
Greenfield non-major ports attractive, MPSEZ in fray for Vizhinjam port
Returns and growth potential may be better for greenfield non-major ports; we
estimate a 34% equity IRR for the Mundra port, for example. MPSEZ itself is one
amongst the two bidders for Vizhinjam port (36mtpa capacity in a phased manner) in
Kerala. While a win would add to its portfolio, these opportunities take longer to
fructify with gestation periods of 3-10 years even after the concession agreements are
finalised. Awarding projects itself could be a long drawn process. For instance, MPSEZ
has been trying to finalise a port concession on the east coast for the last few years.
Limited growth avenues in India, rising risks on investments abroad
Notwithstanding the limited organic growth avenues near term, all three key listed
Indian ports stocks (MPSEZ, GPPV, Essar) are trading at a premium to global peers.
The slower pace of meaningful growth outside of Mundra and the Adani Group’s
interests in coal mines abroad has driven MPSEZ to evaluate overseas growth
opportunities more aggressively; it has already acquired Abbot for a punchy US$2bn
and is evaluating further multi-billion dollar opportunities in Australia (Dudgeon, Abbot
X4-7) and Indonesia. Returns are unlikely to be as attractive as the flagship Mundra
concession, though, even as balance sheet risks rise meaningfully. Maintain U-PF.

State Bank of India -Conference takeaways: Profitability continues to be under pressure::Credit Suisse,

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● SBI has presented at Credit Suisse’s ASEAN conference where it
highlighted its continued NIM focus. The bank expects NIMs to
hold up at 3.5% levels in FY12 even as the upward repricing of
the deposit base comes through on the back of the recent base
rate hike (50 bp) and the additional benefit of 1,000-day deposits
maturing. However, better NIMs are being offset by slowdowns in
fees and treasury income.
● While it expects NPL accretion in SME and mid-corp segments to
pick up, it targets to contain gross slippages at ~2.5% in FY12
(versus 3.1-3.3% over past two quarters). Most of catch-up
provisioning (post new RBI norms) has already been done.
● Tier-one is at a low 7.6% and the bank expects to raise capital in
3Q11 partly from government and the balance from the public
(targets to raise Rs200 bn – 30% of the current book).
● Psot 1Q earnings miss and a slowdown in fees, higher tax rate
and treasury loss, we reduce our FY12E/FY13E EPS by 13%/4%
but raise NIM forecast. Our new target price is Rs2,180, at 1.3x
FY12E book value, in line with historic average. NEUTRAL.
NIMs to hold up at 3.5% level
SBI has highlighted that margins continue to be its key focus area.
The bank recently increased the base rate by 50 bp (currently at 10%)
followed by a 100 bp of lending rate increases in April and May.
Management expects NIMs to hold up at 3.5% levels in FY12 (versus
3.3% in FY11) aided by these lending rate increases and the repricing
of the legacy term deposits. We slightly increase our FY12 NIM
estimate to 3.5% (versus 3.35% earlier). Loan growth is expected to
moderate to 16-18% levels in FY12 and the fee income growth is also
likely to lag asset growth with slowing corporate activity. It aims to
contain FY12 operating expenses growth to less than 20% YoY.

Slippages likely to moderate from 3%+ levels
The bank expects slippages to moderate from 3%+ levels over the
past couple of quarters to ~2.5% in FY12. Most of the catch-up
provisioning (based on new RBI norms) is done and only Rs5.5 bn is
left for 2Q12. The bank is closely monitoring the project and infra
finance exposures, and while some of these projects are 6-12 months
behind schedule it does not expect them to become NPLs. SBI is now
very selective in incremental infra lending and is stringent on predisbursement
milestones. Following rate increases and the macro
slowdown, the bank expects SME and mid-corporate NPLs to rise but
targets to contain gross slippage at 2.5% of loans in FY12 and bring
down net NPLs to 1.5% (currently at 1.6%). Our forecast FY12-13
credit costs are at 1.1-1.0%.

