Markets to remain range-bound this week: Experts (Economic Times)

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 Dalal street is expected to remain range-bound this week and corporate earnings and global cues, especially developments related to Greek debt turmoil, are likely to set the tone, say experts.

The week will see stock-specific activity amid second quarter earnings announcements. Besides, news from Greece, rupee movement, eurozone crisis, US job data will again dominate markets this week, market analysts said.

"Market is trading in a very small range, there will be volatility and market will take cues from how the eurozone and how Greece problem is going to be resolved. Any negative news is sharply going to hammer down the market. The undertone of the market will be range-bound and weak," Ashika Stock Brokers Research Head Paras Bothra said.

Unicon Financial's CEO Gajendra Nagpal, however, believes that "markets have more or less discounted the eurozone crisis. Markets will be stable with the undertone being cautiously bullish".

The way the markets have closed on Friday, gives the feeling that Dalal street will take a breather and will be rangebound, Nagpal added.

The BSE benchmark Sensex lost 242.19 points to end the week at 17,562.61. However, the Sensex had on Friday surged by 80.68 points, with 22 of its components closing in the green.

The coming week is a truncated one, as the stock market will remain close for two days -- on Monday, November 7 on account of Bakri-Id and on Thursday, November 10 on account of Guru Nanak Jayanti.

State Bank of India will be under focus ahead of its results on November 9, and the two-day strike called by its officers.

The All-India State Bank Officers Federation (AISBOF) has served a notice to observe a two-day countrywide strike on November 8 and 9 in pursuance of certain demands.

The week will see stock-specific activity amid second quarter earnings announcements. The comong week will see unveiling of quarterly results by Reliance Infrastructure, Reliance Power, Ranbaxy, Indian Oil Corporation, Power Finance Corporation, DLF, Tata Steel, Hindalco Industries, Mahindra Satyam, Reliance Capital and Coal India among others.

HDFC Bank – Maintains its class ::RBS

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HDFC Bank delivered yet another quarter of strong performance. Retail loans led loan book
growth, both yearly and quarterly. The proportion of low-cost deposits fell, but still remains the
highest among private banks. Stable asset quality, with negligible restructured loans, stands out.
Maintain Buy.


2QFY12: retail loans drive growth; asset quality trends superior to peers
About 70% of the incremental qoq growth in the loan book came from the retail segment. The
loan book grew 7.4% qoq. Of this, the retail loan book grew 10.7% qoq and the corporate book
grew 4.3% qoq (see chart 3). HDFC Bank’s asset quality has generally been superior vs the
industry. The addition to GNPLs was Rs7.5bn in 1HFY12 (100bp annualised on a one-year lag
basis), which includes slippages of Rs2.5bn from MFI exposures. Restructured loans at 0.1% of
loans remain negligible. Provision coverage ratio (specific provisions/GNPLs) remains high at
about 81% as of September 2011. Further, the cumulative floating provisions (treated as part of
Tier-II capital) were about Rs10bn as of September 2011 (0.5% of loans, 3.6% of net worth).
Going forward, management expects asset quality to remain largely stable.
PPOP growth is trailing PAT growth
The pre-provision operating profit (PPOP) growth yoy has been falling over the last 10 quarters
(see Chart 2). However, net profit growth remains consistent at about 30% yoy. This is because
asset quality has improved, resulting in lower provisions for bad loans (from 180bp of loans in
FY10 to 130bp in FY11 and 43bp in 1HFY12).
Cannibalisation by term deposits brings down CASA proportion
Low-cost deposits grew 10% yoy (up 5% qoq), partly due to cannibalisation by term deposits
offering higher interest rates, which were up 26% yoy (+13% qoq). Hence, the proportion of lowcost
deposits (CASA or current and savings accounts) fell to 47.3% as of September 2011 (down
330bp yoy and180 bp qoq). However, it stills remains the highest of peers. The fall in the CASA
proportion partly explains the 10bp margin decline yoy to 4.1% in 2QFY12.
Premium valuation supported by higher operating earnings than peers, maintain Buy
Adjusted for floating provisions, annualised ROA in 1HFY12 was 20bp higher than the reported
160bp. We keep our earning forecasts unchanged and maintain Buy.

Jindal Steel & Power – Taking time ::RBS

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JSP's 2Q12 EBITDA was 10% above our estimate of Rs15.4bn, driven by strong performance of
the steel division. However, we cut our FY12/13 estimates by 14% each due to delays in ramp-up
of the 1,350MW power plant and 2MT Angul steel plant. JSP remains our top pick in the steel
space. Maintain Buy.


2QFY12: strong steel performance beats our expectations
Jindal Steel and Power’s (JSP) consolidated net revenues of Rs44.2bn, up 44% yoy and 12%
qoq, were driven by higher steel volumes and realisations. Steel revenues were Rs36.3bn, up
65% yoy and 19% qoq, and power revenues were Rs9.6bn, down 9% qoq, with lower PLF of
92.5% due to a maintenance shutdown at the 1000MW plant. Steel product sales were up 29%
yoy and 31% qoq at 598kt and pellet sales were up 52% qoq at 526kt. Captive power sales were
222MU vs 259MU in 1Q. Driven by higher-than-expected steel volumes, EBITDA was Rs17.0bn,
up 14% yoy and 5% qoq, 10% higher than our forecast of Rs15.4bn. Adjusted net profit was
Rs9.6bn. Steel’s share of total EBIT was 67% – the highest since 1QFY09, when the 1000MW
plant was not fully commissioned.
1350MW CPP ramp-up has been delayed; 2400MW Tamnar II is on track
Of the 10 CPP units at Raigarh and Angul, three units of 135MW each have been commissioned
so far. However, the units are taking time to stabilise; hence, power sales are yet to ramp up.
Management still expects to commission the remaining units by March 2012, but we factor in
delays. We expect lead times to decline with each unit, as JSP gets familiar with the middlingbased
technology. We forecast sales of 1,104MU in FY12 and 3,666MU in FY13. The 2400MW
plant is on schedule to be commissioned by FY14, though there is no coal linkage for 1200MW
yet. The 1000MW plant continues to operate at full capacity and generate stable cash flows. We
forecast average tariffs of Rs4 per unit for FY12/FY13.


Maintain Buy with a new TP of Rs670
We cut our FY12/FY13 EPS forecasts by 14% each, given the delayed commissioning of the
1350MW CPP, our higher coking coal price forecasts and our revised assumptions of other costs.
We value the steel business at 5.5x FY13F EV/EBITDA (vs 7.5x earlier) due to a fall in peer
average multiples (see Table 4) and use DCF to value the power businesses. Maintain Buy with a
new SoTP-based TP of Rs670 (down from Rs800).

