IT Spending Survey: Index results flat, but growth forecast now lower:: Goldman Sachs,

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Tech and capital spending indices remain firm, but pricing
index falls again at a rapid rate
Taken in mid-July, our latest survey showed resiliency, with our total IT
spending index (including salaries, services, depreciation, occupancy, etc.)
essentially unchanged at 73.0 from 72.5 in our prior survey. This indicates
that survey respondents continue to expect 2011 IT spending to be above
2010 levels, and marks the second-highest index value since 2007. Also,
after reaching its highest level in four years at 72.5 in our June survey, our
tech capital spending index nudged down to 70.5. Our pricing index
notched down for the second consecutive survey to -0.29 (from -0.13 in
June), with the index now at the lowest level since early 2010 as pricing
was recovering, and showing declines at a rate not seen since 2008.
Trimming 2011 IT spend forecast, introducing initial 2012
with a lower growth bias as macro slows
After updating the many macro and micro inputs to our GS Technology
spending model, we are reducing our 2011 IT spending forecast to 5% yoy
from 6%. In addition, we introduce our initial 2012 IT spending forecast at
3%, which reflects our advanced economies and emerging markets
forecasts. We note that our 2012 IT spending growth forecast is 2% below
the Street’s revenue growth forecast for enterprise-facing tech companies,
reflecting our cautious stance. This is consistent with recent estimate
reductions across our TMT coverage.
Share gainers includes a mix of established and emerging
companies
AAPL once again ranked high as a share gainer in the PC segment of the
survey. DELL maintained its historically strong position among corporate
customers. IBM, CSCO, and DELL remained the clear share gainers in
enterprise servers. In storage, NTAP regained its market share momentum,
ranking as the number one share gainer. Given the nascent, ongoing
migration to cloud computing, VMW topped the list of spend gainers in
Software. In Communications Equipment, RVBD moved up to the largest
share gainer on an absolute basis in this survey followed by ARUN. CSCO
remained among the top-three share gainers for the 15th consecutive
survey on an absolute basis.

Tata Motors -: Down but not out:: Credit Suisse,

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● We assume coverage of Tata Motors with a NEUTRAL valuing at
SOTP based target price of Rs 799. Click here for full report.
● Starting with the launch of the Evoque in Sep-11, all brands are to
introduce new models in the next five years. With its model age
declining to 2.5 years by 2015, we have great confidence in LR’s
ability to grow volumes and expect JLR volumes to increase from
~243,000 units in FY11 to 290,000 units in FY13.
● Evoque launch will improve volumes from ~17,000 units to
>20,000 per month. However, we expect margins to continue to
decline going forward on adverse currency, higher incentives to
boost demand in developed markets and mix shift towards
Evoque. Expect consensus to downgrade numbers going forward.
● JLR trades at an implied valuation of 2.4x EV/EBITDA, which,
though cheap is far higher than BMW at 1.8x. Low multiples are a
reflection of concerns about sustainability of current high margins
in China, tougher emission norms forcing carmakers to raise
spends on power trains, reducing ability to generate cash.
Reiterate position of Two > Four, prefer Hero Motocorp in Autos.
Car business continues to drag domestic margins
With the investment cycle in India still not picking up, CV volumes are
likely to remain muted in FY12. However, given its dominant position
in CVs, we are not overtly worried about the segment. The passenger
car business, however, has been a big drag for Tata Motors as it has
borne the brunt of increased competition. Its share has declined from
~18% to ~11% in the last five years. The brand has taken a big
beating and all its three models – Nano, Indica and Indigo – are
witnessing double-digit declines. With competitive intensity in the
space expected to remain strong and with Tata Motors continuing to
invest in its car business, we reckon domestic margins will likely
remain muted.

ONGC:: Inexpensive valuation the principal attraction for the stock now::Credit Suisse,

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Consensus estimates ONGC’s FY12E EBITDA will grow 7% YoY
on assumptions that net realisations remain c.US$55/bbl,
Rajasthan becomes profitable and OVL benefits from higher oil
prices. ONGC then trades at 3.5x EV/EBITDA FY12E. While
inexpensive on headline, this is when E&P comps have fallen
from 6.5x in 1Q CY11 to 4.5x now. ONGC might therefore be a
play on global commodity multiples.
● ONGC should see improving volume momentum. Ex JVs (Cairn),
we expect domestic oil production to grow from 24 MTPA in FY11
to 30 MTPA by FY15. The gas output can similarly grow from 23
BCM/year in FY11 to 27 BCM/year by FY15. Despite cost
pressures, this should be a significant positive for the stock.
● Uncertain subsidy payments remain a large dampener. Scenarios
that argue for downside to potential FPO prices seem extreme –
FY13E EBITDA would be lower than FY11 if oil prices remained
higher than US$110/bbl and upstream paid 55% or more of total
under-recoveries – but may remain an overhang until year-end.
While our target price indicates 29% potential upside; the large
stock sale and policy uncertainty may remain a near-term overhang.
With ONGC’s FPO around the corner, we highlight the key issues and
investment arguments in relation to the company in this note.
Consensus sees 7% YoY EBITDA growth on specifics
Consensus numbers expect ONGC’s FY12 EBITDA to grow 7% YoY,
on (1) an assumption that net realisations (post subsidy net backs)
remain close to US$55/bbl, we think (FY11A of US$54/bbl), (2) higher
oil prices help OVL (the overseas business) earnings, and (3) higher
earnings from ONGC’s share at Cairn’s Rajasthan fields (with a oneoff
reversal of historical royalties in 3Q/4Q FY12).
On consensus numbers, ONGC is not expensive
ONGC trades at 3.5x FY12E consensus — appears inexpensive on
headline, and relative to its own history. These multiples, however,
must be seen in the context of significant corrections in global E&P
multiples, which grew from 6.5x in 1Q CY11 to 4.5x now. ONGC’s
multiple discount to global comps has remained stable.


ONGC – a play on global commodity multiples?
To that extent, ONGC might be a trade on global E&P (commodity)
multiples/confidence. That said, regional E&P stocks — without
government intervention — might be better plays. An increase in E&P
comps may be accompanied by the increasing interest in Indian
stocks per se (increasing ‘risk’ trades). ONGC may not outperform as
much as expected.
Operationally, ONGC is in a good place
We expect ONGC’s domestic oil production (ex Cairn and JVs) to
grow from 24 MTPA in FY11 to 30 MTPA by FY15. The gas output
can similarly grow from 23 BCM/year in FY11 to 27 BCM/year by
FY15. While this depends on ONGC’s projects delivering as per
expectations, on time but may still be at risk, volume momentum
should improve, ideally having a positive impact on earnings.
This is countered by increasing cost pressure — from higher
production costs (inflation) and continued high exploration costs. We
count c.85 deep water wells that ONGC has committed for its NELP
acreage which by themselves could entail a capex of c.US$5-6 bn.
Finally – on subsidies
ONGC’s subsidy payments remain uncertain. Our note, Wait for policy
clarity, 4 July 2011, contains EBITDA sensitivities to subsidy
payments where we highlight that FY13E EBITDA would be lower
than FY11 if oil prices remained higher than US$110/bbl and
upstream paid 55% or more of total under-recoveries. These are the
assumptions that seem harsh relative to history (a 33-39% upstream
share), but may have the disproportionate probability in times of
government’s fiscal stress.
If the government sells the stock at a discount, scenarios that argue
for further downside may seem even more extreme. Given the subsidy
question may not be answered until April 2012, it may be reasonable
to assume ONGC EBITDA remains range-bound or has some limited
upside — as a top-down estimate. The FPO may therefore be more
attractive for the low multiples and any discount that the government
may offer. Without clarity on subsidies and policy, however, any
relative multiple expansion (to other E&P, India) may be limited.