UBS :: Patni Computer Systems-- Integration issues to dampen growth

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UBS Investment Research
Patni Computer Systems
Integration issues to dampen growth
[ EXTRACT]
􀂄 Revenue growth to be impacted by integration issues
We expect revenue growth to remain under pressure for Patni Computer Systems
(Patni) as iGate (which now has an 82% stake in Patni) incrementally tries to move
revenue from large clients such as GE onto its own books instead of Patni’s. We
also expect the demand slowdown to impact revenue.
􀂄 ‘Push-down’ accounting to impact profitability
Post acquisition, iGate has applied the ‘push-down’ accounting policy to Patni as
allowed by US Securities and Exchange Commission regulations. This implies that
acquisition-related assets and liabilities will be visible on Patni’s books.
Accordingly, we have factored in higher amortisation expenses and lower
operating performance in our estimates and cut our 2011/12/13 EPS estimates from
Rs35.75/36.90/39.09 to Rs15.32/25.94/32.35.
􀂄 Stock to remain range bound until corporate action occurs
iGate will need to reduce its stake in Patni to 75% by May 2012 as per Securities
Exchange Board of India regulations or delist the company. We believe clarity on
the corporate action will act as a catalyst for the share price.
􀂄 Valuation: maintain Neutral, lower price target from Rs380 to Rs250
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. Our price target assumes an
11.7% WACC and 3% terminal growth.


􀁑 Patni Computer Systems
Incorporated in 1978, Patni Computer Systems (Patni) is one of the leading
India-based providers of IT services. It has over 14,000 employees across 29
centres across the world. Patni offers services in application development and
maintenance, enterprise solutions and other IT-enabled services. It derives most
of its revenue from the US and the rest from EMEA and Asia. Its main verticals
are insurance, manufacturing and retail, and product engineering.
􀁑 Statement of Risk
We believe the primary risk to Patni is the integration with iGate, which has led
to push down cost accounting. Additionally, a demand slowdown could impact
business momentum.

IT Services:: Timeline of triggers CLSA

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Timeline of triggers
A seasonally strong quarter ahead but 2012 IT budgeting uncertainty
thereafter. Watch-out for fresher hiring trends in Dec’11/Jan’12.
The last decade indicates that even in the best of times, Jan-June has been a
relatively weaker period for Indian tech names. July-Dec has been the best phase
of stock performance. The 2H pick-up has not been set in motion this year due to
the the early set backs on multiple fronts with (i) Infosys and Wipro being held
back due to internal issues (ii) meaningfully sized players such as
Temenos/Software AG having to cut guidance significantly post European macro
issues (iii) overall subdued macro environment.
Looking at a timeline of triggers, we see the fresher hiring season of Dec’11/Jan’12
as the key barometer of 2012 demand trends. October result season will likely
satisfy moderated street expectations but is unlikely to be good enough for a
bounce back in tech stocks. We expect little near term impact on revenues from the
current macro issues globally and we think it is unlikely that tech frontliners will
report any slowdown indicators with their 2QFY12 performance. However, we
expect subdued commentary on the pricing environment.


However, post October/November 2011, another phase of uncertainty could ensue.
This will be the time when 2012 IT budgets are framed and also when the health of
demand over the medium term will be judged. Judging by past trends, we expect
the current macro uncertainty to result in a more extended budgeting cycle, leading
to a weak start to 2012 for most leading outsourcing vendors.
Scale of campus hiring for the graduating class of 2012 will be an important lead
indicator of demand trends. Unlike in pre-2008 timeframe, when IT companies
visited campuses 6 months before the following year budgeting period (in June-
July), nowadays, quantum of fresher offers is more in synch with next year demand
trends. The 6 month lag in campus recruitment c.f. pre-2008 gives IT vendors a
buffer period to assess demand trajectory.
We reject the hypothesis that honouring of fresher hiring commitments for
graduating class of 2011 is a sign of strong demand. Much of the current hiring
(fresher + lateral) is to meet 2011 demand and back-fill attrition. As we have
mentioned earlier in the note, the current macro uncertainty is unlikely to impact
2011 growth by much. Moreover, IT companies do have an opportunity to cut-back
on lateral hiring in case of incremental changes in growth outlook for FY12 (though
we would assign a very low probability to that).
CLSA view on Indian techs continues to be cautious. While near-term
uncertainty will invariably keep stock performance muted, the lack of a
secular medium term re-rating story backs our continued negative stance
on Indian techs. While trough PEs for tech stocks will be higher than the
2008 slowdown, we expect those to sustain for a longer period of time. We
have no positive recommendations in the Indian IT Services space.