Hold Rolta India; Target : Rs 81 ::ICICI Securities

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B e l o w   e s t i m a t e s ;   o r d e r   b o o k   d i s a p p o i n t s …
Rolta reported numbers, which were below our estimates. Rupee
revenues grew 2% QoQ and 13.6% YoY while PAT declined 30% QoQ,
led by a) wage hikes of ~2% onsite and ~11% offshore and b) | 25.9
crore provision made for market-to-market (MTM) losses on foreign
currency loans. Note, reported dollar  revenues of $99.3 million declined
5.5% QoQ. This implies that reported rupee revenue growth is primarily
due to rupee depreciation (conversion rate: | 48.9/$). The EGDS business
grew 2% QoQ (in rupees), EITS by 2.1% QoQ while EDOS was the
weakest with 1.6% QoQ (rupee revenues). Rolta’s order book growth
continues to be tepid and grew by a modest 1.4% QoQ. The number of
employees stood at 3,994; a decrease of 88 employees QoQ. We believe
refinancing of FCCBs; due in June 2012, through ECB and rising taxes
could erode profitability. Consequently, we maintain our HOLD rating and
reiterate our view of staying put with large cap names (TCS, Infosys).
ƒ Earnings summary
The company reported revenues of | 485.3 crore (I-direct estimate:
| 491.8 crore) with growth of 2% QoQ. The growth was primarily
due to rupee depreciation and the order book growth continues to
be a concern. Sequentially, EDOS and EITS gross margins declined
280 bps and 470 bps, respectively, while it increased 220 bps QoQ
for the EGIS business. The EBITDA margin declined by 460 bps QoQ
on account of wage hikes, material cost and provision set aside for
FCCBs through depreciation. Bill rates grew by 1.3% QoQ for EDOS
and 2.6% for the ETIS business. FY12E capex stands around | 250-
300 crore wherein | 100 crore would  be used for renovation of
existing building while the rest could be use for acquisitions, out of
which | 80 crore has been spent in Q1FY12.
V a l u a t i o n
We expect the company to register revenue/PAT growth of 15/20% CAGR
during FY10-FY12E. That said, we continue to value Rolta based on FY12E
earnings due to the uncertain macroeconomic environment and revenue
visibility. Consequently, we have valued the stock at 3.52x our FY12E EPS
of | 23 i.e. at | 81 and maintain our HOLD rating

Hero Motocorp – Margins bounce back ::RBS

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2Q recorded a sharp EBIT margin recovery (after a 7-quarter dip) on the back of lower raw
material costs and strong pricing power. Building rupee depreciation, we raise our EPS
forecasts 4-5%. Buy as we believe that HMCL is a better play on strong rural demand and
softening commodity prices, new TP at Rs2416.50


Results deliver on management’s margin-expansion promise
For 2QFY12, Hero Motocorp Ltd (HMCL) achieved significant milestones: a successful brand
change from Hero Honda to Hero Motocorp with significant promotion, historically high sales
volume and reversal of a seven-quarter sliding trend in its EBIT margin. The results surprised
us, with a huge 16% on EBIT and 21% on normalised PAT, driven by a 220bp reduction in
raw material costs as a percentage of net sales, as well as vehicle price hikes (1.5% qoq)
offsetting higher royalty charges towards rupee deprecation. Normalised EPS for the quarter
is Rs33.2, representing growth of 31% yoy and 19% mom adjusted for a Rs600m one-time
brand-change cost.


We raise our EPS forecasts, already higher than consensus, an additional 4-5%
Bloomberg consensus EPS for FY12 was nearly 9% below our forecast (pre-results). Given
better-than-expected results, we believe consensus will catch up with our estimates soon.
Building in an earlier-than-expected margin revival, continued strong rural demand and easing
commodity prices, we raise our FY12F and FY13F EPS 4% and 5%, respectively. The mark to
market of fixed royalty payments for rupee depreciation limits our EPS upgrade. We increase our
dividend payout forecast to 50-55% from 35% to reflect management guidance, leading to an
attractive dividend yield of 3% for FY12F.
Better defensive rural play, we recommend Buy and raise our target price
With split concerns (from Honda) easing and successful brand transformation, the stock has
outperformed impressively (by 21% for past three months). With nearly 45% of sales coming from
rural demand and EBIT margins starting a recovery path after a nearly 40% contraction in the
past seven quarters, we think it offers the best defensive rural play in the Indian basket of stocks.
On our revised EPS, the stock trades at an attractive valuation of 13.8x FY13F with an EPS
CAGR of 22% for FY11-13F. We recommend Buy and raise our DCF-based TP to Rs2,416.5
(from Rs2157.90), at which the stock would trade at 16.1x FY13F.

HCL Technologies – Mixed bag ::RBS

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HCL Tech's 1Q12 performance was lower on revenues with 5.1% qoq constant currency growth
(RBS 6%). However, the decline in EBIT margins was restricted to just 112bp despite wage
inflation. A sharp correction post the pre-result rally offers a favourable risk-reward ratio, in our
view. Reiterate Buy


1Q12: lower on revenues and better on margins
HCLT reported 5.1% qoq constant currency (CC) growth in US dollar revenues (RBS: 6%).
Notably, growth within key markets of the US was higher at 6.8% in CC terms. Despite
headwinds of 200bp/45bp from wage inflation/lower utilisation, EBIT margins declined by only
112bp qoq, given tailwinds of 102bp from currency and balance through operational efficiencies.
HCLT has a strong track record in winning/executing large deals. We expect it to win an
increasing share of large deal renewals towards the close of CY11 and counter any near-term
demand weakness. HCLT also expects to continue outperforming revenue growth rates
estimated by NASSCOM at 16-18% for FY12. We upgrade our FY12/FY13 EPS estimates by
6%/2% largely driven from INR assumptions. A sharp correction post the pre-1Q12 result rally
offers favourable risk reward, in our view. We reiterate Buy.
Margin visibility improving
HCLT is well positioned to defend margins, in our view, due to: 1) increasing fresher hiring (added
6,446 freshers in 1H12; 2) increased offshoring potential of software services, particularly on

Enterprise Apps; 3) a turnaround in BPO (breakeven expected in 3Q12) and 4) improving
leverage on SG&A with quarterly revenues of US$1bn+. Notably, incremental revenues in 1Q12
over 1Q11 generated EBITDA margins of 20.3% vs reported margins of 17.1% in 1Q12,
indicating improving profitability with scale-up.
1Q12 PAT lower than expected; cash flow muted
With lower-than-expected revenues and higher-than-expected tax, reported PAT was lower at
Rs4.8bn. HCLT's operating cash flow (OCF) was lower at US$25.8m in 1Q12 (US$380m in
FY11) led by an increase in receivable days and translation hit through INR depreciation. We
believe cash flows need to be judged on a yearly basis rather than on a quarterly basis alone. On
an LTM basis, OCF improved to US$396m at end-Sept 2011 from US$356m at end-Sept 2010.

Hold CADILA HEALTHCARE: In a consolidation phase :: BNP Paribas

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In a consolidation phase
CHANGE
Lack of clarity on US growth prospects for
We initiate coverage on Cadila with a HOLD rating
letter on its sterile facility, a key growth driver for the company
question mark on its US growth prospects in the long run. We
if the warning letter would have any indirect impact on
approvals too, which means FY13 growth in the US is
CATALYST
Earnings growth to slow significantly over FY11
High dependence on old molecules is likely to restrict
growth to be in line with the industry. We estimate e
just 14% over FY11-14., significantly lower than the
FY08-11. This is due to slower than historical growth in the US
support from Brazil, Hospira JV and Abbott tie-up
VALUATION
Warning letter from US FDA to remain an overhang
We value Cadila at 17x one-year forward earnings to
INR798, upside potential of 5%. Key risks to our call are slippages in the
domestic market, failure to resolve US FDA issues at its
inability to turn around Nesher’s operations.
COMMENT
Key highlights of the report
§ Base case, bear case, bull case growth scenarios for the US base
business and impact on EPS for FY13 and FY14.
§ Case study of Lupin’s stock performance during the warning letter
period and post resolution
§ Nesher Pharma US FDA/DoJ timelines, P&L statement and balance
sheet
§ Domestic formulations: top 10 brands analysis
§ Analysis of support drivers to the US and India businesses
§ R&D pipeline and spending

