Cairn India 2QFY12: Taking the Royalty Knock; Focus on Production ::JPMorgan

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Cairn India’s 2QFY12 earnings reflect the new royalty cost recovery
regime, including the retrospective impact of royalty/adjustment to profit
petroleum on account of the change. We believe the focus will now be on
production ramp-up, dividend policy/cash use; the stock trades near our
fair value estimate, adjusted for royalty recovery. We retain a Neutral
rating.
 Focus will be on production, dividends: With the royalty issue now
out of the way, focus is expected to shift back to production. Cairn has
stated that the Rajasthan asset can support a peak production rate of
240kbopd, with the Mangala field able to ramp up to 150kbopd from its
currently approved peak level of 125kbopd in short order. With ONGC's
demands now met, we expect approval for new production plans to
come through. Also, with Vedanta acquisition's large debt funding, we
expect generous dividends from Cairn India would help service parent
level debt – we build in a c.30% payout.
 Can Cairn produce more? Media reports have indicated that Cairn
could ramp production up to 300kbopd – were this to also indicate a
reserve upgrade, we expect an 11% impact on NPV. At the post results
conference call, management guided at Mar-12 production at currently
approved FDP level of 175kbpd (lower-than-earlier-anticipated) but
indicated a substantial part of the 240kbpd vision would be achieved by
MBA production by 2013E, subject to approvals, infrastructure ramp up.
 Rating, price target: We retain our Neutral rating on the stock. The
stock currently prices in $98/bbl LT crude, with further upside limited in
the near term, though the dividend could protect on the downside. We
adjust our price target to Rs315 to reflect the new royalty scenario. Key
upside risk to our call is a reserve upgrade/higher-than-expected
production and sustained higher crude prices, and key downside risk is a
sharp correction in crude levels.

Results Calendar 08/11/2011 - 13/11/2011:: Angel Broking,

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Results Calendar
08/11/2011 Reliance Power, Bosch India, Bank of India, IDFC, ABB, Reliance Infra., Aurobindo Pharma, Monnet Ispat, Finolex Cables
09/11/2011 St Bk of India, IOC, Ranbaxy, Lupin, Power Fin.Corpn., Shriram Trans., GMR Infra., Glenmark Pharma., Bhushan Steel, Bharat
Forge, Tata Comm, ITNL, CESC, Apollo Tyres, PTC India, Godawari Ispat
10/11/2011 Tata Steel, DLF, Hindalco, Cadila Healthcare, Cummins India, Mahindra Satyam, IRB Infra, Page Industries, CEAT
11/11/2011 Mundra Port, Adani Power, Rcom, Tata Chemicals, Britannia, MOIL, HDIL, Anant Raj, SpiceJet, Dishman Pharma
12/11/2011 Coal India, Rural Elec.Corp., Nalco, IVRCL Infra
13/11/2011 Sun Pharma, LIC Housing Fin.

Nagarjuna Construction Company (NCC), HEG :: 2QFY2012 Results Review Angel Broking,

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Nagarjuna Construction Company
Nagarjuna Construction Company (NCC) posted poor set of numbers for
2QFY2012 below our and street expectations. For 2QFY2012, NCC reported a
9.2% yoy decline in its top line to `1,090cr, which was below our/street
expectations of `1,261cr/`1,271cr. EBITDA margin for the quarter came in at
9.5%, lower than our estimate of 10.3%. Interest cost during the quarter came in at
`70.9cr, a yoy/qoq jump of 89.4%/10.9%, which was above our estimates. The
company’s bottom line came in at `11.4cr, registering a yoy decline of 75.2%,
owing to subdued top-line growth and escalating interest costs – much lower than
our/street estimate of `29.8cr/`29.1cr.
The current outstanding order book of NCC stands at `16,570cr, with order
inflow of `1,746cr for 2QFY2012. Going ahead, we believe the company’s
order inflow would be driven by EPC work of its own power plant. However,
earnings would continue to reel under pressure due to higher interest cost on
the back of higher debt requirements to fund its investments in the power

project and on potential winning of road BOT projects. At the current price, the
stock is trading at attractive valuations (4.4x its FY2013E earnings adjusted for its
investments and subsidiaries) and at 0.5x FY2013E on P/BV basis (standalone).
Our revised target price of `75 (earlier `82) is arrived on SOTP basis and implies
an upside of ~38.0% from current levels; hence, we maintain Buy on the stock.

