GAIL buys US shale—a sign of lower domestic capex options? ::Credit Suisse,

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● GAIL on Thursday announced the purchase of a 20% interest in
20,200 acres of Carrizo’s Eagle Ford shale assets for US$95 mn
(US$64 mn upfront; US$31 mn carries). GAIL estimates to invest
of US$300 mn over the next five years, with another 139 wells to
drilled.
● Headline valuation of US$23,515/acre is higher than average, and
13% more than the most recent transaction. While this should be
adjusted for the value of the current output (from eight wells), the
adjustment is likely to be small given development is still in early
stages (and if the wells have been producing for some time).
● A US$95 mn investment (or even US$300 mn) is relatively small
for GAIL. Any positive NPV on the transaction is unlikely to move
the needle on valuations, we think. Expensing of drilling carries
and depreciation charges imply P&L losses can be significant, and
can affect consolidated EPS estimates in the near term.
● GAIL trades at c.2x forward book (5Y average), having de-rated
from 3x recently. While our forecasts suggest RoE can contract to
c.17% (from 20% in FY11), GAIL should have limited downside
and may do well in a weak market. Maintain OUTPERFORM.
GAIL buys shale
GAIL has announced the purchase of a 20% interest in 20,200 acres
of Carrizo’s (CRZO US) Eagle Ford shale assets for US$95 mn
(US$64 mn up front and US$31 mn in drilling carries). This includes
interests in eighit wells that are currently producing 1,700 bopd (gross)
and 3,800 mcfd (gross). 1P reserves are 13.8 mmboe (gross); the JV
plans to drill another 139 wells in the acreage over time. GAIL expects
a total investment of $300mn over the next five years. CRZO will
continue to be the operator, while GAIL hopes to learn shale
technologies for a potential use in India.
On headline, GAIL’s purchase is US$23,515/acre, which appears
higher than the average for Eagle Ford transactions (US$12,000/acre).
This should ideally be adjusted for the value of the current production
(we understand comps are at US$70,000 per flowing boe), but this
acreage is relatively early stage (with only eight wells of the planned
151). The eight wells may not be worth much (especially if they have
been producing for some time). GAIL seems to have then paid well
above average for each Eagle Ford acre.


● A US$95 mn investment (or even total US$300 mn) is relatively
small for GAIL. Any positive NPV on the transaction is unlikely to
move the needle on valuations, we think.
● On back-of-envelope calculations, income from current production
should cover interest costs. GAIL will, however, have to fund nearterm
capex. Depreciation charges (and the expensing of the
drilling carry) can lead to relatively large P&L losses (especially
over the next few quarters), which may reduce GAIL’s consol.
EPS.
● We do not see any ‘fit’ between GAIL’s operations and the US
shale business. GAIL may ‘learn’ shale technology for use in
India—but the Indian shale promise is yet un-established. Even if
India has shale resources, the evolution of a regulatory framework
and issues around land acquisition can delay exploitation.
● CRZO’s presentations suggest net EUR of 300 mboe per well,
which, on 143 remaining wells imply recoverable resources of c.43
mmboe. Peak production rates are likely to be higher. Given the
early stage, the asset carries significant execution and cost
inflation risks, we think.
Lower momentum on core businesses?
The disappointment in domestic gas supplies has derailed GAIL’s
pipeline business momentum. While GAIL still has large ongoing
capex in new pipelines and petrochemicals, such an investment in
shale may imply GAIL is forced to look outside core businesses to
spend its annual cash. GAIL may end up being a larger conglomerate,
which can impact valuations in the long term.
GAIL now trades at c.2x forward book—which is an average for the
last five years, having de-rated from 3x recently (valuations have
bottomed at 1.5x). While our forecasts suggest RoE can contract to
c.17% (from 20% in FY11), GAIL should have limited downside and
may do well in a weak market. Maintain OUTPERFORM.

Coal India: Scrambling for coal :Kotak Sec,

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Coal India (COAL)
Metals & Mining
Scrambling for coal. As per media reports, a panel set up by the Ministry of Steel has
proposed de-allocation of Coal India’s (CIL) coking coal blocks in a bid to increase
availability of the raw material for the steel industry. This follows on the heels of a
similar proposal by the Ministry of Power to ban e-auction of coal to make higher
proportions available for thermal stations that has so far not fructified. Despite the
clutter of negative news flows, we remain optimistic on the medium-to-long-term
prospects of the company aided by modest volume growth, better realizations and
improving operational metrics. Maintain ADD rating with PT of Rs454 (Rs470
previously).


After Ministry of Power, steel ministry suggests radical proposals for increasing availability
As per media reports, a panel formed by the Ministry of Steel for examining infrastructure and raw
material issues for the steel sector has recommended that coking coal mines should be demerged
from CIL and either clubbed into a separate entity or auctioned off. The panel argues that coking
coal production in the country has stagnated owing to CIL’s focus on development and production
of thermal coal and CIL has limited plans to develop coking coal assets in XIIth plan as well. In our
view, the proposal reflects the continuing scramble to make additional coal available akin to the
power sector which previously argued in favor of a ban on e-auction sales. We note that such a
proposal would essentially entail demerger of BCCL which contributed 6.7% of overall production
and ~10% of total PAT in FY2011.
Labor agitation issues further weigh in on sentiments—unlikely to recede until wage settlement
Recent media articles indicate a country-wide strike called by coal unions on October 10, 2011 to
meet their demand of an annual productivity-linked bonus of Rs23,000 as against Rs17,000
offered by CIL. The strike could potentially impact CIL’s production and revenues by 1 mn tons and
Rs1.2 bn, respectively. In our view, CIL will likely continue to remain susceptible to labor agitations
in the near term till such time that the ongoing wage negotiations are conclusively settled.
Maintain ADD with a revised target price of Rs454/share
We maintain our ADD rating with a revised target price of Rs454/share (previously Rs470/share)
adjusting earnings marginally for higher cost of production and effective tax rate. CIL currently
trades at 9X FY2013E EPS (adjusted) and 6X FY2013E EBITDA (adjusted). While the spate of news
flows surrounding the wage negotiation, or proposals from the power and/or steel ministry
scrambling for higher coal availability could weigh on stock sentiment—we remain confident of
the medium-to-long-term prospects for Coal India as it continues to benefit from higher
realizations, sedate despatch growth and improving operational efficiencies that will continue to
propel the earnings growth


Key highlights of Annual Report 2011
We discuss below some other key takeaways of the annual report
􀁠 Volume miss in FY2011 spread across subsidiaries, MCL and NCL lead the pack.
Barring BCCL and to an extent SECL, all other coal-producing subsidiaries of CIL missed
their offtake targets for FY2011 by 8-10% driven by (1) environmental hurdles that
stymied new mine development, (2) infrastructure constraints and (3) law and order
problems in certain coal fields. Mahanadi Coalfields (MCL), also the largest producer,
missed its offtake target by 13% driven by lower rake availibility and law and order
problems in the region. Exhibit 2 below highlights subsidiary-wise targeted volumes and
wagon loading against actual achievement.


Exhibit 1: Our target price is based on 13X FY2012E adjusted EPS
Target price calculation of CIL
EBITDA (Rs bn) 210
OBR (Rs bn) 32
Adjusted EBITDA (Rs bn) 242
Interest income (Rs bn) 57
PAT (Rs bn) 186
Adjusted PAT (Rs bn) 168
EPS (Rs/share) 29
Adjusted EPS (Rs/share) 27
P/E on FY2013E adjusted PAT (X) 13.0
Value of coal business (Rs bn) 2,182
Cash (Rs bn) 688
Market Cap (Rs bn) 2,870
Target price 454
Notes.
(1) Adjusted EBITDA is calculated after removing the effect OBR adjustment.
(2) Adjusted PAT is calculating after removing the effect of
OBR adjustment and interest income net of taxes.
Source: Kotak Institutional Equities estimates



􀁠 E-auction premium drives FY2011 earnings. CIL’s average e-auction realization
jumped to Rs1,846/ton in FY2011 from Rs1,583/ton in FY2010 with premium over
notified prices increasing from 62% to 75% in FY2011. Sale of beneficiated coal
increased 6% yoy to 15.5 mn tons in FY2011 at an average realization of Rs2,203/ton
(Rs2,267/ton in FY2010). 8% yoy jump in raw coal realization was primarily driven by the
impact of price hike in March 2011 as well as higher realization for coal sold through
MoU.
􀁠 BCCL and MCL drive jump in profitability. BCCL and MCL registered a sharp yoy jump
of 56% and 52%, respectively in profitability (EBITDA per ton) in FY2011 driven by a
15% jump in realizations. Increase in realization for BCCL was primarily driven by increase
in price of coking coal (linked to imported prices) while MCL jump was driven by the price
hike in March 2011 which aligned MCL prices to SECL for all grades of coal. Further,
BCCL also benefitted from a strong 18% yoy growth in volumes in FY2011 while WCL
and NCL registered a negative volume growth.