Hold CIPLA -Execution is the key :: BNP Paribas

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Execution is the key
CHANGE
P/E compression due to underutilised capacity, India investments
Cipla’s large capacity build-up (INR25b in four years) and investments in
the domestic market have put pressure on margins and, along with lack
of clarity on leadership, has led to P/E compression and stock
underperformance. We do not see a case for re-rating unless capacity
utilisation ramps up fast and leadership issues are addressed adequately.
CATALYST
Indore SEZ holds the key as India business undergoes transition
Sharp ramp-up at Indore SEZ (capex of INR8b-9b) is critical for margin
expansion as the domestic business digests large field force additions,
entry into new therapies. Margin expansion will have to be driven by core
operations as technical know-how fees decline. Capex for formulations is
largely completed but is set to continue for API.
VALUATION
Trading at the lower end of its historical P/E band
We value Cipla at 17x one-year forward earnings to arrive at a target
price of INR285. Key upside risks to our HOLD call are a sharp pickup in
domestic formulations, higher-than-estimated other operating income,
large partnership announcement/stake sale by promoters and earlierthan-
estimated launches of inhalers in the regulated markets.
COMMENT
Key highlights of the report
§ Capacity addition over the last four years
§ Field force expansion over the last three years
§ Indore SEZ performance so far
§ Trend in domestic formulation sales over four years
§ What Teva is saying on inhaler launches in regulated markets
§ Trend in other operating income, EBITDA margins and core margins

Hold LUPIN : price target of INR449: BNP Paribas

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Limited room for slips
CHANGE
Re-rating done, all eyes on execution
Lupin saw a sharp P/E expansion over the last two years driven by large
filings in the US – niche products like oral contraceptives (OC’s) - and
potential ramp up of the US branded generic business. With the latter
showing signs of moderation, all eyes will be on execution in OC’s. Other
geographies like India and Japan continue to remain strong.
CATALYST
FY13/14 EPS is 10% lower than street on slower OC ramp up
We believe market dynamics for OC’s may have become more competitive,
while delays in product approvals for over a year may have reduced
competitive advantages for Lupin. We assume a slower ramp up in OC’s
with sales of USD100m in FY14, which is 20-50% lower than company
indications. Our FY13/14 EPS estimate is 12% lower than consensus.
VALUATION
September 2012 base case price target of INR449
We value Lupin’s base earnings at 17.5x one year forward earnings, or
INR444 and its Para IV pipeline at INR5. Upside risks are greater than
expected ramp up in OC’s which gives a bull case value of INR509;
downside risks are delay in key launches in the US and lower than
expected market share in OC’s which gives a bear case value of INR417.
COMMENT
Key highlights of the report
§ Lupin’s execution history in the US
§ Market dynamics of oral contraceptives which include key brands,
Sandoz launches until date and study of Lupin’s competitive
advantage
§ Lupin’s US branded generic overview
§ Para IV opportunities in US
§ India sales trend and new launches
§ Japan sales trend and contribution
§ Acquisition history of Lupin
§ Base case, bull case, bear case scenarios

Reduce RANBAXY LABORATORIES :Base business lacks traction : BNP Paribas

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Base business lacks traction
CHANGE
Markets ignoring base business performance which lacks traction
We believe markets are completely focussed on successful US FDA/DoJ
resolution and scheduled launch of generic Lipitor next month. Base
business traction is not coming through even after significant passage of
time and remains an area of concern. Initiate coverage with a REDUCE.
CATALYST
Stock lacks triggers once regulatory issues are resolved
We do not see any major triggers once regulatory issues are resolved and
Lipitor is launched as per schedule. Attention, therefore, is bound to
return to base business performance as the next major FTF launch is only
in 2014. We believe sharp base business margin expansion is in the price.
VALUATION
SoTP based price target of INR435
Our TP implies 15.5% potential downside from current levels. We value
Ranbaxy’s base business at INR384 (16x one year forward earnings) and
Para IV pipeline at INR51. Key risks to our call is sharp pickup in base
business operations, less than estimated price erosion for generic Lipitor
and any delisting attempt by the parent.
COMMENT
Key highlights of the report
§ Trend in base business margins
§ Five potential scenarios for generic Lipitor launch
§ EPS sensitivity from Lipitor launch (price erosion and market share as
variables)
§ Para IV filings for Ranbaxy
§ Base business margin assumptions

Buy DR REDDY'S LABORATORIES :: BNP Paribas

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Investment view – Well set for the next leg of growth
The US is the anchor driver, with support from Russia, India and other businesses
We initiate coverage on Dr Reddy’s Laboratories with a BUY rating and a 12-month target price of INR1,677.
The US remains the anchor growth driver in Dr Reddy’s quest to achieve its sales vision of USD2.7b, and
this would be supported by Russia, India and other businesses. We estimate Dr Reddy’s will add USD880m
worth of sales over FY11-14, of which the US is estimated to contribute 40%. A large part of this addition
would come from limited competition products which are to be introduced over the next 12-15 months. We
have modelled slower-than-historical growth for Russia and India, with Europe and API likely to continue
their existing growth trajectory


Key limited competition products to drive US growth over the next 18 months
Over the last decade, Dr Reddy’s has developed a strong pipeline for the US. The company has filed 170
ANDAs of which 94 are approved and 76 pending approval with the US FDA. Of the 76 pending, Dr Reddy’s
has 38 Para IV filings of which 10 are first-to-files (FTF). The company is also present in the OTC space in
the US (USD80m, 19% of US sales).
Dr Reddy’s has a good history of monetising its Para IV opportunities in the US. Key opportunities monetised
so far are Fluoxetine (Prozac, 2001), Fexofenadine (Allegra, at risk launch, 2006), Ondansetron (Zofran, FTF,
2007), Simvastatin (Zocor, authorised generic, 2007), Sumatriptan (Imitrex, authorised generic, 2009),
Omeprazole Mg OTC (Prilosec OTC, 2010), Rivastigmine (Exelon, 2011). The company has also launched
interesting limited competition products such as Fondaparinux (Arixtra, 2011) and Tacrolimus (Prograf,

2010). We estimate Dr Reddy to have booked sales of more than USD800m from these limited competition
opportunities so far in the US (~40% of cumulative US sales starting 2005).

Buy SUN PHARMACEUTICAL:: Quality comes at a premium :: BNP Paribas

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Quality comes at a premium
CHANGE
Market has rewarded Sun’s focussed approach
We initiate coverage on Sun Pharma with a BUY. We believe the market
has rewarded Sun’s focused approach as market cap has expanded in line
with revenue growth. Sun’s strong positioning in India, presence in niche
therapies in the US, ability to identify opportunities ahead of peers, and
focus on profitability/cash flows are key investment points.
CATALYST
Room to improve market share in India and US
Sun has the potential to gain market share even in existing therapies in
India despite rising competition. For the US, the strategy is to have a
basket of difficult-to-manufacture generics and to build a branded
generic business through Taro. Sun’s strong balance sheet allows it to
target large acquisitions. Sun’s M&A history has been very good so far.
VALUATION
SoTP-based price target of INR550
Our TP implies 14% upside potential from current levels. We value Sun’s
core business at INR473/share (23x one-year forward earnings), cash on
books at INR65/share and Para IV pipeline at INR12/share. Key risks to
our call are any slowdown in the domestic market and any liability from
the generic Protonix ‘at-risk’ launch.
COMMENT
Key highlights of the report
§ Analysis of Sun’s high field-force productivity and top brands
§ Sun’s ability to consistently beat peers in domestic formulations
§ Therapy-wise approvals in the US
§ Para IV pipeline
§ Acquisition history