Bharti Airtel, ::Currency movements could lead to share price volatility; underlying fundamentals intact::Credit Suisse,

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● The rupee has depreciated sharply since the beginning of August
(6.7% over the last 40 days and 5% since the end of June). This is
important with respect to Bharti’s debt in USD (~US$10 bn),
mostly unhedged and largely related to Zain’s African acquisition.
● Under Bharti’s IFRS accounting, the resulting translation losses of
~US$500 mn do not have an impact on P&L, rather they are
adjusted to reserves.
● Every 1% depreciation in rupee reduces Bharti’s book value by
~0.9%, due to the above accounting treatment. Thus, we could
see ~4.5% book value reduction during the quarter due to
currency movement so far (see details for further adjustments).
● By taking unhedged foreign currency debt, we believe Bharti is
managing to keep annual interest costs lower by ~US$725 mn.
However, this could lead to share price volatility.
● However, we believe that on-the-ground fundamentals for the
telecom sector continue to improve, and we remain confident of
the business fundamentals for Bharti. We reiterate our
OUTPERFORM rating on the stock.
Sharp depreciation of the rupee versus USD
Starting early August, the rupee has depreciated sharply against USD,
depreciating 6.7% over the last 40 days. As against the closing rate of
the June quarter, the rupee has depreciated 5% against USD.
Bharti has significant unhedged debt exposure
Bharti has significant borrowings in USD terms, taken for its
acquisition of Zain’s African operations last year. As per the FY3/11
annual report, the company had Rs454 bn (US$10.2 bn) in USD
denominated borrowings (mostly unhedged).
Bharti restates its foreign currency liabilities (net) at the end of each
quarter, and as per the accounting rules of the company, the
gains/losses from such restatement will be adjusted with foreign
currency translation reserve. Thus, there will be no impact on P&L.
Our calculation indicates that every 1% depreciation in rupee will lead
to: (1) a 0.9% reduction in book value due to the restatement of
liabilities and (2) a 0.7% increase in book value due to the restatement
of goodwill, resulting in a net reduction of 0.2% on book value. Thus,
the currency movements QTD could lead to a ~1% reduction in
Bharti’s book value (4.5% ignoring the goodwill adjustment).
Our forex strategists view (Ray Farris and team) remains bullish on
the rupee with an expectation of strengthening. In our models, we
assume an exchange rate of Rs45/US$. If the exchange rate were to
remain at Rs47/US$, then our target price could go down by 4.5% (as
calculated above, excluding the goodwill impact).
We note that by taking an unhedged foreign currency borrowing,
Bharti has managed to keep its cost of funding for acquisition low (its
total cost of debt LTM was 4%). If, however, we were to replace this
with domestic (AAA yield of 9.4%) or hedged borrowing, additional
interest expenses would be US$725 mn (28%/11%/10% of
FY12/FY13/FY14 PBT, respectively). In our models, we have a
consolidated cost of debt of 5% in FY3/12 for Bharti.


Underlying fundamentals remain strong
On the ground, we continue to believe that the competitive scenario
improves for the better, for incumbents such as Bharti. In addition to
previous newsflow on tariff hikes and falling dealer commissions, our
recent store visits indicated that the industry is also reducing other
parts of the S&M spend (in-store promotions, number of layers in the
distribution system, etc. – see our note dated 7 September 2011).
These measures indicate a clear shift of focus from subscriber
quantity to quality (one of the key reasons for falling net adds
numbers), and could boost margins.
Rupee appreciation could lead to volatility in the stock price over the
near term; however, we remain confident of the long-term
fundamentals and maintain our OUTPERFORM rating on the stock.

Housing Development Finance Corp:: National Housing Bank (NHB), regulator for housing finance companies (HFCs), has reportedly raised general provision (GP) requirement for HFCs to 0.4%:: Credit Suisse

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●  National Housing Bank (NHB), regulator for housing finance
companies (HFCs), has reportedly raised general provision (GP)
requirement for HFCs to 0.4% (similar to banks).
●  For HDFC, this translates to additional provisions of Rs3.1 bn
(~2% of book value). However, HDFC currently carries Rs11.7 bn
provisions (against Rs9 bn NPLs & NHB prov. req. of Rs8 bn) and
these excess provisions will largely offset the new GP needs.
●  Notably, Rs8 bn of provs. are now getting used up for GP (2% on
dual-rate & 0.4% on other loans) that implies specific cover at only
38% of gross NPLs. To reach 100% NPL cover, it would need topup
provisions of Rs5.4 bn (3.0% of book). HDFC should see about
Rs3.2 bn GP release over FY13 & FY14 as the dual rate converts
to floating rate loans, which will boost NPL coverage.
●  While mortgage rates are up 175 bp over the past nine months,
with loan momentum still healthy, we expect HDFC’s EPS growth
to sustain at robust 20% over FY12-13. Core ROEs healthy at 24-
26% but mortgage business at 17xFY12EPS, 3.8x B/V. NEUTRAL


GP requirement of 0.4%
The RBI working group has also made recommendations that
prudential norms for NBFCs should be brought in line with that of
banks (banks have 0.4% GP on mortgages). Assuming HDFC
maintains 100% NPL cover, this translates to an additional Rs5.4 bn
(3.0% of book value). However, HDFC currently has a provision of
Rs4.0 bn on teaser loans and Rs3.2 bn of it shall be released by April-
12 as it moves from dual rate to normal loans.


Even as HDFC has raised lending rates 175 bp over the past nine
months, with affordability still robust (particularly outside metros), it is
confident of maintaining loan growth (gross) at 20%+ levels in FY12
and the medium term. Lending rate hikes and the fact that it runs no
ALM mismatches should help HDFC maintain stable spreads (2.2-
2.3%). HDFC is confident of stable asset quality (0.8% gross NPLs).

India: Time for some selective risk-taking:: Credit Suisse,

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We believe risk aversion is the highest it has been in a decade
except in the two months post the ‘Lehman moment’ (Fig 1).
Given that such a catastrophe is not a certainty, further de-risking
for the market may be unlikely. Notwithstanding the recent
bounce, taking risks selectively could yield healthy returns.
● To calculate our risk index, we ascribed risk weights to gearing,
governance, rate sensitivity and earnings and stock price volatility.
As macro-economic uncertainty is still ahead of us, markets may
still fall further, but material outperformance of low-risk stocks and
sectors may be behind us.
● We therefore focus on relative valuations, especially within
sectors. We screened for stocks that have borne the brunt of risk
aversion despite healthy fundamentals (JSPL, RIL, Axis
Bank, Crompton Greaves): the risk-reward in these stocks is now
attractive despite the moves last week.
● Conversely, there are stocks that have significantly outperformed
their sectors despite weak trends in consensus est (Tata Steel,
Kotak Bank, Power Grid, Petronet LNG, HUL and ACC)

High risk aversion in the market
We ascribed risk weights to gearing, governance, rate sensitivity, and
earnings and stock price volatility, and discovered that risk aversion is
the highest it has been in a decade except in the two months post the
‘Lehman moment’. Given that such a catastrophe is not a certainty,
further de-risking for the market may be unlikely. This does not rule
out further declines for the market. However, notwithstanding the
recent bounce, taking risks selectively could yield healthy returns.
Macroeconomic uncertainties continue:
We continue to believe that the period of uncertainty is ahead of us
and not behind us. The problems of sovereign debt in Europe,
potential recessions in US/EU, a possible hard landing in China and
continuing high inflation and slowing growth in India are yet unsolved.
It is unwise, therefore, to aggressively add risk to the portfolio or to
drastically change portfolio weights. Yet, sharp price movements
provide opportunities to both buy and sell stocks.
Buy ‘risky but cheap’, trim sector outperformers
We focus on relative valuations, especially within sectors. We
screened for stocks that have borne the brunt of risk aversion despite
healthy fundamentals (JSPL, RIL, Axis Bank, Crompton Greaves).
The risk-reward in these stocks is now attractive despite the moves
last week. Conversely, there are stocks that have significantly
outperformed their sectors despite weak trends in consensus
estimates (Tata Steel, Kotak Mahindra, Power Grid, Petronet LNG,
HUL and ACC)

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.