India Oil and Gas Sector:: Is the Indian gas story over?::Credit Suisse,

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Saurabh Mishra / Research Analyst / 91 22 6777 3894 / saurabh.mishra@credit-suisse.com
● Despite D6 volume downgrade, total gas volumes in India can still
exhibit some growth. If (1) D6 decline moderates, (2) ONGC’s
rejuvenation programme perform as forecasted, (3) PMT does not
fall off a cliff and (4) spot LNG prices do not increase further. For
full report, please click here.
● GSPL volumes are more dependent on market dynamics than
GAIL, we think. We estimate that a 20 mmscmd increase in FY14
domestic gas output will increase GAIL throughput by 6.5
mmscmd (5%), but improve GSPL numbers by 21% (10
mmscmd); with similar sensitivity on the downside. With GSPL
trading at ex growth valuations (10x FY12E consensus), and at a
significant discount to GAIL on P/E, P/B (with higher RoE), stock
appears compelling.
● Despite increasing spot prices, the strength in LNG imports has
surprised. Increasing Rasgas contract prices, and any potential
price pooling can affect gas consumed at power plants, which can
have a material impact on long term LNG import into India.
● We update gas transmission forecasts for GAIL and GSPL. GAIL/
GSPL FY13E EPS fall 4/9% to Rs34.9/10.3. Our GAIL TP falls to
Rs521 (from Rs557). Our GSPL TP rises from Rs117 to Rs127


Gas volumes can still grow
A flood of D6 gas was expected to swamp the Indian gas market,
drowning other issues and assuring volume growth for intermediaries
and customers. With that turning out to be a damp squib (at least near
term), uncertainties in other supply sources come to the fore, eroding
growth expectations at most related gas stocks. With PLNG now
operating 105%, GAIL and GSPL guidance of volume growth are
currently being ignored, we think. Total gas availability in India could
in fact grow, if (1) D6 decline rates moderated (as RIL is currently
guiding to), (2) ONGC’s rejuvenation program and marginal field
projects perform as forecasted, (3) PMT does not fall off a cliff and (4)
spot LNG prices do not increase further. Total natural gas availability
in India could then grow c.30 mmscmd between FY11-FY14. We note
this volume growth estimate is ‘un-risked’, and based on multiple
assumptions, but also highlight that market is currently expecting none.
LNG import constrained by capacity
The recent strength in Indian LNG imports (despite increasing spot
prices) has surprised, having being led by consumption at refineries.
Refineries – with limited capacity addition, and city gas – with low
specific gas consumption – are unlikely to drive medium-term demand.
Consumption of gas at power plants can potentially be large, but is
dependant on LNG costs. Power tariffs in India do not support current
spot LNG. The sharp increase in Qatar take-or-pay contract prices
(and any consequent pooling of prices), when combined with any
increase in prices of domestic gas, can materially impact gas volumes
(specifically LT LNG volumes) consumed at power plants, we believe.
This will affect utilisation of import terminals and gas pipelines. In the
near term, however, we see little risk of this. On our India gas model,
we see terminal utilisation remaining c.100% until FY14 as long as
spot LNG prices (delivered) are less than US$12-13/mmbtu.