􀁠 Capex and capacity addition. CIL incurred a capex of Rs25.4 bn in FY2011 as against
the original budgeted estimate of Rs38 bn. Capex miss was driven primarily by
environmental concern and more specifically the moratorium imposed by CEPI which
stalled the process of new mine development in FY2011. During the year, CIL completed
six projects aggregating to a capacity of 13.65 mtpa while another eight projects
aggregating to a capacity of 15.88 mtpa commenced contribution to production in
FY2011.

􀁠 Net attrition and improvement in productivity. Total employee count reduced from
396,342 as of March 2010 to 383,347 as of March 2011 implying a net attrition of 3%.
Correspondingly, employee productivity, output per man shift (OMS) increased 6% yoy to
4.73 tons in FY2011. We factor an average net attrition of 2.5% and 6% CAGR in
employee productivity in the FY2011-17E period. Average wages increased 14% yoy in
FY2011 primarily on account of likely inflation in variable dearness allowance linked to
inflation.

Reader Query Answered:: Mutual Fund Talk:: Business Line,

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I have started investing Rs 1000 per month in each of the three funds - HDFC Top 200, DSP BR Equity Fund and ICICI Pru Dynamic through SIP. I wish to have a corpus of Rs 25 lakh for my five-year old son, for his higher studies after 12 years. I want to have your advice on these SIPs, keeping my target in mind. I am ready to change funds or increase the amount, if required. I also want to start investing Rs 2000 per month through SIP for the next five years for purchasing a car worth Rs 5-6 lakh. Please suggest schemes for the same. I am 37 years old.

Vinod Sharma

It is good that you have set yourself goals and the time frame for achieving it. You have not stated when you started your SIPs. We therefore assume that you have just commenced them. The sum that you are currently allocating for your son's education and the amount you intend to invest to buy a car are both inadequate.

EDUCATION PORTFOLIO

Let us first look at the amount needed for education. You have 12 years to reach your target. However, as a matter of precaution we recommend investors to switch systematically to safer debt avenues a year or two before the target date, especially when you have a long-term goal of over 10 years. We shall consider the time available for investment as 11 years in your case. To reach Rs 25 lakh in 11 years you can consider investing Rs 5,000 per month in diversified equity funds that would earn a compounded annual return of 15 per cent and Rs 2,500 per month in a mid-cap fund that would deliver at least 18 per cent per annum. In all, you would need Rs 7,500 per month towards the education portfolio Rs 4,500 more than your current investment.

Do look at whether this is feasible as you would need 7,500 per month (delivering 15 per cent annually) for the next four and a half years to buy a car as well. If the education target appears too stiff, you have one more option. Consider investing Rs 5,000 per month (of which Rs 2,500 can be in a mid-cap fund) and think of upping investment by another Rs 5,500 per month five years from now. This second lot of investment, we assume, will yield 15 per cent per annum for the remaining six years.

This will mean setting aside Rs 5,000 towards your son's education to begin with and Rs 10,500 per month (Rs 5,000 plus Rs 5,500), from the sixth year (2016). Yes, the total outgo will be more if you increase your investment later; simply because early investments, by way of compounding over a longer period, deliver higher returns than investment made late. You need not necessarily increase this after five years; you may gradually step-up savings every year too.

You can hold HDFC Top 200 and ICIC Pru Dynamic. Please review performance of the latter every year and exit if the fund trails its benchmark — Nifty. You can shift from DSPBR Equity to DSPBR Small and Midcap for the mid-cap exposure (of Rs 2,500) that we have built in our return calculation. Please remember that mid-cap funds need to deliver 18-20 per cent annually to make up for the higher risks undertaken.

A year (or earlier if you have reached the target) before your goal, use a systematic withdrawal or transfer plan to shift the sums to short-term debt funds. If interest rates in one-year bank deposits are attractive at that time (say 11-12 per cent), you can also invest a part of this sum in few such deposits.

BUYING A CAR

Moving to your aspiration of buying a car in five years, as mentioned earlier, you will need Rs 7,500 per month to manage Rs 6 lakh, four and a half years from now (use the six months to shift to safe liquid funds or short-term bank deposits).

We are assuming a 15 per cent annual return in this portfolio and not more, given the relatively shorter period of this goal. It is noteworthy that some of the best funds have only managed 12-13 per cent returns in the last five years and the diversified equity category as an average delivered a measly 10 per cent per annum in the same period. We will add a mid-cap fund to your portfolio. Hopefully this will help achieve the 15 per cent annual return mark.

You can hold HDFC Equity, Fidelity Equity and IDFC Premier Equity in this portfolio. You do not have much leeway here to tinker with the quantum of savings needed for the goal, given the five-year time period. You may at best postpone your goal if you are unable to spare any surplus or go for a car loan for part of the car value, provided you can comfortably pay the EMI.

JSW Steel: Production down to 30% as new directive exacerbates supply problems:

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JSW Steel (JSTL)
Metals & Mining
Production down to 30% as new directive exacerbates supply problems. JSW
Steel has scaled down capacity utilization from its 10 mtpa Vijaynagar steel plant to
30% after (1) the Supreme Court directed NMDC to sell iron ore produced in Karnataka
through e-auctions despite NMDC’s long-term supply agreement with JSW and (2)
minimal dispatch of iron ore sold through the e-auction route due to procedural delays.
Continued problems with iron ore supply can lead to a further cut in our earnings
estimates. SELL.


Iron ore availability worsens and impacts production
JSW issued a press release indicating that it has scaled down its Vijaynagar plant capacity
utilization to 30% from the planned 80%. JSW is the second largest domestic steel player with
crude steel share of production of 10% in FY2011 and is a large player in the flats segment. JSW
cited several reasons for its scale back:
􀁠 The Supreme Court’s directive to sell iron ore produced by NMDC in Karnataka through
the e-auction route irrespective of the long-term contracts. NMDC has a long-term supply
agreement and was selling ~10K tonnes of iron ore (~25% of iron ore sourcing after the
Supreme Court’s decision to ban mining in Bellary region of Karnataka) to JSW. JSW’s press
release mentions that “disruption of supplies by NMDC cut the lifeline to run the furnaces in
safe condition”. We presume JSW will continue sourcing 7-10K of iron ore from Bailadila mines
(Chattisgarh) of NDMC.
􀁠 Procedural delays. JSW’s press release mentions that Supreme Court’s decision to sell 1.5 per
mn tonnes per month from iron ore stockpiles through the e-auction route has been ineffective
due to (1) overpricing of low grade fines, which led to 31% of iron ore remaining unsold and
(2) of the 69% iron ore auctioned, only 10% has been dispatched due to procedural delays.
We model 7.6 mn tonnes of crude steel production in FY2012E; the company produced 2.9 mn
tonnes during Apr-Aug 2011. The company would have to produce 665k tonnes of crude steel/
month for the remaining seven months to meet our FY2012E estimates. Our estimates are at
risk if the current iron ore sourcing challenges remain unresolved.
Maintain SELL rating
JSW currently trades at 6.5X FY2012E EBITDA with a high downside risks to our estimates. Even if
the current issues of mining and iron ore availability are resolved, iron ore sourcing may increase
on sustainable basis and impact profitability and return ratios. In addition, high leverage may also
play spoilsport. We maintain our SELL with end-FY2013E target price of Rs660/ share.