Marico, Punj Lloyd, Madras Cements :: 2QFY2012 Results Review Angel Broking,

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Marico
Marico posted healthy top-line growth of 25% yoy to `975cr, in-line with our
estimates. Growth was led by 14% volume growth, with Parachute rigids and
Saffola registering ~10% and 11% volume growth, respectively. The international
business registered 33% yoy growth. Recurring earnings grew by muted 9.4% yoy
and came in at `78cr, despite margin contraction and a 573bp increase in tax
rate. We maintain our Neutral view on the stock.

Prakash Industries, Relaxo:: :: 2QFY2012 Results Review Angel Broking,

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Prakash Industries
Prakash Industries reported its 2QFY2012 results. The company's net sales
grew by 9.0% yoy to `459cr mainly on account of increased product prices.
However, operating expenses increased by 14.8% yoy to `398cr mainly
because of higher raw-material expenses, which grew by 17.8% yoy to `98cr
on the back of increased input costs. Consequently, EBITDA margin slipped by
869bp yoy to 38.7% and EBITDA decreased by 10.9% yoy to `178cr. Financial
expenses grew by 573.0% yoy to `2cr. Hence, net profit decreased by 22.7%
yoy to `55cr in 2QFY2012. We maintain our Buy rating on the stock while we
keep out target price under review.

Result Reviews ONGC , Motherson Sumi Systems:: Angel Broking,

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Result Reviews
ONGC
For 2QFY2012, ONGC’s top line came in-line with our estimates, while the
bottom line was significantly above our estimates. The company’s top line for the
quarter grew by 24.3% yoy to `22,616cr, in-line with our estimate of `22,991cr.
Oil production during the quarter remained flat yoy at 6.8mn tonnes, while gas
production volume increased by 2.2% yoy to 6.4bcm. However, the company’s
crude oil sales volume decreased by 1.6% yoy to 5.8mn tonnes. ONGC’s top-line
growth was driven by higher net realization, which grew by 33.4% yoy to
US$83.7/bbl. The company shared a subsidy burden of `5,713cr in 2QFY2012
vs. `3,019cr of subsidy shared in 2QFY2011and `12,046cr in 1QFY2012.
Despite a 33.4% increase in crude oil realization, EBITDA margin expanded by
only 174bp yoy to 64.0% on account of a 36.0% yoy increase in royalty expenses
to `2,880cr. EBITDA registered a 27.8% yoy increase to `14,469cr. The company’s
depreciation, depletion and amortization expenses decreased by 25.5% yoy to
`3,337cr due to lower dry well write-offs. Consequently, net profit increased by
60.4% yoy to `8,642cr, significantly above our estimate of `6,161cr. We maintain
our Buy recommendation on ONGC; our target price is under review.

8 Nov: Economic and Political News 􀂄 Angel Broking,

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Economic and Political News
􀂄 Allow banking licenses to stock broking firms: Assocham
􀂄 Forex reserves jumps over US$2bn to US$320bn
􀂄 Assocham estimates losses of `30,000cr per year due to bad roads
􀂄 Infra growth down to 2.3% in September on rising interest, cost
Corporate News
􀂄 ONGC sees `1,900cr royalty recovery from Cairn
􀂄 Fitch assigns 'A+' ratings to Tulip Telecom
􀂄 JLR launches Range Rover Evoque at `45lakh in India
Source: Economic Times, Business Standard, Business Line, Financial Express, Mint

Derivative Report - 8 Nov 2011 -Angel Broking,

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Comments
 The Nifty futures’ open interest decreased by 1.21% while
Minifty futures’ open interest increased by 0.61% as
market closed at 5284.20 levels.
 The Nifty Nov. future closed at a Premium of 32.65 point
against a Premium of 30.10 points. The December Series
closed at a Premium of 57.55 points.
 The Implied Volatility of at the money options is
decreased from 22.62% to 20.52%.
 The PCR-OI is unchanged to 1.37 points.
 The total OI of the market is `1,22,441.20cr. and the
stock futures OI are `33,043.41cr.
 Stocks were cost of carry is positive are SOBHA, TTML,
JSWISPAT, TATACOMM and RUCHISOYA.

Market Outlook India Research November 8, 2011 -Angel Broking,

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Dealer’s Diary
Indian markets are expected to open flat or in the red tracking mixed cues from
the Asian markets in opening trade and the fresh concerns arising from the
sovereign crisis in Europe.
The political situation in Greece has eased a bit following the announcement of
stepping down of the Greek Prime Minister after abandoning his call a week ago
for a referendum on the European Union debt-relief plan and formation of a
transitional government, which would ease investor sentiments. However, the
focus of investor concern has now shifted to Italy where the yield spreads have
climbed to record high levels as speculation over Italian prime minister’s
resignation and whether the third-largest economy in the euro area can continue
to pay its debts gained impetus. The yield spreads of Italian government bonds to
German bonds climbed to record high levels, leading to the most European
markets closing in the red on Monday.
Although the US markets closed higher, there was considerable volatility over the
course of the trading day as investors once again focused on the latest headlines
out of Europe.