GSPL has higher sensitivity to gas availability
Of the two principal pipeline companies, GSPL has larger leverage to
gas availability due to (1) a lower base (GSPL currently ships 36
mmscmd to GAIL’s 120) and (1) the government’s gas allocations,
which have been focussed on plants along GAIL’s pipelines. A large
part of the decline in D6 gas volumes has come off GSPL’s networks
being replaced by LNG. Given the government is allocating both D6
and APM gas, we expect allocation priorities to be similar. Any
increase in ONGC’s output could then materially impact GSPL
volumes.
Update models
We update our Indian gas model linking (1) domestic gas production
(falling D6, increasing ONGC), (2) gas consumption capacities
(operational, and under construction), (3) gas pipe-line capacity and
(4) LNG import (dependent on capacities and LNG prices), and
update GAIL/ GSPL numbers accordingly. For GAIL, we now have
transmission volumes at 122/ 127/ 136 mmscmd (123/ 132/ 132
earlier) for FY12/ 13/ 14. FY13E EPS falls 4% (on volumes and DD&A
from new pipelines) and FY14E falls 10% to Rs40.3. Our target price
falls from Rs557 to Rs521. We reduce GSPL gas volumes for FY12/
13 from 41 / 51 to 37 / 39 mmscmd. Our target price increases from
Rs117 to Rs127, as we remove the 25% discount we had earlier
applied to GSPL’s ‘growth option value’ (we now have specific, bottom
up volume forecasts). GSPL trades at a significant discount to GAIL
on P/E and P/B, despite higher RoE, and is our preferred pick in the
Indian gas pipeline space.

The Lodestone- Disconnect continuing?::JPMorgan,

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 Iron ore- Physical demand moving up: While commodity linked equities
continue to  fall, physical demand  from China for iron ore has again picked
up  pushing  spot  iron  ore  prices  above  $185/MT.  JPM  Shipping  analyst
Corring Png, in her weekly update, highlights 30 Capesize were chartered in
the spot market (+30% w/w), while average daily earnings for Capesize rose
36% w/w, with Chinese demand for iron ore driving 77% of the Capesizes
chartered. JPM Global metals analyst Michael Jansen highlights that 'while
there is normally a solid seasonal stock build in the LME in many metals in
H2 we could be seeing a flatter build this year or no build at all given that
physical demand is going to be unseasonably strong in Q3 courtesy of the
dump in LME prices over the past few weeks’. Additionally  on support  for
LME  metal  prices,  Michael  highlights-‘In  copper  for  instance  the  price
action shows clearly that the $8500 area is very good medium term support
and  dips towards this  level  have led to  both  an  open import  window  into
China  and  additional  spot  tonnage  $2300  provides  good  support  for
aluminum, $2200 in lead and $2000-$2050 in zinc’.
 Steel prices- List  prices  see  marginal  move  up:  China  Steel  announced
modest  price  increases  (1%)  for  Oct  and  Nov.  JPM  UK  Steel  analyst
Alessandro  Abate  highlights  that  ex  China  steel  prices  are  back  on  the
upward  trend  after  the  announcement by  US  companies  (  +$60/t,  even
though  +$30-40/t  are  more likely to  stick, in  our  view),  supported  by low
inventory  and  recent increase  of Chinese HRC  steel  prices’. Metals media
(SBB)  have indicated Hard Coking  coal  contracts  at  $285/MT  for the OctDec  quarter,  down  from  $315/MT  for  the  Sept  quarter.  These  prices  are
lower than JPM forecast of $300/MT for the Dec quarter. JPM BHP analyst
Amos Fletcher in  his  results update  highlighted that Met Coal  volumes are
still impaired  and  guidance  remains  for that to  continue  until the  calendar
year  ends.  Continued  elevated  spot  iron  ore  and  coking  coal  prices
indicates  that  at least in  the  next  three months,  steel  prices  have  very
little downside from current levels.
 India- Domestic  steel  price  discount  to  imports  widens  on  INR
depreciation: As per our estimates domestic HRC prices at Rs34.5K/t are at
6%  discount  to  landed  import  prices.  While  import  FOB  prices  have  not
moved up, INR depreciation has helped. Post today’s Supreme Court ruling
on  Karnataka  iron  ore  mining  issue,  which  would  give  some  clarity  on
availability  and  cost  structure  for  ~20%  of  India's  steel  production,  we
expect some more modest steel price movement up (1-2%).
 India Iron ore: Important ruling today: The Supreme Court is to hear the
issue of whether mining needs to be banned in the Chitradurga and Tumkur
areas of Karnataka (which in our view is ~20% to 45MT annual production
out of Karnataka). Mining is already shut down in the biggest belt of Bellary
(other  than  NMDC  mines).  While  exports  out  of  Karnataka  have  been
banned  for more than a year now and hence any  further stopping of mining
activities  would  not  have  any  direct  impact  on  iron  ore  exports,  the  cost
curve  for JSW Steel could materially increase if the company has to source
iron  ore  from  other  states  (though the  CEC  report  mentions that  25MT  of
inventory should be supplied to steel companies).