Pharma -Searching for differentiation :: BNP Paribas

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Investment summary
We initiate coverage on the Indian pharma sector with a DETERIORATING outlook. We see three challenges
for the Indian pharmas: 1) domestic formulations: an undifferentiated expansion strategy by most
companies is leading to margin pressure, and this may be the start of the much talked about
consolidation; 2) US: impending patent cliff, rising regulatory risks and increasing competition even for
Para IV opportunities; and 3) succession issues particularly for small Indian companies. These challenges
come at a time when earnings growth is likely to slow while the sector trades at a near all-time high
premium to the broader market.
We see limited scope for earnings surprises – acquisitions and a favourable currency movement are
probably the only two areas that could surprise positively. We believe companies with focus on specialty
products, R&D-backed products and tighter cost control will emerge winners. We initiate coverage on six
pharma companies, with BUYs on Sun Pharma and Dr Reddy’s, REDUCE on Ranbaxy, and HOLDs on Cadila
Healthcare, Cipla and Lupin.
An undifferentiated expansion strategy is putting margins under pressure
Majority of the top 15 Indian pharma companies have very undifferentiated expansion strategies, which
revolve around adding field force and increasing revenue mix from products related to the chronic segment
versus the acute segment. Very few companies have spoken about improving field-force productivity. We
believe field-force productivity will not peak soon, given the sector revenue is driven by the pull factor
rather than the push factor and given the market today is not wide enough to absorb the push factor
(generated by field-force addition). We believe the lack of differentiation is creating margin pressure. The
scenario is particularly challenging for the smaller Indian companies whose product concentration is high
and field force has been relatively less stable. Furthermore, the privately held companies have been
demonstrating very robust growth (3-4x ahead of the market), putting further pressure on listed peers. We
strongly believe the current growth trend in the domestic market is unsustainable and that this could lead
to the much talked about consolidation in the Indian market, post which we believe efficiency may return to
the system
US: Impending patent cliff, rising regulatory risks, Para IV opportunities not as lucrative as previously
Over 2011-15, drugs worth USD96b will lose patent protection, compared to USD74b over 2005-10. Out of
the USD96b, about 60% of the drugs will go off-patent over 2011-12. The impending patent cliff is likely to
see slower number of launches in the US starting 2013. Given that the third wave of Indian generics has
entered the US market with their set of filings, market dynamics are likely to become more competitive in
the near future. Regulatory risks in the form of warning letters/import alerts have been on the rise, while
introduction of authorised generics by the innovators even for products as small as USD100m has meant
greater price erosions and lower market share during exclusive periods, thus not making Para IV as
lucrative an opportunity as It was previously.
Earnings growth slowing, nonetheless the sector trades at near all-time high premium to the market
We believe these challenges will lead to slower earnings growth for the sector. For our coverage universe,
we project core earnings growth of 17% over FY11-14, versus 25% achieved over FY08-11. Including nonrecurring
opportunities, we estimate FY11-14 earnings CAGR of 11.1%, versus Bloomberg consensus
forecast of 13.5%. We anticipate earnings cuts by the Street.
Limited scope of earnings surprise, but inorganic growth and forex movement may surprise positively
We see limited scope for earnings surprises, though acquisitions and a favourable currency movement could
surprise positively. Indian companies have been less acquisitive than their global peers such as Teva (TEVA
US, Not rated), Watson (WPI US, Not rated) and Mylan (MYL US, Not rated), and certain portfolio gaps can
be bridged through acquisitions. We believe Indian companies are relatively much more mature to handle
acquisitions and the deals can be concluded without significant equity dilution given their stronger balance
sheets.
A favourable forex movement would be another positive factor, but at this point we have limited
understanding of where the currencies will head from current levels. Assuming currency stays at current
levels (INR43/USD, INR76/GBP, INR67/EUR and INR63/JPY), we estimate earnings growth over FY11-14E
would jump 3ppt to 20% versus our current estimate of 17% growth.
BUY Sun Pharma and Dr Reddy’s, REDUCE Ranbaxy, HOLD Cadila, Cipla and Lupin
We believe Sun Pharma is best placed to overcome the challenges in the sector and is our top pick for its
focused business approach (US + India presence), strong execution history and a solid balance sheet to fund
acquisitions without equity dilution.


Our BUY rating for Dr Reddy’s is mainly based on its strong US pipeline. We acknowledge the risks
associated with the exposure to Russia, but the company seems better prepared to handle the structural
changes in Russia than it was with BetaPharm (Germany). India and APIs could surprise positively as there
are no major expectations from these areas.
We initiative coverage on Ranbaxy with a REDUCE rating, as we believe valuations adequately price in the
recovery of the core business. In our view, the market is too focused on generic Lipitor launch and US
FDA/DoJ resolution and is ignoring the slow progress of the core business. We believe Ranbaxy will lack the
triggers once Lipitor is launched and the US FDA/DoJ issues are resolved.
We have HOLD ratings for Cadila, Cipla and Lupin. For Cadila, the US FDA’s warning letter on its sterile
facility, a key growth driver for the company, puts a question mark on its US growth prospects in the long
run. We are not sure if the warning letter will have any indirect impact on the non-sterile approvals too,
which means FY13 growth from the US market is also unclear.
Cipla’s share price has corrected significantly compared to its peers. While current valuations look
reasonable, re-rating is unlikely any time soon unless clarity emerges on a key intangible issue – leadership.
Lupin has seen a sharp P/E expansion in the past two years, driven by large filings in the US (niche products
such as oral contraceptives) and planned ramp-up of the US branded generic business. With the latter
showing signs of moderation, all eyes will probably be on execution in oral contraceptives (OCs). We believe
the market dynamics for OCs may have become more competitive and that the delay in product approvals
for over a year may have withered some competitive advantage for Lupin. We assume slower ramp-up in
OCs with sales of USD100m in FY14, which is 20-50% below the company’s indication. Our FY13-14 estimate
is 10% below consensus.


Valuations and top ideas
An undifferentiated expansion strategy is putting margins under pressure
Majority of the top 15 Indian pharma companies have very undifferentiated expansion strategies, which
revolve around adding field force and increasing revenue mix from products related to the chronic segment
versus the acute segment. Very few companies have spoken about improving field-force productivity. We
believe field-force productivity will not peak soon, given the sector revenue is driven by the pull factor
rather than the push factor and given the market today is not wide enough to absorb the push factor
(generated by field-force addition). We believe the lack of differentiation is creating margin pressure. The
scenario is particularly challenging for the smaller Indian companies whose product concentration is high
and field force has been relatively less stable. Furthermore, the privately held companies have been
demonstrating very robust growth (3-4x ahead of the market), putting further pressure on their listed
peers. We strongly believe the current growth trend in the domestic market is unsustainable and that this
could lead to the much talked about consolidation in the Indian market, post which we believe efficiency
may return to the system.
US: Impending patent cliff, rising regulatory risks, Para IV opportunities not as lucrative as previously
Over 2011-15, drugs worth USD96b will lose patent protection, compared to USD74b over 2005-10. Out of
the USD96b, about 60% of the drugs will go off-patent over 2011-12. The impending patent cliff is likely to
see slower number of launches in the US starting 2013. Given that the third wave of Indian generics has
entered the US market with their set of filings, market dynamics are likely to become more competitive in
the near future. Regulatory risks in the form of warning letters/import alerts have been on the rise, while
introduction of authorised generics by the innovators even for products as small as USD100m has meant
greater price erosions and lower market share during exclusive periods, thus making Para IV not as
lucrative an opportunity as it was previously.
Earnings growth slowing, nonetheless the sector trades at near all-time high premium to the market
We believe these challenges will lead to slower earnings growth for the sector. For our coverage universe,
we project core earnings growth of 17% over FY11-14, versus 25% achieved over FY08-FY11. Including nonrecurring
opportunities, we estimate FY11-14 earnings CAGR of 11.1%, versus Bloomberg consensus
forecast of 13.5%. We anticipate earnings cuts by the Street.
Limited scope of earnings surprise, but inorganic growth and forex movement may surprise positively
We see limited scope for earnings surprises, though acquisitions and a favourable currency movement could
surprise positively. Indian companies have been less acquisitive than their global peers such as Teva (TEVA
US, Not rated), Watson (WPI US, Not rated) and Mylan (MYL US, Not rated), and certain portfolio gaps can
be bridged through acquisitions. We believe Indian companies are relatively much more mature to handle
acquisitions and the deals can be concluded without significant equity dilution given their stronger balance
sheets.
A favourable forex movement would be another positive factor, but at this point we have limited
understanding of where the currencies will head from current levels. Assuming that currency stays at
current levels (INR49/USD, INR76/GBP, INR67/EUR and INR63/JPY), earnings growth over FY11-14 would
jump 3ppt to 20%, vs. our estimate of 17% growth.
BUY Sun Pharma and Dr Reddy’s; REDUCE Ranbaxy, HOLD Cadila, Cipla and Lupin
We believe Sun Pharma is best placed to overcome the challenges in the sector and is our top pick for its
focused business approach (US + India presence), strong execution history and a solid balance sheet to fund
acquisition without equity dilution.
Our BUY rating for Dr Reddy’s is mainly based on its strong US pipeline. We acknowledge the risks
associated with the exposure to Russia, but the company seems better prepared to handle the structural
changes in Russia than it was with BetaPharm (Germany). India and APIs could surprise positively as there
are no major expectations from these areas.
We initiative coverage on Ranbaxy with a REDUCE rating, as we believe valuations adequately price in the
recovery of the core business. In our view, the market is too focused on generic Lipitor launch and US
FDA/DoJ resolution and is ignoring the slow progress of the core business. We believe Ranbaxy will lack the
triggers once Lipitor is launched and the US FDA/DoJ issues are resolved.
We have HOLD ratings for Cadila, Cipla and Lupin. For Cadila, the US FDA’s warning letter on its sterile
facility, a key growth driver for the company, puts a question mark on its US growth prospects in the long