NSE, Bulk deals, 08-Nov-2011

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Date Symbol Security Name Client Name Buy / Sell Quantity Traded Trade Price / Wght. Avg. Price Remarks 08-Nov-2011 ALKALI Alkali Metals Limited HEENA GANDHI BUY 67,000 45.25 - 08-Nov-2011 ALKALI Alkali Metals Limited HEENA GANDHI SELL 67,000 46.37 - 08-Nov-2011 AMRUTANJAN Amrutajan Health Ltd A.P.T. PORTFOLIO PRIVATE LIMITED BUY 32,282 831.05 - 08-Nov-2011 AMRUTANJAN Amrutajan Health Ltd A.P.T. PORTFOLIO PRIVATE LIMITED SELL 32,282 831.34 - 08-Nov-2011 AMRUTANJAN Amrutajan Health Ltd AJAY ASSET MANAGEMENT PRIVATE LIMITED BUY 39,361 833.65 - 08-Nov-2011 AMRUTANJAN Amrutajan Health Ltd AJAY ASSET MANAGEMENT PRIVATE LIMITED SELL 39,061 834.73 - 08-Nov-2011 AMRUTANJAN Amrutajan Health Ltd ARUL KUMAR G [WO] BUY 17,906 826.78 -

FII DERIVATIVES STATISTICS FOR 08-Nov-2011

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FII DERIVATIVES STATISTICS FOR 08-Nov-2011
	BUY		SELL		OPEN INTEREST AT THE END OF THE DAY
	No. of contracts	Amt in Crores	No. of contracts	Amt in Crores	No. of contracts	Amt in Crores
INDEX FUTURES	54513	1440.36	44816	1183.86	545153	14328.38	256.49
INDEX OPTIONS	393349	10304.14	387630	10151.57	1574841	41660.17	152.58
STOCK FUTURES	43951	1136.87	53560	1354.73	1174288	29389.64	-217.85
STOCK OPTIONS	11983	304.74	11480	294.87	32548	855.13	9.87
						Total	201.08

 

-- 

8/11/11: Categories Turnover (Rs. crore) Clients NRI Proprietary Trade Data

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Categories Turnover

(Rs. crore)
	Clients			NRI			Proprietary
Trade Date	Buy	Sales	Net	Buy	Sales	Net	Buy	Sales	Net
8/11/11	1,414.04	1,446.17	-32.13	0.50	0.36	0.14	387.51	383.09	4.42
4/11/11	1,613.09	1,645.90	-32.82	0.62	0.60	0.02	450.63	439.32	11.31
3/11/11	1,489.04	1,512.91	-23.87	2.12	1.99	0.13	450.31	431.66	18.66
Nov , 11	7,672.60	7,678.03	-5.43	4.35	4.13	0.22	2,216.99	2,174.08	42.91
Since 1/1/11	420,890.85	425,626.92	-4,736.07	300.99	209.79	91.21	122,517.62	121,638.62	879.00

BSE, Bulk deals, 8/11/2011

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Deal Date	Scrip Code	Company	Client Name	Deal Type *	Quantity	Price **
8/11/2011	512161	8K Miles Software	SURENDRA MANGALDAS MARFATIA	B	60000	46.89
8/11/2011	512161	8K Miles Software	BHAVINI VIJAYKUMAR SHAH	S	37000	47.11
8/11/2011	590006	Amrutanjan Health-$	CROSSEAS CAPITAL SERVICES PRIVATE LIMITED	B	41160	832.76
8/11/2011	590006	Amrutanjan Health-$	A K G SECURITIES AND CONSULTANCY LTD	B	50858	832.74
8/11/2011	590006	Amrutanjan Health-$	Quadeye Securities Pvt Ltd	B	19697	828.32

8/11/11: FII & DII Turnover (BSE + NSE) (Rs. crore)

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FII & DII Turnover (BSE + NSE)