Bharat Heavy Electricals (BHEL) Entry pricing by Hitachi--not losing sleep-over 􀂄BofA Merrill Lynch,

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Bharat Heavy Electricals
Entry pricing by Hitachi--not
losing sleep-over
􀂄 Aggressive bid in STG bulk tender; To win 1.6GW order; Buy
NTPC 9x800MW bulk tender for turbine generators saw an entry pricing (L1 ASP
@ Rs10.1mn/MW) by BGR-Hitachi (BGRH), which was 8% below BHEL and 16%
below BofAMLe. BHEL shall still win ~Rs16bn (2% of FY12E inflows) / 2x800MW
STG order vs BofAMLe of 4 sets. Importantly, blended BTG ASP for BHEL in this
bulk tender is in-line at Rs26.5mn as boiler ASP in tender yesterday, read BHEL)
was ahead of our est. BGRH strategy is similar to L&T-Mitsubishi' 1st bid entry
price during Jun’08, after which it raised prices by >20% from next bid onwards.
Buy BHEL on visibility of 22% EPS CAGR over FY11-13E with a backlog at 3.4x
FY12E sales and improved competitiveness, trading at 10.4x FY13E. Stock overhang
(divestment) could cap upside near-term.
Strategic imperatives - fragmentation + 1% OB add
The key strategic observations from this bid are a) Lower profitability / higher losses
in the TG sector on complete fragmentation / low utilization ex-BHEL. The winners
of 1st bulk tender - BF-Alstom (5 sets) and JSW (2 sets), didn't win any sets in 2nd
bulk tender and BGRH won 5 sets and L&T-MHI won 2 sets and b) Increase in
competition on entry of BGRH in India and aggressive bidding by BGRH, L&T-MHI
and JSW-Toshiba. We think that these low prices are unsustainable as banks may
turn cautious to finance this loss-making sector. For BHEL his lower margin order
shall constitute just 1% of its backlog but for its competitors it a/c for 20%-100% of
backlog. With ~10GW of supercritical order in its bag (table 1). BHEL has already
reached its indigenisation threshold (better margins).
How good is Rs10.1mn / MW ASP; Back to Jun'08
ASP of BGRH was 8% below BHEL while L&T-MHI (L2) bid and JSW-Toshiba (L3)
were almost neck-and-neck with L1. This is as gap in order win was big - minimum
order was 2 sets and max order was 5, per terms of bulk tender. Level of margin
sacrifice by BGRH can be gauged by the fact that its bid was just 4% higher vs L&TMHI
bid for 2x800MW STG order for Krishnapatnam TPP of APGenco despite
appreciation in Yen by >50% vs INR during this period (since Jun’08).


Price objective basis & risk
Bharat Heavy (BHHEF)
Our Price Objective of Rs2500 is based on 15x FY13E earnings with PEG of 0.8x
(vs 1x) to factor-in slower future growth and increased competition, which is inline
to its current multiples, the 41pct discount to peak PE in the last cycle (94-97) and
the mid-range of PE bands. On FY12E, BHEL trades at 5% discount to the
market, despite BHEL's superior market position, forecast earnings growth (19pct
for BHEL vs. the market 21pct) and RoE (30pct vs. the market 19pct). Risks to
our price objective are Govt. encouragement to its competitors with continued
zero % import duty / assured orders, Chinese, Japanese and Korean competition,
a rebound in metal prices, higher-than-expected wage hikes and on-ground
project execution challenges.

Buy MOIL-Reading the leaves: Mn ore price recovery? ::JPMorgan

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MOIL Ltd Overweight
MOIL.BO, MOIL IN
Reading the leaves: Mn ore price recovery?


Investor concerns about MOIL given the steep price correction in global
manganese ore (down 60% from Aug-10 peak) and threat from cheaper
imports has led to the decline in share price. Weak domestic steel demand
(4.5%/7% in FY12E/FY13E, in our view) could keep volumes muted in the
near term. We are cutting our EPS by 30%/27% in FY12E/13E as we assume
a 22% lower realizations y/y in FY12E (vs. -10% previously) given a slower
than expected improvement in Mn ore market and possible pricing recovery
likely in 2012 (flat prices in 3QFY12E and modest improvement in
4QFY12E).
 Waiting for Mn ore price recovery: Global miners have kept Mn ore
prices unchanged over the last 4-5 months stabilizing at $5.4/dmtu.
Inventories at Chinese ports have steadily declined from the peak of 4MT in
May to ~3.5MT as inquiries have increased recently. Chinese domestic
ferro-alloy market has shown an upward trend with prices of FeMn up
~10% since July. However, lower production due to power restriction in
Southern China has led to lower import offers in this sub region. On supply
side, the current price levels have reduced production from higher cost
mines (smaller Australian and South African mines have avg cash cost of
$5-5.5/dmtu).
 Volume- Late steel cycle play: Sales volume in 1QFY12 was impacted by
price differential between domestic and imported ore. In our view, the weak
end market demand could keep volumes muted in the near-term despite
prices at par with imported Mn ore. We expect steel demand growth to
remain anemic (YTD +1.3% y/y) and given the exiting inventory, expect flat
volumes y/y in FY12E (1HFY12 volumes likely -10%y/y).
 Mn ore price recovery - A key catalyst: The stock has declined ~20%
since mid-Jul and at 3.7x FY13E EV/EBITDA, we believe MOIL remains
attractive given its low cost of production and a robust balance sheet (FY11
net cash ~40% of Mcap). We see upside in MOIL from two key catalysts: a)
signs of Mn ore price increase (1% change in Mn ore realization impacts
EBITDA by 1.4%) and b) improvement steel demand and therefore, MOIL’s
offtakes. Key risks are slow recovery in Chinese demand and delay in
improvement of Mn ore prices; and lower volume trend in a weak domestic
steel environment.

UBS :: DLF - Pick-up in non-core asset sales, a trigger

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UBS Investment Research
DLF Limited
P ick-up in non-core asset sales, a trigger
􀂄 Event: Gurgaon land sold for Rs4.4bn; sale of 2 IT Parks expected shortly
Press suggests DLF has sold 28 acres in Gurgaon for Rs4.4bn, and transaction will
be completed in a month (already received Rs1.5b). Further, stake sale of leased IT
Parks in Noida & Pune (something mgmt highlighted in its 1Q12 call) also seem to
be in advanced stages, can potentially yield cash flows of Rs13bn by Dec’11. This
aside, more land sale in key cities and other non-core assets are being evaluated.
􀂄 Impact: First step towards de-leveraging, in our view
We see this large land sale in its prime Gurgaon market as mgmt’s serious efforts
to cut debt and achieve non-core asset sale target (Rs70bn over 2-3 yrs). Further,
media reports also suggest DLF is exploring options - 1) strategic sale of Aman
resorts, hotel chain and has received 5 bids of Rs18-22bn; 2) monetize its holding
in insurance business with Pramerica. We expect momentum to pick up further.
􀂄 Action: Reiterate BUY; large non-core asset sales/pre-sales the trigger
We believe leverage is close to peak levels at Rs215bn and 0.9x D/E; and efforts to
cut debt through non-core asset sales, rental/plot sales growth with rate scenario
easing will be key catalysts. While recent CCI-penalty issue, large interest outflow
and risk of pre-sales bunching to 2H may stay an overhang; but concerns seems
priced in – foresee attractive return potential over 12-mth period. Key risks
however being prolonged high rates and sever macro slowdown.
􀂄 Valuation: Close to recession lows at 1.3x P/BV
Trading at deep discount of 56% to NAV (close to 60% of crisis times), we see
more upside potential than downside – stays are core proxy to India property.


Trough levels at: 56% disc to NAV, 1.3x P/BV
Our price target of Rs350 is based on a 25% discount on NAV of Rs 465. Our
lower discount for DLF vs peers (30-45%) is derived from a combination of: 1)
its superior business model and good asset-geographic mix; 2) its strong rental
annuity, with growth potential; 3) its execution track record; Our NAV/share of
Rs465 includes Rs389 for the development portfolio and Rs76 for rental
yielding assets plus potential yield assets. This is higher than consensus due to –
1) lower cap rates of 9% ascribed to value its 14msf leased commercial assets
(16% of NAV), building in upside from the recovery, 2) consolidation of the
DAL-Caraf asset portfolio; 3) other developable commercial assets valued at 10-
11% cap (17% of NAV); 4) non-core asset sales of Rs25bn.. Residential,
although still dominates with 67% of NAV. Our other assumptions being - 1) no
price escalation, 2) 15% cost of capital, 3)25% tax rate; and 4) development land
reserve of 418 msf with 1-2 year execution delay.
Trading at 27% below our bear-case NAV, provides margin of safety
With NAVs likely to remain volatile during recovery cycles, we highlight the
bull-case and bear-case scenario for DLF’s NAV. Our bear case (Rs275/share)
factors in five-year development visibility (100msf, 15% of NAV), values
undeveloped land reserves (55% of NAV), and yielding group assets (29% of
NAV) and builds in high debt levels and lower cash from non-core asset sales.
The bull case (Rs600/share) builds in 10% higher prices, a faster execution
cycle; further upside on leased assets and lower debt levels. We believe this
provides an overview of downside risks and upside potential for NAVs.


