Will China come to the rescue? ::Macquarie Research,

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Will China come to the rescue?
Feature article
 We summarize apparent demand commodities to July 2011, highlighting
relatively strong growth year-to-date in most of them (except met coal, iron
ore and zinc). We highlight the inverse relationship between Chinese and
non-Chinese demand and speculate that weaker non-Chinese demand
growth in 2012 may well be accompanied by a surge in Chinese growth.
Latest news
 Monday was another down day for base metals on the LME, as further growth
fears impacted global markets. Nickel took the biggest hit, down 2.8% on the
day to close below $21,000/t for only the second time this year. All other
major base metals also dropped over 1%, while WTI oil dipped 4%. The China
services PMI was the day’s weak data point, falling to a record-low of 50.6;
the slowest pace of tertiary business growth in the survey's six-year history.
 Gold rose towards a new nominal high, reaching $1,895/oz on the PM fix and
moving over $1900/oz in Comex trading. Gold is also again trading at
a premium to platinum, with the Pt:Au ratio dropping to 0.987. While we
wouldn’t rule out gold moving higher, we think that longer term gains should
require a drop in the US$, which has been fairly steady since markets turned
down. For more details, see the latest instalment of the Precious Pulse.
 Freeport McMoRan Copper & Gold's Indonesia mine workers have
announced plans to strike indefinitely from September 15 unless the company
meets their pay rise demands, Reuters reports. The strike would be the
second since July at Grasberg, the world's third biggest copper mine.
Meanwhile, workers at Freeport's Cerro Verde copper mine in Peru also plan
to hold a two day strike on 7th and 8th September in a push for improved pay
and conditions. The mine produced ~312,000t of copper contained in 2010.
 Jinchuan Group, China's top nickel producer and third-biggest copper
producer, is to invest in two laterite mines on Palawan Island in the
Philippines after signing agreements with two companies last week.
 BHP Billiton has for a fifth time rolled over its monthly reference price for
manganese ore shipments from September to October, leaving benchmark
Gemco lump ore unchanged at $5.50/dmtu CIF China. Mn ore prices had
fallen sharply through the second half of last year and early 2011 - BHPB's
October reference price is 21% below the same month of last year - but prices
appear to have stabilised as high stocks start to be drawn down. Chinese Mn
ore port stocks fell by 3% MoM to 3.85mt (gross weight wet basis) in July,
according to the latest data from the IMnI. Crude steel production remains
strong and, as the stock draw continues, we would anticipate prices for Mn
ore to start moving up.
 The spectre of further production losses is again rearing its head in the met
coal space. McCloskey’s has reported that unions at BHP-Mitsubishi
Alliance’s met coal operations in Queensland are planning to start 24-hour
stoppages simultaneously at 7 mines in the regions. Until now, stoppages
had mainly been limited to 12 hour blocks. Meanwhile, a roof fall at
Peabody’s North Goonyella mine looks set to cause at least 4 weeks of output
losses, equating to ~200kt of met coal.

Steel prices increase selectively :: JPMorgan

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 Steel prices moving up across some markets: Some US mills have
announced a follow up $40/st increase in HRC prices over and above the
$66/MT announced in early August. JPM European steel analyst Alessandro
Abate estimates that ‘while only $50/st of the $66/st has stuck in the US
market, the second price increase was not surprising given the sharp
decline in US steel imports’. In India media reports (ET) have indicated that
steel mills are likely to increase prices by up to Rs1000/MT (~3%). We do
not find this surprising and have highlighted this possibility in our previous
Lodestone. A depreciating INR, seasonal pick up in demand (as the
rains give way to the festival season), increase in iron ore costs for JSW,
and modest pick up in import prices, should allow most of the
Rs1000/MT price increase to go through.
 India Iron ore- Update: In what could possibly be a precedent for the
future, the Supreme Court allowed iron ore auctioning for domestic users in
the state of Karnataka from the 25MT iron ore reserves. So far the only
details available on the auctioning process is that the reserve prices would be
based on NMDC prices.We are not sure if the entire 25MT of the stated iron
ore inventory is saleable and whether all mine owners would participate in
the auction process. We expect iron ore costs for the Karnataka based steel
mills to increase. There is still no update and when production at the shut
mines would start. Exports are still banned from Karnataka. Spot iron ore
prices remain firm at $189/MT .
 Views from China on steel and aluminum: JPM China mining analyst
Daniel Kang, in his update on BaoSteel highlights that ‘Baosteel
management forecasts growth in Baosteel's key end-user demand segments
(automobiles, home appliances and machinery) to slow down in 2H11’. As
per Daniel, Chalco management believes global aluminium prices will
fluctuate between USD2,400 and 2,700/t, while domestic aluminium prices
will range from RMB16,600 to 18,100/t. The company sees alumina import
prices ranging from USD380-420/t, while domestic alumina prices are likely
to be in between RMB2,700/t and 2,900/t.’
 Base Metals- What to expect from MB aluminum week: JPM Global
metals analyst, Michael Jansen highlights that while ‘Ally bulls will point
towards the rapidly dropping ingot stocks in China (down from 500k to 100k
this year) and the escalating costs in the production side as reasons to be
bullish, along with the fact that the ongoing sinkhole in Detroit will act to
keep the cash market tight. While these factors are definitely real, the other
reality is that the market is now beginning to show more signs of surplus
even taking into account warehousing / financing deals, and the MW
premium has softened accordingly. Additionally this year with so much new
capacity in China (esp brownfield) we should indeed see a very strong
production increase in H2 that loosens the market materially in China and
averts the trend lower in ingot stock’.

The Bricks & Mortar Report- Sep 11: what the curves yield :: JPMorgan

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 Watch the curves. The shape of yield curves in emerging Asia has
historically been a good predictor of the direction of property stocks in
those markets. In China and India, yield curves are now inverted, a
generally negative indicator for property stocks. Short-term liquidity
conditions appear to be tight for developers in both markets, giving us
pause about becoming more pro-active toward the China and India
property developers. Inflation trends in both markets are likely to be
critical in short-term tactical positioning for the property stocks.
 Developed Asia-ex needs some policy normalization: Real interest
rates in Hong Kong and Singapore are still in negative territory, and
until the market can see a path toward monetary policy normalization,
property stock discounts to NAV are likely to remain wide. Hong Kong
and Singapore developers are trading at one standard deviation below
their historical average discounts to NAV (-32% and -43%, respectively).
 Mostly fear this year. We have drawn on the technical analysis by our
Asia-Pacific Head of Research Sunil Garg and Global Technical Analyst
Michael Krauss to triangulate our fundamental analysis and stock calls.
The FTSE EPRA NAREIT Asia index fear and greed chart has been in
“fear” mode for most of this year, although the daily chart has recently
turned positive. The technical analysis is indicating support levels at
1,450 on the index.
 Country calls – prefer emerging ASEAN. We retain our preference for
emerging ASEAN markets in the region (over China and India), and
between Hong Kong and Singapore we favor the latter, given fewer
structural rigidities and our view that the policy overhang in Singapore is
removed quicker, given greater policy flexibility and a better supplydemand
balance. The value in the Taiwan property sector has increased
meaningfully given the sell-off in the last month, and we keep our
positive stance on this market. Within emerging ASEAN, we continue to
prefer Indonesia (positive structural drivers) and Thailand (on the back of
fiscal stimulus being introduced by new government).


Investment strategy
We have presented above the key fundamental metrics (the shape of yield curves in
emerging Asia markets, real interest rates in developed Asia) we will monitor for the
appropriate turning points, but as yet we do not see any reason for the markets to
reverse the bearish macro-challenged mode it has been in for 18-24months now. The
short-term technical factors (as indicated in J.P. Morgan’s technical analysis) suggest
a "hold" at current levels, with strong support at the 1,450 level on the FTSE EPRA
NAREIT Asia index.
The index has traded in a +/-10% range of the 1,500 level for the past two years now,
and it is difficult to see how the stocks can break out of this trading pattern without a
change in the macroeconomic status quo.
We believe the benchmark Developed Asia index will continue to trade within this
range for the balance of the year. We retain our expectation of a zero price return
from the benchmark FTSE E/N Asia index in 2011.
We prefer emerging ASEAN markets over China and India, and in Developed Asiaex,
we believe the Singapore property stocks should outperform their Hong Kong
counterparts in the balance of the year on a total return perspective. Within emerging
ASEAN we continue to favor Indonesia real estate, as we expect a confluence of
structural factors to propel growth in volumes and raise real estate sector
productivity.