(Rs. crore)
	FII			DII
Trade Date	Buy	Sales	Net	Buy	Sales	Net
8/11/11	1,696.02	1,239.74	456.28	369.26	746.73	-377.47
4/11/11	2,256.56	2,127.94	128.62	938.47	867.98	70.49
3/11/11	1,884.03	1,868.58	15.45	973.06	971.15	1.91
Nov , 11	9,220.63	8,648.72	571.91	3,683.85	4,570.12	-886.27
Since 1/1/11   *	528,619.48	546,024.81	-17,405.33	245,950.69	224,791.45	21,159.24

Hold ACC, Target : Rs 1105 ::ICICI Securities

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H i g h e r   c o s t s   e r o d e   m a r g i n s …
ACC reported net sales of | 2150 crore (up 31% YoY, down ~10% QoQ),
in line with our estimate of | 2105 crore. However, the EBITDA margin of
10.3% was below our estimate of 14.1% primarily on account of higher
than expected employee cost and other cost. Net profit of | 168 crore (up
~67% YoY, down ~50% QoQ) came in line with our estimate of | 181
crore supported by higher other income pertaining to write-back of sales
tax. Sales volumes and realisation were muted on a sequential basis due
to sluggish demand and correction in cement prices during the quarter.
The EBITDA/tonne has declined ~58% QoQ to | 387/tonne (our estimate:
| 527/tonne) due to a decline in realisation and spurt in costs.
ƒ Cement volume up ~18% YoY on stabilisation of new capacities
Sales volumes increased ~18% YoY (declined ~4% QoQ) to 5.7
MTPA  in  Q3CY11  on  account  of  stabilisation of new capacities
added by the company at Chanda, Maharashtra and Wadi,
Karnataka. Realisation improved ~11% YoY to | 4052/tonne but
declined ~7% QoQ due to a correction in cement prices during the
quarter on account of sluggish demand.
ƒ EBITDA down ~58% QoQ to | 387/tonne on lower realisation
On a YoY basis, the EBITDA/tonne  improved  ~10%  to  |  387/tonne
due to higher realisation. However, it was down ~58% on a
sequential basis due to a decline in realisation and increase in costs.

V a l u a t i o n
At the CMP of | 1184, the stock is trading at 21.4x and 18x its CY11E and
CY12E earnings, respectively. The stock is trading at an EV/EBITDA of
11.7x and 9.4x CY11E and CY12E EBITDA, respectively. On an EV/tonne
basis, the stock is trading at  $138 and $133 its CY11E and CY12E
capacities, respectively. We have valued the stock at $130/tonne at CY11E
capacity of 30.5 MTPA, which is in line with the current replacement cost.
We are maintaining our target price of | 1105/share with a HOLD rating on
the stock.

Sun Pharmaceutical – Sun offers to buyout Taro ::RBS

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Sun's offer to buyout remaining stake in Taro at US$ 24.5/share valuing Taro at US$1bn (valued
at 7.25x EV/EBITDA and 10x PE) is a positive in our view. Sun holds 66.3% stake in Taro at a
total investment of US$ 260m. We expect more value-accretive deals as Sun holds US$1bn in
cash and cash equivalents.


Sun offers to buyout remaining 33.7% stake in Taro - a positive
􀀟 Sun Pharma has proposed to acquire all outstanding shares of Taro Pharma (Sun's
subsidiary) for a per share consideration of US$24.50 in cash representing a 26% premium
over the 17 October 2011 closing price of US$19.45 (post the offer, Taro's stock closed 23%