IPOs: Grey Market Premium: RDB Rasayan Tijaria Polypiles Indo Thai Securities Flexituff International Taksheel Solutions Onelife Capital Advisors M And B Switchgears Swajas Air Charters

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Company Name	Offer Price (Rs)	Expected Listing Price Premium
Vaswani Ind.	52	Discount
Prakash Constrowell	138	Discount
RDB Rasayan	72 to 79	Discount
Tijaria Polypiles	60	Discount
Indo Thai Securities	70 to 84	Discount
Flexituff International	145 to 155	10
Taksheel Solutions	130 to 150	Discount
Onelife Capital Advisors	100 to 110	Discount
M And B Switchgears	180 to 186	Discount
Swajas Air Charters	84 to 90	Discount

Prakash Constrowell Ltd IPO to list on Oct 4 (Tuesday)

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Prakash Constrowell Ltd IPO to list on Oct 4 (Tuesday)

IPO price fixed at Rs 138

Click link below for

IPO Grey Market Premium

IFCI Infra Structure Bonds (80CCF) Issue Open: Save Tax; Good Interest rate

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IFCI Infra Structure Bonds (80CCF)
Issue Opens: 5 Sept 2011
Issue Closes: 14 Nov
Issue Size: 200000 Nos. with Green Shoe option on over subscription

Basic Terms of Issue:

Interest Payment Frequency: Cumulative & Annual
Face value: (Rs./Bond) 5,000/
Minimum Application: One Bond
In Multiples of One Bond
Buy Back Option: Yes
Tenure: 10 Yrs. & 15 Yrs.
Coupon: 8.50 % per annum & 8.75% per annum


Buyback Date: December 12 of the Calendar years 2016 & 2018 (on 10 yrs term)
Buyback Date: December 12 of the Calendar years 2018, 2021 and
2023 (on 15 yrs term)

Buy Back Intimation Period:
August 12 to September 11 of Calendar years 2016 and
2018. (10 Yrs term)
August 12 to September 11 of Calendar years 2018,
2021 and 2023. (15 yrs Term)

India Market Strategy - Testing times ahead for commitment to lower inflation ::Credit Suisse,

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● We believe the government and RBI’s commitment to control
inflation will be tested in the next two months.
● The Rs528 bn increase in FY12 government borrowing target
does not incorporate any change in the fiscal deficit target and
only reflects a miss on small savings. CS deficit estimates are
significantly higher than the government’s. Deficit in the first four
months was already 55% of FY12 targets, versus ~40% in normal
years (Fig 2), and ahead of even CS expectations.
● In the first five months, due to higher refunds, direct tax inflows
are only 18% of the FY target – it has been lower only in years
where the economy was accelerating (Fig 3). This has so far not
affected either bond yields or strained credit growth. However, this
is largely due to the strong 2H seasonality (Figure 4).
● Even using the government’s target borrowings and 17% deposit
growth, for credit growth to be more than 11% (9% on CS deficit
estimates), RBI would have to buy government bonds, i.e. ‘print
money’. This is likely to perpetuate the inflation problem (see our
note Inflation: closing one tap is not enough for details).
Figure 1: Increase in borrowing in spite of unchanged fiscal deficit target
Rs bn
Gross borrowing target in the Budget 4,170
Net borrowing target 3,428
Total redemption due in 2011-12 742
Gross borrowing in H1 (concluded) 2,500
Gross borrowing in H2 (revised on 29 Sep 11) 2,200
=> Expected gross borrowing in FY12 4,700
=> Expected net borrowing in FY12 3,958
=> Increased borrowing 528
Source: RBI, Bloomberg, Union Budget
The Government has released its 2HFY12 borrowing calendar,
increasing its FY12 borrowing target by Rs528 bn (Figure 1). This is
driven purely by funding changes (drop in collections through small
savings schemes), as the fiscal deficit targets remain unchanged.
CS estimates for FY12 fiscal deficit are substantially higher than the
government’s – fiscal deficit in the first four months of this year was
55% of the FY target, when normally it is in the 40% range (Figure 2).
Further, in the first 5 months, given higher refunds, the government
has so far collected 18% of the budgeted direct tax target (Figure 3).
This has so far not affected either bond yields or strained credit
growth (up 20% YoY YTD). But this is largely due to the strong 2H
seasonality (Figure 4): from 31-Mar to Aug-end deposits are up 5.4%,
while credit growth is 2.6% (seasonal 3.7%). Assuming 17% YoY
deposit growth for the banking system, and government’s revised
targets, we estimate the RBI may have to conduct open market
operations (OMO) to buy government bonds, i.e. print money again if
credit growth has to be anywhere higher than 11% in FY12 (Fig 5). If
CS borrowing numbers apply, the ‘no OMO’ credit growth rate would
be 9%.

Larsen & Toubro: Better risk-reward; capex cycle, inflow quality & competition concerns continue::Kotak Sec,

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Larsen & Toubro (LT)
Industrials
Better risk-reward; capex cycle, inflow quality & competition concerns continue.
The recent correction provides improves the risk-reward tradeoff (standalone at 13.5X
FY2013E P/E); nevertheless, we retain our REDUCE rating due to (1) weak capex cycle,
(2) quality of inflows (Rs200 bn+ may not be ready for execution) and (3) potential
disappointment (execution and margins) in near-term earnings, (4) increasing
competition across sectors. Inflow guidance is not key; quality (ready, margins and
Wcap) is key.


Much better risk-reward post recent correction; prices in reasonable stress case
The recent price correction (down 17% in the past three months) provides a better risk-reward
tradeoff for L&T. L&T (at Rs1,450/share, adjusted for Rs440/share for value from subsidiaries) is
trading at relatively attractive valuation of 13.5X FY2013E standalone EPS. At about Rs1,450, the
stock seems to price in a reasonable stress case scenario with standalone EPS of about Rs70 for
FY2013E at 15X P/E and subsidiaries valuation of Rs400/share (both 10% lower than our base
case). This EPS would result from 15% revenue growth in FY2013E post 19% in FY2012E and a
steep total of 180 bps margins drop in two years.
Inflow growth guidance may not be as important; quality (ready, margins, working capital) is key
There is some apprehension about L&T’s guidance at the end of 2Q, however, we would not be
overly concerned if guidance is lowered, as even flat (Rs800 bn) ordering would be enough to
maintain growth momentum. Execution readiness, margins and working capital are more
important for the order inflows. E.g. about Rs200 bn+ of orders in the past two years may not be
execution ready, apart from about Rs206 bn of orders from commercial and residential real estate.
There is a marginal risk of L&T downgrading revenue growth guidance from 25% as in FY2007
and FY2010, if on-ground execution is slower based on review of its business units performance
before 2Q results.
Retain REDUCE on weak capex cycle, potential disappointment and increasing competition
Our outlook for the stock is less negative, however, we are constrained to retain our REDUCE
rating on account of (1) weak capex cycle as reflected in various variables, (2) quality of order
booking (Rs200 bn+ may not be ready for execution), (3) potential disappointment in near-term
earnings performance versus reasonably high expectations, (4) potential for sharper-than-expected
margin contraction and (5) increasing competition across sectors along with clients breaking orders
in small parts reducing L&T’s size advantage. We revise our standalone (consolidated) estimates to
Rs69.3 (Rs79) and Rs77.1 (Rs91.7) from Rs69 (Rs79.6) and Rs82 (Rs98.2) for FY2012E and
FY2013E and correspondingly revise our target price to Rs1,625/share (from Rs1,800/share).


Order inflow growth may not be as relevant, while quality of inflows is key
We believe concerns related to potential miss of order inflow growth guidance may not be
as relevant. Even if the company reports no growth in order inflows in FY2012-13E (implying
inflows of about Rs800 bn each year), this would be sufficient to maintain a revenue growth
momentum of about 15-20% over the same period. The quality of order inflows (in terms of
potential margins, client profile etc) would be a more important factor to watch.
We build in relatively low order inflow growth assumption of only 2% in FY2012E versus
management guidance of 10-15% growth and about 7% in FY2013E.


Several orders may not be ready for execution in the near term
We note several orders to the tune of about Rs200 bn which may not be ready for execution
in the near term. These include in-house development projects such as Hyderabad Metro
project, BPP Tollway and Rajpura thermal power plant. Power equipment/ EPC orders (thirdparty)
may also face some delays as the sector is wrought with several challenges such as
environmental clearance issues, coal linkages etc.


Rs137 bn+ (about 15%) order inflows in FY2011 and FY12E have come in from the
industrial and commercial buildings segment, wherein execution may be slower than
expected.