􀁑 DLF Limited
DLF is India's largest real estate company by market capitalisation. Established
as Delhi Land and Finance (DLF), it has a track record of more than 60 years in
real estate development. The major shareholders are KP Singh and family, who
own approximately 90% of the company. DLF commenced operations in Delhi,
expanded into the National Capital Region in the late 1980s, and now has a
presence in all major Indian cities. The company is a leader in office space and
has a large portfolio of residential and retail projects. It is expanding into SEZs
and hotels.
􀁑 Statement of Risk
Key risks to DLF include rising rates, inflation and regulatory policy changes.
This apart, a severe macro economic slowdown would adversely impact growth.

UBS ::GMR Infrastructure -- Island Power: Company expects high project profitability

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UBS Investment Research
GMR Infrastructure
Island Power: Company expects high
p roject profitability
􀂄 Event: GMR expects equity IRRs of ~18% in Island Power project
GMR today organized a presentation on the 800MW Island Power project
(Singapore power company acquired from Intergen). The ~SGD1.2bn project is
likely to be commissioned in Q4CY13. Equity investment from GMR (parent) will
be less than SGD100m. Project financing has been secured and the liability of
GMR (parent) is limited to US$100m. Our SOTP currently does not include any
value for Island Power. This project is not a part of GMR Energy currently.
􀂄 Impact: Higher returns at GMR parent level due to project structuring
IRR to GMR, the project sponsor, will likely be higher at ~20%, due to funding
structure- ~75% of the equity funding will be through subordinated shareholder’s
loan taken from Indian banks. The interest cost on this loan will be ~SGD20m,
less than the fees that GMR will likely earn from the project company (success fee
and O&M fees- both approved by project lenders).
􀂄 Action: Likely to dilute ~30% stake in the project
GMR could dilute ~30% stake in the project over the next few months. Fuel supply
agreement has been signed, EPC contract has been awarded and construction has
commenced. This project is likely to have higher efficiencies than other generation
companies in the region due to usage of latest technology and hence better returns.
􀂄 Valuation: Buy rating with SOTP-based PT of Rs38
We have a Buy rating and long-term risk-reward is favourable in our view.


Profitability: This plant is likely to have higher efficiencies (by 5-6%)
compared to other power generating companies in the region (due to better
technology, it being a new construction) and given that pricing is largely similar
across power producers, it expects higher profitability. At the project level,
equity IRRs are expected to be ~18% and at GMR level it could be ~20% (due
to the funding structure).
Valuation
Our SOTP valuation for GMR is as follows (with individual assets being valued
on DCF). We have not included 1) Island Power, 2) power transmission projects
(400KV 386 circuit kms in Rajasthan; financial closure to be achieved soon) and
3) Kakinada SEZ (master-planning of the port about to be completed as per
news reports) and 4) the hydro-power projects (early development stage) in our
valuation.


􀁑 GMR Infrastructure
GMR is one of India's leading infrastructure developers, with an asset portfolio
(attributable) of: (1) 765 acres of real estate near Delhi and Hyderabad airports;
(2) about 3,900MW of power capacity (+4,100MW at an early development
stage); (3) three airports with ultimate pax handling of 89m; (4) eight road
projects (more than 520km); (5) three SEZs of more than 3,400 acres; and (6)
stakes in coal mines with mineable reserves of over 150m tons. Additionally,
GMR holds 50% of Intergen, which has global power assets of 6,600MW (and
2,700MW under development).
􀁑 Statement of Risk
In our view the key risks for GMR with regard to airport projects are: a)
execution delays; b) regulatory risks related to revenue; and c) traffic risks. With
regard to power projects, we believe the key risks are: a) shortages in fuel
supply; and b) collection risks. For road projects: a) traffic; and b) collection are
key risks. All of GMR’s projects face interest rate-related risk.

UBS Key Calls – Asia ex-Japan :: Federal Bank – Buy, Rs550

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UBS Investment Research
UBS Key Calls – Asia ex-Japan
O ur highest conviction ideas
􀂄 What are Key Calls?
Key Calls represent our highest conviction single stock research ideas across the
region. The list is designed to generate bottom-up ‘alpha’ and is not a portfolio that
we use to express our top-down view. The key selection criteria are analyst
conviction, liquidity (more than US$10m average daily turnover for most stocks),
and a strategy overlay in terms of the macro outlook, market positioning and risk
management.
􀂄 Equity strategy view
In the short-term, we expect continued weakness as economic data remains
volatile. However, we still expect data to stabilise into September, which from a
cyclical perspective, should help Asian equities. As a result, with sentiment washed
out, and our expectation that data will improve into the final stretch of this year, we
expect Asian equities to end the year higher than they are today, but to remain
weak in the short term.
􀂄 Our live Key Calls
We have eight live Asia Key Calls: Cheung Kong Infrastructure (CKI); China
Unicom - H; Federal Bank; Industrial & Commercial Bank of China (ICBC – H);
KEPCO; Li & Fung (Sell); OCBC; and Sun Hung Kai Properties (SHKP).


Key Calls represent our highest conviction single stock ideas. The list is
designed to generate bottom-up ‘alpha’. It is not a balanced, index-tracking
portfolio that we use to express our top-down view. It combines our analyst and
strategy views—with an emphasis on the former—while taking into account our
views on the macro backdrop and market positioning.
Criteria for Key Call selection
We select our Key Calls based on the following criteria.
􀁑 Analyst conviction. This is the most important criterion given the bottom-up
nature of our Key Calls. The primary consideration is the strength of the
individual stock investment case. In many instances, this also translates into
significant upside/downside in our price targets.
􀁑 Liquidity. We set a minimum threshold of US$10m in average daily trading
turnover over the past three months. We make exceptions for strong ideas,
particularly in the smaller markets.
􀁑 Strategy overlay. Key Calls are bottom-up driven and as such, they are not
selected on the basis of how well they fit our top-down views. That said, we
apply a top-down overlay on our stock selection in terms of the macro
outlook, market positioning and risk management. In practical terms, if we
hold a cautious view on the market for instance, this will not stop us from
selecting a high-beta stock with a strong company-specific investment case
as a Key Call. However, it will likely mean that the Key Call list will be
more weighed to defensive rather than high-beta stocks.
Summary of our strategy view
Our year-end target is now 580 on the MSCI Asia ex Japan index. This implies a
return of 10% from end-August levels. This would bring Asia ex Japan close to
2x price-to-book and 12x forward earnings by year end. This would leave Asian
equities about 15% below their long-run forward PE multiples.
In the short-term, we expect continued weakness as economic data remains
volatile. However, we still expect data to stabilise into September, which from a
cyclical perspective should help Asian equities. As a result, with sentiment
washed out and our expectation that data will improve into the final stretch of
this year, we expect Asian equities to end the year higher than they are today,
but to remain weak in the short term.
Our key country picks are India, where we think policy headwinds may peak
and earnings risks are now beginning to be reflected in estimates, and China,
which we see as a market that should benefit from falling inflation. We have
underweight positions in Korea and Taiwan as we think slowing global growth
will remain a headwind. We are neutral on Thailand to reflect the increasing
political uncertainties due to the upcoming elections. In general, the Association
of Southeast Asian Nations (ASEAN) markets appear to be least at risk from a
growth slowdown and could benefit from subsiding inflationary fears. We are
neutral on those markets due to their relatively expensive valuations.