higher at US$24/share). This offer, however, is subject to the approval of Taro Board and
such other authorities as may be required and subject to completion of necessary
compliances/formalities as may be required.
􀀟 Sun currently holds a 66.3% equity stake (with 77% voting rights) in Taro with a total
investment of US$260m till date (the company bought a 9.4% stake from Brandes
Investments Partners on 19 February 2008 for US$38m (valued at US$10.24/share) and a
12% stake from Templeton Asset Management on 1 November 2010 for US$82m (valued at
US$16/ share).
􀀟 With Taro reporting US$106m of PAT in the last four quarters, Sun's offer values Taro at
US$1bn (at 7.25x EV/EBITDA and 10x PE).
While the offer seems lucrative for Sun, there are some hurdles
􀀟 However, this has been objected by Grand Slam Master Fund, LTD (Grand Slam) which has
expressed its dissatisfaction with the offer by Sun Pharma as Taro has traded in the public
markets at a discount to its peers despite having strong free cash flows, great operating
margins and double digit revenue growth. This was caused by the Board's failure to have
Taro's shares trade on a nationally recognized exchange despite qualifying to do so. In no
way does the offer at a 23.80% premium to current share price fairly value the shares.
􀀟 The fund believes a fair offer would be at a minimum of US$48.5 per share (which would be
valued at ~15x EV/EBITDA and ~20x PE) based on the deals happened in the past ranging
from 15x EBITDA on the low end to 24x on the upper end of the range.
􀀟 Thus the fund believes that Sun's offer is at a healthy discount to the EV/EBITDA of Taro's
competitors despite the fact that Taro is growing more quickly and has higher margins than
these companies.
We expect more value-accretive deals
􀀟 Sun made eight acquisitions in 1996-2001, but has made fewer since. The company raised
US$350m in 2004 to fuel further growth and made a few small acquisitions. However, we
believe, it could make no large acquisitions because of expensive valuations.
􀀟 Sun acquired a controlling stake in Taro in September 2010 after three years of litigation. In
June 2011, it has acquired the 24.5% of Caraco that it did not previously own for US$46.8m
(or US$5.25/share), and now owns 100% of Caraco.
􀀟 We believe Sun is now well positioned to make value-accretive deals, despite the ongoing
global slowdown, as the company has US$1bn in cash and cash equivalents.
Structurally well positioned; maintain Buy
􀀟 Sun looks structurally well positioned for growth, as 83% of its revenues are from the US
(benefiting from a robust ANDA pipeline, improvement in Taro and a depreciating INR) and
India (above industry growth). Moreover, with US$1bn in cash, Sun looks well poised to
achieve value-accretive deals.
􀀟 We value Sun’s core business at Rs518 (20.9x FY13F, at a 10% premium to the sector) and
one-offs at Rs7 (after a 20% execution discount) resulting in an SOTP-based TP of Rs525.
maintain Buy.

Buy Bank of Baroda; Target : Rs 954 ::ICICI Securities

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R  o  b u  s t   a l l - r o  u n  d   p e r f  o r m a n  c e …
Margin expansion to 3.07% from 2.87% QoQ along with stable asset
quality at 0.47% NNPA remain the highlight of the quarter. Total deposits
grew 22.1% while advances grew 23.9% boosted by NII growth of 26%
YoY to | 2567 crore ahead of our estimates. Net profit surged 14.4% YoY
in line with expectation to | 1167 crore. We maintain our estimate of 18%
CAGR in PAT over FY11-13E to | 5925 crore.
ƒ International book grows at a faster pace, domestic NIM up 28 bps…
The bank reported a 36.8% increase in the international loan book
and 19.3% growth in the domestic book. Global NIM stood at 3.07%
but domestic NIM increased by  28 bps to 3.67% from 3.39%
sequentially. Domestic yields spiked sharply by 91 bps in a quarter
to 12.14% whereas cost of deposits rose only 41 bps to 6.82%
boosting NIMs.
Non-interest income grew at 7.8% YoY to | 734 crore. Core fee
income (CEB) grew 26% YoY to | 313.7 crore in correlation with
strong credit growth. Also, the international business contributed
36% to core fee income.
Strong liability franchise has helped maintain CASA at 34.2%
ƒ Stability of asset quality in tough times…
GNPA (| 3402 crore) remained flat QoQ in absolute terms and came
down to 1.41% whereas NNPA (| 1118.6 crore) rose marginally to
0.47%. Restructured assets increased to | 7829 crore from | 7167
crore, an increase of | 662 crore in Q2FY12. These assets comprise
58% wholesale banking, 23% SME, 11.4% agriculture and 7.5%
retail. Of the total amount, | 959  crore has slipped into NPA. We
expect GNPA & NNPA to reach 1.6% & 0.5%, respectively, in FY13E.
V a l u a t i o n
We remain positive on the stock as the management has consistently
delivered both on profitability and asset quality guidance. We expect
business to grow at 20% CAGR over FY11-13E and RoE and RoA to stay
above 20% and 1.2%, respectively. We, therefore, maintain the premium
multiple of 1.4x FY13E BV for the bank and target price of | 954.