Order inflows just about keeping pace
L&T has announced orders to the tune of about Rs40 bn post 1QFY12-end which leads to
total order inflows of about Rs210 bn in FY2012 so far (reported inflows of Rs162 bn in
1QFY12 + announcements post 1QFY12). These inflows were primarily led by the industrial
& commercial buildings segment, which contributed about Rs32 bn of the total inflow
announcements. The company had also seen a pick-up in the international segment in
1QFY12 with order inflows (power T&D) from several Middle East geographies.
Note that L&T only announces its large orders and hence actual order inflows in 1QFY11 are
likely to be higher.


Stock prices reasonable stress case on earnings; could undershoot fair value
At about Rs1,450, the stock seems to price in a reasonable stress case scenario with
standalone EPS of about Rs70 for FY2013E at 15X P/E and subsidiaries valuation of
Rs400/share. Both these estimates are about 10% lower than our base case. This EPS would
result from 15% revenue growth in FY2013E post 19% in FY2012E and total of 180 bps
margins drop in two years. Rs400 of subsidiary valuation implies 2.7X the value of FY-11-
end invested equity in various subsidiaries.
This is versus our base case assumption of Rs77 EPS in FY2013E (implying a value of
Rs1,157/share based on 15X FY2013E EPS) and subsidiary valuation of Rs439/share.

BUY Apollo Tyres: Inroads across the world: Kotak Sec,

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Apollo Tyres (APTY)
Automobiles
Inroads across the world. Apollo is a leading company in the Indian tire industry with
a consistent market share of 21% in the past six years. The company is preparing to
reap domestic growth with capacity expansion even as it ensures a global role for itself
with two acquisitions—Apollo is well-placed to grow its export business by leveraging
its low-cost production base. We initiate coverage on the stock with a BUY rating and a
target price of Rs85 (at 8.5X FY2013E EPS). At our target price, the stock will quote at
0.9X FY2013E book value and 5.2X FY2013E EBITDA.

Bharat Electronics: FY2011 AGM: Business as usual, some useful data points ::Kotak Sec,

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Bharat Electronics (BHE)
Industrials
FY2011 AGM: Business as usual, some useful data points. BEL is confident of nearterm
execution based on its progress in execution FY2011 large orders and highlighted
incremental ordering (possibly Rs77 bn in FY2012 plus Rs50 bn already won). Key
points: (1) some caution about margins based on higher project share competition
(though we do not see order wins for the private sector in defense), (2) Rs100 bn sales
target pushed to 2015E (18% CAGR) and (3) 12-14% EBITDA CAGR possible as
revenues double and margins contract 200-300 bps over the next four years. Retain
ADD.


Confident of near-term execution; Rs100 bn sales target pushed to 2015 in line with estimates
The company appeared confident of achieving its FY2012E MOU target of Rs62 bn on (1) large
backlog (Rs236 bn at end-Mar-11 and Rs260 bn at August-end), (2) strong incremental ordering
expectations (Rs77 bn for 2HFY12) and (3) execution progress on new orders in FY2011. However,
it has pushed the Rs100 bn FY2013E sales target by two years (18% CAGR), which is not
surprising as we build in Rs74 bn as FY2013E sales. BEL also recounted execution issues of
customer acceptance of deliveries etc.
Cautious on margins: higher competition (no news of order wins for private sector), project share
The company highlighted intensifying competition (Tata, Mahindra and others seem to be
increasing investments in defense). We remain doubtful of much private sector impact as there
have been no big orders in favor of the private sector from defense recently, going by public data.
The contribution margin may decline on higher project share (65% in future versus 35%). We
expect the decline in margin to be mitigated by operating leverage gains as projects business
scales up. A potential doubling of sales with 200 bps EBITDA margin fall (8-10% at contribution
level) over FY2011-15E would still imply a 12-13% CAGR in EBITDA. We note that FY2011
margins remained stable at 16% even though large system orders such as Akash, Rohini and
Shakti have contributed about half of FY2011 revenues.
Shares order-wise execution (large orders have impressive execution), revenue mix, incr. orders
􀁠 1/3 of FY2011 large orders executed. The company listed Rs106 bn of FY2011 orders (Rs84
bn from Akash, Rohini radar and Shakti orders), of which about Rs40 bn was executed in
FY2011 - including from large orders. This validates near-term execution targets.
􀁠 Rs77 bn incremental orders likely. The company provided details of Rs77 bn worth of
incremental orders that may come in over the next few months

􀁠 Shares revenue mix - radars contributed 25% of annual business. BEL shared breakup
of FY2011 revenues which reveals that radars contributed 25% of business in FY2011.
􀁠 August-end backlog is Rs260 bn versus Rs236 bn at March-end. BEL shared that
order backlog at the end of August 2011-end stands at Rs260 bn versus Rs236 bn at the
end of March, 2011.
􀁠 Debtor days improve by 68 days. The company cited that end-2011 debtor days (192)
suffered from Rs4 bn impact from delay on Coastal Surveillance order and has corrected
since then. This may have improved working capital further which was already –ve 149
days of sales.
􀁠 Foreign technology providers (22% of business) demand JV. BEL indicated foreign
technology developers now ask for JVs and not just order share as earlier. In the attempt
to win half the order rather than none, BEL may eventually agree to such tie-ups.
Reiterate ADD on acyclical demand, attractive valuations; caution on execution,
lack of data points
We retain our estimates and reiterate ADD (TP:Rs1,875) on (1) acyclical and growing defense
spending, (2) attractive valuations (11XFY2013E), (3) strong cash position (Rs800/share -
Rs360/share even assuming 100 days of normative working capital) as well as incremental
cash generation characteristics (negative working capital and marginal capex), (4) large
unexecuted backlog (Rs260 bn as of end-Aug-11), and (4) potential scale up of project
business opportunity. Risks originate from near-term execution issues leading to negative
earnings surprise and lack of publicly available data points.
Our FY2013E estimates build in almost 400 bps contribution margin drop and 80 bps
EBITDA margins drop as employee and other expenses provide operating leverage on
growing revenues (16% yoy growth in both FY2012E and FY2013E).

Unitech – Upgrade on underperformance::RBS

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The CBI's partial exoneration of Unitech Wireless in the 2G spectrum scam is positive, but
Unitech is still charged with being ineligible to receive a 2G licence. Unitech's debt reduction plan
through asset sales seems aggressive; execution and balance sheet remain concerns. We
upgrade to Hold after underperformance.


Some positive developments…
Unitech faces liquidity pressure due to ongoing sector headwinds as well as one of its promoters,
Sanjay Chandra, being in prison for more than five months as part of the 2G wireless spectrum
allocation probe. To overcome this, Unitech is launching new projects at attractive prices to
achieve faster monetisation (such as Anthea Floors in Gurgaon, which booked Rs3.5bn sales via
450 bookings, as per The Economic Times). Also, the company gained a reprieve in the 2G
investigation after the Central Bureau of Investigation’s (CBI) public prosecutor informed the
special court that there was no evidence of a ‘quid-pro-quo or a money trail’ between Unitech
Wireless (the telecoms arm of Unitech) and former telecom minister, A Raja (The Economic
Times, 30 Aug 2011).
…but share overhang persists
Wireless woes and the size of its debt burden have been key overhangs on Unitech shares.
Unitech is still charged with being ineligible to receive a mobile permit (issues surround stipulated
paid-up capital/net worth and inability to meet main object clause in Memorandum of
Association). To tackle its debt, Unitech has announced a target to reduce existing debt
(Rs56.5bn) by 10-15% every year via land sales and investments in IT SEZs and IT Parks (60%
owned by Unitech Corporate Park). We believe this remains a challenge. We highlight that
Unitech has been selling its assets (Saket office, hotels, retail mall and land) since 2009 as a part
of its de-leveraging strategy, which in our view leaves it with few monetisable assets other than
land. Unitech’s high level of debtors (up 70% in FY11 to Rs21.5bn), also highlighted by the

auditors, and the slow pace of ongoing project execution remain concerns. It has delivered only
11.7msf of projects launched before March 2009, and the remaining 12.2msf are still at various
stages of construction.
Upgrade to Hold after significant underperformance
We factor in sector headwinds and cut earnings estimates by 16%/8% for FY12F/13F, resulting in
a revised DCF-based TP of Rs28 (applying a 40% discount for execution risk) for its real estate
business, down from our earlier TP of Rs30. Unitech’s 38% underperformance ytd vs the Sensex
causes us to think further downside is limited. Thus, we upgrade to Hold.