Why is Federal Bank a Key Call?
Federal Bank is a private sector bank (established in 1931) with 746 branches (60%
in Kerala) and a balance sheet of Rs527bn, with market cap of US$1.4bn. We
believe Federal Bank is on the brink of an operations turnaround catalysed by a
change in leadership and a structural improvement in asset quality. We expect the
new CEO’s focus on improving the contribution of fee-based income (one of the
lowest in the industry) to offset a cyclical decline in NIMs, while a pickup in asset
growth and lower credit costs could support an earnings CAGR of 27% over FY11-
13, which is one of the highest in the industry.
Further Data
Current Price Rs383.05
Market Cap US$1.42bn
Av. Daily Value US$4.8mn
Forecast Dividend Yield 2.1
Net Cash (debt) NA
Bloomberg code FB IB
Reuters code FED.BO
Consensus (Bloomberg)
Buy 23
Neutral 1
Sell 1
’12 EPS median 41.5
’12 EPS range 34.3 - 48.7
The Buy Case
(1) Federal Bank has all the ingredients of a newer private sector bank (those licensed in the 1990s): Federal Bank is
an older private sector bank with 746 branches and access to a unique non-resident Indians (NRI) customer base.
Trading at 1.0x FY13E book and 7x FY13E earnings, we think it is one of the cheapest private sector banks in India with
the potential to re-rate to the level of its newer private sector bank peers (which are trading at 1.6x-3.3x book).
(2) New management team all set to transform the bank franchise: Federal Bank earns high NIMs of 3.9% (Q1 FY12),
which is supported by its low-cost deposit base of around 33% and its small and medium enterprises (SME) loan book. It
struggled with high non-performing loan (NPL) additions and slower growth in the past, but we think this should change with
a new management team on board. We expect the new management team to significantly enhance the bank’s franchise in
the next few years by improving its risk management systems, adding fee products, and fostering a performance-based
incentive culture among its staff.
(3) Expect improvement in franchise to drive re-rating: We expect loan-loss provisioning (LLP) to decline despite industry
pressure, from 1.8% in FY11 to 1.2% in FY13, and a 36% fee CAGR over FY11-13, supporting an ROE expansion from
12% currently to 16% by FY13. We forecast an earnings CAGR of 27% over the same period due to falling NPL provisions
and an improving revenue profile. The stock is trading at a 50-60% discount to the private sector banks; we expect this to
narrow in the coming years. We believe Federal Bank could be a potential M&A candidate given the Reserve Bank of
India’s (RBI) plan to award new bank licences.
Key issues/risks
(1) We believe the risks include a delay in execution by the new management due to a lack of co-operation from the
unionised employees. We believe friction between management and employees has reduced over the years due to
open communication channels, performance-based incentives, and technology. However, we think it remains the
biggest impediment for the bank to scale up in line with private sector banks. A systemic deterioration in asset quality
could also delay the bank’s NPL recovery.
Catalysts
􀁑 Improvement in asset quality from Q2 FY12: We believe the market is extrapolating current asset quality in future too; we
expect non-performing assets (NPA) to improve with a slowdown in NPA additions and an improvement in recoveries from
Q2 FY12 onwards.
􀁑 Improvement in ROA: With declining credit costs, we expect ROA to improve from 1.3% in FY11 to 1.4% in FY13 even
though we have built in a decline of 40bp in NIM.
􀁑 Potential M&A candidate: We believe new banking licences, which could be awarded in the next 12-18 months, could
trigger M&A in the sector and Federal Bank could be a potential M&A candidate given it is a private sector bank with
inexpensive valuations.

Hindustan Unilever – Has HUVR cut Surf Excel prices?::RBS

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Media reports say that HUVR has cut Surf Excel Blue prices by 21%. Our channel checks tell
us this is more of localised promotions that some of the modern retail formats are running.
There is no structural drop in prices either in conventional or modern retail, so in effect no
cause for concern. Maintain Buy.


No structural cut in detergent brand - Surf Excel Blue prices
􀀟 Media reported that HUVR has effectively cut the prices of the premium detergent brand-
Surf Excel Blue by 21%.
􀀟 As per our feedback this is more of a regional and localised promotion which one of the
modern retail formats has been running. At various points of time, such limited offer
promotions are run to stimulate demand, and most of the times these schemes are not
even national.
􀀟 We have confirmed that the company has not changed any of its official prices for any of
its brands, nor dropped prices for any of its products to modern retail.
Management continues to manage business to drive growth
􀀟 HUVR's step up in volume growth in the past 2 years is closely linked to the innovation it
has put through in its exisiting and new product offerings. Over 50% of its products have
been re-launched in the past 2 years.


􀀟 The biggest success in the past 2 years has been the emergence of 'Dove' as a premium
brand accross categories, and its growing market share in shampoos and soaps.
􀀟 Its focus on services in categories like ice-creams, coffee remain intense, and it has
continued to open new formats to strengthen the brand positioning.
We remain positive on the stock, recommend Buy at declines
􀀟 We are expecting a 120bp improvement in EBITDA margins over the next 3 years, which we
believe will drive EPS growth of 14.9% which would be ahead of the expected revenue growth
of 13%.
􀀟 HUVR's volume growth has been in line or ahead of the industry average volume growth for
the past 6 quarters, which indicates the renewed management focus. The level of innovations
in existing categories have been stepped up, and its focus to participate on the growth in the
categories of the future is also sustained.
􀀟 We reiterate our Buy recommendation with EPS forecasts which are around 3.5% ahead of
consensus estimates.

News headlines ::Sept 17 ::RBS

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News headlines
Oil & Gas
􀀟 Oil companies hike Aviation Turbine Fuel price by 2.5% (Economic Times)
􀀟 Oil India hints at investment in HPCL project (Economic Times)
􀀟 Petrol prices hiked by Rs3.14 per litre effective midnight (Economic Times)
􀀟 Indian Oil Corp plans to invest US$1.87bn to up Koyali refinery capacity (Economic Times)
􀀟 ONGC sells Nov Sokol at steady premium (Economic Times)
􀀟 State-run oil marketing companies' borrowings up 24% to Rs1,200bn in FY'12
(Economic Times)
􀀟 Looking for oil blocks, partners overseas: Oil India head (Economic Times)
􀀟 Natural gas sector: Big companies to reap benefits from pipeline network (Economic Times)
􀀟 ONGC may put off FPO (Business Line)
Banks
􀀟 ICICI Bank goes slow on foreign deposit mop-up (Business Standard)
􀀟 Axis Bank board meets today to seal Enam deal (Business Standard)
Commodity
􀀟 SAIL iron ore mines to double production (Economic Times)
􀀟 JSW Steel buys iron ore at 25-30% premium to market price (Economic Times)
􀀟 NALCO finalises 300,000 tonnes alumina export deal (Economic Times)
􀀟 Tata Steel gets $70-million order to supply high-speed rail track (Economic Times)
􀀟 India steel demand, output to surge by 2020: JSW (Economic Times)
􀀟 Government directs CIL to rationalise coal supply sources (Business Standard)
􀀟 JSW Steel output up 23% in August (Business Line)
Consumer
􀀟 FMCG companies go for expansion (Business Standard)
IT & Telecom
􀀟 Mahindra Satyam gets US court approval for class-action settlement (Economic Times)
􀀟 Infosys, Wipro to add hundreds of staff in China as US, EU face slowdown (Economic Times)
􀀟 Global crisis a win-win situation for Indian IT companies: Infosys chairman KV Kamath
(Economic Times)
􀀟 US jobs data suggests fears of Indian IT firms taking away good American jobs may be
exaggerated (Economic Times)
􀀟 TCS in pact with payments firm Nets (Business Line)
􀀟 DoT xtends deadline for telecom companies to comply with security rules (Economic Times)
Power, engineering & infrastructure
􀀟 ABB wins US$15mn order from JK Paper (Economic Times)
􀀟 L&T July-Sept advance tax seen at Rs3.5bn (Economic Times)
􀀟 NTPC further cuts generation as coal supply from Singareni dries up (Business Standard)


Automobiles
􀀟 Maruti to resume production on Monday even as 17-day deadlock with striking workers
remains unresolved (Economic Times)
􀀟 Mahindra’s see M&As slowing down after 28 deals in 3 years (Economic Times)
􀀟 Tata Motors global sales up 3% in August (Economic Times)
􀀟 Ashok Leyland eyes Rs23bn investment in LCV segment (Economic Times)
􀀟 Maruti Suzuki India to shut plants tomorrow; 11 hurt in scuffle (Economic Times)
􀀟 Maruti Suzuki, Hyundai, Toyota, Mercedes say government flip-flop on diesel hurting plans
(Economic Times)
􀀟 Bajaj hopes to sell 2,000 Boxer models in AP (Business Standard)

ITC – Andhra Pradesh raises VAT to 20% ::RBS

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Following the recent hikes in VAT rates by states like West Bengal and Tamil Nadu to 20%,
Andhra Pradesh has also raised VAT from 14.5% to 20%. AP is an important state for ITC
with around 8-9% of revenues, and hence ITC needs to raise prices by 0.5% to neutralise
impact.


The new VAT tax rate heading towards 20%, with one more hike
􀀟 The state of Andhra Pradesh has raised VAT on cigarettes to 20% from 14.5%.
􀀟 Andhra Pradesh accounts for around 8-9% of ITC's revenues, hence the above hike will
need a 0.5% increase in weighted average cigarette prices to neutralise.
􀀟 We believe the weighted average VAT rate for ITC has crossed 17% with the recent hike.
Recent VAT increases are a growing cause for concern
􀀟 In 2011, we are witnessing a gradual move up in the VAT rates in most states which is
clearly a cause for concern, as VAT is currently charged on maximum retail price (MRP),
and hence has a cascading impact on ITC's tax incidence.
􀀟 Before West Bengal (13.5%-20%), the states of Tamil Nadu (12.5-20%), Assam (12.5%-
20%), Gujarat (12.5-25%), and Rajasthan (12.5%-40%) had increased VAT on cigarettes
and tobacco products.