Buy Indian Overseas Bank; Target : Rs 117 ::ICICI Securities

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S l i p p a g e s   m o u n t ;   h i g h   p r o v i s i o n s   h i t   P A T   g r o w t h
IOB continues to grapple with asset  quality concerns as slippages rose
sharply by | 995 crore in Q2FY12 (| 485 crore in Q1FY12) pushing up GNPA
by 18% to | 3898 crore (GNPA ratio @ 3.07%). Out of the total slippages, |
498 crore slipped as the bank shifted loans below | 50 lakh to system based
NPA recognition system, thus shifting its entire portfolio to automated NPA
recognition. Consequently, higher  provisions for NPA bogged down PAT,
which was flat QoQ and YoY at | 207.5 crore. The core business
performance was strong with credit growth of 44.4% YoY, deposits up
38.5% YoY and NII rising 32% YoY to | 1266 crore after contracting by
2.3% QoQ in Q1FY12. Both CASA and NIM that declined last quarter were
stable QoQ at 27.5% and 2.86%, respectively, in Q2FY12. We expect
business growth of 20% CAGR to lead to 21% CAGR in NII over FY11-13E.
However, in light of higher-than-expected slippages & provisions we have
lowered FY12E and FY13E profit estimates by 21% and 4%, respectively.
ƒ Pre provisioning profit (PPP) up 47.3% YoY despite higher opex…
NII increased 32% YoY backed by sequentially flat NIM at 2.86%.
Other income grew a healthy 26% QoQ buoyed by fee income and
profit on sale of investments. Despite a sustained increase in opex (up
9% QoQ), PPP was up 47.3% YoY (13% QoQ) at | 906.8 crore.
ƒ Slippages high as bank completes automation of NPA recognition…
GNPA jumped 18% QoQ to | 3898 crore and NNPA rose 20% QoQ to
| 1505 crore due to high slippages of | 995 crore (| 498 crore due to
bank shifting loans below | 50 lakh to system based NPA recognition).
Consequently, provision for NPA was higher at | 463 crore with PCR at
71.7%. Restructured assets rose 7% QoQ to | 7179 crore while
slippages from restructured assets amounted to |229 crore in Q2FY12.
Although IOB has shifted to system based NPA, we expect slippages
to remain high and estimate GNPA of 2.8% & NNPA of 1.2% by FY13E.
V a l u a t i o n
Asset quality concerns have come to haunt IOB again after its much touted
turnaround in Q2FY11. Even though the bank has shifted its entire loan
portfolio to system based NPA resulting in higher slippages, we expect
slippages to stay high (albeit lower than | 995 crore seen in Q2FY12).
Recoveries and upgradations need to be monitored for a revival in asset
quality. We have revised our profit estimates on account of lower credit
growth guidance of 20% for FY12E and higher provisions. Hence, we
maintain our target multiple at 0.9x FY13E ABV and arrive at a TP of | 117

Buy TVS MOTORS- Target: RS.75 :: Kotak Sec

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TVS MOTORS (TVSM)
PRICE: RS.66 RECOMMENDATION: BUY
TARGET PRICE: RS.75 FY13E P/E: 9.9X
q TVS Motors reported a strong set of results for 2QFY12. Robust volumes
and healthy operating performance helped the company clock 40% YoY
and 30% QoQ jump in net profits.
q Results remained ahead of our expectation on account of better than expected
sales realization and the same leading to healthy show on the operating
front.
q Company expects their volumes to grow by 15% in FY12 and expect the
industry volume growth to range between 12-15%. Management also expects
commodity prices to soften and that will be positive for the margins
going forward.
q We have revised our FY12 estimates upwards in view of better than expected
2QFY12 performance. We are also introducing FY13 estimates.
q We are rolling over our target price to FY13 expected earnings. We value
the stock at 11.2x (20% discount to PE multiple of 14x that we assigned
to Hero MotoCorp and Bajaj Auto). Our revised price target now stands
at Rs75 (earlier Rs70) and we continue with our BUY rating on the stock

Macquarie Survey Tools:: Steel and Cement markets look tough ::BUY Jindal Steel & Power

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Macquarie Survey Tools
Steel and Cement markets look tough
Event
􀂃 The results of our Chinese Steel and Cement surveys for October reveal
that markets look challenging as we head into November and December.
Sentiment in the steel sector has definitely turned negative and this has been
reflected somewhat in the iron ore price this week, which has fallen to
US$120/t. Cement markets remain a little mixed but the key message is that
demand looks uncertain in the medium-term. We did hold a conference call
with Anhui Conch this week (largest Chinese Cement company) and it did
provide a little more confidence as to the health of the market.
􀂃 Iron ore prices fall aggressively while steel prices in China appear to be
stabilising. The key focus now for investors remains the level of production
for steel as we head into the back of FY11. The most recent data out of CISA
suggests production has fallen to an annualised rate of 657mtpa down from
the highs of 737mtpa seen in June. If this sort of production slow down
continues, it could put further pressure on iron ore prices but it would be
supportive for steel prices as supply into the market falls.
Impact
􀂃 The fall in iron ore prices has been rapid. We feel prices have crashed
through cost support of US$130-135/t but given steel production is also down,
the cost support could move towards US$100-110/t. The small uptick in steel
prices means steel company margins on a spot basis have seen an increase.