Goldman Sachs:: Analyzing currency fluctuation impact on India/ASEAN telcos; Buy Bharti.

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Analyzing currency fluctuation impact on India/ASEAN telcos
Major foreign currency exposure for telcos is on debt and capex
In this report, we highlight the impact of Asian currency movements on
operators’ debt /capex and hence on earnings/valuations for our coverage.
Our analysis indicates that telcos earnings are not materially impacted (2%-
4% downside on average assuming 10% depreciation) as the majority of
their revenues/costs are in local currencies and any MTM (mark-to-market)
impact due to currency fluctuations on debt (45% of total debt in our
coverage is foreign debt) is mainly taken through the balance sheet. The
impact on FCF is 5%-11% as the majority of capex (c. 90%) is dollar
denominated. Our implied values on avg. decline 1%-5% with major impact
being on Indian telcos as a larger potion of their debt is unhedged.
Bharti/RCOM impacted more; ASEAN telcos are better positioned
Amongst Indian telcos, we find Idea as the best positioned operator (our
top pick in Indian telcos) given relatively lower forex exposure and Bharti/
RCOM as more impacted as they have higher un-hedged debt. We est. the
impact of 10% depreciation to be 9.8%/5.5% for RCOM/Bharti on implied
values and 1.9% for Idea. While ASEAN telcos are currently not seing
major currency fluctuations (although IDR, THB, PHP have depreciated
3.8%/4.0%/3.9% in the last 1 month), we see the impact to be limited even if
the local currency depreciates as the proportion of foreign debt is low and
the majority of their debt is hedged. In fact, an operator like PLDT benefits
on revenue/EBITDA due to a depreciating local currency as c. 26% of its
revenues (majority of them being BPO) are USD denominated, assuming
no negative impact from US slowdown. In ASEAN telcos, we find AIS and
DTAC as best positioned operators for any adverse currency movement
given very low foreign unhedged debt and est. a 7.5%/4.9% negative
impact on our implied values of Indosat/XL if IDR depreciates 10% vs. US$.
We est. impact of fluctuations on Bharti’s implied value to be 5.5%
We note that the majority of the forex impact of c. US$ 10 bn debt will be
reflected through the balance sheet (and not P&L) as per the IFRS
accounting policy – thus reducing impact on earnings. The impact of recent
currency movements on FY12E earnings is Rs 8.0 bn or 12.9% of EPS and
5.5% on our implied value. We note Bharti’s stock price is down 15.0% (vs.
Sensex down 11.7%) since INR started depreciating (early-Aug) and
therefore think that currency impact has been largely factored into the
current stock price. Reiterate Buy on Bharti.

HDIL – Focus shifts to non-SRS projects::RBS

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MIAL, a Slum Rehabilitation Scheme (SRS) project, continues to face delays. HDIL is shifting its
focus to non-SRS projects, eg, FSI sales and development of residential projects. We keep our
Buy, but reduce our TP to Rs160 (from Rs225) and our forecasts due to approval delays in
Mumbai, where HDIL is a key player.


Focus shifts to non-SRS projects in the near term
HDIL has shifted its focus to non-SRS projects – such as Floor Space Index (FSI) sales and
development of residential projects – due to the delay in the Mumbai International Airport (MIAL)
SRS project, from which HDIL used to generate Transfer of Development Rights (TDR) by
building housing units for slum dwellers. Given the headwinds in the Mumbai real estate market,
TDR sales volumes and prices have declined post 3Q11. This shift of focus to FSI sales has
helped HDIL maintain sales and cash flow momentum. However, given the liquidity crunch,
developers that are buying FSI might stagger payments on their purchases. According to press
reports (The Economic Times, 19th September), HDIL is close to selling FSI in Virar (on the
outskirts of Mumbai) worth Rs3bn, and in Goregaon (in suburban Mumbai) for Rs1.7bn, which
would support sales momentum in the near term, in our opinion.
Revenue recognition from residential projects should begin by late FY12/early FY13
With longer-than-expected approval delays on slum redevelopment projects, we have already
seen HDIL disclose its development pipeline in the residential segment. Policy changes across
product segments in Mumbai are resulting in slowing sales volumes and approval delays in these
projects. However, HDIL, which uses the project completion methodology for revenue recognition,
is likely to start recognising revenues because few of HDIL’s projects (launched in 2009) are
nearing completion. That said, we anticipate pressure on cash flows because recognising profits
on sold projects would result in tax outgo.
We factor sector headwinds into our model and cut TP by 29%; Buy on valuation
We maintain our Buy rating, but cut our forecasts and TP due to approval delays in Mumbai,
where HDIL is a key player (as 60% and 87% of its Gross Asset Value is from Mumbai and
Mumbai Metropolitan Region (MMR) respectively). We cut our FY12F and FY13F earnings by
12% and 10%, respectively. We roll forward our valuations to FY13F and fine tune our SOTPbased
TP to Rs160 – derived from Rs47/share for MIAL (post 70% execution risk discount),
Rs176/share for non-MIAL projects (post 25% execution risk discount) and Rs31/share for its new
redevelopment projects (1x investment cost), reduced by Rs94/share for debt. Buy on attractive
valuation.

DLF Ltd – Asset sale to start deleveraging::RBS

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Press reports suggest that monetisation of about Rs30bn from the sale of DLF's assets are under
way, which should help the company partially reduce its net debt by year-end. While 2Q12
remains muted in terms of launches and sales, we expect the company to achieve momentum in
2H12 (festival season). Buy.


Asset sale likely to start deleveraging
Press reports (The Economic Times, ET) suggest that non-core asset monetisation worth Rs30bn
is visible in the next six months, which would partially reduce DLF’s high net debt (Rs227bn as of
30 June 2011). This is in line with the company’s guidance of reducing debt to the extent of Rs60-
70bn in next two to three years. As per various press reports, the assets up for sale include: 1)
the sale of the Pune IT SEZ (in which DLF has about a 70% stake) for Rs8-9bn (ET, 13
September 2011); 2) the sale of the Noida IT Park (in which DLF has about a 70% stake) for Rs4-
5bn (ET, 21 September 2011); 3) the sale of a 28-acre property in Gurgaon for Rs4bn (ET, 19
August 2011); and 4) the sale of Aman Resorts for Rs18bn (ET, 20 September 2011). Further,
there are press reports (ET, 13 September 2011) that DLF is looking to sell its Lower Parel
property in Central Mumbai at Rs25bn-40bn.
Sales seemed subdued in 2QFY12, but we expect momentum in 2H (festival season)
Given the slowdown in demand and, hence, volumes, DLF to date has not been able to
launch/sell plot developments as it expected in Lucknow and Panchkula this quarter. We believe
this could slow the earnings run rate in 2Q. That said, we now expect the proposed launches and
sales to happen during the festival season (Oct-Dec 2011), enabling DLF to improve operational
cash flows during 2HFY12.
CCI’s potential fine and tax on IT SEZs remain overhangs
The Competition Commission of India’s (CCI) recently fined DLF Rs6.3bn for “abuse of dominant
position”, which DLF has challenged and remains confident of a favourable resolution. During
1QFY12, DLF received an income tax demand notice of Rs5.5bn (in addition to Rs11.6bn in
FY11) related to the sale of IT SEZs to DAL (DLF Assets Ltd), which is a concern. However, DLF
is confident of a favourable resolution on this too.
Maintain Buy owing to DLF’s focus on deleveraging
Given global headwinds, we reduce our asset monetisation assumption from Rs45bn to Rs30bn,

resulting in a new SOTP-based target price of Rs260/share (from Rs270), which is based on our
FY13F DCF valuation of Rs214/share (post a 10% discount to GAV) for its land bank and
Rs46/share for completed leased assets (60% share). We maintain our Buy rating.