The Good & Service Tax (GST) implementation we believe will ensure that there would be
uniform levy on state taxes, however we believe the timing of the implementation is uncertain,
as there is no consensus among many states on various issues.
􀀟 However, the only positive aspect has been the growing attempt to create awareness of the
ill-effects of other formats of tobacco like banning of "sachet" packaging, and media publicity
of ill-effects of chewing tobacco on health. This can, over time, shift the dual users of
cigarettes and these formats of tobacco to cigarettes.
ITC's earnings drivers intact, Buy maintained
􀀟 We expect ITC to take calibrated price increase to counter the recent 2 VAT hikes from the
states of West Bengal and Andhra Pradesh. It has raised prices of "Classic" brands recently,
to neutralise the VAT hikes in the state of Tamil Nadu.
􀀟 ITC recorded a volume growth of 8% in 1QFY12. However, for the full year we expect ITC to
record a 6-7% volume growth. This volume recovery has to be viewed in the context of the
2.8% volume decline which ITC recorded in FY11 due to sharp price hikes induced by 17%
excise duty hikes. In FY12, the volume recovery gathered momentum in 2HFY11, and hence
we are expecting some softness in volume growth in the later quarters of FY12.
􀀟 ITC's other FMCG business could be the next value driver as the business is reaching critical
scale in many segments. Overall it would have a revenue of Rs53bn in FY12F, and continues
to deliver growth of 19-20%. We expect the business break-even in FY13, and turn profitable
beyond that.
􀀟 We have an EPS growth estimate of 19% in FY12. While the lower base of 1QFY11 has
driven a higher PAT growth of 24.5% in 1QFY12. We maintain our Buy recommendation.

Lupin – Its time for a breather::RBS

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While Lupin's ex-US and IP businesses remain robust, we believe the US could show only muted
growth in the near term, largely due to weakness in its branded business. We expect a gradual
recovery but a value accretive acquisition could surprise us. Significant outperformance limits
upside, downgrade to Hold.


While Lupin’s ex-US business and IP strength is gaining momentum...
Lupin’s ex-US businesses remains healthy (1QFY12: India 17% yoy revenue growth, Japan 15%
yoy at constant currency). We expect Lupin’s tie-up with Eli-Lily for India and Sanofi Aventis for its
Philippines business to add to this growth momentum. Lupin’s Intellectual Property (IP) business
has shown strength through its recent licensing deal with Medicis (milestone receipt of US$20m)
besides the recurring quarterly milestone receipt of US$1.5m from Salix.
…the US business signals some near-term pain
1QFY12 performance was weak – EBITDA and PAT grew by 3% and 7% respectively – as it was
adversely impacted by: 1) significant pricing erosion in gLotrel; 2) muted growth in US branded
business revenues; 3) high field force costs; and 4) delays in the launches Allernaze (earlier
estimated in 3QFY12 now expected in FY13) and Oral Contraceptives (OCs, previously full range
in 3Q-4QFY12 but now in FY13).
Gradual recovery expected but any value accretive acquisition could spur growth
We expect a gradual recovery in operating margin from FY13 as: 1) benefits from AllerNaze and
OCs kick in; and 2) remedial measures for the US branded business (suprax brand extension,
sales force optimisation to support Antara) take effect. This should be aided by the FTF pipeline
in US, which is gaining traction, but is back-ended. While a gradual recovery is expected, any
value accretive acquisition could increase growth


Downgrade to Hold on outperformance and absence of significant catalysts
We factor margin pressure into our forecasts resulting in a 4%/8% cut to our FY12F/13F
earnings. We roll forward our valuation to FY13. We continue to value Lupin’s core business at a
5% discount to the FY13F sector PE (of 18x, on our estimates) which results in our TP of Rs460.
With 14% outperformance of the sector in the last three months and with no significant upside
triggers in the near term, we downgrade the stock to Hold.

UBS: Emami - London conference takeaways ; price target of Rs550

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UBS Investment Research
Emami Ltd
L ondon conference takeaways
�� Event: key takeaways from the London Bat with India Inc conference
Management largely reiterated its positive outlook with its niche ayurvedic healthfocussed
product portfolio in under-penetrated categories, limited MNC
competition, and aggressive advertising spend. It is keen on evaluating M&A
opportunities (but no internal targets) and thinks Indian ayurvedic/cosmetic
companies are unlevered for any distressed buy-out opportunities. Mom-and-pop
shops are integral to distribution and there are no major hierarchy issues.
�� Impact: maintain our estimates and long-term positive view on the stock
We maintain our estimates and long-term positive outlook on the company based
on the company’s ability to innovate on new products and patiently incubate
categories. Sales growth in top five products and new launches is encouraging,
although we remain slightly cautious on raw material cost pressures.
�� Action: upside limited; niche health-based brands positive
Our Neutral rating reflects the limited upside potential on the stock on FY13
estimates. We are positive on Emami’s niche products, high gross margins and
plans to introduce a 6-7% price hike for FY12 to pass on high costs.
�� Valuation: Neutral rating with a price target of Rs550
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. We assume a WACC of
11.3%.

Goldman Sachs:: Reliance Infrastructure (RLIN.BO): Maintain Neutral

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Reliance Infrastructure (RLIN.BO): Maintain Neutral
What's changed
We reiterate our Neutral rating on Reliance Infrastructure (RELI), as we
believe the risk-reward profile remains balanced. We reduce our sales
forecasts by 4%, 16%, and 14% and our EPS estimates by 2%, 4.5%, and
1.5% for FY12E-FY14E. This reflects slower progress in Sasan project
and milder growth in traffic in the metros. Our EPS estimates are now
7%, 19%, and 2% below Bloomberg consensus for FY12E-FY14E.
We believe the key regulatory overhang is now behind us as MERC is
likely to renew the distribution license for its Mumbai license area for
the next 25 years. It also has been awarded recovery of regulatory assets
worth Rs 23.2bn and allowed to invoice a cross-subsidy charge on all
migrating consumers.
However, the completion of some of its road projects have been delayed
(particularly expanding two-lane roads to four); consequently, toll
collections are down on the existing lanes. Also, traffic growth for both
existing road projects and the Delhi metro has fallen short of
management’s expectations. RELI incurred a loss of Rs 500mn from
Delhi metro in 1QFY12; however, management guided for an improved
top-line through retail and advertising revenue. The company expects to
commission line 1 of Mumbai metro by end of this financial year and
has achieved financial closure for line 2.
We would be more positive on the stock if we have more visibility on
commission of infra projects and on news flows about deployment of its
cash in profitable projects.
Valuation
We cut our 12-month SOTP-based target price to Rs 540 (from Rs 700)
given the following: 1) lower target price of Reliance Power (Rs 70 from
Rs 91) after eliminating the Krishnapatnam project from our valuation; 2)
reduced valuation of EPC business due to contraction in multiples of
other construction peer group; and 3) lower valuation of infrastructure
business due to delay in road projects and low traffic growth.
We have updated our model with the abridged balance sheet. We wait
for the full balance sheet to update our SOTP-based target price with the
details of the cash invested in liquid funds.
Key risks
Upside risks to our forecasts and target price are the following:
1) the completion of Reliance Power projects ahead of schedule and
faster resolution of concerns in Krishnapatnam project; 2) the timely
completion of Mumbai metro and EPC projects; and 3) Improved
profitability of Delhi metro.
Meanwhile, key downside risks include slower progress on road projects
and further delays in the commissioning of the Mumbai metro lines.