Dr. Reddy's Laboratories - Growth drivers to FY14E priced in; initiate with Neutral:: JPMorgan

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 Initiate coverage with Neutral rating and PT of Rs1600, valuing the base
business at Rs1534/share (20xFY13E P/E) and one-off opportunities at NAV of
Rs66/share. Following strong re-rating over the past two years, DRRD trades at
24.2x base FY12E P/E. Further multiple-expansion looks unlikely to us as: 1) bigticket
opportunities in the US over FY12-14 appear priced in and visibility beyond
FY14 is low, 2) branded generics in India and Russia face competitive/
legislative headwinds, and 3) the growth in Europe and PSAI business remains
tepid. While the stock offers defensive characteristics in a weak market (8.5%
outperformance vs. Sensex YTD), we would be more constructive near Rs1300
levels.
 Strong growth in US likely to taper off beyond FY14E…. Para IV opportunities
and complex limited competition products in the US are likely to drive revenue
CAGR of 26% in the US over FY11-14E. However, growth outlook beyond FY14E
seems challenging on a high base and low visibility of big-ticket product
opportunities beyond FY14E.
 …while potential headwinds emerge in India/Russia... Growth in India (16% of
FY11 revenues) is slowing and channel checks suggest pricing pressures. Recent
legislative changes in Russia (12% of FY11 revenues) raise questions about the
sustainability of pricing and current growth rates over the long term. In addition, the
growth outlook for European generics (11% of revenues) and PSAI businesses (26%
of revenues) is muted.
 …..even as DRRD seeks new growth drivers: Distribution alliance with GSK and
biosimilars offer good growth opportunities, but will take 5-10 years to scale up, in
our view. We foresee GSK distribution contributing only ~3% to overall revenues by
FY14, while biosimilars will take 7-10 years to scale up, given long development
lead time and still evolving global regulation.
 Earnings and key risks: We forecast base EPS CAGR of 10.5% over FY11-FY13,
driven by 12% base revenue growth and steady margins. Earnings growth and
payout of bonus debentures are likely to drive improvement on ROCE from 15.4%
in FY11 to 20.1% by FY14. Key upside risks to our thesis include new big-ticket
product approvals in the US, pick-up in domestic market growth and steep ramp-up
of GSK alliance. Key downside risks include potential regulatory issues (USFDA
related/Russia), delays in product launches in the US, and a protracted slowdown in
growth in India.

Sharp y/y growth in July due to benign base and lower rainfall; trend slows m/m in August :: JPMorgan

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 August offtake of large players slows: Despatches reported by the four
large firms – ACC, ACEM, UTCEM and JPA (NR) – stood at 7.77MT,
down 6% sequentially as rainfall increased in most regions across the
country. However, y/y trend remained strong with cumulative offtakes up
10%. ACC and Jaypee continued to lead the pack with sharp y/y growth of
20% and 21% respectively, while ACEM’s despatches increased 5.5% and
UTCEM lagged the large players with ~3% y/y growth. Sequentially,
players with large exposure in North India declined with ACEM down 11%
m/m and Jaypee declining 9%. While July and August dispatches have been
strong, we believe this does not (yet) indicate an improvement in underlying
demand, as July-Sept are the rainy months, and the incidence of rains in a
particular month can distort the y/y growth rates.
 July despatches: One-off factors rather than underlying demand
improvement: The cement despatches for July were up nearly 11% y/y
(highest growth since Oct-10) and +2.5% m/m, lower than the monthly
despatch trend reported by the large players (the big 4 reported July volume
growth of 16% y/y and +3% m/m). In our view, the strong y/y trend in
despatches is driven by the benign base and lower rainfall y/y during July,
which led to lower disruption in construction activity. While trends reported
were strong for most players in the country, South India companies
continued their weak performace y/y, highlighting the lack of any recovery
in demand in the region. However, similar to the trend seen in the last
month, Dalmia and Chettinad were the only South India players that
reported y/y growth unlike their regional peers. Dalmia’s volumes increased
26% y/y, while Chettinad was up 4.4% y/y. Industry capacity utilization
levels improved m/m to 74% with lower utils in South India (below 70%),
followed by North India at 74%.
 Interesting change in dispatch share data between April and July 2011:
Analyzing the dispatch data on a company basis indicates a sharp loss of
‘dispatch share’ between April and July for companies such as ACEM
(10.3% down to 9.3%) and UTCEM (down to 17.3% from 18.2% in May-
11), while smaller companies such as Dalmia (up from 2.2% to 2.8%) and
Chettinad (up from 1.9% to 2.6%) increased share. While some of this can
be attributed to rains in the key markets of ACEM and UTCEM, in our view,
this does not fully explain the sharp increase in the South-based smaller
companies. We will watch this trend more closely.
 North and West India seeing sharp increase in consumption: Cement
consumption increased by 7% y/y and +3% sequentially in July highlighting
trends similar to despatches. However, East India was more or less flat
(+0.8% y/y) and South India continued to decline. YTD, consumption
increased 1.3% y/y.
 Dealer check shows pricing pressure in August: Cement prices weakened
in August, in most markets, though the correction is more in Central India
markets than in South India. In our view, a post-monsoon demand recovery
is critical in North and Central India for prices to recover

India Monthly Wrap August 2011: Not an august month for Indian equities :: JPMorgan

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 MSCI India (US$) lost a significant 12.5% over the month and
underperformed the MSCI Emerging markets index (down 9.2%).
Consumer Discretionary, Consumer Staples and Energy companies were
relative out performers, while Telecom, Utilities and IT Services
underperformed.
 1Q FY12 GDP growth moderated, but still remains at healthy levels.
India’s Apr – June quarter GDP increased in-line with our expectation at
7.7% oya. Strong exports (24% oya) and a marginal pick up in
investment (7.9% oya) helped aggregate growth. Consumption growth
has moderated notably from 9.5% to 6.3% compared to 2Q CY10.
 Inflation moderates. July headline inflation moderated to 9.2 % oya on
account of softening global commodity prices. The trend in core
inflation however remained worrisome and further accelerated to 7.5%.
 June IP surprised positively. June IP grew at a significantly higherthan-
expected 8.8% oya. The positive surprise came from a sharp
rebound in the Capital goods segment.
 DIIs buyers, FIIs sellers. FIIs were sellers over the month and sold US$
2,394 mn of Indian equities. DII however turned buyers over the month.
Insurance companies bought US$1,345 mn while domestic mutual funds
bought US$481 mn over the month.
 Other key developments over the month:
 INR depreciated by 3.6% vs. the US$ over August
 Headline WPI Inflation for June reported at 9.2%.
 10 year treasury yield softened 13 bps to 8.32% over
August

Indian EquitiesAn Opportunity in the making!:: Reliance MF

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Bottom-line: In the current volatile environment, investors have started extrapolating the current context
and speculating about the repeat of the doomsday scenario of 2008.
We assess that the current environment, though challenging is quite different and most variables now are
far superior in comparison to those prevailing at that time. While near-term challenges for the economy
and Indian equities will test our patience, is it probably a great opportunity for long-term Indian equity
investors? We give our perspective.
Over the last few days, Indian market has materially sold off owing to the massive rise in global risk
aversion. Globally, key indices have declined over 10% in less than two weeks due to macro data
disappointments from all over the World, especially the US. The latest announcement of US debt rating

cut by agency S&P has also added to the concern about the direction of the global equity markets in
particular.
Indian equities have, in fact, been facing headwinds since the beginning of this year owing to “domestic”
macroeconomic concerns. The news flow on the political front has also not helped matters. The recent
global uncertainty has added to the market’s woes. The US downgrade has probably acted as the last
straw to break the back of the Indian investor’s confidence. Not surprisingly, a section of the concerned
market has started talking about a double-dip and whether there would be a repeat of year 2008.
While, we acknowledge that the investment climate remains challenging, we think the concerns on repeat
of 2008 kind of sell is a bugbear. We assess that the current market backdrop is starkly different from the
doomsday scenario of 2008. Moreover, post the global financial crisis, the relative resilience of many EM
(emerging markets) economies, in general, and India, in particular, has led to increased investors’ faith in
these economies/markets. We explore these individual variables and highlight that the fundamentals are
far superior, while animal spirits are running at rock bottom levels.
Global economy and markets: The 2008 financial crisis was centered around US banks and corporate.
The fundamentals of these banks and corporates have tremendously improved in the last four years.
Moreover, it’s a well established fact that owing to their superior fundamentals, EM (emerging markets)
economies’ growth is far more sustainable as compared to their DE (developed economies) counterparts.
In 2007-08, the engines of global growth were DM (developed markets), while in the last 4 years, EM
have emerged as the biggest source of growth. Share of EM in global GDP has gone up from 28% in
2007 to 35% now. In 2011, EMs are expected to grow by 6% in 2011 while DM to grow by 1.5%. Though
not completely immune, the world economy is far less vulnerable to US and other DMs growth scare.
Impact of US credit rating downgrade: While, in near term, this has resulted in heightened risk aversion,
this is a reminder of the unsustainable overleveraged situation of the Western economies. The silver
lining is that global equities are trading at a very reasonable valuations (MSCI World index at below 11x
PE ratio) and from relative valuation perspective, equities are looking better than debt as an asset class.
From the medium term perspective, such events clearly strengthen the case of EMs assets (India, China).
They have the potential, over a period of time, to hasten the fund flow into faster growing, more resilient
and domestic oriented economies like India.
Sharp corrections and a softer pricing outlook for commodities and oil can be an additional long-term
positive for India. The monstrous concerns of inflation and high interest rates might also be a thing of the
past.
Indian economy: Indian macro variables have remained challenging for the last 3-4 quarters. The
expectations from Indian economy are far more muted now as compared to FY07-08. We might have
already seen the worst of the inflationary pressure and consensus expects below 8% GDP growth in India
in FY12. Over the last few quarters, market has only focused on few negatives on Indian economy, while
ignoring the robust expansion of the domestic economy. Since FY08, domestic economy has grown by