run. We are not sure if the warning letter will have any indirect impact on the non-sterile approvals too,
which means FY13 growth from the US market is also unclear.
Cipla’s share price has corrected significantly compared to its peers. While current valuations look
reasonable, re-rating is unlikely any time soon unless clarity emerges on a key intangible issue – leadership.
Lupin has seen a sharp P/E expansion in the past two years, driven by large filings in the US (niche products
such as oral contraceptives) and planned ramp-up of the US branded generic business. With the latter
showing signs of moderation, all eyes will probably be on execution in oral contraceptives (OCs). We believe
the market dynamics for OCs may have become more competitive and that the delay in product approvals
for over a year may have withered some competitive advantage for Lupin. We assume slower ramp-up in
OCs with sales of USD100m in FY14, which is 20-50% below the company’s indication. Our FY13-14 estimate
is 10% below consensus.

Inflation in India to 'drop considerably' by March 2012: Nomura in ET

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Financial services company Nomura has said inflation in India is likely to "drop considerably" by end of the current fiscal and the Reserve Bank is expected to pause its policy of monetary tightening.

"We share the view with the RBI that inflation will likely drop considerably as we approach March 2012, due to lagged effects of past monetary actions and the recent moderation in commodity prices.

"Further, as growth prospects appear to be weakening ... we expect no further rate hikes by the RBI in the current cycle," Nomura said in its Asia Economic Alert.

RBI has hiked its key policy rates 13 times, totalling 350 basis points, since March 2010 to tame demand and curb inflation. The rate of price rise has been above the 9 per cent mark since December last year.

At its second quarterly review of credit policy last month, RBI projected inflation to moderate from December onwards and touch 7 per cent by end of the financial year.

Economic growth slowed to 7.7 per cent in April-June, lowest in six quarters. Growth in industrial production stood at 4.1 per cent in August.

Experts have blamed the repeated rate hikes, which has led to increase in the cost of borrowing, for slowdown in fresh investments and industrial growth.

In its review, the apex bank said that notwithstanding current rate of inflation the likelihood of a rate action in the December mid-quarter review is relatively low.

"Beyond that, if the inflation trajectory conforms to projections, further rate hikes may not be warranted," RBI had said.

Commenting on RBI's forward guidance, Nomura said: "This, in our view, is a very strong statement indicating that there will be no rate hikes in December and beyond, so long as inflation moderates as expected".

Table:: TERM INSURANCE PREMIUM :: Business Line

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Policy Term: The number of years for which insurance cover will be available.

Premiums sourced from quotation engines on each individual company website. Premiums are inclusive of Service Tax except in cases where this information may not have been available at individual websites.

Buy Indian Hotels; Target : Rs 90 ::ICICI Securities,

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H i g h e r   o p e r a t i n g   c o s t   w e i g  h s   o n   m a r g i n s …
Indian Hotels Company (IHCL) came out with its Q2FY12 results wherein
the company reported standalone net revenues of ~ | 358 crore (up ~9%
YoY)  in  line  with  our  estimate  of  |  355  crore.  However,  the  PAT  of  |  8.1
crore (against loss of | 6 crore in Q2FY11) was below our estimate of |
15.2 crore in Q2FY12 mainly on account of higher operating costs. We
believe the revenue growth was mainly driven by improved occupancy
and marginal improvement in average room rates (ARRs). The EBITDA
margin dipped by 33 bps YoY to 10.8% mainly on the back of a rise in
employee cost and P&F cost by 22% YoY and 17% YoY, respectively.
Interest cost declined by 16% YoY to | 25 crore due to conversion of
short-term loans into long-term loans.
ƒ Better geographical room mix aids topline growth
IHCL reported topline growth of ~8.8% YoY to | 358 crore on a
standalone basis largely driven by ~100 bps YoY rise in occupancy
(I-direct estimate: 63%) due to its better geographical room mix and
marginal growth in ARR by ~2% YoY. Performance of leisure
destinations remained subdued due to seasonality impact while
among business destinations RevPAR across Delhi, Bangalore and
Kolkata improved ~1%, ~5% and ~8% YoY for the same period.
ƒ Higher operating costs put pressure on margins
IHCL’s operating profit grew merely by 6% YoY to ~| 39 crore as
operating cost remained at a higher level with 9.3% YoY growth at
~| 319 crore. Among major cost drivers, employee cost and power
& fuel cost surged by 22% YoY to | 117 crore and 17% YoY to | 33
crore, respectively.
V a l u a t i o n s
We expect FY12E and FY13E revenues to grow by ~9.5% and ~11.5%,
respectively, on account of a moderate industry outlook. At the CMP of |
70, the stock is trading at 12.6x and 10.1x its FY12E and FY13E
EV/EBITDA, respectively. However, we continue to maintain our target
price of | 90 (i.e. 12x FY13 EV/EBITDA) factoring its asset value and
maintain our BUY rating on the stock.