Key stock picks
􀂃 Iron ore – Rio Tinto, FMG, AGO and Mitsui
􀂃 Coking Coal – Fushan, Aston Resources, White Heaven Coal and Mitsubishi
􀂃 Steel – Hyundai Steel, POSCO, Jindal Steel & Power and Maanshan
􀂃 Cement – CR Cement

Hold Wipro; Target :Rs 360 ::ICICI Securities,

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T o o   e a r l y   t o   b e   s a n g u i n e ?
Wipro reported Q2FY12 revenues, which were ahead of our estimate but
EBITDA margin and reported PAT were a tad below. US$ revenue growth
of 4.6% QoQ to $1472.5 million did beat its own 2-4% guidance but was
lethargic in a seasonally strong quarter given it was aided by SAIC‘s
contribution. Organic volume growth of 4.6% was also in line with peers
while Q3FY12 revenue growth guidance of 1.9-3.9% was tepid.
Acknowledging that the operational performance improved this quarter,
we believe, a quarterly performance cannot be construed as restructuring
effort payoff and multiple re-rating demands consistent outperformance
relative to peers.
ƒ Earnings summary
Consolidated revenues grew 6.2% QoQ and 17.6% YoY to | 9,095
crore (I-direct estimate:| 8,855.4 crore). IT services revenues grew
4.6% QoQ to $1,472.5 million vs. our $1,423 million estimate.
Consolidated EBITDA margins declined 120 bps QoQ to 18.9% (19%
estimate) mainly due to wage hikes (given in June) and promotions
given this quarter. Reported PAT of | 1,300.9 crore (| 1,308 crore
estimate) declined 2.6% QoQ and was modestly below our estimate.
The consumer care business continues to perform well with 20.3%
YoY revenue growth while IT product YoY revenue growth was
tepid at 6.4%.
ƒ Price realisations continue to be a challenge
Price realisations continue to be a challenge with offshore pricing
declining 4.1% QoQ – it had declined 0.4% in Q1FY12 while onsite
pricing declined by 0.4% vs. 0.8% decline in Q1 and could likely be
attributed to revenue growth driven by infrastructure services.
V a l u a t i o n
We expect consolidated rupee revenue/EPS to grow at 14.6/10.8% CAGR
during FY10-FY13E. Further, we are modelling 14.5% CAGR growth in IT
service revenues in rupee terms during the same period. We continue to
value the stock at 14x our FY13E EPS estimate of | 25.7, i.e. at | 360 and
maintain our HOLD rating.

‘Meltdown may make metal stocks hot picks':: Angel Broking

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The metals sector has been facing a tough time, partly due to the correction in global commodities prices and also because of certain domestic developments like the ongoing CBI probe into the mining industry in Karnataka.

Many frontline metal stocks like JSW Steel, Tata Steel, Sesa Goa, Hindalco and Sterlite, to name just a few, have seen a severe contraction in prices. What has further compounded the problem is the ongoing crisis in the Euro Zone and the fear that China's metal demand may slow.

It is tough to say which metals segment — copper, steel or aluminium — would take a greater hit than the others or whether the producers catering to domestic demand would be spared from demand recession compared to companies like Tata Steel which has a significant presence in European markets.

But for long term investors, it would be tempting to know whether the current meltdown in metal stocks make them hot investments, even in the likelihood of further price correction in these shares. All the five metal stocks mentioned earlier have suffered serious erosion in value and three of them have seen their Price to Earnings (PE) ratio come down to single digits.

The extent of carnage the sector has suffered could be judged by taking a look at today's NSE closing prices compared to their year's high (given in brackets):

Sesa Goa - Rs 204.25 (Rs 383.65); Jindal Steel and Power – Rs 480 ( Rs 755.50); Tata Steel - Rs 420.70 ( Rs 737); Hindalco - Rs 126.10 (Rs 252.85) and Sterlite - Rs 113.35 (Rs 195.95).

But what is intriguing is that while the stocks of metal companies has seen a correction, it is not as if all metal prices have corrected. For instance, the steel prices have not gone down so much compared to the share price of steel stocks. Given the problem in mining in India, it is possible that domestic steel prices may remain firm, benefiting steel producers.