India Telecoms Sector--What is behind falling net adds? ::Credit Suisse,

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● Monthly net adds data have never been stock market movers
historically for Indian telcos (and this is still the case). However,
the sharp and sustained falls in net adds recently have raised
some investor concerns, and warrant a careful review.
● We believe that the key reason behind the volatility of reported net
adds is the high churn rates the companies are facing. Indian
companies’ ‘net adds margins’ are among the lowest across the
world.
● In this context, the 46% drop in net adds for Bharti between June
and August could have been driven by: (1) a 6% drop in gross
adds or (2) a seemingly immaterial 50 bp increase in churn from
6.4% to 6.9%.
● We believe that a part of net add falls could get reversed as we
move out of the seasonally weak September quarter. Changing
competitive dynamics and operator strategies could have an
impact on net adds for a longer time. However, we believe that the
underlying growth trajectory remains intact. We retain
OUTPERFORM ratings on Idea and Bharti.
Figure 1: Monthly net adds—Indian telecoms
Net adds (mn) Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug
2010/11
Bharti 2.0 2.0 3.0 3.1 3.1 3.3 3.2 3.2 2.4 2.5 2.1 1.5 1.2
Reliance 2.0 2.0 2.0 3.0 3.3 3.2 3.3 3.5 2.9 2.5 2.1 1.5 1.3
Vodafone 2.3 1.8 2.5 3.1 3.1 3.1 3.6 3.6 2.4 2.4 2.1 1.5 1.1
BSNL/MTNL 2.3 2.3 2.4 3.0 3.0 2.1 1.5 1.5 0.2 0.9 0.9 1.4 0.4
Idea 2.0 1.5 1.8 2.8 3.0 2.5 2.5 2.7 2.5 1.8 1.4 1.0 2.3
Tata Tele 2.1 2.1 1.7 1.8 1.6 1.8 1.6 1.5 1.2 0.4 0.2 -2.7 0.2
Aircel 1.6 1.6 1.0 1.2 1.4 1.7 1.7 1.3 1.1 1.1 0.9 0.6 0.6
Others 3.9 3.7 4.5 4.8 4.1 1.2 2.8 2.7 2.6 1.8 1.7 1.8 0.3
Total 18.2 17.1 19.0 22.9 22.6 19.0 20.2 20.2 15.3 13.4 11.4 6.7 7.5
Note:Aug-11 CDMA subs for BSNL/MTNL assumed same as Jul-11; Source: TRAI,
COAI, AUSPI.
Sharp declines in net-adds
Subscriber net additions in the India telecoms sector have seen sharp
declines in recent months, with industry net adds falling by nearly twothirds
between January and August 2011.
High churn = volatile net adds
Indian operators are experiencing among the highest churn rates
across the world. In our view, this induces a high degree of volatility
into net adds (net adds = gross adds – churn). If we define the ratio of
net adds to gross adds for an operator as ‘net adds margin’, Indian
operators have among the lowest net add margins across global
telcoms. This is analogous to a company with a high cost base and a
low profit margin—small changes in revenues or costs could lead to
wide swings in profits.
With this perspective, we can see that:
● The 46% drop in net adds for Bharti between June and August
2011, could have been driven by either (1) a 6% drop in gross
adds with churn being constant or (2) a seemingly immaterial 50
bp increase in churn from 6.4% to 6.9%, with constant gross adds.
● The 72% increase in net-adds for Idea between June and August
2011 could be driven by (1) a 12% increase in gross adds or (2) a
130 bp drop in churn from 9.7% to 8.4%.


A combination of gross adds and churn could be factors
We believe a combination of factors is at play in India:
1) A fall in gross adds due to changing operator priorities in urban
markets where SIM card penetration is high (~160%)—from
selling SIM cards to growing revenue earning customers (RECs).
2) A fall in gross adds due to seasonal weakness in the September
quarter (see our last year’s note on this topic dated 21
September 2010). Bharti’s net adds fell 25% from June 2010
quarter to September 2010 quarter, only to recover completely by
December 2010 quarter. The higher swing in 2011 could be
explained by the (higher churn and corresponding) lower ‘net
adds margin’ versus the previous year—from 28% in June 2010
to 16.5% in June 2011. This is akin to a fall in profit margins in
our company analogy, leading to greater volatility in profits.
3) An increase in disconnections as operators focus on weeding out
inactive SIM cards (in the wake of TRAI publishing active VLR
subs data every month). We note that 12 out of 14 operators
showed an increase in the percentage of VLR in July 2011—
indicating an industrywide effort.
Factor 2 above is a seasonal issue, and the impact should reverse
from October 2011 onwards. The other two factors are symptomatic of
the changing competitive landscape in the country, and could linger
for a few more months (with a potential positive impact on ARPU—
independent of tariff hikes). However, we believe that these are not
indicative of a sharp fall in the sector’s secular growth.

India Telecoms Sector--What is behind falling net adds? ::Credit Suisse,

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● Monthly net adds data have never been stock market movers
historically for Indian telcos (and this is still the case). However,
the sharp and sustained falls in net adds recently have raised
some investor concerns, and warrant a careful review.
● We believe that the key reason behind the volatility of reported net
adds is the high churn rates the companies are facing. Indian
companies’ ‘net adds margins’ are among the lowest across the
world.
● In this context, the 46% drop in net adds for Bharti between June
and August could have been driven by: (1) a 6% drop in gross
adds or (2) a seemingly immaterial 50 bp increase in churn from
6.4% to 6.9%.
● We believe that a part of net add falls could get reversed as we
move out of the seasonally weak September quarter. Changing
competitive dynamics and operator strategies could have an
impact on net adds for a longer time. However, we believe that the
underlying growth trajectory remains intact. We retain
OUTPERFORM ratings on Idea and Bharti.
Figure 1: Monthly net adds—Indian telecoms
Net adds (mn) Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug
2010/11
Bharti 2.0 2.0 3.0 3.1 3.1 3.3 3.2 3.2 2.4 2.5 2.1 1.5 1.2
Reliance 2.0 2.0 2.0 3.0 3.3 3.2 3.3 3.5 2.9 2.5 2.1 1.5 1.3
Vodafone 2.3 1.8 2.5 3.1 3.1 3.1 3.6 3.6 2.4 2.4 2.1 1.5 1.1
BSNL/MTNL 2.3 2.3 2.4 3.0 3.0 2.1 1.5 1.5 0.2 0.9 0.9 1.4 0.4
Idea 2.0 1.5 1.8 2.8 3.0 2.5 2.5 2.7 2.5 1.8 1.4 1.0 2.3
Tata Tele 2.1 2.1 1.7 1.8 1.6 1.8 1.6 1.5 1.2 0.4 0.2 -2.7 0.2
Aircel 1.6 1.6 1.0 1.2 1.4 1.7 1.7 1.3 1.1 1.1 0.9 0.6 0.6
Others 3.9 3.7 4.5 4.8 4.1 1.2 2.8 2.7 2.6 1.8 1.7 1.8 0.3
Total 18.2 17.1 19.0 22.9 22.6 19.0 20.2 20.2 15.3 13.4 11.4 6.7 7.5
Note:Aug-11 CDMA subs for BSNL/MTNL assumed same as Jul-11; Source: TRAI,
COAI, AUSPI.
Sharp declines in net-adds
Subscriber net additions in the India telecoms sector have seen sharp
declines in recent months, with industry net adds falling by nearly twothirds
between January and August 2011.
High churn = volatile net adds
Indian operators are experiencing among the highest churn rates
across the world. In our view, this induces a high degree of volatility
into net adds (net adds = gross adds – churn). If we define the ratio of
net adds to gross adds for an operator as ‘net adds margin’, Indian
operators have among the lowest net add margins across global
telcoms. This is analogous to a company with a high cost base and a
low profit margin—small changes in revenues or costs could lead to
wide swings in profits.
With this perspective, we can see that:
● The 46% drop in net adds for Bharti between June and August
2011, could have been driven by either (1) a 6% drop in gross
adds with churn being constant or (2) a seemingly immaterial 50
bp increase in churn from 6.4% to 6.9%, with constant gross adds.
● The 72% increase in net-adds for Idea between June and August
2011 could be driven by (1) a 12% increase in gross adds or (2) a
130 bp drop in churn from 9.7% to 8.4%.