Buy Maruti Suzuki India; Target : Rs 1286 ::ICICI Securities,

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R e s u l t s   f a i l   t o   c h e er ,   w o r s t   i s   b e h i n d …
Maruti Suzuki India’s (MSIL) Q2FY12 numbers were disappointing with
net sales at | 7537.5 crore (I-direct estimate: | 7196.4 crore), a lower than
anticipated decline of 15.7% YoY even as volumes were lower by 19.6%
at 2.5 lakh units. The volume decline was accentuated by a loss of
~29,000 odd units due to the recent labour unrest. The only positive side
came through as realisations improved 4.8% YoY due to the twin impact
of richer product mix in terms of diesel sales (up ~3% YoY) and better
export realisations( up 6.6% YoY). EBITDA margins took a steep hit,
declining to 6.6%, a 320 bps QoQ hit. This was due to ~160 bps MTM hit
taken due to unfavourable currency movement and a combination of high
ad spends (up 100 bps QoQ) and lower leverage benefits owing to strike.
Thus, PAT came in much below our  estimates at | 240.4 crore (I-direct
estimate: | 411.4crore).
Highlights of the quarter
MSIL’s Q2FY12 has been marred by negatives on various fronts ranging
from currency challenges to deep labour unrest. It lost 28,539 units due to
the strike in the Manesar facility, which came to a conclusion only in
October 2011. The unprecedented JPY, INR movements have hurt the
hedges undertaken on both the royalty, raw material front and caused ~|
127 crore one-time impact. On the  positive side, MSIL has witnessed
bookings of more than 1 lakh units for the new Swift. The management
reflected on the growing demand for diesel vehicles in view of higher
pricing gap between the fuels and is expected to ramp up the diesel
vehicle capacity to ~25,000 units/month by the end of Q3FY12. Diesel
sales in proportion to total volumes were ~up 300 bps YoY at 21%. This
would help in continuing the realisations growth in the domestic market.
V a l u a t i o n
MSIL witnessed one of the worst operational performances. However,
with easing of JPY to ~80 levels, the management has actively started to
hedge its FY12E exposure. At the CMP of | 1125, the stock is trading at
11.8x FY13E EPS. We have valued MSIL at 13.5x FY13E EPS to arrive at a
value of | 1286/share. We maintain our  BUY rating on the stock and
suggest investors who entered at higher levels make a staggered entry.

Query Corner: Ambuja Cements, ACC, Genus, SKS, HCL, Unitech, Zylog, Dewan :: Business Line

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Please discuss the medium- and long-term outlook of ACC and Ambuja Cements.

Anil

ACC (Rs 1223.4): This stock has built on the base around Rs 400 to move strongly higher. It is one of the stocks that has bucked the correction in broader market this calendar to gain over 10 per cent. ACC has strong long-term resistance around Rs 1,000. After fluctuating for a protracted period around this level, it appears to have broken higher this week.

Immediate target is the previous all-time high at Rs 1,315.

The stock could take a breather once it reaches this level and spend some time consolidating in the band between Rs 1,000 and Rs 1,350.

Target on a break above Rs 1,350 is Rs 1,800.

Investors can hold the stock as long as it trades above Rs 900. Subsequent supports are at Rs 800 and Rs 700. Investors with longer investment horizon can buy in declines as long as the stock holds above Rs 700.

Ambuja Cements (Rs 161): In our review of Ambuja Cements in July 2010, we had written that the stock could break higher to Rs 150 or Rs 160 after consolidating for few months in the range between Rs 92 and Rs 125.

The stock followed our script to move to the peak of Rs 166 by last November. But it has been unable to make any headway beyond that zone. The stock has formed a triple mountain formation in the weekly candlestick chart.

But the ongoing sideways movement in the broad range between Rs 115 and Rs 165 is positive from a long-term perspective.

Investors can hold the stock as long as it trades above Rs 110. Declines to this level will also provide the opportunity for long-term investors to buy the stocks.

The ceiling around Rs 160 will continue to thwart the stock in its attempts to move higher. Once it breaks higher, the long-term target is Rs 187 and then Rs 232. Long-term supports below Rs 110 are at Rs 102 and then Rs 88.

Please let me know the prospects of Genus Power purchased at Rs 22.

K. Srinivasan

Genus Power Infrastructures (Rs 13.9): Genus Power recorded the peak of Rs 105 in the last phase of the previous bull market, in January 2008. The stock then went on to slide below Rs 10 in the correction that followed.

The recovery in 2009 has been disappointing and has not helped the stock retrace even one-third of the losses suffered in 2008.

It needs to climb above Rs 44 to make the long-term outlook positive.

The medium-term trend is down since the peak of Rs 28.4 recorded in November 2010. But the stock is hanging on to the key medium-term support at Rs 15.

Investors can hold the stock with stop at Rs 12.5. Decline below this level will pave the way for a slide all the way down to the March 2009 low at Rs 7. Medium-term resistances will be at Rs 22 and Rs 29.

I am holding SKS Micro Finance purchased at Rs 550 and HCL Infosys bought at Rs 85. What is short- and long-term technical view for these stocks?

Nagabhushanam

SKS Microfinance (Rs 209): SKS Microfinance does not have sufficient history to enable us to give guidance on the long-term technicals.

The stock has been sliding lower incessantly since the high of Rs 1,490 recorded in September 2010.

The sequence of lower troughs formed since this peak indicates that the secular trend in this stock is down. Attempting to buy the stock near its bottom will be akin to catching a falling knife.

The stock is currently trying to hold above the support at Rs 200. Investors can hold the stock as long as it trades above Rs 190.

It is hard to judge where the next halt will be once it declines below Rs 190. The more risk-averse investors can switch out of the stock at this juncture.

HCL Infosystems (Rs 62.7): In our review of HCL Infosystems in August last year, we had written that fresh purchases should be avoided on a close below Rs 100 since that would imply an impending decline to Rs 66.

The stock made an emphatic move below Rs 100 in July and is currently hovering around the long-term support at Rs 64. Investors can hold the stock with stop at Rs 60. If the stock bounces above this level, it can move higher to Rs 109 or Rs 140 over the medium-term.

Long-term resistances for the stock are at Rs 180 and Rs 210.

I purchased Unitech at its 52-week high of Rs 99. Please let me know whether I can average at current levels and wait for long-term.

Dr M. Sockalingam

Unitech (Rs 28.8): Unitech has long-term support betweenin Rs 20 and Rs 25. The stock reversed from this zone repeatedly between November 2008 and March 2009. This base is once again supporting the stock since this August.

Investors can hold the stock with stop at Rs 20. Those with a greater penchant for risk can buy the stock at current levels with stop at Rs 19.

The stock will, however, face strong resistance at Rs 61 and then at Rs 84 in the months ahead. Investors with lower investment horizon can divest their holding at either of these levels. Long-term view will, however, turn positive only on move above Rs 118.

Is it advisable to buy Zylog Systems at current levels?

Rohit

Zylog Systems (Rs 451.9): Zylog Systems has been showing strength since the beginning of this year, moving in a narrow band between Rs 370 and Rs 450.

The stock is just beginning to break higher from this trading range. Immediate targets for this stock are at Rs 487 and then at Rs 614.

The stock could pause at its former high of Rs 614 again and give up some gains. Target on a break above Rs 615 is Rs 830. Key supports for the days ahead would be at Rs 370, Rs 340 and then Rs 270.

Can I buy Dewan Housing Finance at current levels with one-year time horizon?

Pradeep

Dewan Housing Finance Corporation (Rs 214.4): Dewan Housing Finance recently formed the trough at Rs 190 after retracing half the gains made since 2009.

The rally from this level has, however, not progressed far enough to imply that the stock is out of the woods. Investors can, however, accumulate the stock in declines with stop at Rs 155. Close below Rs 160 is required to make the long-term view negative in this stock.

Medium-term resistances for the stock are at Rs 250 and Rs 290. Long-term target is at Rs 347.

52 week FLOP: BSE BANKEX :: Business Line

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BSE Bankex, which represents the banking sector was the top performing sector index (banking sector) up to November 2010 peak. Since then, it has lost a quarter of its value. During the same period, the BSE Sensex lost 16 per cent of its value. Concerns of rising interest rates and slow down impacting the asset quality of their loans, tight liquidity and cost of savings deposit pressuring spreads, and credit growth moderation led to a de-rating of the sector.

The BSE Bankex's price-to-book valuation fell from 3-2 times book in a year. This is despite PSU banks expanding their books due to capital infusion from the Government.