India Regulatory risk update: Now it is the state pollution control boards:
India’s mining sector has seen a spate of regulatory intervention across multiple
levels. Recently the Jharkhand State Pollution Control Board ordered the closure of
some of Coal India's mines. The company has confirmed that as of now the mines are
still operational. Recently the Goa State Pollution Control Board had asked some
iron ore mines to shut down. The regulatory uncertainty has hit multi billion dollar
capex programs, including some projects which are already on their way of
commissioning.
BHP Update: Mining inflation: JPM UK mining analyst Amos Fletcher in his
update on BHP highlights -the company estimated total cost inflation ex-CPI and FX
of 4.9% and highlighted that ‘further increases are coming’. Inflation rates on the
same basis peaked at 9% in FY09. Of the total controllable cost variance seen YoY,
BHP estimates c.55% is structural, the bulk of which was in labour costs. Hence, the
recent move to acquire its iron ore contractors (who moved c.80% of volumes in the
Pilbara) to insulate itself against further inflation’.
Commodity Global views, Bull and Bear Portfolios: JPM Global commodity
analyst Colin Fenton in his update (Commodity Phase Shift: Surfing the seas of
commodity volatility) highlights- Investment seas characterized by strong cross
currents on growth and inflation, and uncertain economic and policy oriented winds,
are difficult waters to navigate. To manage the stomach churning volatility through
what we believe will be tempestuous but short-lived (4-to-6 months) squalls, on
August 8 we introduced the idea of structuring commodity investment risk across two
commodity portfolios. The first portfolio is comprised of long or overweight
commodity positions geared toward Asia, capex, and inflation. The component
commodities of “Bull” are ICE Brent crude oil, ICE gasoil, CMX gold, ICE RAW
sugar, LME copper, CBT corn, and MGE wheat (Cover exhibit). The second book
is comprised of short or underweight commodity positions geared toward the US,
consumption, and disinflation. The component commodities of “Bear” are NYM
WTI crude oil, NYM RBOB gasoline, LME aluminum, LME zinc, and NYM
natural gas. Each of the books is equal weighted on a dollar basis at inception, as
are the two books against each other. So far, results have been favorable.

Invest right to secure a monthly income ::Business Line

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A big worry for many investors nearing retirement is managing their monthly expenses after they call it a day. Retirement could turn out to be a nightmare if you have not adequately planned for a regular source of income. If you receive pensionsor annuity payments from an insurance plan or have regular cash flows such as rental income, you may have less reason to worry. Otherwise, generating regular cash flow, assuming you do have high savings may be a challenge. For instance, savings stashed in cumulative deposits or bonds may not provide you with ready money until the deposits mature. And even when they do , you might end up putting away the proceeds in your savings account which yields poor returns and depletes wealth rapidly.

Here are a few options to earn reasonable returns and generate monthly cash flows without too much hassle.

TRADITIONAL OPTIONS

Most investors may be aware of the good old Monthly Income Scheme (MIS) offered by the post office. Offering a rate of 8 per cent per annum, this option would pay out interest every month. A bonus of 5 per cent is paid on maturity after six years. However, if your annual income falls within the tax net, then the interest on MIS is subject to tax. An 8 per cent return may thus be reduced to 7.2 per cent (in the 10 per cent tax slab) or even lower on a post-tax basis. Hence, while MIS would be a convenient option you should avoid investing all your funds in this product, given the fact that it may not fetch returns over and above the current rates of inflation (over 8 per cent).