65%, while India’s market capitalization has gone down by 20%. India’s market cap to GDP ratio has
come down from 145% in FY08 to less than 80% now. Falling oil and commodity prices bodes well for the
economy and the equity markets.
Earnings and valuations: Earnings growth expectations are far more reasonable than what it was in
2007-08. Similarly, valuations are far more reasonable. The overall health of corporate India is better than
what it was in 2008. Indian market is trading at 13.7x 1 yr fwd P/E ratio as compared to 24x in FY07-08.
India’s broad market is far cheaper. Indian small cap index is trading at ~7x 1 yr fwd P/E versus over 13x
in FY07-08. Indeed, Indian market is trading at well below average multiples as compared to its own
history as well as versus its peers.
Flows and positioning: Unlike 2007-08 when foreign investors were extremely gung-ho on Indian
market (decoupling argument), this time the level of excitement is limited. While, flows into equities in the
last two years have remained satisfactory, year till date flows in 2011 has remained subdued suggesting
lesser exuberance of FIIs towards Indian equities.
Similarly, exuberance from the domestic investors both retail and institutions is now starkly in contrast
with 2008 levels. Indian institutions have received virtually negative inflows over the last 2 years and
therefore it can be deduced that the animal spirits among the Indian investors are running at low levels.
Other indicators like Open interest (OI), turnover (volumes), leveraged positions etc, corroborates the fact
that the exuberance in Indian equities is far from being called excessive.
To conclude, we acknowledge that the headwinds to Indian equities have been significant over the last
few months and that the uncertain global macro environment has added to the volatility. However, we
assess the fears of massive selloff, reminiscence of 2007-08 global subprime crisis are overdone. On
comparison, the variables at around the sell-off of 2008 were different and far more menacing than they
are now. While currently, certain section of the market is worried about repeat of 2008, we believe as
investors one should avoid panic and rather look at the current adverse environment as an opportunity.
While the market has been pricing a lot of those concerns, many of the headwinds which have been
troubling our market (domestic inflation and interest rates) are likely peaking now. From an investor
standpoint, we think notwithstanding the events/risks in the next few months, if one invest in equities now,
in the ensuing period one can expect relatively better returns over the following 12- 18 months.
In the following page, we provide an exhaustive snapshot of key variables to highlight the difference in
fundamentals and risks prevailing at around 2008 crisis versus now. Please have a look.
Common Source: Bloomberg

India Power:: Indo coal risk; Prefer – Tata Power, NTPC and Powergrid. -- CLSA

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Indo coal risk
Indonesian government’s decision to set a benchmark price for every grade of
coal for exports has raised question marks for the financial viability of many
power projects in India. As per most PPAs, change in law in a foreign country
does not qualify as a force majeure and therefore the risk has to be borne by
the project developer. Project developers would try to re-negotiate the tariffs
with the procurers but it would be difficult given that most of the PPAs were
signed post a competitive bidding process. Our preference in the Utility space
remains for low risk business models – Tata Power, NTPC and Powergrid.
High benchmark prices for coal stumps Indian power sector
q Indonesian government has fixed a price for 61 grades of coal for exports to
prevent revenue loss due to cheaper transfer pricing of coal from the country. The
government was loosing out on royalty and income tax due to cheaper exports.
q Many Indian power companies who were banking on imports from Indonesia would
have to shell out more money which will have an impact on the profitability of the
power projects.
q All existing contracts are to be modified by September 2011 and to provide for
price adjustment every 12 months and to comply with the new regulations.
Even companies/groups owning mines will be negatively impacted
q The PPAs signed by most power companies usually don’t have a change in law in
the foreign country as a force majeure event.
q Even for Indian companies/groups that directly own the coal mines in Indonesia
(like Tata Power) or through a group company (like Adani Power and AEL) the net
impact will be negative.
q Power project profitability could come under serious stress and though mining
companies would be making better margins in Indonesia – they will also have to
pay higher royalty and income taxes.
q Power companies have been therefore been caught between the rock and a hard
place as breaking a PPA (penalties are not large but could jeopardize the chances
for getting future projects) at this juncture, when merchant tariffs also have been
spiralling downwards, is also not a lucrative option.
q We expect the lenders to the power companies which have mining operations in
Indonesia would insist to have either access to the cash flows of coal mining or ask
for more equity injection in the power SPV given the higher risk associated with
the power cash flows post the change in Indonesia.
Renegotiation of the PPAs in the future?
q Tata Power and Reliance Power have written to MoP about the impact of the change
in Indonesian policy on the financial viability of the two UMPPs. Reliance Power has
claimed that lenders are not willing to disburse money for the project due to the
change in coal pricing.
q Essar Power and Shapoorji Paloonji Power have recently cancelled their PPAs with
Gujarat from their imported coal based projects (though they haven’t listed out the
reason as the high coal price). Adani Power is already in a dispute with Gujarat to
supply power at Rs2.35/kWh from its Mundra III project.
q Since nearly all these companies have signed their PPAs post a competitively bid
process (which allowed them to build in escalation rates for the fuel costs) and
therefore ideally can’t expect the power procurers to agree for a higher tariff now.
q However, future PPAs for imported coal based projects may include change in law in
foreign country as a force majeure clause.
q Since the problem is so wide spread and the domestic coal production has also
been disappointing, the government /distributors/ regulators might be forced to
allow some kind of relief to the power project developers. However, we remain
sceptical about any near term solutions given the government is already embroiled
with corruption cases and favouring some select private sector groups might create
more problems for them at this juncture.
q Our preference in the Utility space remains for low risk business models – Tata
Power, NTPC and Powergrid.

JSW Steel -- Availability of ore less of an issue than its cost:: Credit Suisse,

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● On Friday the Supreme Court gave an order allowing
1.5mnt/month of iron ore e-auctions in Karnataka from the
supposed 25mt of inventory lying with miners. As and when this
inventory becomes available to steel producers, it should help
alleviate the crunch on ore in Karnataka.
● In our view, significant uncertainties remain: 1) JSW’s expectation
of shipments starting in 7-10 days may be too optimistic by a few
weeks given challenges in setting up procedures and finding
transport; 2) the grade of ore available (furnaces need consistent
grades for efficient production), 3) potential demand for it (Figure
1), and 4) willingness of miners to sell (they can’t be forced to).
● With demand likely to be higher than supply, and the key
competitors for ore – the pellet plants – seeing US$175/t pellet
prices and a ~US$60/t conversion cost, eventual prices are likely
to be far higher than the US$72 seen by JSW so far.
● With JSW’s current procurement at only 30kt/day (equivalent to
60% utilisation), and a sharp rise in costs ahead, we still find the
stock expensive. Maintain our Underperform, with a TP of Rs550.
Court orders e-Auction of Karnataka ore inventory
On Friday, the Supreme Court gave an order allowing 1.5mnt/month
of iron ore e-auctions in Karnataka from the supposed 25mt of
inventory lying with miners. Mining is still banned. Key features of the
order:
● No middlemen/traders can participate. Only Karnataka-based
steel plants and pellet/beneficiation plants can buy for domestic
sales. There are a large number of pellet plants in this region.
● The base price for e-Auctions will be based on NMDC prices.
● MSTC would be the authorised agency for conducting the
auctions.
● The Central Empowered Committee overseeing the crackdown on
illegal mining in Karnataka has recommended that a 10% royalty
be applicable. Sale proceeds will not be shared with miners who
have been alleged to mine illegally. Also, 80% of sales proceeds
would be given to the miner, the rest retained by the government.
● No overstocking will be allowed by buyers
● Physical verification of the stock will be conducted before the e-
Auction. Further, the stock would be re-weighed at one checkpoint
on the transportation route.
Still too early to assess impact on JSW
As and when this inventory becomes available to steel producers, it
would help alleviate the crunch on ore in Karnataka. However,
significant uncertainties still remain:
● Implementation timelines: Setting up e-auction procedures for
all miners, finalising the maximum requirements for each buyer,
issuing permits, etc will take time. So will the setting up of checkposts
for surveillance of loading/transportation/overstocking. We
think JSW’s expectation of getting ore from e-Auctions in 7-10
days is at least a few weeks too optimistic.
● Pricing: The final outcome from the auctions is likely to be a
substantial rise in iron ore prices. We don’t think miners will be
forced to sell, and only a few would be under cash flow pressures:
demand-supply dynamics are therefore uncertain. While JSW is
by far the largest and lowest cost producer of steel in the region,
several pelletisation plants can compete for iron ore (Figure 1).
● Grade of inventory: The actual grades available are not clear,
and all Furnaces/Beneficiation plants/Pellet plants can only work
efficiently with a certain consistent grade of ore. JSW
management guides to two thirds of the inventory being fines for
which there would not be too much competition – we disagree,
given the pelletisation capacity in the region


There seems to be enough leeway for prices to rise: with cost of
conversion of fines to pellets being ~US$60/t, and pellets selling at
US$175/t, there is enough leeway for prices to go up substantially
higher than the US$72/t at which JSW currently buys.
JSW is able to procure only 30kt/day, which implies only 60%
utilisation levels. We think low utilisation will continue for longer, and
prices through e-auctions will be much higher than current
procurement prices. The stock’s rally In the face of this uncertainty
looks unjustified. We maintain our estimates and Rs550 target price.