A combination of gross adds and churn could be factors
We believe a combination of factors is at play in India:
1) A fall in gross adds due to changing operator priorities in urban
markets where SIM card penetration is high (~160%)—from
selling SIM cards to growing revenue earning customers (RECs).
2) A fall in gross adds due to seasonal weakness in the September
quarter (see our last year’s note on this topic dated 21
September 2010). Bharti’s net adds fell 25% from June 2010
quarter to September 2010 quarter, only to recover completely by
December 2010 quarter. The higher swing in 2011 could be
explained by the (higher churn and corresponding) lower ‘net
adds margin’ versus the previous year—from 28% in June 2010
to 16.5% in June 2011. This is akin to a fall in profit margins in
our company analogy, leading to greater volatility in profits.
3) An increase in disconnections as operators focus on weeding out
inactive SIM cards (in the wake of TRAI publishing active VLR
subs data every month). We note that 12 out of 14 operators
showed an increase in the percentage of VLR in July 2011—
indicating an industrywide effort.
Factor 2 above is a seasonal issue, and the impact should reverse
from October 2011 onwards. The other two factors are symptomatic of
the changing competitive landscape in the country, and could linger
for a few more months (with a potential positive impact on ARPU—
independent of tariff hikes). However, we believe that these are not
indicative of a sharp fall in the sector’s secular growth.

Accenture's results provide a positive datapoint in this uncertain demand environment ::Credit Suisse,

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● Accenture reported its Aug 2011 quarter results on 27 Sept.
Revenue growth of 14% YoY (constant currency) was 2% ahead
of consensus estimates. FY8/12 revenue growth guidance of 7-
10% in CC terms was unchanged and ahead of consensus
estimates. The stock closed up 3% during regular trading and 4%
in extended trading. Quarterly order bookings of $8.4 bn were an
all-time high for the company.
● Management commented that clients are well aware of the
external environment but see strong activity and investments in
new and maintenance projects that take out costs.
● Financial services business grew 13% YoY in CC terms in the
Aug-11 quarter, nearly in line with the overall 14% growth. They
continue to be cautious about their consulting business in
European financial services. Overall, there has been no indication
of increased scrutiny in spending by clients.
● While the environment continues to be uncertain, these results
present yet another datapoint that demand trends for IT services
remain solid. Reiterate OVERWEIGHT.


Robust top-line growth
4Q revenues increased 23% YoY in USD terms, 14% YoY in constant
currency to US$6.7 bn compared to consensus estimates of US$6.5
bn and guidance of US$6.4 to US$6.6 bn.
Consulting revenues, which are more relevant for Indian IT services
companies grew 16% YoY in CC terms. Outsourcing grew 13% YoY.


Financial services growth nearly in line with total, Europe
continues to be relatively weak
EMEA region continued to be the slowest growing geography in the
company. Management indicated that it had some concern with
respect to ongoing macro-economic concerns, especially with respect
to consulting business in the European financial services space.
However, it mentioned that there was significant disparity with respect
to demand environment in different European countries. While south
European countries were struggling, Germany and the Nordic
countries were doing well. We note that Indian IT services companies
have little exposure in southern Europe.
Financial services business grew nearly in line with other businesses
for Accenture.


Guidance ahead of street expectations
FY8/12 revenue growth guidance of 7-10% in CC terms was
unchanged. This is ahead of street expectations.
Strong order book
Quarterly order bookings of US$8.4 bn were an all-time high for the
company. For the full year ending Aug-12, management has guided to
order bookings of US$28 bn to US$31 bn.


Macro worrying, but no impact so far
While Accenture management recognised recent global macro risks
have increased and global growth has slowed, it had not seen any
impact on IT spending so far. Management stated that there has been
no indication of project delays or increased scrutiny in spending.
Accenture reported that its clients were highly focussed on cost
management in the macro climate and that clients had much stronger
balance sheets currently than at the time of the previous crisis and
continued to invest.
We reiterate our positive view on Indian IT companies
While clearly the global environment is uncertain, strong results from
firms such as Accenture and Oracle, results of corporate surveys in
US and Europe and positive datapoints from Indian IT companies give
us a high degree of confidence for 15-20% near-term revenue growth
potential. Europe and financial services remain areas to monitor
closely. If a recession were to occur, growth will definitely be a lot
lower and valuations will fall but our argument has been then this
segment may still be a relatively safe place to be in.

Coal India : A deep dive shows significant operational gains ::Credit Suisse,

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● We went through the annual reports of CIL’s subsidiaries to
understand trends which get lost in consolidated analysis.
● Much against the trend for mining companies globally, and despite
rising strip ratios and substantial increases in costs of fuel, rubber
and steel, non-staff costs saw only a 3% CAGR over FY06-11. A
division-wise analysis shows a significant impact of rising
outsourcing and automation on rising profitability.
● There is significant variance in EBITDA/t across CIL subsidiaries:
the four largest (MCL, NCL, SECL and CCL) contribute 75% of
volumes, but are 87% of EBITDA, and show the lowest cost
increases. This provides opportunities—the big four are also
expected to drive most of the volume expansions going forward;
price increases are easier to justify in the inefficient ECL/ BCCL.
● With further outsourcing and automation, we believe there is a
significant scope for cost-driven EBITDA improvements in the
coming quarters/years. As mining costs, especially for thermal
coal, continue to rise globally, and CIL’s costs do not, headroom
for price increases will continue to expand. Even near-term, with
rains over, volume slippages should be behind us. We maintain
OUTPERFORM with a target price of Rs450. Full Report.
Our note, A deep dive shows significant operational gains, 29 Sep
2011, delves deep into the annual reports of CIL’s subsidiaries to
understand trends which get lost in consolidated analysis.
Large differences in profitability
Much, if not all, of the analysis of Coal India is at the consolidated level,
and in addition to volumes and prices, focuses on staff costs. This can
be misleading, as staff costs are only half the total and miss significant
improvement in non-staff costs at a time when mining costs are rising
globally. In this note we focus on the other half of costs using additional
disclosures available in the annual reports of CIL’s subsidiaries.
There is significant variance in EBITDA/t across CIL subsidiaries—
some of this is driven by realisations, but far more interestingly, there
are sharp differences in costs. In particular, cost increase per tonne
was insignificant in the four most profitable subsidiaries NCL, MCL,
CCL and SECL. These are together 75% of volumes. The profitability
drivers for each of these four subsidiaries are different, in our view: (1)
a better strip ratio, (2) more outsourcing, and (2) more automation.

India's unsustainable export boom: The next shoe to drop:: Credit Suisse,

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The following is a summary of our new India economics report.
The note looks at why exports were so strong recently (72% YoY
in July) and whether it will continue.
● Since the bottom of the global financial crisis, India’s nominal
exports have risen 125%—way more than any other Asian
country. An anatomy of the country’s export performance shows
that transport equipment has proved a particular success story.
● Looking ahead, the combination of weaker global growth and a
trend strengthening in the real trade weighted exchange rate
points to a considerable softening in export growth in both nominal
and real terms. Our fundamental analysis suggests India is likely
to avoid another period of export contraction in YoY terms,
although the PMI export orders series suggests this cannot be
ruled out (Figure 1).
● Weaker export growth is another reason to be cautious about
India’s prospects for capital spending and, indeed, GDP growth as
a whole. The risks to our bottom of the range 7.2% and 7.3% real
GDP growth forecasts for 2011/12 and 2012/13 are probably on
the downside, while we continue to expect one final 25 bp policy
rate hike, before the cuts start from the April-June quarter of 2012.


We believe India’s export growth is set to slow sharply in the coming
months, possibly turning negative before the current fiscal year is out.
This might seem a little unlikely given merchandise export values
have just recorded their strongest YoY growth rate since the early
1970s. But statistical analysis and survey evidence (Figure 1) point
convincingly in that direction, notwithstanding the recent drop in the
INR.
There are two key fundamental reasons for concern. Import growth
among key trading partners is softening, while the competitiveness
benefits stemming from the collapse in India’s real trade weighted
exchange rate during 2008-09 have now run their course. Transport
equipment is the sector best placed to buck the trend, in our view


Weaker exports are not good news for an economy which is also
beginning to feel the lagged impact of the RBI’s aggressive interest
rate action. Sharply weaker export growth is another reason why we
would not be optimistic that investment growth will rebound any time
soon.
In our view, most forecasters are still too optimistic about India’s GDP
growth prospects for both this financial year and next. Having been
the best part of 1 p.p. below the consensus projection for 2011/12 real
GDP growth, we are now just 0.3 p.p. lower at 7.2%. The bigger
difference is for 2012/13, when we are expecting 7.3% growth
compared with a consensus forecast of 8.0% (Figure 3). If one is
looking for a silver lining it is the likelihood that India is finally just one
25 bp hike from the policy rate peak and six months from the first cut,
in our opinion.