A better option, if you are over 60 years old, would be the Post Office Senior Citizens Savings Scheme (SCS). With interest rate at 9 per cent per annum, the scheme is a better option for many reasons. One, the principal amount invested is available for deduction under Section 80C. Hence, if you have taxable income, investing in SCS would help lower your tax payout. As a result the post-tax yield is good. You can invest up to Rs 15 lakh in this scheme whereas MIS is capped at Rs 4.5 lakh (single account holder) or Rs 9 lakh (for joint accounts). Being able to invest a bulk in SCS will also ensure that you interest payouts are sizeable, especially when you lack other cash flows. Do not be put off by the quarterly interest payout in SCS. You can always let it lie in the savings account at the post office or your bank for a couple of months. Interest though is taxable, and tax is deducted at source if interest exceeds Rs 10,000 per annum. Ensure that you submit Form 15H if your annual income is well below the minimum tax slab.

DEPOSIT OPTIONS

While the post office schemes are available at all times and interest rates don't change based on market cycles, the current high interest rate scenario has made deposits of banks and NBFCs more attractive. NBFCs with high credit rating such as HDFC, ICICI Bank, Bank of Baroda and smaller ones such as Tamilnad Mercantile Bank offer monthly payout options on their fixed deposits. Interest rates hover around 9.5-10.5 per cent for a 1-3 year period. Yields on a quarterly payout would be marginally superior given the longer duration. Remember, here too, the interest is taxable and TDS laws are same as explained earlier.

SMARTER OPTIONS

The traditional options offer regularity in income but are not necessarily tax efficient or optimal in terms of returns earned. While people with no other sources of income would do well to allocate a majority of their savings in safe options, a fifth of their savings can be parked in savvier options that mutual funds offer. We are not delving in to the universe of equity funds for reasons of high risk.

Mutual fund investors may be aware of Monthly Income Plans or MIPs that seek to offer a monthly dividend payout to investors. These funds predominantly invest in short and long term fixed income instruments issued by government or corporates, debentures and commercial paper. MIPs however, have a 15-20 per cent exposure to equities to provide some kicker to returns. The key limitation here is that dividend amount may vary across months and there is no guarantee of regular dividend payout as gains are linked to interest rate cycle.

WITHDRAW SYSTEMATICALLY

So how does one get over the limitation of varying dividend payments and also prevent NAV erosion that happens by way of dividend distribution tax of 13.5 per cent (including surcharge and cess) paid by the debt funds? A good alternative would therefore be a less popular strategy called the systematic withdrawal plan. Almost all fund houses allow you to withdraw a fixed sum monthly, quarterly or half-yearly from any of the debt funds or MIPs on offer. You could either opt to withdraw a fixed sum or alternatively withdraw only the gains made on your capital. All you need to do is to opt for such a scheme at the time of investment or much later. However, here a few points that you should know while investing in SWPs. Do not opt for dividends if you go or SWPs. And, ensure there is no exit load when you start the withdrawal. Exit loads are typically charged within one year of investment. Hence, start investing a few years before you require regular cash flows. Withdrawal after the first year will ensure that you do not suffer short term capital gains. Tax on long term gains would be 10 per cent without indexation or 20 per cent with indexation

Brooks Labs IPO: Listing on Monday (Sept 5)

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Brooks Labs IPO: Listing on Monday (Sept 5)


CLICK here for Grey Market Premium

Bajaj Auto-Assuming Coverage with NEUTRAL- Margins have peaked out::Credit Suisse,