Maruti Suzuki:: Risk – Reward turning favourable:: Prabhudas Lilladher,

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􀂄 Risk – Reward turning favourable: Maruti Suzuki’s (MSIL) stock price has
declined by 15.2% in last 6 months underperforming the broader markets by
6.0%. Increased competition, negative currency impact (Yen appreciated by
~8%) coupled with higher commodity prices led to a severe underperformance.
However, given the current valuation of 11.5x FY13E EPS, which is well below
the 5yr average of 15.2x 1yr fwd PE, and the expected recovery in volumes in
FY13E, we believe the risk: reward ratio for Maruti Suzuki is turning favourable.
􀂄 Upgrade to ‘Accumulate’ from ‘Reduce’ on account of limited downside : We
have been maintaining our ‘Reduce’ rating since Feb’10 on account of capacity
constraints, competition and appreciating yen. However, at the CMP, the stock
is trading at 13.9x FY12E EPS and 11.5x FY13E EPS, which is attractive, given the
20.6% YoY growth in earnings for FY13E. Given the limited downside from the
current level and attractive valuations, we are upgrading our recommendation
to ‘Accumulate’ from ‘Reduce’ earlier.
􀂄 Interest rate cycle nearing its peak: The strongest indicator that rates have
peaked, or are near peak, is seen in the trends in the OIS (Overnight Indexed
Swaps) curve. The OIS curve has turned sharply inverted in the last 60 days with
longer tenor swaps yielding 100-150bps lower than near-term swaps. This
indicates that the bond market now expects rates to come down in the not-toodistant
future. With interest rate cycle nearing its peak, we believe the four
wheeler space will be the most likely beneficiary of the same.
􀂄 Average one‐year fwd P/E stands at 15.2x: Assuming a 10% discount to the
average 1-Yr fwd P/E of 15.2x (last 5 years average) i.e. 13.7x, we arrive at a
target price of Rs1,313 based on FY13E EPS a potential upside of 18.8%.


Worst case Scenario target price @ Rs1,000: We assume volume growth of only
5.8% against our base case of 12% volume growth in FY13E. At the same time,
we have modelled no improvement in operating margins. As a result, we arrive
at a TP of Rs1,000/ share based on the current valuation of 11.6x FY13E EPS of
Rs86.2.
􀂄 Our volume estimates: We estimate a flat volume for FY12E at 1.25mn and a
12% volume growth for FY13E at 1.4mn units. New Swift has received a good
response and MSIL already has an advance booking of ~50,000 units. Initial
wholesale volumes are expected to be higher at 16,000 units / month compared
to earlier Swift which use to sell around 12,000 units/ month.

India Oil & Gas: Two more reports… ::CLSA

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Two more reports…
Two reports discussing policy reforms for natural gas have recently been
submitted. While it is still early days, the recommendations call for stopping
preferential supplies to merchant power, city gas players and other non-core
sectors. Pooling of natural gas supplies for fertiliser and regulated power players
will also improve the affordability LNG – a positive for P-LNG and transmitters like
Gail, GSPL. It is as yet unclear how this will impact domestic gas prices but we are
encouraged by the recommendations to move towards a free-market. Every
US$1/mmbtu change in prices impacts EPS of Reliance, ONGC, OIL by 4-6%.
CANR – withdraw allocations to merchant power developers
q The Committee on Allocation of Natural Resources (CANR) was set up by the Group
of Ministers (GoM) headed by the FM to consider measures to tackle corruption.
q The CANR report, yet to be accepted by the GoM, enunciates principles for future
natural gas supplies without affecting the current gas utilisation policies.
q The committee recommended that fertiliser players continue to be supplied
domestic gas as per government’s current policies in the short term (3-5 years).
q While it recognises the need to efficiently utilise power capacities in light of the
sharp rise expected, it has advocated that domestic gas allocations be allowed only
to producers that submit to regulated tariffs and not to merchant power developers.
q Indeed it recommends an immediate change even for existing supplies here with
the cognizance of the EGOM on natural gas allocations and indicates that such
developers as well as city gas players be grouped with other users who should
procure their future requirement at market determined prices.
Gas price pooling – make LNG affordable
q Separately, an inter-ministerial panel set up to formulate policy on pooling of
natural gas prices has recommended pooling domestic gas and LNG for supplying to
power and fertiliser sector consumers at a blended average price.
q It recognises that fertiliser will take precedence in domestic supplies followed by
power but notes that proportion of LNG in the respective pools will rise nonetheless.
q The committee also proposes to cap use in city gas to 6mmscmd (similar to current
levels) and notes that incremental supplies here and to other non core sectors
(refiners, petrochems, steel) should be predominantly fed from imported LNG.
q It also argues for reversion to postalised (or equalised) tariffs from the current
zone-based tariffs for gas transmission and to simplify state taxes on natural gas.
Early days yet but P-LNG, Gail, GSPL will gain
q It is still early days for the committee reports – especially the one on pooling for
gas supplies which appears to be facing resistance from several quarters.
q Pooling may also conflict with existing contracts and vitiate the NELP auction
process for gas pricing while the recommendations for equalised transmission tariffs
is at variance to current the downstream regulator PNGRB’s regulations.
q Nonetheless, prima-facie, the recommendations will increase the cost of sourcing
gas for city gas players like Indraprastha Gas. Similarly, existing merchant power
developers and those with significant expansion plans will face headwinds.
q Pooling of supplies for fertiliser, regulated power will also improve affordability of
LNG – a positive for P-LNG where rising prices could become a growth headwind.
q Transmitters like Gail and GSPL will benefit too if this improves LNG imports.
Impact on pricing is uncertain but eventual free market
q It is as yet unclear how the recommendations will impact domestic gas prices.
q For example, the pooling report notes that gas-pools may weaken the negotiating
hand of Indian LNG buyers in the global market while increasing the temptation to
keep prices from domestic producers – both unintended consequences.
q Nonetheless, while we see little scope for any upward revision of Reliance KG-D6
prices (and concomitantly that for ONGC and Oil India) before Mar-14, we are
encouraged by the recommendations of both reports to underscore an eventual
transition to a free market where global gas prices play an important role.
q Every US$1/mmbtu increase in gas prices lifts the EPS of Reliance, ONGC and OIL
by 4-6% and cuts Gail’s EPS by 7-8% (lower margins in LPG and polymer).

Mahindra & Mahindra : August sales up by 25% y/y driven by strong LCV and tractor demand; re-iterate Overweight:: JPMorgan

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M&M’s unit sales grew +25% yoy over the month, given all round growth
- the automotive segment grew +28% yoy and the farm equipment
segment sales grew (+19% yoy).
 Automotive segment growth was driven by LCV’s which came in at
12,563 units (+67%yoy), driven by ramp up of the Maximmo and the
pick up portfolio. However, passenger UV sales (+9% yoy) moderated
this month while low value three wheeler sales grew by 26%yoy. While
management has highlighted that volume growth for the automotive
industry is likely to moderate to c.10% yoy (given macro headwinds),
the OEM will grow ahead of industry given that they have a refreshed
product portfolio (Maximmo, new SUV launch, Genio pick ups).
 Farm equipment sales continue to surprise: Tractor sales at 16,003
units were up +19% yoy - driven by the prospects of a normal monsoon.
Sales for tractors +19% YTD are running ahead of management’s
FY12E guidance of c.12%. M&M will ramp up the capacity of the
Yuvraj to 1,500 units p.m. by year end.
 Mahindra & Mahindra Financial Services (MMFS) may get
Banking license: As per new draft bank license guidelines released
earlier this week, NBFCs are allowed to bid for new banking licenses.
Our banking analyst Sheshadri Sen believes MMFS could be one of the
NBFC’s that would be able to meet requirements to get a banking license.
Given the holding restrictions proposed, M&M would have to merge all
existing financing businesses into the new bank, though.
 Over the month, the stock price (+2% yoy) outperformed the broader
BSE Sensex (-8% yoy). We re-iterate our OW stance on the stock as the
OEM is benefiting from a refreshed product portfolio in the automotive
segment as well as sustained growth in the FES segment.