Goldman Sachs:: Reliance Power (RPOL.BO): Sell but removed from Conviction List

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Reliance Power (RPOL.BO): Sell but removed from Conviction List
What happened
We reiterate our Sell rating on Reliance Power, cutting our SOTP-based
target price to Rs70 from Rs91, for potential downside of 18%. Despite
its recent decline, we continue to remain negative on the stock, as we
still consider it expensive. We do not believe the company’s ROE will
improve sufficiently to justify its current P/B until the commissioning of
the Chitrangi power project. We remove Reliance Power from our
Conviction Sell list. Since we added it to our Conviction Sell list on
October 26, 2010, the stock has declined by 46.7%, while BSE Sensex fell
15.1%. Over the past 12 months, the stock has fallen 45.5% vs. the
index’s 8.0% decline.
We reduce our SOTP-based target price, primarily given that we have
eliminated potential value from the Krishnapatnam power project. News
flow [business standard] indicates that the company may not proceed
with construction of the project unless it receives some relief in the form
of tariff hike (from distribution companies) to compensate for potentially
higher fuel costs. (Higher fuel costs are the likely outcome if the recently
proposed Indonesian mining law amendment is implemented).
Our calculations indicate that the Case 2 bid of Krishnapatnam project
implies a delivered cost of US$45/ton.
Current view
Our new target price of Rs 70 reflects our removal of the Krishnapatnam
project from our SOTP valuation, which faces high execution risk due to
a proposed change in Indonesian law that would mandate all parties to
sell coal at market prices. According to management, if this regulation
passes, it would not be able to meet the conditions set by the lenders; in
turn, the cash flow requirements of the project would be affected. We
also update our model to reflect the FY2011 annual report and valuation
of individual projects, which slightly changed due to debt and capex
amounts incurred during the year.
Key upside risks to our estimates and valuation are the following:
1) completion of projects ahead of schedule; 2) any commentary that
indicates that Reliance Power could transport coal for their
Krishnapatnam project at the negotiated prices instead of benchmark
prices; 3) news flow that the company can sell coal from the Sasan and
Krishnapatnam mines ahead of the commissioning of the project; and 4)
if the distribution utilities allow RPWR to revise the PPA of the
Krishnapatnam project allowing them higher fuel costs.

Goldman Sachs:: Orient Green Power (ORIN.BO): D/g to Neutral on execution issues

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Orient Green Power (ORIN.BO): D/g to Neutral on execution issues
What's changed
We downgrade OGPL to Neutral and reduce our 12-month SOTP-based
target price to Rs20 from Rs48, which implies potential upside of 42%.
Since we initiated coverage on OGPL with a Buy rating on December 2,
2010, the stock has declined by 54.9% while the BSE Sensex fell 14.1%.
We believe YTD underperformance of Orient Green is on account of the
following: 1) delays in capacity additions due to transmission constraints
in the state of Tamil Nadu; 2) weak finances of Tamil Nadu state
electricity board thereby heightening uncertainty over utilization levels
and the recovery of outstanding dues; and 3) a lack of clarity on the REC
mechanism regarding the weak finances of the state electricity boards.
We do not expect clarity or positive news flows on any of the above in
the near term, which will remain an overhang on the stock.
We had expected to gain visibility earlier on the utilization rates of its
new projects in this quarter. However, we now anticipate that we will
have to wait until 2Q FY13E, given delays in commissioning wind
capacities for FY12E and the fact that the wind season will be over by
end-Sep 2011. Furthermore, OGPL earnings and valuation have very
high sensitivity to utilization rates. A 100bp change in utilization rates for
wind would impact valuation by 15% and affect earnings by 20% for
FY13E/14E. This is primarily because of the company’s high operating
leverage and interest expense.
Our calculations indicate that the market is implying negative value to
assets being constructed and current market price is composed of only
cash and book value of existing assets. We, however, believe the rerating
of the stock is contingent on visibility on 1) utilization rates; and 2)
realization of REC benefits, which may not happen until 1Q-2Q FY13.
Pending uncertainty on both utilization rates and realization of REC
benefits, we now assume a utilization rate for wind of 24% (vs. company
forecast of 27%-30%). Our number is a mid-point between management
guidance and the utilization rates implied by the market. Also, we await
more visibility on REC and assume no REC benefits in our earnings
estimates and valuation in the interim.
Valuation
We reduce our target price to Rs 20 and cut our EPS estimates by 69%-
66% for FY2012-2014, primarily on removal of the EPS benefits and
attributing the value of only announced projects in the pipeline.
Key risks
Key downside risks: 1) further deterioration of health of SEBs leading to
a relaxation of obligation of purchase of REC certificates; 2) margin
pressure due to high biomass fuel cost.
Key upside risks: 1) the realization of REC benefits and 2) higher-thanexpected
utilization rates.

Goldman Sachs:: Lanco Infratech (LAIN.BO): Down to Neutral on lack of +ve catalysts

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Lanco Infratech (LAIN.BO): Down to Neutral on lack of +ve catalysts
What's changed
We downgrade Lanco Infratech to Neutral from Buy and cut our 12-
month SOTP-based target price to Rs21 from Rs43, implying potential
upside of 12%. Since we added Lanco on our Buy list on February 22,
2011, the stock has declined by 51.4% while BSE Sensex slid 6.2%. Over
the past 12 months, the stock has fallen 72.7% vs. the index’s decline of
8.0%. We attribute the stock’s underperformance to high debt,
magnifying the concerns on the sector and declining short-term rates.
We downgrade our rating for the following reasons.
1. High beta to positive news flows on the sector, but none in the
medium term: Although the stock price correction (77% YTD) reflects
downside risks, in our view, we believe data points on: 1) continued
softening of merchant rates, 2) declining supplies of domestic coal and
gas, 3) delays in reforms required for improvement in finances of state
electricity boards, and 4) consensus downgrades of earnings estimates
(we are 43-52% below consensus on FY12-14), may likely limit stock
performance. Moreover, we believe high debt is likely to magnify the risks
of any negative news flows on the sector and the stock may under
perform its peers.
2. Uncertainty in recognition of income from construction division: In
line with IFRS accounting policy, Lanco eliminates income (at PAT level)
earned from construction related services to its subsidiaries, however, still
pays taxes on such income. With almost 60% of its order-book from
projects which are internal in nature, we believe earnings will continue to
be a function of the quantum of elimination of construction income. We
reduce our earnings estimates by 28%-51% over FY12E-14E primarily to
reflect eliminations and have now valued the construction order book on
cash methodology (DCF vs. EV/EBITDA earlier)
3. Valuations look inexpensive, but clarity on pipeline key for rerating:
We believe the current market price reflects value of existing
projects but not reflect of the pipeline. We, however, believe the Street will
start assigning full value to the pipeline on higher visibility of ‘profitability’
of the projects which is contingent on: 1) assurance of domestic coal
supplies; and 2) terms of PPA (critical for utilization rates). With no
visibility on production growth of Coal India limited from FY13E onwards,
we believe profitability of pipeline continue to remain uncertain.
Valuation
We reduce our SOTP-based target price to Rs21 from Rs43 primarily on
account of: 1) Assigning negative value to construction division due to
increase in debt on its parent balance sheet; 2) Valuing pipeline only on
equity invested so far, pending visibility on coal supplies; 3) Lower value
to Udupi project due to delay in the pipeline; 4) Reflected negative value
to Griffen asset to reflect the downside risks of their dispute with
Perdaman lower valuation of construction business
Key risks
Further delay in commissioning of Udupi/Anpara projects is the key
downside risk and visibility on fuel supplies to the pipeline is the key
upside risk.

Goldman Sachs, Adani Power (ADAN.BO): Down to Neutral on higher fuel costs

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Adani Power (ADAN.BO): Down to Neutral on higher fuel costs
What happened
We downgrade Adani Power to Neutral from Buy with a 12-month SOTPbased
target price of Rs93 (from Rs134 earlier), implying potential upside
of 1%. Three reasons drive the downgrade:
1. Negative news flow on Bunyu mine: Per our ASEAN commodities
team, the Indonesian government is likely to benchmark all coal produced in
Indonesia to the International coal indices. Even though this regulation is
applicable on a case-by-case basis and implementation timelines are
uncertain, we calculate that the fuel costs for its Mundra complex will likely
increase by 23%, as Adani Power may have to pay higher royalties and taxes
at their Indonesian subsidiary. Consequently, we expect the delivered cost of
coal at Mundra to increase by about US$10/ton to US$54/ton from the
current US$44/ton.
Furthermore, the Indonesian government is contemplating a ban on exports
of low grade coal for meeting their domestic fuel obligations. The current cut
off calorific value is about 5100kcal (as per APL the coal from Bunyu is about
5200kcal) and is likely to be implemented from 2014 onward. As these
regulations are still in the drafting stage, we do not reflect the adverse effect of
this regulation in our valuations and earnings estimates. Nevertheless, we
believe this regulation will be a key overhang on the stock.
2. Decline in utilization levels: We believe APL has higher risk of
utilization levels as Gujarat has largely became power surplus and the
utilization levels particularly for Mundra I & II during the off season will get
impacted. As a result, we reduce the utilization levels to about 75%-80%
from earlier estimates of about 80% -85%.
3. Equity dilution from acquisition of minority stake in Tiroda project:
APL’s equity issuance for the purpose of acquiring a 26% stake in the
Tiroda project is dilutive and the consideration paid is at a 42% premium
to our valuation. We now update our earnings estimates to reflect the
dilution.
Since we initiated on Adani Power with a Buy on April 20, 2010, the stock
declined 21.4% vs. a BSE Sensex down 1.7%. We attribute its
underperformance primarily due to concerns on fuel supplies – both
domestic and international and softening of merchant rates
Valuation:
We valued Adani Power on SOTP based FCFE methodology. We reduce
our TP and EPS estimates by 31% and 37%-42% over FY12E-14E primarily
to reflect the above risks. Adani now looks fairly valued both on P/B vs
ROE and DC methodology. Although APL execution of new capacities has
been impressive, we believe the fuel issues for both the Mundra and
Tiroda projects will remain a key overhang on the stock.
Key upside risk includes reduction in coal prices and key downside risk
includes delay in commissioning of capacities under construction and
higher than expected increase in coal prices. On our calculations, a 1%
increase in coal price would lead to a 3% decline in FY12E EPS.