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● Assume coverage with NEUTRAL. We assume coverage of
Bajaj Auto with a DCF-based target price of Rs1,552, which
translates to 14.5x (15% discount to Hero Motocorp) FY13 EPS.
● Margins will gradually trend lower. With product mix in the
domestic market worsening and exports being driven by the lower
margin African market, Bajaj Auto’s margins will gradually trend
lower. Additionally, if DEPB does not get extended beyond Dec
2011, for 3% reduction in benefit margins will fall by 70 bp.
Moreover, the substitution of higher margin three-wheelers with
four-wheel LCVs can further deteriorate margins medium term.
● Domestic volume momentum slowing down. Bajaj Auto’s
domestic volume momentum has slowed down significantly in the
last few months, because of Discover volumes peaking and sales
in the premium segment slowing.
● Prefer Hero Motocorp to Bajaj Auto. With the margin trend
between Bajaj Auto and Hero Honda reversing, we believe Bajaj
Auto will trade at a discount to Hero Honda.
Product mix deterioration will affect margins
We believe that Bajaj Auto’s product mix has clearly peaked, and the
share of lower-margin entry segment bikes is likely to increase in the
future. The mix has already started to worsen in the last few months,
with the share of the entry-level segment increasing from 13% to 23%
at the expense of the higher-margin executive segment. The
upcoming launch of the Boxer 150cc could further this trend. Bajaj
Auto’s volumes in the premium segment have also started declining.
Also, on the exports side, volume growth is being driven by Africa
where margins on motorcycles are lower, as the company competes
with Chinese manufacturers. The withdrawal of the Duty Entitlement
Passbook Benefit (DEPB) scheme could also greatly hurt the
company, as its margins would be affected by 70 bp for every 3%
reduction in export benefits, and EPS would fall by 3%.

ICICI Prudential Discovery Fund - INVEST ::Business Line

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Value investing limits the risks

Even though mid-cap stocks have been major laggards so far this year, there still are pockets of value in this segment. Investors looking to add some midcap exposure to their investments can consider buying units of ICICI Prudential Discovery Fund. The fund follows a ‘value investing' strategy and therefore comes tagged with lower risks than its mid-cap focused peer funds.

This holds considerable investment merit in the present market. A decent returns scorecard and a promising portfolio of stocks also add up in the fund's favour. Investors may, however, consider a phased exposure by way of a systematic investment plan, given the high volatility in the markets at present.

SUITABILITY

Though the fund makes for a lower-risk option within the universe of midcap stocks, the risks are far higher in relation to large-cap or index funds. The fund, therefore, makes a good investment option for investors with some appetite for risk. That apart, the fund's value-investing strategy and mid-cap bias necessitate a long-term investment horizon.

PERFORMANCE

While the fund's one-year returns are in the negative, it is better than that of its benchmark CNX Midcap. The margin of outperformance over a three-year period however is way higher. During a three-year period, the fund delivered a compounded return of approximately 18 per cent. This compares quite favourably with many of its peers.

It also enjoys a fairly reasonable record in containing downsides. For instance, between January 2008 and March 2009, the Discovery Fund managed to contain the fall in its Net Asset Value (NAV) to approximately 59 per cent, marginally less than the Sensex. That even diversified funds with relatively a large-cap bias struggled to do this during the period highlights the efficacy of the fund's value-investing approach. Its five-year returns, however, are just in line with its benchmark, as the fund had been a marked underperformer in the bull markets of 2006 and 2007. The fund has, however, managed to improve its performance since then. Its returns during one-, three- and five-year periods compare favourably with its category average too.

PORTFOLIO

While there is no doubt that investing in midcap stocks is now ridden with risks, the fund's portfolio choices have been somewhat offbeat. Contrarian and dividend yield stocks (and sectors) with a focus on low Price-Earnings (PE) stocks make up its portfolio.

The fund has also occasionally dabbled in derivatives and made periodic cash calls while rebalancing its equity exposure. Its portfolio is also prone to frequent changes, and therefore enjoys a relatively high portfolio turnover.

In its current portfolio, large-caps (stocks with more than Rs 7,500 crore market capitalisation) make up more than 36 per cent of its overall portfolio, while mid- and small-caps make up 24 per cent and 34 per cent, respectively.

While banks, software, auto ancillary, and cement make up its top sectors in its latest portfolio, the stock choices within that aren't typical. For instance, stocks such as Rain Commodities, CESC and Standard Chartered PLC find a place in its top ten stocks' list