Indian Telecoms- First signs of data tariff reductions - positive for takeup :: JPMorgan

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Idea Cellular has cut rates for its 3G data plans by ~50%. According to
ET Now, the rate cut is in a handful of circles including Maharashtra,
Mumbai, Delhi, Madhya Pradesh and Kerala. We view this move as
positive for the sector and the 3G telcos. This is in-line with our view that
data rates in India need to decline to promote 3G services take-up.
 Details of the rate cut: When 3G services were launched in early-2011,
most telcos launched plans with similar data rates. At that time Idea
offered plans starting at 100MB for INR 105 (prepaid) or INR 100 (postpaid),
implying ~INR1/MB declining toward INR0.36/MB for the 2GB
plan. Now, Idea is offering 200MB for INR105/INR100 so implying
INR0.50-0.53/MB, a 50% cut. We also note that Idea is now offering
higher data packs at 6-10MB/month. Furthermore, the rate per KB once
the free usage is exhausted has also been lowered for higher data plans
to 2p/10KB. See Table 1 and Table 2 below.
 Bharti, Vodafone still at higher rates but expect them to follow: Our
checks on Bharti and Vodafone’s tariffs indicate that they have not
reduced rates at this time. For example, Bharti continues to charge
INR1/MB for the 100MB pack to INR0.38/MB for the 2GB pack while
Vodafone’s rates on post-paid also remain unchanged. We expect other
3G telcos to also reduce their rates to remain competitive. We also
expect Idea to offer its reduced rates across more circles vs. the handful
mentioned by news channels today.
 In-line with expectations: Our estimates are based on 3G tariffs for the
industry declining from INR0.8/MB to INR 0.5-0.6/MB in FY12. We
continue to believe that lower tariffs are required to increase both
penetration of 3G services in India but also usage per sub. Device pricing
is declining nicely with several 3G handsets available for $120 and some
tablets too launched at $100-$300. We note that 3G take-up in Q2FY11
(to June 2011) was disappointing with the number of 3G subs increasing
only modestly across some telcos. See Table 3 below for more.
 We continue to be positive on the next 2-3 year data opportunity in India
as telcos leverage their coverage design linked capacity. During this time
we expect 3G data to contribute 4% of wireless revenue in FY12
increasing to 16% in FY14 driven by increased penetration and increased
usage which is turn is helped by both lower tariffs and cheaper devices.
We caveat this by noting that the 16% contribution is not necessarily
large and also that any growth beyond this would require substantial
increase in capital intensity or larger spectrum awards. Please see our
note “The Economics of Wireless Data - India Edition” from June 1,
2011 for more.

Everonn Education - Adverse corporate event could have overhang on stock:: Credit Suisse,

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● The founder CEO/MD of Everonn, Mr P Kishore, was recently
arrested by Indian investigating agencies on charges of bribery
and tax evasion. The Chairman of Board has resigned and a new
CEO has been appointed from within the top management (a cofounder
of the company).
● While immediate business continuity may not be a concern, we
see risks to business prospects over the longer term.
● At the highest risk is the government business (18-20% of sales
currently). Further, the promise of the large NSDC contract (a JV
with a government entity, not in our estimates) may not fructify.
However, we see minimal risks to the non-government businesses.
● We reduce our revenue and margin estimates, leading to EPS
cuts of 8-17% over the next three years. We believe that the stock
multiples could derate because of the event. Our DCF-based
target price falls to Rs340.
● While the stock has corrected sharply (to below book value), we
see limited catalysts near term. We downgrade to NEUTRAL.
Recent negative events
The founding CEO/MD of Everonn, Mr P Kishore, was recently
arrested by the Central Bureau of Investigation (CBI) on charges of
bribery and tax evasion. CBI has alleged that Mr Kishore paid a bribe
of Rs5 mn to suppress taxable income of Rs600 mn of the company
(out of an alleged concealed income of Rs1.1 bn). In our discussion
with management post the event (the new CEO – see below), we
understand that the company was not aware of this amount prior to
the event happening. We note that the amount disclosed as contested
tax claims (under contingent liabilities) as of Mar-11 in the annual
report is only Rs14 mn.
The underlying business could be impacted
Following this event, the Chairman of Board, Mr JJ Irani, resigned
from this position. The board has now appointed another whole-time
director, Ms Susha John as the CEO. We would expect Kishore to
stay out of the company activities until the charges are resolved.
Ms John is one of the co-founders of Everonn along with Mr Kishore,
and brings with her 25 years+ of experience. A business council has
been formed to advise the CEO, with two veteran directors of the
company: (1) Mr R Sankaran (40 years+ experience including at Tata
Steel), (2) Mr Joe Thomas (23 years+ experience including at P&G).
Management explained that over the past couple of days, senior
management has contacted key customers, bankers and reached out
to employees. We see little risk to business continuity in the absence
of Mr Kishore.
While the immediate business fallout could be minimal, over the
longer term this event could have negative repercussions on the
company prospects.
We expect that the government businesses (18-20% of revenue)
could be at the highest risk (possible blacklisting of the company if
charges are found to be true). We are now building no new contract to
be won by the company in the government ICT business. A lot of
expectations were also built around the NSDC contract of Everonn
(cumulative revenues of Rs140 bn over ten years, not in our
estimates), which has a risk of being downsized/cancelled, in our view.
The impact on the private businesses could be limited, in our view.
Downgrade to NEUTRAL
Based on the above risks, we cut our revenue estimates for Everonn
for the near term, leading to 8-17% earnings cuts over the next three
years.
It is likely that there may be further management changes at Everonn.
The corporate governance issues raised by recent events may have
an overhang on the stock over the near term (leading to multiple
derating). Despite recent correction and stock trading at 0.9x book, we
see limited catalysts for stock performance in the near term. Our
target price decreases to Rs340 (21% potential upside to Monday’s
close), and we downgrade the stock to NEUTRAL.
The risk to our downgrade comes from possibility of a buyout.

Understanding cash flow statement:: Business Line,

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The cash flow statement (CFS) forms part of a company's annual report. It is a summary of receipts and payments disclosing the movement of cash during a specific period. The CFS reflects the liquidity and solvency position of a company. It throws light on the ability of the company to generate cash from its core operations, and where from it sources funds for expansion. It is also a useful tool to gauge a company's ability to effectively manage cash. While profit figures by itself may not help the company plan for repayment of debt and replacement of assets, an analysis of the cash flows will provide information on funds available for this.

OPERATING ACTIVITIES

Cash flows are classified under three heads — operating, investing and financing activities. Cash sales, receipts from debtors, payment to suppliers, selling and distribution of expenses, all fall under operating activities.

Actual cash flows differ from profits. A company may be low on cash but report good earnings and vice-versa. The CFS explains the reason for this divergence. Consider this. A company that has sold its goods on credit (captured as debtors) may take time or have trouble realising the cash. This may elongate the company's working capital cycle and force it to resort to other funding options to keep the production cycle moving. Similarly, a company may have produced goods but piled them up as inventory without quickly converting them into revenues. Here again the cost of holding such inventory would affect operations. Thus, a study of operating cash flows may be a key indicator of a company's health or provide cues for impending trouble.

INVESTING AND FINANCING

While purchase and sale of fixed assets, investments, interest income/dividend received are examples of cash flows from investing activities, receipts from the issue of shares and debentures, repayment of loans, payment of dividends fall under financial activities. These are disclosed under separate heads in the CFS. Investing activities indicate the extent to which a company has spent on resources that generate future income and cash flows. Flows from financing activities indicate the various avenues from which a company's funds are sourced and the debt servicing and repayments made to such sources.

NEGATIVE CASH FLOWS

Theoretically, positive operating cash flows are considered an indicator of efficiency. But does that mean that operating cash flows should not be negative? This is typical of companies in the growth phase which raise money to expand operations and generate future cash flows (after a lag) whether directly or through subsidiaries.