Private sector players such as HDFC Bank, Kotak Mahindra were the only banks which have managed to give positive returns during the past year. State Bank of India, Union Bank of India and IDBI Bank were the worst performers. SBI lost close to 40 per cent due to higher asset quality slippages, taking a one-time employee provision hit instead of spreading it out as other banks have done and rating agency downgrade.

PSU banks additionally had high exposure to government investments which led to investment depreciation and fall in sale of investments. Unlike private banks, they also didn't have access to a large proportion of fee income to protect against earnings volatility.

Employee provisions, high proportion of restructured assets and system-generated NPA recognition have also led to more losses from PSU bank stocks.

Investment Focus: Wheels India - Buy :: Business Line

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Since new sales of passenger cars and commercial vehicles (CV) have moderated, prospects for companies with exposure to other segments of the auto industry or those present in other segments tend to be brighter.

One such company is Wheels India, a leading supplier of steel wheels for on-road and off-road vehicles. Although the company derives about 50 per cent of its revenues from the sale of steel wheels for CV and cars, it is a leading supplier of wheels for tractors and mining vehicles too.

Besides, it has diversified into making air suspension systems for buses, trucks and trailers, which unlike wheels have a higher service and replacement market. It also makes steel structural components for power plants.

Together, these currently bring in about 5-7 per cent of the revenues. At the current market price of Rs 314, the stock trades at a PE of just nine times its trailing 12-month earnings.

Despite the moderation witnessed in the domestic auto volumes, the company has put up a good second quarter performance.

For the three months ended September 2011, net sales have grown by 19 per cent to Rs 496 crore and net profits have more than doubled to about Rs 11 crore, over the same quarter last year.

A healthy outlook for tractor sales (60 per cent market share in tractor wheel supplies) and a robust export demand for mining wheels imply that the company will continue to show strong growth. This makes a good case for investment in the Wheels India stock.

With 34 clients globally and supplying to markets such as Japan, Korea, North America, Europe, Brazil, China and Indonesia, the company has been a beneficiary of the strong demand for large mining trucks witnessed in these export markets.

Catering mainly to the mining and construction equipment industry abroad, Wheels India derives about 15-20 per cent of revenues from exports. Going forward, based on projections from customers, the company expects exports to continue to drive topline growth in the next 12-18 months.

This market, along with tractors, air suspension systems and power plant parts also brings in superior margins when compared with ‘mass market' products such as CV and passenger car wheels.

While these factors are expected to keep profitability intact in the near term, the company will fire on all cylinders once the domestic auto markets regain momentum.

With the interest rates expected to peak out soon and demand for freight holding up, CV sales will gain traction sooner than later.

Also, the company has been roped in for many of the new passenger car launches and so, volume growth on this front will not be difficult to come by. It has about 45-50 per cent market share in both these segments.

Buy NHPC; Target :Rs 28 ::ICICI Securities,

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M e e t s   e x p e c t a t i o n s …
The company reported sales of | 1981 crore much higher than our
estimate of | 1279 crore due to inclusion of water cess of | 463 crore paid
by the company to the J&K government and other operating income of |
123 crore as interest from beneficiary states. Adjusted profit for the
company in Q2FY12 was | 729 crore vs. our estimate of | 698 crore
primarily due to higher incentives on a YoY basis. During the quarter, the
company generated 7088 MUs (up  12% QoQ, down 1% YoY). Sales
realisation per unit stood at | 2.23/kwhr (net unit sales taken at 88% of
gross generation). Valuation is at 1.1x FY13 P/BV with capacity addition of
515 MW in FY12 and 697 MW in FY13. We maintain our BUY rating with a
target price of | 28. NHPC has least fuel risk in an environment where fuel
security can materially impact earnings and valuation of power utilities.
Delay in capacity addition (as in 2000 MW Subanshri lower and 800 MW
Parbati) is the key risk for the stock.
ƒ Other key highlights for the quarter
In Q2FY12, out of operating income of | 151 crore, | 123 crore was
due to interest from beneficiary states. Other expenditure (| 325.6
crore) included expenditure of | 202 crore towards water cess with
respect to power stations situated in J&K. Total expenditure booked
by the company in this regard for H1FY12 is | 407 crore.
Depreciation declined 16.5% YoY due to a change in rate (5.2%
current vs. earlier rate of 10%).
V a l u a t i o n
At the CMP of | 25.2, the stock is trading at P/E of 12.6x and 11.5x on
FY12E and FY13E EPS, respectively. Similarly, on P/BV multiple, the stock
is trading at 1.1x and 1.1x FY12E  and FY13E, respectively. We maintain
our BUY rating on the stock with a target price of | 28.

52-WEEK BLOCKBUSTER: UTV SOFTWARE :: Business Line

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The stock of UTV Software Communications has rallied spectacularly over the past one year. The company had a fantastic FY11, with revenues increasing 40 per cent over the previous fiscal to Rs 929.5 crore, while net profits zoomed by 154 per cent to Rs 135.5 crore.

All its three segments — television, movies and gaming, expanded and all of them also delivered positive numbers at the EBIT (earnings before interest and taxes) level.

Movies that the company released, such as Delhi Belly, were big hits at the box office.

This led the first leg of the rally.

The bigger rally came after UTV announced in July that the company the company is looking to delist.

Walt Disney, one of the existing promoters, which held a little over 50 per cent of the shares in the company made the proposal to delist from the exchanges. The proposal is to buy 19.8 per cent of the shares from other promoters. A minimum of 90 per cent shareholding needs to be achieved by Walt Disney to delist UTV Software. The balance 20 per cent stake would be bought from the public.

The price of acquisition was fixed at Rs 1,000 a share. This immediately led to a substantial spike in the stock price and it has been hovering around these levels over the past few months.

South Indian Bank: Buy :: Business Line

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Investors with stomach for risk can consider fresh exposure to the stock of South Indian Bank (SIB). This old private sector bank has over the last few years managed to improve its return ratios and asset quality.

The return on equity improved from 14 per cent in FY07 to 17.6 per cent for the half year ended September 2011. Gross NPA ratio is down from 3.94 per cent in FY07 to 0.99 per cent in September 2011. There is further scope for improvement in its other operating metrics once the full benefits of the management's initiatives are realised over the long-term. This may warrant a valuation premium to SIB over its old private sector bank peers.

At the current price of Rs 24, the SIB stock trades at 1.1 times its estimated FY13-end adjusted book value and 6.7 times its estimated FY13 earnings. Despite out-performing most banks on a year-to-date basis, SIB's valuations continue to be attractive. Its valuations are inline with other old private banks despite its metrics being better than those of its peers.

The second largest branch network among old private banks (which is largely under-utilised), rising proportion of high-yielding gold and SME portfolios supporting margins, superior asset quality, thanks to majority of the asset book being secured, are key positives for the bank. The bank's net interest margin (NIM) improved from 2 per cent in FY08 to 3 per cent in September 2011. While Kerala accounts for 56 per cent of the bank's branches, it is slowly diversifying into other areas with more than 50 per cent of incremental branches being set up outside the state.

BUSINESS

SIB has a well-diversified loan book. However, gold loan portfolio has taken the centre stage in recent times with the management planning to increase its focus on high-yielding loans (including SMEs).

Gold loans currently account for 26 per cent of the loan book. The rates on SIB's gold loans are lower, which may prompt borrowers to shift from gold-financing companies. The portfolio is also relatively protected with loan to value in the 73-76 per cent range.

The bank's overall business, thanks to a low base, has grown at 27 per cent compounded annually during FY07-FY11. Net profit during the same period grew at 30 per cent. The September-end business (deposits plus advances) of the bank stood at Rs 56,386 crore. Given its high historical rate of growth, even after considering some moderation in loan book growth, SIB may still achieve its internal target of Rs 75,000 crore of business by FY13 end.