Property Radar India – Price cuts to rekindle demand? ::RBS

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Fundamentals remain challenging as sales volumes continue to decline on weak affordability
as seen in sector underperformance. We expect a gradual recovery on price cuts, peaking
rates, policy reforms and sector deleveraging as we remain sanguine about India's long-term
structural growth story. Top pick DLF.


While fundamentals remain challenging, in our view…
The real estate sector has been a laggard (down 17% vs the Sensex since January and 34%
in the last 12 months). Sales volumes in Indian real estate markets continue to decline due to
weak affordability on account of high property prices and high mortgage and inflation rates.
The Prop Equity database (covering the primary and secondary markets) shows sales
volumes data for June remained weak, with some improvement in July – Gurgaon up 23%
yoy and Bangalore up 34% yoy – due to significant launches. On the supply side, developers
are caught up with high debt and low asset churn, which continue to reduce their return on
equity. Banks’ exposure to developers has remained largely flat since April, partly reflecting
the banking sector’s cautious stance on real estate.
We expect gradual recovery on price cuts, rates peaking and proposed policy reforms
We believe banks may require developers to cut property prices (if they don’t on their own) to
rekindle sales volume during the upcoming festival season (Oct-Dec 2011) as buyers have
been delaying purchases in anticipation of price corrections. RBS Economist Sanjay Mathur
believes interest rates have peaked and will ease from March 2012 on. While proposed

policy reforms (land bill, floor space index (FSI), government approval for the sale of special
economic zones (SEZs) could take time because of various ambiguities, we believe that these
are steps in the right direction and bring sector transparency and faster execution. These coupled
with developers’ measures to deleverage via non-core asset sales could lead to a gradual
recovery as we remain sanguine about India’s long-term structural growth story. Moreover, our
Indian IT analyst expects the top 4 Indian IT companies to increase their employee strength by
around 15% in FY12 alongside wage inflation. This is important as the IT sector is one of the
country’s biggest consumers of real estate.
DLF our top pick; we upgrade Unitech to Hold
We make DLF our top pick given the visibility of Rs30bn of asset monetisation to reduce its high
debt, the biggest overhang on the stock. We upgrade Unitech to Hold on its significant
underperformance (38% ytd). While we believe headwinds remain for Mumbai-based developers
in the near term due to ongoing policy uncertainty, leading to project delays, we maintain Buys on
HDIL and Indiabulls Real Estate (and reduce our TPs).

IT Services – Accenture 4Q11 results read through::RBS

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Accenture's reiteration of FY12 business outlook (given in April'11) with strong set of 4Q11 results
is positive for the Indian IT. Its Outsourcing order book growth of 43% yoy in 4Q11 is a key
positive for the sector. Any significant macro slowdown in US/Europe is a key risk.


Accenture's reiteration of FY12 business outlook is positive for the sector
􀀟 Accenture reiterated its FY12 business outlook (given earlier in April 2011) with revenue
growth guidance of 7-10% in local currency (vs 15% growth in FY11) despite increased macro
headwinds. Even on operating margins for FY12, company guided for 10-30bp improvement
to 13.7-13.9%.
􀀟 Accenture expects new order bookings worth $28-31bn for FY12 versus order booking worth
$28.8bn in FY11 (indicating a growth of 7.5% on upper end and decline of 2.9% on the lower
end). For FY11 Accenture exceeded its new order book guidance of $25-28bn by clocking
$28.8bn bookings.
􀀟 For 1Q12, Accenture expects revenue growth of 12.5-15.8% yoy (1.7-4.7% growth on qoq
basis) in reported currency with assumption of a positive impact of 3% through currency
indicating local currency growth of 9.5-12.8% yoy versus guided growth of 7-10% for FY12
(Accenture commented that revenue visibility is healthy for the initial period of FY12).
􀀟 Accenture also commented that in the near term the yoy growth is likely to be higher in
consulting versus outsourcing. Accenture's 1Q12 guidance indicates that recently increased
macro headwind is unlikely to impact the Indian IT revenue visibility significantly in coming
quarter.
􀀟 As per Accenture, despite moderating the growth expectation from Europe financial services
(largely from consulting/discretionary services) and management consulting for FY12 due to
increased macro headwinds post April 2011, two acquisitions in BFSI (one signed and one
about to be signed), large deal win from Nokia, high exit rate of 4Q11, faster conversion of
booking into revenues and increasing deal win ratio has lead to its reiterating the business
outlook for FY12 given earlier in April 2011
􀀟 In line with comments of some of the Indian IT peers, Accenture did not witness any major
change in client behaviour in terms of decision making, project delays or any high
scrutiny/increased approvals for deal awards yet. However Accenture witnessed slight uptick
in terms of conversion of pipeline into deal awards.
􀀟 Accenture expects growth from US to outperform versus Europe and vertically it expects
broad based growth going forward.
􀀟 In line with our view, Accenture also commented that current slowdown is different than 2008-
09 slowdown with current slowdown emerging more from sovereign debt issues while the
financial positions of clients is in much better shape.
4Q11 order bookings up 30% yoy
􀀟 Accenture reported new order booking of $8.44bn in 4Q11, yoy growth of 29.8% with
consulting order book growth of 18.9% and outsourcing order book growth of 42.7% (order
book growth was positively impacted by 9% yoy due to currency). As per Accenture, this was
helped by large order win from Nokia as well as its increasing deal win ratio.
􀀟 Robust growth of 42.7% in outsourcing bookings (one of the highest in past several quarters)
in 4Q11 augurs well for Indian IT companies. Even on qoq basis new order book registered a
robust 18.9% increase with growth of 12.4% in consulting and 25.9% in outsourcing order
book. As per Accenture, most of the deal wins over US$100m were largely in outsourcing.
􀀟 Book-bill ratio for Accenture now stands at 1.26x for 4Q11, one of the highest in past several
quarters with outsourcing book to bill ratio of as high as 1.52x which is positive indicator for
Indian IT companies.
􀀟 Though Accenture does not expect any major change in mix of new order bookings for FY12,
it expects it to tilt towards outsourcing which again augurs well for Indian IT.
4Q11 result highlights
􀀟 Accenture reported 14% local currency growth (yoy) in revenues in 4QFY11. In reported
currency, revenues grew 23.4% yoy versus guidance of 18-22%. Consulting revenues
registered 16% yoy growth while outsourcing registered 13% growth in local currency during
4QFY11.
􀀟 Continued higher growth in consulting (3Q11 growth of 17% and 2Q11 growth of 20%) clearly

indicates that discretionary spend still remains healthy for the sector (augurs well for Infosys
and HCL Tech).
􀀟 On a qoq basis, Accenture registered a decline of 0.5% in revenues (in reported currency)
with 2.1% decline in consulting and 1.9% growth in outsourcing (generally 4Q is seasonally
weak quarter on qoq basis for Accenture).
􀀟 In 4Q11, all verticals registered near to company average growth in local currency with
Products and Resources leading with 16% and 18% yoy growth respectively. Revenues from
US registered 18% growth in local currency, while EMEA registered 8% growth and Asia
Pacific registered 23% growth.
Our picks within Indian IT
􀀟 We continue to remain cautiously optimistic on the sector as we believe that sector is better
poised than last slowdown given no major excesses on billing rates and IT spend by clients
post 2008-09 slowdown, expected pricing discipline amongst vendors going forward and
better health of US corporates' balance sheet.
􀀟 In this state of increased macro uncertainty, we prefer stocks with relatively low valuations,
more revenue diversity and higher flexibility in managing margins. Infosys, HCL Tech and
Wipro are our top large-cap picks. Polaris is our top mid-cap pick.
􀀟 Stock correction resulting from further macro news flow is possible, but over the medium to
longer term we expect valuation multiples for companies in our sector coverage universe to
improve given a likely rebound in earnings growth from 2HCY12
􀀟 Any sharp deterioration in the macro environment in the US and Europe is a key risk.