Negative cash flow in one year should not be immediately misconstrued for trouble. An analysis of cash flows from one period to another may provide a better picture. Negative cash flows from investing could suggest that the company is incurring capital expenditure, which would generate income in future. When a company is repaying debt or buying back shares or paying dividends, cash from financing operations tends to be negative. However, in this case, there is often sufficient cash generated from operations to make the above-stated payments

Buy Maruti Suzuki:: Prepares for strong demand after near-term headwinds:: Motilal oswal,

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Prepares for strong demand after near-term headwinds
Focus on alternative fuels, to boost sales network, cut costs
 Long-term outlook positive with 15% volume CAGR over FY11-16; Capacity
addition reflects MSIL's preparedness for strong demand.
 Focus on alternative fuels to counter rising petrol prices, enhance sales &
service network.
 Targets vendor localizations to cut forex exposure and save costs.
 Downgrading estimates by 7.5% for FY12 and FY13; Maintain Buy.
Long-term outlook positive with 15% volume CAGR (FY11-16E)…: Despite shortterm
headwinds, Maruti Suzuki (MSIL) expects strong demand with volumes to double
over the next five years to 4.5m-5m units and CAGR of 10-12% through the rest of the
decade. MSIL believes Suzuki Motor Corporation's design philosophy of aggressive
and sporty cars, K-series technology and the popularity of the diesel car will enable
MSIL to maintain leadership.
… reflecting MSIL's preparedness in capacity addition: Based on its positive
volume outlook, MSIL is expanding capacity at Manesar. A second line of 0.25m
units has started operations in September 2011 and a third line of 0.25m units will
start by September 2012, taking total capacity to 1.9m units. Due to a possible
increase in small-car exports and the need to cut risks of production disruption, MSIL
plans to set up a 1m-unit capacity plant in Gujarat. It has broad-based exports to
dilute the impact of a slowdown in the EU exports.
MSIL to focus on alternative fuels to counter rising petrol prices: Sales have
risen of vehicles powered by alternative fuels due to rising petrol prices. The proportion
of diesel (volumes) increased from 60% to 80% among available models (~20% of
total volumes). MSIL will increase its diesel-engine capacity (in the SPV Suzuki
Powertrain) from 0.25m to 0.29m units by September 2011. It is focusing on promoting
CNG cars based on its superior i-GPI CNG technology.
Strengthening sales and service network: MSIL's focus is on widening its sales
and service network, its key strength. In FY11 it added 191 sales outlets, totaling 993
outlets in 668 cities. It increased service outlets by 206 to 2,946 outlets in 1,395
cities. Over the past four years rural sales contribution increased, contributing ~20%
to domestic sales. About 40% of MSIL's sales outlets are in the rural format, with
scaled-down investment, enabling viability on lower volumes.
Aims at localization of imported parts to cut forex exposure, costs: To cut
exposure to the yen, MSIL increased focus on localization of imported components.
MSIL has a three-year roadmap beginning FY13 to cut vendor imports 600-700bp
from 14-15% of revenue. MSIL is considering opportunities from FTAs and other
arrangements for source substitution of imported technologically complex items.
Downgrading estimates by 7.5%; Maintain Buy: We are downgrading consolidated
EPS 7.5% for FY12 and FY13 to INR79.1 and INR93.8 respectively, as we lower
FY12 volume estimates to 1.27m units (flat) and estimate EBITDA margin decline of
20bp to 9.3%. The stock trades at 11.6x FY13E consolidated EPS and 7.7x FY13E
consolidated EPS. Maintain Buy with a target price of INR1,418 (~10x FY13E
consolidated EPS).

CT scan your CTC:: Business Line,

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Fresh out of college, Nikhil was all smiles when he landed an appointment letter from a reputed company. The offer seemed to have it all – the job profile was in sync with what he wanted to do, the company was a marquee name, and importantly, it came with a neat pay packet – the cost-to-company (CTC) mentioned was Rs 7,50,000 a year. The figure that worked out to Rs 62,500 each month was not bad for a rookie, he thought. After a month , when he checked his bank account, Nikhil's enthusiasm quickly turned to disbelief and anger. Instead of Rs 62,500 , the amount credited in the account was Rs 45,000, a good 28 per cent lower! Nikhil tried to contact the HR department to seek an explanation, but it was late Friday evening, and most of the office had left.

“What a lousy start to my weekend!” wondered a flustered Nikhil and headed home. Waiting there was his cousin and confidant, Ashwin, a veteran of many a company. Sensing from his young cousin's sour mood that ‘all is not well', Ashwin probed, “Trouble at office?” “No, not really.” droned Nikhil. “Touchwood, work is good. It's just that I received my first salary today, and I am at a loss to understand how I have been paid much less than what I was promised.”

A faint smile crossed Ashwin's lips. He seemed to know the reason. “If you don't mind, could I see your appointment letter and payslip?” asked Ashwin. “Sure” said Nikhil. After a brief perusal of documents, Ashwin asked “Did you read these carefully?” Nikhil sheepishly admitted that he had not. “That would have saved you a lot of anguish today,” said Ashwin. “Often, what you see is not what you get. What's mentioned in the offer letter is CTC - the sum which your company says it will spend on you. This is not the amount which the company has said it will pay you. What it actually pays you is mentioned in your pay-slip and credited to your bank account. Do you see the difference?” Startled, Ashwin fumed, “But why should there be a gap between my CTC and the money I finally get to take home? Is this not cheating?”

“Calm down”, said Ashwin. “First and foremost – understand that the CTC mentioned in the offer letter is a pre-tax amount. Your company is obliged to deduct tax from your salary and pay it to the government. So, the amount credited to your account is a post-tax figure. See the tax deducted amount on your payslip…that explains a chunk of the gap.” Looking at the payslip, Nikhil whined, “What the government did not take, the company seems to have pinched”. Ashwin explained, “The offer letter states that the company provides some benefits in kind. Just because you don't get it in cash does not mean that it is not part of your CTC – it does cost the company to give you these extras, doesn't it? Tell me, does your company provide food and transportation facilities?” “Yes”, replied Nikhil, “Snacks and lunch which would otherwise cost around Rs 40 a day is provided at a subsidised rate of Rs 5. Also the HR manager mentioned that the company incurs a monthly transportation cost of around Rs 1,500 per employee”. Ashwin interrupted, “So, that translates into around 2,500 bucks per month included in your CTC. Some employees are also given food vouchers or gift coupons which also form part of CTC. Remember, there is no such thing as a free lunch and free ride in most corporate set-ups.” Ashwin continued, “Also, your payslip shows 12 per cent of Basic Pay and Dearness Allowance as being deducted towards provident fund (PF). The company also pays a similar amount towards your PF which is not reflected in your payslip. Now, this benefit, though not apparent, is real and will stand you in good stead in the future. In addition, your company provides group health insurance for employees. A pro-rata portion of the insurance premium may be included in your CTC.”

Nikhil who was all ears interjected, “But all this still does not explain the huge gap.” Smiled Ashwin “Because there is more to come. Bonus, for instance. Your offer letter mentions that come year-end, you would be paid up to Rs 60,000 as variable pay - provided your performance is reckoned to be at 100 per cent levels. Now, this 60K forms part of your CTC, whether or not you finally pocket the entire amount. Some companies base bonus amounts on other factors too including the company's and the team's performance. Now, this may not be fair to high-performers, but we don't live in an ideal world, do we?” Ashwin continued “Then, there is the whole gamut of reimbursements – medical, telephone, fuel, periodicals. You could claim reimbursements against these expenses up to certain limits on submission of bills. These do not reflect in your current pay-slip, but form part of your CTC. Likewise, leave travel allowance which you will receive against claim, or at the end of the year also adds to the company's cost. Employees who avail of perquisites such as company provided accommodation and vehicles will see their CTC bulge. Several banks provide loans at concessional rates to employees. The difference in interest cost also forms part of CTC. And yes, don't forget the amount company provides towards your gratuity payment. You receive this largesse not on a monthly basis but only when you serve a long stint in the company, say 5 years. Nevertheless, the company accounts this provision as a cost incurred for the employee.” At this point, Ashwin couldn't resist a chuckle “And if I know you well, you may as well kiss this amount goodbye. Your staying in a company for five straight years seems improbable, if not impossible.”

Nikhil, somewhat relaxed by now, retorted, “Thanks for the compliment, Mr. six jobs-in-seven years. But seriously, all this gyaanhas been a revelation. Had I known earlier, I would have bargained for a better package”. Ashwin smiled “You'll learn from experience, bro. You know, some companies take the idea of cost-to-company to extreme lengths. There are companies that include training expenses and rent for office space as part of CTC. So, it's important to take a close look at the offer letter to get a sense of what you'll finally be able to take home.”

Ashwin concluded, “All said and done, before joining or jumping companies, view what's on offer in a holistic way. CTC and take-home are undoubtedly important but don't join just for the money. Ignoring intangibles such as the fit with your skills and interests, the culture, and work-life balance could leave you disappointed. Get a career, not a job…the money will follow.”

Tata Power - Pushback for Mundra UMPP's tariff renegotiation:: Credit Suisse,

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● The new Indonesian mining regulation, which requires all coal exports
to be priced at least at a benchmark price for each grade of coal, is
expected to result in imported coal-based projects depending on
Indonesian coal, such as Mundra UMPP, becoming unviable.
● On full commissioning by FY14, we expect Mundra UMPP to incur
an annual loss of Rs14–18 bn. In light of this, Tata Power recently
requested the Ministry of Power to consider upward revision of the
project’s tariff to allow pass-through of higher coal costs.
● However, the Gujarat government has declined any upward
revision in tariff and indicated that since UMPP biddings were
conducted by the Centre, state governments should not be
involved with the issue. It has also recommended the Central
government to take up the issue of new regulation with the
Indonesian government.
● Akin to Mundra UMPP, several other projects based on Indonesian
coal are expected to become unviable post the implementation of
the new mining regulation. Even the developer lobby has requested
the government to intervene or allow power tariff revision. This
issue, though critical, is unlikely to be resolved soon, in our view.
Indonesia mining regulation risks Mundra UMPP’s viability
Tata Power has hedged coal cost for 45% of its coal needs (about
12mmtpa) at Mundra UMPP by mirroring the pricing terms in its coal
contract with Bumi Resources. 50% of the remaining coal needs has
been contracted with Bumi at a fixed rate, while the remaining 50%
has been kept unhedged. However, in September 2010, the
Indonesian government introduced a new mining regulation that
requires all coal exports to be priced at least at a benchmark price for
each grade of coal. This regulation is implemented with retrospective
effect, requiring even existing coal supply contracts to be modified by
23 September 2011.
The sharp increase in regional coal prices was expected to hurt
Mundra UMPP for its unhedged coal quantity (27.5% of overall needs).
However, the new regulation would further dent the project led by an
expected increase in coal cost by US$30–35/ton (as per the
company’s estimate) for the fixed price coal component (also 27.5% of
overall coal needs).