In an interview to Business Line, Mr Bhavesh Chauhan (Senior Research Analyst  — Metals & Mining), Angel Broking, Mumbai, shares his views on the metal sector's performance and what it holds for them in future. Excerpts:           

Metal stocks have taken a hammering. Do you consider them worthy of investment at current prices or is some more pain due?

The last 6-8 months have been bad for metal companies due to escalating debt crisis in Europe and stocks have been battered. As long as the situation in Europe remains grim, metal demand would remain weak and sentiment will keep metal prices lower. Monetary tightening in China has also played its part, although there hasn't been any huge decline in China's appetite for resources so far.

Different metal stocks (Sterlite (copper), Hindalco (aluminium), JSW Steel, Tata Steel and Sesa Goa) have suffered. Do you see any particular company recovering in the short term? Are all metal stocks in the same league?

Metal being a global commodity, all the stocks would be in the same league, although broadly we classify the companies as ferrous and non-ferrous and then we could have the classification in terms of steel makers and miners as well. Again, recovery of any stock would depend on how Europe shapes out. Also, there are concerns on US going into double dip too. So that factor has to be seen closely.

The reasons for the downslide in shares — controversy in the Karnataka mining sector and slowdown in Europe — are different. Do you think it would take some time for these negative factors to disappear?

 For Karnataka mining, it is more of a regional thing and it affects companies operating in Karnataka. I believe the Karnataka issue could be sorted out in 6-9 months. European slowdown is a big concern actually and how long it will take for these factors to disappear is a challenging question.

The economic slowdown has led to demand contraction resulting in fall in metal prices. But any economic recovery would see demand for metals picking up. So, do you feel the fall in prices is temporary or will it continue for a while?

Any recovery in Europe should see base metal prices recovering, although the way the scenario is today, it is difficult to give a time frame. At least in the near-term I do not expect any recovery in base metal prices.

Which are the sectors that would benefit due to metal prices falling — autos, housing, electrical goods, capital goods. Do they have any upside potential because of this?

Companies in capital goods and infrastructure will benefit if prices fall. However, steel prices have not fallen so far. Steel is the commodity which is used mainly as a raw material in machinery and construction. We do not expect any significant fall in steel prices anyway as prices of raw material remain high and are expected to remain firm due to supply concerns.

Though metal prices have fallen, the woes in Europe and US may not lead to pick-up in demand for products. How will Indian companies benefit?

Base metal prices have fallen. So, a little benefit will flow to some companies. However, steel remains the most widely used commodity.

How will the rise in dollar value and fall in rupee value affect the Indian metal cos? Hasn't the fall in rupee value neutralised any benefit of fall in commodity prices?

With the rupee depreciating, it helps companies selling metals as imports become expensive and hence domestic producers can raise prices. As far as importers of commodities are concerned, so far the falling rupee has offset falling commodity prices as you rightly say.

Have the frontline metal stocks become investment worthy after price correction? What are your picks and why?

We do feel that front-line metal stocks are now worth investing as we believe markets are discounting on the near term global macro issues (primarily Euro zone crisis). The current price levels do not discount the expansion plans by companies over the next 2-3 years. We like companies with captive resources and big expansion plans. With captive resources, these companies would generate higher return on capital employed at even current metal prices. Though we like Hindustan Zinc, SAIL, Sterlite amongst others, Tata Steel and Hindalco are our top picks –Tata Steel with a target price Rs 614 and Hindalco with a target price of Rs 196.

We like Tata Steel for its buoyant business outlook, driven by higher sales volume on completion of its 2.9 mt brown field expansion in Jamshedpur. The company's raw material projects are expected to be commissioned by 4Q FY2012 with lower off take initially; the full benefit is expected to accrue in FY2013E. Additionally, restructuring initiatives at Tata Steel Europe are likely to benefit the company going forward. We believe Hindalco is well placed to benefit from its aluminium expansion plans (capacity increasing by nearly two-three folds in the next two-four years). Most of its new capacities will be backed by captive mines leading to robust margins. Further, we expect steady EBITDA of $1 billion annually from Novelis.   

Steel prices have not fallen much but steel stocks have suffered. Because of the mining issue, steel prices may remain firm. Does that make steel stocks attractive for investment?

Steel prices have not fallen because prices of iron ore and coking coal across the globe are still firm. The mining problem is only India-specific and does not have any impact on the steel prices, which are globally determined. We believe steel stocks are attractive given that their margins have shrunk drastically over the last 9 months or so. We like steel stocks as coking coal prices are expected to fall, interest rates in India should fall sooner than later, capex cycle should pick up in the next six months. The stock prices have discounted all the negatives, leaving some of the stocks highly undervalued.