Goldman Sachs, Tata Power (TPWR.BO): Maintain Buy

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Tata Power (TPWR.BO): Maintain Buy
What happened
We reiterate our Buy rating on Tata Power and our 12-month SOTPbased
target price of Rs1436, implying potential upside of about 40%.
Our positive view is based on two key factors:
1. Projects in pipeline not valued into share price: Tata Power
corrected by 24% YTD (underperformed Sensex by 7%). On our
calculations, the correction implies no value for the projects in the
pipeline. We believe the market will start assigning value for those
projects on completion of pre-construction activities.
Even if we were to remove the value of future projects (we estimate
Rs166/share) from our SOTP methodology, we believe the stock would
still be attractive, potentially offering more than 20% yield. We have
included the value of the future projects as there is no uncertainty on
fuel supplies.
We believe current prices imply most of the downside risks from
Mundra project. Any positive news, either in the form of tariff revisions
by beneficiaries of Mundra Project or successful implementation of
using low grade coal, would have a positive impact on the stock.
2. Existing business offers downside protection: With most of the
generation (except Mundra) and distribution assets operating under a
regulated mechanism, we see relatively lower risks for its existing
business. Tata Power earnings and valuation have very low sensitivity to
changes in fuel prices, utilization rates and short-term rates.
Also, with the commissioning of Mundra project, we think its earnings
cyclicality would lessen as falling international coal prices would benefit
the project and vice versa. Although Tata Power has high earnings
sensitivity to coal prices, we believe the impact on valuation would be
limited as Tata Power has significantly underperformed the Indonesian
coal equities from the start of 2011 (Exhibits 34 & 35). A drop in
international coal prices should have a limited impact on its stock price.
Valuation:
We reiterate our Buy rating with a 12-month SOTP-based target price of
Rs1436, implying upside potential of 40%. We value the coal business at
6x FY12E EV/EBITDA.
Key Risks:
The following are three key downsides risks: 1) disclosures during the
2Q results season that suggest greater-than-anticipated losses arising
from Mundra; 2) news flow indicating that Tata Power distribution arms
will be asked by the respective state governments to absorb some
portion of the under-recoveries arising from selling power at lower
tariffs and 3) higher-than-expected rise in costs at Bumi, particularly
deferred stripping costs.

Goldman Sachs, : Utilities - Headwinds continue; Downgrade Adani, Lanco and OGPL to Neutral

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India: Utilities
Equity Research
Headwinds continue; Downgrade Adani, Lanco and OGPL to Neutral

LINKS to company specific reports:

Tata Power (TPWR.BO): Maintain Buy

Adani Power (ADAN.BO): Down to Neutral on higher fuel costs

Lanco Infratech (LAIN.BO): Down to Neutral on lack of +ve catalysts

Orient Green Power (ORIN.BO): D/g to Neutral on execution issues

Reliance Power (RPOL.BO): Sell but removed from Conviction List

Reliance Infrastructure (RLIN.BO): Maintain Neutral

Headwinds remain, more visible; maintain cautious stance
We continue to be cautious on India’s utilities sector, owing to greater
uncertainty over the following three key determinants of earnings: 1)
utilization rates – weak finances of state distribution companies and intra-
/interstate grid constraints; 2) fuel costs – no meaningful steps to improve
domestic coal and gas supplies, and a proposed regulation in Indonesia
that all miners must sell coal at market prices; and 3) short-term rates –
demand for ST power is contingent upon state government’s discretion.
Cut FY12E-14E EPS by avg. 20% and target prices by avg. 25%
Consequently, we update our EPS and TP estimates on higher uncertainty
over earning drivers and are now 21%-23% below Bloomberg consensus for
FY12E-14E. We calculate earnings sensitivity (particularly for IPPs) of 2%-3%
for a 100bp change in utilization levels or fuel costs. Given our expectation of
little/no improvement in the operating environment over the medium term,
we believe earnings and returns for IPPs are likely to remain volatile.
Prefer stocks with upcoming projects not priced in; Buy Tata Power
We look for our coverage sector’s installed capacity to increase by an average
3x by 2014E. While share price corrections (41% YTD for IPPs) already reflect
near-term risk to existing projects, we think those stocks deriving a higher
valuation from upcoming projects are more exposed to a deteriorating
operating environment. We calculate that Tata Power stock is not pricing in
for upcoming projects; also, they have a low sensitivity to changes in
utilization rates, fuel costs, and short-term rates. In contrast, Reliance Power
(Sell) stock derives 60% of its value from future projects.
Downgrade Lanco, Adani Power and Orient Green to Neutral
Despite 77% and 50% ytd correction  in Lanco’s and OGPL’s stock price, we
downgrade both to Neutral based on: 1) lack of significant catalysts in the near
term as both stocks have high leverage to positive sector newsflows, 2) high
gearing (likely to magnify the risk of negative sector data); 3) high sensitivity to
short-term rates and utilization levels. We downgrade Adani to Neutral on
heightened earnings headwinds, particularly fuel costs (due to potential
regulatory changes in Indonesia). Its share price still implies 18% of value from
upcoming projects (based on domestic coal linkage). Valuations looks
reasonable and do not offer protection from downside risks


Adani, Lanco, Orient Green Power Down to Neutral
We continue to be cautious on the utilities sector on account of higher uncertainty in three
operating variables: 1) utilization rates, 2) fuel costs; and 3) short-term rates. Given the greater
uncertainty, we believe earnings will remain volatile and stocks that imply a higher value from
upcoming power projects stand to be more exposed to further deterioration in the operating
environment. Our calculations indicate that Tata Power share price does not reflect value for its
upcoming projects and therefore has a low sensitivity to utilization rates, short-term rates and fuel
costs. We, however, downgrade OGPL and Lanco despite their sharp correction and OGPL’s
higher potential upside, as their share price performance is highly dependent upon positive news
flows on the sector, which we do not expect to see in the near term. We keep our Sell rating on
Reliance Power (but remove it from the Conviction List), as its share price derives about 60% of its
value from upcoming projects.


Underperformance continues, near-term risks more visible
The Indian utilities sector has underperformed the BSE Sensex by 500bp YTD, with the IPPs
in our coverage universe correcting by an average 41%. We believe the market has become
increasingly aware of the risks facing existing utilities projects: falling utilization rating,
higher fuel costs, and weaker short-term rates; as a result, consensus earnings forecasts
have fallen).
 Declining utilization rates – YTD utilization rates have slid sharply, with the
private sector falling 700bp and the central sector dropping 300bp. This is primarily
due to the following: 1) the weak finances of state distribution utilities; 2) shortage of
coal and gas; and 3) intra-state transmission constraints).
 Higher fuel costs – No signs of improved availability of domestic coal and gas
supplies have emerged yet).
 Short-term rates – We look for them to soften, as we enter into seasonally
weaker quarters).


Downgrades of consensus estimates
We cut our earnings estimates by +1% to -69% for FY12E-14E on the following: 1) higher
fuel costs (50% coal from e-auction and imported coal) for capacities based on domestic
coal; 2) lower short-term rates (Rs3.75/kwh versus consensus of about Rs4-4.5/kwh); and 3)
risks to utilization rates (70-80% vs. consensus of 85%). Our new forecasts are 21%, 25%,
and 23% below consensus. However, we anticipate consensus downgrades on greater
visibility of the abovementioned risks, which will likely keep a lid on sector performance.