Tata Power has requested the Centre to intervene
At its quoted tariff, Mundra UMPP would be an unviable project even
at current imported coal prices (expected to increase further). On full
commissioning by FY14, we expect Mundra UMPP to incur an annual
loss of Rs14–18 bn. Tata Power had recently written to the Ministry of
Power, requesting it to consider the revision of the project’s tariff to
allow the pass-through of higher coal cost on account of the new
Indonesian regulation. It has also requested the government to
convene a meeting of the project beneficiaries to discuss this issue.
Central government referred the issue to the beneficiaries ...
The beneficiaries of the project include Gujarat (1.9GW), Maharashtra
(0.8GW), Punjab (0.5GW), Haryana (0.4GW) and Rajasthan (0.4GW).
As per media reports, the Central government has requested the
Gujarat (key beneficiary state) energy ministry to convene a meeting
of all beneficiary states to consider Tata Power’s request and has also
indicated that the Central government is not a party to this issue.
… however, Gujarat government has refused to raise tariff
Media reports suggest that the Gujarat government has declined any
revisions in Mundra UMPP’s tariff. Further, the Gujarat government
has highlighted to the Central government that since the UMPP
biddings were conducted by the Central government, state
governments should not be involved with this issue. It has also
recommended that the Central government should take up the issue
of new mining regulation with the Indonesian government.
Issue unlikely to be resolved soon
Akin to Mundra UMPP, several other projects based on Indonesian
coal are expected to become unviable based on the norms of the new
mining regulation. Even the developer lobby has requested the
government to intervene in this issue or allow revision in power tariffs.
This issue, though critical, is unlikely to be resolved soon, in our view,
and could lead to litigations from project beneficiaries. Meanwhile, we
expect the profits of these projects will be hit.

Power Generation:: August all-India generation up 9%, PLF up 212bp YoY ::Motilal Oswal,

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August all-India generation up 9%, PLF up 212bp YoY
FY12 monsoon period hydro generation up 25%+ YoY
Sector observations
 In August 2011 all-India generation grew 9% YoY to 72BUs, led by an increase in
installed capacity by 14GW over the past 12 months and higher PLF of nuclear and
hydro plants.
 PLF for coal and gas plants were down 184bp and 231bp YoY respectively but they
were up 11ppt and 19ppt YoY for hydro and nuclear plants.
 Most important, the average generation growth in the system was 9.1% since January
2011, much better than generation in previous months. Generation growth was aided
by higher hydro-power generation. During the FY12 monsoon period (June-August)
hydro power generation grew by over 25% YoY.
Performance of key companies
 Adani Power synchronised its second unit of the Mundra Ph-III, from 1.9GW capacity
it generated 1.3BUs and reported PLF of 85% (against 62% in July 2011).
 JSW Energy generated 874MUs, down 8% MoM. The Rajwest plant, awaiting approval
of a tariff hike (existing tariff ceiling INR2.4/unit) from the RERC, was closed for the
third consecutive month.
 Jindal Power generated ~662MUs down 8% YoY and PLF dipped 750bp YoY to
89%. Lower generation was led by plant maintenance shut-down of two units.
 Lanco Infratech Udupi PLF improved MoM to 64% but Kondapali PLF dipped to 44%
(against 77% in July 2011, 73% in August 2010).
 NTPC's August generation was 17BUs (down 3% YoY) of which coal and gas plant
generation was lower by 2% and 13% YoY respectively. The PLF of the coal plant was
down 351bp YoY at 79%
ST prices range bound
The IEX average ST price for the week to September 05 was INR2.7/unit against INR3.1/
unit a month earlier. Since the start of FY12 IEX prices moved in a INR2-4/unit range.
Valuation and view
The power sector has seen significant valuation de-rating due to concerns over delayed
capacity additions, merchant prices, lower demand and fuel supply issues. We are positive
about companies that are relatively better positioned on these fronts. Our top picks in the
sector are NTPC, Powergrid and Coal India and among mid-caps we prefer CESC.


NTPC: Generation down 3% YoY led by lower coal, gas plant generation
 NTPC's August generation was 17BUs (down 3% YoY), of which coal plant generation
was 15BUs (down 2% YoY) and gas plant generation was 2BUs (down 13% YoY).
 The August PLF of the coal plant was 79% against 83% a year earlier. Out of 15 coal
stations, PLF was down MoM for 10 stations. The maximum fall was of 20ppt at the
Farakka plant to 59%, given logistics issues such as availability of imported coal.
 Gas plant PLF was 63% against 72% a year earlier. Out of seven gas stations the
PLF for four fell MoM.

India IT Feedback from Asia investors: Indian IT in Neutral zone? ::Macquarie Research,

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India IT
Feedback from Asia investors: Indian
IT in Neutral zone?
Event
􀂃 We spent last week on the road meeting over 30 investors based in Asia. The
uncertain business outlook for Indian IT vendors, coupled with a sharp fall in
stock prices, has had investors waiting on the sidelines before taking a call in
either direction. We retain TCS as our preferred pick in the sector in India.
Impact
􀂃 Biggest concern on IT: If US economy sneezes, India catches a cold.
Indian IT companies are suffering from a US economy overhang. We believe
that markets are clearly discounting a budget squeeze and expected high
single-digit revenue growth in FY13. The latest macro data (unemployment
rate, ISM Manufacturing Index) has stoked speculation of a potential US
recession and over the fallout for demand at Indian IT players.
􀂃 Interest in large caps vs. mid caps. Just when investors were getting
excited about the growth prospects for selected Tier 2 names, scepticism over
demand has translated into reduced the risk appetite for mid cap names in the
IT space. Hexaware remains our preferred mid-cap player in the space.
􀂃 2Q performance – not in focus currently. Given the increased overhang on
the potential for the sector to grow through the economic cycle, we received
limited queries on performance expectations for the current quarter. Investors
recognise that since there have been no abrupt project cancellations the
quarterly performance for Jul – Sept might not reflect the trends that could
emerge two quarters down the line.
􀂃 Is the correction temporary or is it a structural de-rating? This has been
one of the vexing questions facing investors in the sector. Investors who
believe that high teens growth for these companies is a thing of the past are
justified in arguing for lower PERs for the sector leaders. Even so, we think
otherwise. It is difficult to argue against potential demand slack in the near
term due to slowdown in the developed markets, but we think the business
model is resilient and can show growth spurts in the coming years.
Outlook
􀂃 Stay selective – prefer TCS. Our scenario analysis implies that the risk
reward is stacked favourably for the sector leaders at current stock prices. We
believe that TCS has navigated well in a difficult environment and is our
preferred pick in the space in India.
􀂃 Remain cautious on Wipro. Wipro stock has declined 19% following 1Q
results (vs. TCS’ 9% and Infosys 17%). We believe the company would
struggle to reach industry average growth rates in FY12 and uncertain end
market dynamics weaken the bullish investment arguments hinging on FY13
revival.

Utilities:: Coal supply shortfall YTD aggravates risk from fuel deficits:: Credit Suisse,

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● Coal India’s 1Q FY12 production was 2.4% below the target,
resulting in coal supply to the power sector being 7% lower than
the target. Supply to NTPC during April-July 2011 was 8.7% lower
than the target.
● Coal India is expected to supply 347 mn tonnes of coal to the
power sector in FY12. But our interaction with CEA suggests that
it would be able to supply only 320 mn tonnes. While Coal India is
confident of meeting its supply commitments for the year, we note
that its supply targets were missed by 12% during July-August.
● We see likely low coal supplies as the key risk to our FY12
estimates for utility stocks. Our sensitivity analysis suggests that a
project’s earnings would be impacted by 20-24% for a 10% fall in
the plant’s availability on account of low fuel supplies.
● To avoid penalties, Coal India could first fulfil its supply obligation
of 306 mn tonnes under its fuel supply agreements/FSA (mostly
signed for projects commissioned up to March 2009).
● This implies that companies with a higher share of post-March
2009 coal linkage-based projects (or projects with no FSA) are at
a higher risk from potential coal deficits and would witness sharp
earnings cuts (Figure 3). We expect the domestic coal deficit
situation to worsen and maintain our cautious sector view.