To fund its future business growth, SIB plans to raise Rs 1000 crore of capital once the market scenario improves. Raising close to 50 per cent of the existing net worth is indicative of bank's aggressive business plans. SIB plans to increase its branch network from the present 644 branches to 750 branches by FY13.

SCOPE FOR IMPROVEMENT

Old private banks, in general, and SIB, in particular, suffer from low business per branch. For the year ended March 2011, the business per branch was low at Rs 77 crore as against the all-bank average of Rs 129 crore.

The profit per employee of the bank is also low at Rs 5 lakh per employee as against the all-India average of Rs 7 lakh due to low fee income contribution. SIB plans to use its branch network for distribution of third-party products, which will enhance its fee income.

Low business per branch, while improving, is partly due to relatively low credit-deposit ratio of 70 per cent. SIB has always been conservative in terms of credit-deposit ratio despite having high levels of capital.

This move has also limited margin expansion in spite of the bank moving to high-yielding businesses. As credit-deposit ratio improves, in addition to balance-sheet growth, the business per branch would improve automatically.

Improvement in credit-deposit ratio would also neutralise strain from rising costs due to savings rate de-regulation, thereby allowing the bank to maintain margins at 3 per cent. The net interest margin for the second quarter of FY12 was 3 per cent, an improvement of 10 basis points from the June quarter.

Even as SIB's low-cost deposits (including NRI deposits) account for close to 30 per cent of its total deposits, the bank has one of the highest cost of funds (7.66 per cent) in the system. Given that the states of Kerala and Tamil Nadu are crowded in terms of banks, high interest rates need to be offered to attract depositors. As the bank moves into more under-penetrated areas, it would have the flexibility to price its products more economically.

GOOD ASSET QUALITY

The bank is positioned among the best in the system in terms of asset quality, with net NPA ratio of 0.25 per cent as of September 2011.

With close to 85 per cent of its portfolio being secured, asset quality pressures may be limited for the bank. The restructured asset proportion is also low at less than 2 per cent of the loan book.

Buy JK Lakshmi Cement; Target :Rs 61 ::ICICI Securities,

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L o w e r   r e a l i s a t i o n   h u r ts  m a r g i n s …
JK Lakshmi Cement reported net sales of | 354 crore (up ~33% YoY and
down ~10% QoQ) and net profit of | 6.5 crore (up ~13% YoY and down
~71% QoQ). These were above our respective estimates of | 320 crore
and net loss of | 13 crore on account of higher-than-expected cement
volume  at  1.13  MT  against  our  estimate  of  0.96  MT  and  higher-thanexpected realisation at | 3148/tonne against our estimate of | 3023/tonne.
The EBITDA/tonne improved ~25% YoY to | 366/tonne in Q2FY12 but
declined  ~44%  QoQ.  We  expect  volume  growth  at  ~8%  CAGR  over
FY11-13E  with  ~5  MT  in  FY13E  from  4.3  MT  in  FY11  on  account  of  an
improvement in utilisation rates. We estimate an EBITDA/tonne of | 546 in
FY12E and | 588 in FY13E against | 451 in FY11.
ƒ Net realisation down ~9% QoQ, volume up ~19% YoY (flat QoQ)
Blended cement sales volumes increased ~19% YoY to 1.13 MT but
remained flat QoQ. The cement  realisation increased ~12% YoY
(declined ~9% QoQ) to | 3148/tonne due to a correction in cement
prices across its selling markets during the quarter.
ƒ EBITDA declines ~44% QoQ to | 366/tonne on lower realisation
The EBITDA/tonne has declined ~44% YoY to | 366 on the back of a
decline in realisation, which negated the impact of a decline in the
power & fuel, freight and other costs. On a YoY basis, the
EBITDA/tonne has improved ~25% on higher realisation.

V a l u a t i o n
At the CMP of | 43, the stock is trading at 6.8x and 5.6x its FY12E and
FY13E earnings, respectively. The stock is trading at an EV/EBITDA of 5.8x
and 6.6x FY12E and FY13E EBITDA, respectively. On an EV/tonne basis,
the stock is trading at $58 and $52 its FY12E and FY13E capacities of 5.4
MT and 8.1 MT, respectively. We have valued the stock at $60/tonne its
FY13E capacity of 8.1 MT, which is ~53% discount to the current
replacement cost of $130/tonne. We have maintained our BUY rating on
the stock with a target price of | 61/share.

Oct 7th week: Pivotals : Reliance Industries, SBI, Infosys, Tata Steel :: Business Line

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Reliance Industries (Rs 879.6)

RIL moved sideways in the past week testing its key resistance level at around Rs 900 as well as its 200 DMA and closed lower by 2 per cent. However, the stock managed to trade above our first support level of Rs 847. Traders can consider buying the stock as long as it trades above Rs 847. Upward reversal from there and a decisive breakthrough of Rs 900 will lift the stock northwards to Rs 920 or Rs 970. Conversely, inability to move higher and a fall below Rs 847 will pull the stock down to Rs 830. Subsequent supports below Rs 830 are at Rs 809 and then Rs 787 levels.

The stock still continues to be in a medium-term downtrend. However, it is turning around from its long-term support zone between Rs 700 and Rs 750. We restate that investors with greater penchant for risk can consider buying the stock in declines with stop-loss at Rs 700.

State Bank of India (Rs 1,964.2)

SBI climbed Rs 57 or 3 per cent in the previous week. This upmove of the stock is in line with our expectation. Traders with short-term perspective can prolong their long positions with revised stop-loss at Rs 1,870. Upside targets for the stock are Rs 2,000 and then Rs 2,106. Failure to move beyond the first target will confine the stock to moving sideways in the band between Rs 1,800 and Rs 2,000, before moving higher. A drop below Rs 1,800 will drag the stock down to Rs 1,710.

The medium-term trend is down for the stock. However, its long-term support band between Rs 1,700 and Rs 1,900 is cushioning the stock. Emphatic breach of this band will pave way for the stock heading towards Rs 1,510. Important medium-term resistance for the stock is pegged at Rs 2,500 and Rs 2,530 band.

Tata Steel (Rs 467.9)

In line with our anticipation, the stock took a breather and declined close to Rs 454 levels before rebounding and trimming its weekly loss to 2.6 per cent. Traders can still consider holding their long positions with stop-loss at Rs 454. Reversal upwards will take the stock higher to Rs 483, Rs 503 and Rs 515 in the short-term. On the other hand, tumble below its immediate support range between Rs 450 and Rs 454 will pull the stock down to Rs 430 and Rs 419. Traders should avoid initiating longs on a decline below its immediate support range.

The stock has significant medium-term resistance at around Rs 515, which coincides with 38 per cent Fibonacci retracement level of its prior down move. Conclusive jump above this resistance will push the stock higher to Rs 553 or Rs 592. However, a downward reversal from the resistance will confine the stock hovering between Rs 400 and Rs 500.

Infosys (Rs 2,829.1)

The stock was volatile and formed a spinning top candlestick pattern in its weekly candlestick chart signalling indecisiveness. It lost Rs 30 or one per cent in the last week. Traders should tread with caution in the upcoming week. Failure to move beyond Rs 2,900 will pull the stock down to Rs 2,730 or Rs 2,660 in the sessions ahead. A fall below the second support will be a threat for the stock's short-term uptrend and the stock can decline to Rs 2,550 and then to Rs 2,450.

On the upside, the stock is nearing its significant medium-term resistance at around Rs 3,000. Strong move above Rs 3,000 will pave the way for a rally towards its life time high of Rs 3,500 in the medium-term.