Coal India falls short of its supply targets in 1Q FY12
As per media reports, Coal India’s production at 96.3 mn tonnes in 1Q
FY12 was 2.4% lower than the targeted production of 98.7 mn tonnes.
Coal India claims that this miss was due to local law and order
problems and adverse weather conditions (heavy rains), impacting
coal supply to the power sector. Against the targeted supply of 80.4
mn tonnes earmarked for the power sector during 1Q FY12, Coal
India’s despatches fell short by 7% at 74.7 mn tonnes


According to the Ministry of Coal, coal supply to NTPC during April-
July 2011 fell short of Coal India’s target by 8.7%. Similarly, NALCO’s
captive power and aluminium plants were supplied about 96% of their
annual contracted quantity (ACQ).
Industry experts expect a miss in FY12 targets …
Of its FY12 targeted production of 452 mn tonnes, 347 mn tonnes have
been earmarked for the power sector. However, our interaction with CEA
suggests that Coal India would be able to supply only 320 mn tonnes of
coal to the power sector, indicating a further downside risk to our
estimates. Media reports also indicate that Coal India’s production fell
18% YoY to 6.1 mn tonnes in August due to the dengue outbreak in
Orissa (impacting labour availability) and heavy rains.
… though Coal India is confident of meeting its targets
Coal India expects to make up for the 7% shortfall in coal supply to the
power sector during 1Q12 in 2Q12 and is also confident of meeting its
full-year target through higher production and inventory liquidation.
However, its targets were missed by 12% in July-August, too.


Earnings sensitivity to coal deficits is high
As highlighted in our March 2011 report, Domestic fuel deficit a structural
risk, all projects, including those under the regulated model with an
assured RoE, face the fuel risk. We reiterate that contrary to the general
perception, though regulated projects (such as NTPC’s) are insulated
from a fuel price risk, the unavailability of fuel does pose a serious risk to
their earnings. Our sensitivity suggests that for every 10% fall in plant
availability (led by fuel deficit), a regulated project’s earnings fall by 24%.
This is because the pass-through of fixed costs and the assured RoE are
subject to the project demonstrating 85% plant availability (PAF) and are
pro-rated for a fall in PAF. Earnings sensitivity for a 10% fall in PAF for
Case I/II and merchant projects is also high at 20-24%.
Companies with recent projects are at a higher risk
Linkage coal projects commissioned up to March 2009 have
contractually binding fuel supply agreements (FSA), with a penalty
structure for Coal India for not honouring its coal supply commitments.
Most projects implemented thereafter do not have such FSA (they
only have a letter of assurance/MoU which has no contractual
obligation). We thus believe that most of the available coal would first
be supplied to projects up to March 2009. Since 306 mn tonnes of
coal is already contracted under these FSAs, a potential miss in FY12
targeted coal supply would leave very little coal for projects
commissioned after March 2009 (Figure 3), implying a risk of higher
earnings downgrades.

India media sector View from the buy side: Roadshow feedback ::Macquarie Research,

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India media sector
View from the buy side: Roadshow
feedback
Event
􀂃 Investor interest in the Indian media sector remains high even in current
volatile markets. We got little pushback on our thesis of DTH players scoring
over the cable companies in the sector. Reiterate Dish TV as our preferred
pick and advise caution on Zee.
Impact
􀂃 Dish TV – is it all in the price? Investors felt that the growth story driving the
investment thesis on the stock is well understood and this is what they
believed would see the stock appreciate from these levels. We believe the
favourable industry dynamics imply that the company’s EBITDA growth would
remain in double digits even three years from now. As such, current
valuations still have room to move up as the company continues to ride the
secular growth curve in the distribution space.
􀂃 Cable companies – what does the future hold? The sharp YTD stock price
corrections of 50% and 77% in the two leading cable operators – Hathway
(HATH IN, Rs84, Not rated) and Den Networks (DEN IN, Rs41, Not rated)
have tempted value investors. We would be less interested in these names
since we see a structural decline in the business as digitisation is likely to
pressure carriage and placement revenues. We think the regulatory push
towards digitalization by 2014 as mandated by TRAI remains key.
􀂃 Zee: Sit out the downgrade cycle. Investors were interested in hearing our
anti-consensus call on Zee. The street EPS estimates have already come
under pressure (FY12 cut by 8% and FY13 cut by 7%) post the flat YoY ad
revenues reported by the company in 1Q. Recent strength in the fiction show
ratings for Sony could aggravate the pain for Zee and result in further
earnings downgrades. We are 7% below street for FY13E EPS and would
advise taking a position once the downgrade cycle has played out.
􀂃 Sun TV: Re-visiting the business fundamentals. Most investors hold the
view that the company is unlikely to see a sharp deterioration in business
fundamentals post the change in the Tamil Nadu state government. Even so,
the key worry on the name remains potential fall-out of the 2G telecom scam
on the company and an end to uncertainty associated with the case.
􀂃 Print names: Exciting rural story but limited takers. The leading print
players in the Hindi space present an interesting way to play the rising
consumption of Tier 2 and 3 cities in India. Even so, limited free float and thin
trading volumes restrict the interest in the space.
Outlook
􀂃 Recommend switching from Zee to Dish. We believe investor expectations
for a sharp ARPU jump for Dish have started to moderate and we recommend
adding the stock. We would wait out for the earnings downgrade cycle for Zee
and keep a close eye on the fiction show ratings of Sony before turning more
constructive on Zee.

India: another month, another drop in the PMI :: JPMorgan

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India: another month, another drop in the PMI

India’s manufacturing PMI declined for a fourth consecutive month driven by a moderation in both output and new orders The services PMI, which has remained relatively buoyant until now, also plunged in August to its lowest level in two years Both of these are consistent with our view that activity is poised to decelerate appreciably in the coming quarters notwithstanding last week’s solid Q2 GDP print However, inflationary pressures continue to remain in the system with manufacturing input prices rising for a third consecutive month putting further pressure on margins With inflation still uncomfortably high, the RBI is expected to continue raising rates at its September review despite slowing activity Manufacturing PMI continues to fall across the board… Last week’s expectedly solid Q2 GDP report was evidence that the economy had not slowed appreciably during that quarter. However, as we had warned then, leading indicators have suggested for a while that the economy is poised to slow further in the quarters to come. The latest set of PMI reports has served to reinforce this notion. Manufacturing PMI declined for a fourth consecutive month in August falling to 52.6 (from 53.6 in July) – thereby printing at its lowest level in 29 months. The decline was across the board with output, new orders and new export orders all continuing to decline. Output fell for a fourth consecutive month to 56 from 57.2 in July, reflecting the slowdown in new orders since April of this year. In turn, new orders declined for a fifth consecutive month to 53.1 from 54.5. Solace, if any, was found in the fact that the decline was relatively moderate compared to the sharp plunge in July, perhaps suggesting that demand is stabilizing but at a lower level. New export orders also continued to moderate sharply printing at 45 in August compared to 49.2 in July and 53.2 in June. This is not surprising given a slowing global economy and suggests that the sizzling export momentum witnessed in the first half of this year could moderate appreciably in the second half. In the wake of sharply slowing new orders, strong export realizations over the last few months likely reflect the fact that exporters have been covering the backlog emanating from strong export demand earlier in the year. …but inflationary pressures remain in the system In a sense, today’s PMI report served as a double whammy. Not only did activity continue to slow, but inflationary pressures continue to remain entrenched in the system. While the output price index moderated slightly, the input price index rose by its largest margin since February, putting further pressure on already compressed margins. This is the third consecutive month that input prices have increased and reflects the sharp increase in non-food primary article prices within the WPI basket in the first few weeks of August. As such, while output prices may have moderated in August, they may be forced to increase in the months to come, unless demand slows to the point that producer pricing power is significantly eroded. Service business activity plunges to its lowest level in 2 years While much attention is paid to the manufacturing PMI, it is important to recognize that manufacturing constitutes less than 20% of GDP. Instead, buoyant growth in services (trade, transport, communication, financial and business) has propelled economic growth over the last few quarters and propped up growth in last week’s Q2 GDP report. Consistent with this, business activity within the services PMI has remained relatively buoyant over the last few months even as its manufacturing counterpart has been on a secular decline. This phenomenon changed in August. Services business activity plunged to 53.8 (it’s lowest level in more than two years) from 58.2 in July. The plunge also constitutes the sharpest decline since January 2009 in the immediate aftermath of the global financial crisis. Furthermore, future prospects also look sobering with new business activity also plunging to 54.9 from 59.3 in July – the largest fall over the last year. What all this suggests is that, like industrial growth, growth in services is posed to decelerate in the months to come and could cease to be the lynchpin that has supported growth over the last year. Growth to slow but RBI not done as yet In sum, the forward looking components within the latest set of PMI surveys are consistent with our view that growth is likely to decelerate appreciably over the coming quarters as the full impact of the monetary and fiscal tightening takes hold. Furthermore, the surveys also suggest that inflationary pressures continue to remain entrenched in the system and, with August inflation expected to accelerate over already elevated July levels, we expect the RBI to continue its monetary tightening process at its quarterly review next week.